Tuesday, September 01, 2009

Why China 2009 Isn't Like Japan 1989

When I in 2005 predicted that China would eventually become the world's leading economy, I was asked why the bullish view on China wasn't like the bullish view of Japan in the late 1980s and early 1990s, when some people believed that Japan would overtake America as the world's biggest economy, something which hasn't happened (or even come close of happening as the U.S. economy is nearly 3 times larger than the Japanese).

My answer in short was, because there are about 10 times as many Chinese as Japanese. And has been demonstrated in majority Chinese countries like Hong Kong, Taiwan and Singapore, the Chinese aren't incapable of high productivity and with China gradually moving away from communism, mainland Chinese per capita income levels should approach those in Hong Kong, Taiwan and Singapore. Something which given the size of China's population will make it the world's biggest economy.

Via the Naked Capitalism blog, I now however again see the assertion that China is the new Japan resurface.

One argument is that the Chinese government statistics are manipulated. That is probably true, but there still exists overwhelming evidence that the Chinese economy is indeed growing, and that moreover during some periods of time, official statistics have underestimated growth.

The second key argument is that there is currently excessive credit- and money supply growth. That is also true, and that means that there is a high risk of future cyclical slumps in China. But cyclical slumps don’t necessarily mean a permanent decline. America in the late 19th century experienced several cyclical slumps, but nevertheless quickly recovered and experienced rapid long term growth.

And China 2009 is in fact more like America 1879 than Japan 1989. The reason why the Japan stagnated in the 1990s (and 2000s) was first of all that they responded to the crisis with bad policies that inflicted permanent damage on the Japanese economy. And secondly because Japan later experienced a demographic implosion with a shrinking work force and rapidly increasing elderly population.

Now, while China's current population policies risks creating similar problems in the future, which is likely decades away. And more importantly, in 1989, Japan had almost its entire population employed in relatively high productivity urban economic activities. In China, by contrast, a significant portion of its population is still employed in low productivity rural economic activities. Moreover, even much of its urban population has the potential to move significantly up the value chain, something which was not the case in Japan in 1989.

6 Comments:

Blogger investmentgardener said...

I think your argument that China will overtake the US is right. Only, the cyclical slumps are closer than you imply in your post. They're just around the corner. However many chinese are still living in the countryside.

10:34 PM  
Blogger Brian said...

I'd say 1879 is pretty right. After all, they have been relying on slave labor for competitive advantages. Small problem: Slaves don't make good consumers and good consumers don't make good slaves. You can't have full control over your population, enslave them, then suddenly tell them, "here's $50, get yourself something nice." They're going down. Hard.

10:45 PM  
Blogger SAJ said...

The biggest threat to China ascending to the throne as the worlds new economic superpower lies in the fact that the Communist Party will have to let go of some of the power it holds. Something which is not likely to happen.

Last time liberal reforms went to far it led to the Tiamen square backlash which was followed by a severe crackdown on political as well as on ecnomic liberties. I don't think that the government will make that same mistake twice.

Recommended reading: Capitalism with Chinese characteristics by Yasheng Huang.

2:08 PM  
Blogger stefankarlsson said...

Contrary to the myth, Brian, slave labor is very rare in China and consists only of prisoners (which includes both real criminals and political dissidents).

5:12 PM  
Blogger Brian said...

So let's say the "slave class" thing is a myth. They still have enormous poverty levels. They lack a middle class. The entire Chinese economy is dependent upon the poverty and exploitation of their citizens. You don't create a middle class that is forgiving of past transgressions very quickly. I just can't buy into any theory that has China getting passed this without either a.) a very large bubble bursting or b.) their people waking up and getting pissed.

11:51 PM  
Blogger stefankarlsson said...

Brian, first of all, your assertion that China lacks a middle class is simply wrong. How could car sales in China be as large as in America if China didn't have a middle class?

And secondly, every industrialization in history, including those in America, Europe and Japan featured the existence of many low paid workers in the beginning. That didn't stop continued development in those countries so why should it do so in China?

10:25 PM  

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