Will China follow Japan's downward spiral?
http://www.businesstimes.com.sg/sub/...97540,00.html?
Published December 11, 2010
Show me the money
Will China follow Japan's downward spiral?
Its growth model is similar to Japan's during the latter's high growth period from 1956 to 1975
By TEH HOOI LING
SENIOR CORRESPONDENT
I ATTENDED a seminar organised by the Institute of Southeast Asian Studies (ISEAS) this week. The topic was Does the East Asian Growth Model come to an End? and it was conducted by Shigeyuki Abe, professor of economics, Doshisha University, Japan and visiting fellow of ISEAS.
Professor Abe's theory is this: Japan has built its economy based on the export model, which the rest of Asia is following. And he questioned the wisdom of such over-reliance on export for growth.
Prof Abe outlined Japan's development over the years. Positive demography, advances in technology, production efficiency and labour's productivity resulted in a high growth period from 1956 to 1975 in Japan. Then came the first and second oil shocks - both of which were weathered by the Land of the Rising Sun adequately.
But as Japanese companies continued to gain global market dominance in a number of products, it began to chalk up ever increasing trade surpluses with other countries, in particular the US.
That precipitated a number of trade friction situations between the US and Japan. The US claimed that the Japanese yen was undervalued. So under the Plaza Accord, the value of the yen was raised from 240 to 120 per US dollar.
The US and Japan also signed the Structural Impediments Initiative (SII) aimed at 'identifying and solving structural impediments in both economies that stand as impediments to trade and balance-of-payments adjustment'. Among other things, the US argued that the Japanese were saving too much and not spending enough.
The measures in the initiative 'should contribute to the promotion of open and competitive markets, the reduction of trade and current-account imbalances, and an improved quality of life', according to official reports.
Various outcomes followed from the demands of the US, said Prof Abe. These included:
# The Japanese government stepped up spending, resulting in the country now having the highest public debts in the world, at 200 per cent of GDP;
# Japan also agreed to impose voluntary export restraint to the US.
Meanwhile, the appreciation of yen had other fallouts. Japanese companies started direct overseas investment in a big way. Jobs were exported overseas. By 1997, Japanese companies' production overseas had exceeded the country's exports.
The high yen also made imports cheaper. Consequently, many import competing industries within Japan suffered. 'Appreciation killed so many things inside Japan,' said Prof Abe.
Today, Japan is in a lamentable situation, he said. For every full-time job opening, there are 2.8 people vying for it. It is now operating at 8 per cent below its potential GDP. 'Japan was famous for being an equal society, with fairly equal income distribution,' said Prof Abe. 'Not anymore. The younger people, and the older people are making barely enough to survive. This is creating a lot of social problems.'
Another huge problem of course is the rapidly ageing population. Many of those who are on some form of pension scheme will get less than one-third of what they contributed by the time they retire.
'Considering the uncertain future, Japanese can't afford to spend today.'
The country has moved from Japan as No. 1 to 'Japan Bashing' to 'Japan Passing' to now 'Japan Nothing', noted Prof Abe.
Today, China is on the receiving end of pressure from the US. The Chinese yuan is undervalued, the Asian people are not spending enough.
The East Asian growth model, pointed out Prof Abe, is similar to Japan's: export-promotion, manufacturing centred, and the gradual progression from low to high-end industries. This will lead to trade friction.
Yes, the Japanese companies managed to overcome these obstacles - by moving to cheaper cost countries and importing cheaper goods from overseas.
But at what cost? There was a hollowing out of industries from Japan which led to high unemployment and the dismal state that the economy is in now.
Could similar hollowing out happen to Asia, to China? What should be a more balanced way to grow a country?
Sufficiency Economy
Modern economic theories say that a country should focus on industries that it has a global comparative advantage in. From Japan's experience, Prof Abe wondered if countries should also enhance industries in which they have no comparative advantage so as to have some form of self-sufficiency and to maintain a more balanced economic development. I guess the new movement of buying local - buying produce or products grown or made in near vicinity - is an indication of people's increasing recognition of the need to support local industries.
In fact, this idea of promoting balanced economic growth by allocating resources to producing things that a country has no comparative advantage in so as to have some form of economic security and the capacity to protect oneself from external shock and instability was mooted by the King of Thailand.
In the aftermath of the economic crisis of 1997, seeing many of his subjects suffering, King Bhumibol Adulyadej advised the Thai people to change their economic philosophy in order to cope with economic adversity and withstand future economic insecurity. The King's words have become known as the Philosophy of Sufficiency Economy and have been used as the guiding principle in drafting Thailand's 9th National Economic and Social Development Plan.
In recent years, this idea has gained more international traction. Medhi Krongkaew, professor of economics at the School of Development Economics, National Institute of Development Administration in Bangkok, interpreted Sufficiency Economy as consisting of two frameworks. One is the inevitability of facing the globalised world in which economic efficiency and competition are the rules of the game; the other is the need for economic security and the capacity to protect oneself from external shock and instability.
'The laws of comparative advantage and gains from trade are at work in today's world. But it would be foolish to pursue all-out specialisation without basic security, especially in food, shelter, and clothing,' Prof Krongkaew wrote in an article in 2003. 'This is where the framework of the new Sufficiency Economy comes in. This concerns the basic capacity of the people of a country to look after themselves.'
The optimisation principle applies when we seek to answer the question: How much of our time and energy should be devoted to the first and second frameworks, respectively? In other words, how much of resources should be allocated to producing for trade based on comparative advantage principle, and how much for basic security?
The best mix between the two allocations would represent the optimal state of affairs, both in mainstream and Sufficiency Economics, he concluded.
Now back to the question of China. How likely will it go the way of Japan? One seminar participant pointed out two major differences between Japan and China. One, China is politically stronger, unlike Japan which was defeated by the US in the second World War and had to depend on the US for security. So China can resist pressures from the US.
Two, China is a huge country. It can create its own domestic demand.
And finally, the third point he made is that if the rich countries use their surpluses to help poor countries develop, then global growth will increase to the benefit of everyone.
Savings vs investments
Yes, indeed. As Prof Abe pointed out, China has saved its ever ballooning foreign exchange reserves in US Treasuries. And because of the quantitative easing by the US, the US dollar has depreciated. China has lost a lot of its wealth as a result.
That set me thinking - would China's wealth be better preserved, and perhaps even be better utilised to yield greater economic returns, had it use the money to, say, build more schools and industries in its central and western regions, or even in Africa, or other poorer countries in Asia?
In the current unprecedented times that we live in, it may pay to reflect on what constitutes savings, and what constitutes investments. Hoarding of cash, as found out by China, may not be the best option.
And finally, Prof Abe's understanding of Sufficiency Economy is about knowing how to be satisfied. He was in Italy recently and he said that the 'economy there is very good'. There are a lot of old buildings, there is music and great food and beautiful people. They have two hours of 'nothing time' after lunch. 'Life is enjoyable.' In Japan, he said, men don't come home until 10 pm!
