Economic Superpower Sweepstakes: Can China
Succeed Where Japan Failed?
By Ren Xiang (Paul) Tan
University of London (UK): School of Oriental and African Studies (SOAS)
Introduction
Although close neighbours, throughout history China and Japan
competed against each other for dominance in the region. Being
different in many respects, the two countries each took a very different
path when it came to economic development after World War II.
Their divergent political systems would play an influential part in their
post-war economic development:
at that time Japan became a
constitutional monarchy, where its people acquired representation
through democratically elected governments, and by contrast China
adopted communism after its civil war. Since then, both China and
Japan have striven to attain the status of economic superpower. The
comparative analysis that follows yields two conclusions (i) while Japan
has not yet succeeded in achieving this status, it is unlikely to do so
before China due to its lack of resilience, and (ii) between China and
Japan, China is better positioned to become a global economic power,
not only because of its own resilience to global economic challenges,
but also because the underpinnings of its economy. The paper start with
a description of Japan’s bid to become a world superpower since the
1970’s and the factors leading to its decline. A comparison is then made
to the different economic path China chose to take. The comparison will
show that although Japan and China may have similar patterns of
economic development, the differences are in China’s favour.
1
Japan: A Promising Start Leads to One Falter after Another
From 1970s to the 1980s, Japan enjoyed double-digit growth, above the
2% benchmark, and was being considered as a prospective superpower
(Hayashi and Prescott, 2001; Agnese and Sala, 2009). In hindsight, many
factors undermined Japan’s bid to achieve that status.
strong economic growth in the 1980s,
Despite its
the effects of deflation, its
growing fiscal debt, and a liquidity trap all worked to reduce any
flexibility it might have had with its monetary policy, and further
tightened its dependency on its Western allies, notably the United
States (Bayoumi, 2001).
During the 1990s, now known as its ‘lost decade’, Japan’s economy was
the worst-performing one among industrialised nations, with its GDP
ranging from 1.2 percent down into negative digits (Horioka, 2006). The
period of deflation that resulted from this stagnant and negative growth
devalued domestic assets even though both government and consumer
spending continued to grow. In addition, its unemployment rate began
to rise, worsening the decrease in GDP growth. One could argue that
the change in work hours, from 44 to 40 hours a week, did not
contribute to the decrease in productivity from 1988 to 1993 (Hayashi
and Prescott, 2001). This is based on the reasoning that the productivity
rate would be offset by increase in employment where the labour input
would remain equal, though it reduces the rate of return to capital and
also discourages private investments (Fukao and Kwon, 2005).
As well, in the early 1990s other developed economies around the
world, including superpowers, were in a recession. Overall productivity
was beginning to contract and consumer spending levels were dropping.
Since Japan’s economic model is export-driven, companies were forced
to shrink operations, and national output/productivity was also cut back
as a result (Boltho, 1996). To make matters worse during that
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widespread recession, Japan was hit with its own, and first, recession
since the 1970s (Bayoumi, 2001). It is widely accepted that the decline
of Japan’s high growth hitherto that began in 1990 is credited to two
factors: the burst of the bubble that drove its growth in the 1980s and
an unsuccessful attempt by the government to implement a Japanesestyle Big Bang in its domestic financial markets (Reszat, 2003).
From 1990 to early 1998, Japan’s growth averaged only ¾ percent per
annum, while its output gap declined from a positive 4½ percentage
points in late 1990 to a negative 7½ percentage points by early 1998
(Bayoumi, 2001). Some have argued that it was the government’s fiscal
and regulatory policies of the time that led to a decrease in, if not a halt
to, government spending, and a credit-crunch (Griffin and Odaki, 2009).
However, although the government’s fiscal and regulatory policy may
have contributed to the drop in investment by the private sector, it was
not the cause: Japan’s domestic financial institutions were being
stretched, it did not prevent businesses from seeking alternative
sources of funds and investments beyond its borders, if they chose,
since other financial institutions in the world had the ability to provide
financing to them (Hayashi and Prescott, 2001).
Aside from the effects of the global recession at the time, the
government itself was financially constrained. As a direct result of being
heavily in debt, the government was unable to provide stimulus
funding, unlike the governments of other industrialized economies, who
were able to do so in their respective economies (Bayoumi, 2001; Iida
and Matsumae, 2009). Despite the size of Japan’s population and the
country’s economic growth between 1970s and 1980s, the global
recession, inflation, and fiscal issues all had an indisputable influence on
slowing its growth. It would take another decade for it to recover. And if
that weren’t enough, the stock and land value to boom that Japan
3
experienced in the 1980s, and the resulting bubble burst compounded
by the 1997 financial crisis, have left its financial infrastructure in
shambles (Reszat, 2003).
China – The Metamorphosis of an Economic Dark Horse into a
Galloping Elephant
China has undertaken numerous changes to modify its economic
structure, from opening up its market to a wide range of domestic
reforms, all of which have contributed to its economic growth
(Demurger and Berthelemy, 2000; Goodhart and Xu, 1996). These
reforms have also enabled China to benefit from rising globalisation. As
it began its economic reforms in 1978, China’s GDP averaged 9.7% per
year up to 1998, even though its legal and financial infrastructures were
not as developed as those of other industrialised countries (Chow and
Li, 2002). Despite its economic reforms are still in progress and have yet
to mature, the growth of China’s private sector is much stronger than
most other domestic sectors as well as those of developed countries
(Allen et al, 2005). Even though China, by the nature of its political
structure, is a controlled economy, its government has allowed some
degree of capitalism to permeate and benefit its economy.
There is a considerable spectrum of views in the literature about the
actual causes behind the strong economic growth enjoyed by China and
rest of East Asian countries (excluding Japan). Still, there is a broad
recognition that high-growth Asian economies benefited from selective
or strategic government interventions and regulation, which ranged
from extreme laissez-faire to extreme regulation (Collins and Bosworth,
1996). China’s growth has also been credited to the incentives offered
to attract foreign technology and capital investment (Demurger and
Berthelemy, 2000).
4
Although, historically, economic reform has usually been accompanied
by a deep decline in output, such as has happened more recently in the
economies of Eastern Europe, China has managed a successful
transition from a centralised system to a more open and market driven
economy, giving its economy in an immediate boost (Boresnztein and
Ostry, 1996).
In contrast to Japan’s post-war economic path, China’s direction is more
promising, for two reasons. First, China has been able to attract direct
foreign investment; it was the first nation to do so among the
developing economies and the second in the world after the United
States. Globally, direct foreign investment has facilitated the transfer of
technology from developed to developing countries, effectively
narrowing the technological gap between them (Demurger and
Berthelemy, 2000). On the other hand, Japan’s post-war experience did
not include direct foreign investment, much to its detriment.
Second, China has a more diversified group of trading partners than
Japan had at the time. During Japan’s post war economic
reconstruction, its main trading partners are the United States, Britain
and France. In comparison, China is essentially the main nexus for the
world’s manufacturing and production facilities (Prasad, 2009).
Beyond those advantages, China maintains a tight control over its fiscal
policy, and as a result, and it is not as heavily indebted as Japan was at
the time. Collins and Bosworth (1996) assert that the high growth rates
of the Chinese and other East Asian economies were driven by effective
government policies, and their maintenance of high rates of savings and
investment. These factors helped ensure China was in a more resilient
position when it, like others around the globe, faced the collapse of the
global financial markets of 2008-2009 in the wake of the housing crisis.
5
Compare this with Japan, which was vulnerable to the effects of its
recession, and from which it could not emerge until a decade later
(Hoshi and Kashyap, 2005).
China’s response to this last financial crisis was to initiate spending
programs to stimulate its economy, while holding down inflation, and
preventing deflation. But perhaps most importantly, because China has
a strong base of direct foreign investments within its borders, it was
able to accumulate substantial domestic and foreign currency reserves
(Collins and Bosworth, 1996). This is notwithstanding the other benefits
from having encouraged foreign investment, namely the creation of
jobs and building of infrastructure, relieving the central government
from having to use its own reserves for such investment.
Weighing in on the Bets for China
It would not be a stretch to suggest that, when Japan’s economy began
to surge in the 1980s, it did not go unnoticed by the Chinese, who then
initiated their reforms. Japan was attempting to tighten regulation of its
own financial sector, while China was going in the oppose direction,
fiscal decentralisation (Lin and Liu, 2000; Baskaran and Feld, 2009). Yet
the two neighbours have shared a similar pattern of economic growth
that is starting out as a small-scale economy to becoming one of the
largest in the world. Should one then conclude that China risks the same
fate in the face of financial crisis as Japan when it suffered the fallout
from the burst of its own economic bubble? Not when factoring in the
differences in their respective approaches and economic constituents.
China has been largely successful in keeping its inflation rate steady,
regardless of the boom in land values that resulted from its economic
success, as Japan experienced during the 1980s. It is therefore notable
that, at the time as well as today, China’s legal and financial systems
6
were still a ‘work in progress’ and yet to be fully developed (Hasan et al,
2009). In contrast, when Japan experienced its economic boom and
bust, its legal and financial structure were much more established
(Reszat, 2003). However, China is endowed with three advantages that
Japan did not have. First, the fact of having a centralized government
enables China to make policy and regulatory changes that may go
against market demand and restrict uncontrollable growth. Second,
China’s is a two-way economy. On one hand, it exports manufactured
goods and products, but on the other it imports investment and
advanced technology to develop and sustain its economy. Compare with
Japan which, during the 1980s and to some degree today still, remains
an export driven and protectionist economy. Third, China is much more
diversified in terms of trading partners than Japan was during the
1980s. Beyond that, the size of China’s population cannot be
discounted, even with the large income disparities. China will always
attract global investment by virtue of its massive domestic market
(Fleisher et al, 2009; Woo, 1998).
Future Studies & Synthesis
Given with such strong prospect of becoming an economic superpower,
China currently feels powerful, but it is still weak in terms of economic
development. Therefore, it would be beneficial to re-examine China’s
legal and financial structure within the coming decade to assess the
flexibility and adaptability of its infrastructure to withstand economic
typhoons. Nonetheless, with all of its advantages and continuing
initiatives, China has positioned itself to reach the coveted status of
economic superpower ahead of Japan in the coming decades, and likely
sooner than later.
7
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