11 October 2010

Ghost Nations: China's Drift After Japan's Fade

China's adoption of the Japanese growth model in the 1990s was widely praised for deregulating and opening up China. This new economic model took shape under the leadership of President Jiang Zemin and Premier Zhu Rongji. Engineers by training, both had been mayors of Shanghai and were seasoned technocrats by the time they rose to national power in 1989 and 1991, respectively. During their tenure, China's GDP soared thanks to what Massachusetts Institute of Technology economist Yasheng Huang calls "a growth strategy centered on large-scale infrastructural and urban investment projects." _FP
Nations and empires pass through various stages, during their rise and fall. A policy which led to dynamic growth in one stage of development, may set the stage for decline into oblivion in a succeeding stage.

Japan's triumphant march from the 1970s to the 1980s, turned into a demographic and economic decline in the 1990s and 2000s. China's successful rapid growth, export-heavy policies were modeled after Japan's earlier export-driven rise. But as conditions inside and outside China settle into a long-term state of dynamic uncertainty, China may be learning the limitations of a one-trick pony economy.
...China borrowed much of its economic model from Japan: producing low-cost exports to fund investment at home while aggravating trading partners. At times, it seems like only the names have changed. Where Detroit automakers once denounced Honda and Toyota for dumping cheap, fuel-efficient sedans on American housewives, Treasury secretaries now wring their hands about the undervalued renminbi while China's trade surpluses yawn.

As pleasurable as it must be for China's leaders to have beaten Japan at its own game, the joke might soon be on them.

...In both China and Japan, finance, media, and other key service sectors are seen as too sensitive for free competition, so players with government ties are protected by onerous regulatory barriers to entry. It is not a coincidence that Japan has the lowest service-sector productivity in the G-7 and one of the lowest in the OECD. For their part, China's heavily protected and state-owned banks not only seek to limit their own competitors, but, through their lending practices, also hamper competition in other sectors by giving lower rates to favored, often state-owned, companies. A recent study by Li Cui of the Hong Kong Monetary Authority found that small businesses in China have less access to credit and pay much higher rates than larger companies. A recent article in the IMF's Finance and Development magazine concludes that opening up China's banking market to foreign competition could have sweeping positive effects throughout the economy.

While none of these reforms is easy, China's ticking demographic clock makes them urgent. China's one-child policy produced a large demographic dividend in the 1980s and 1990s as those of working age had fewer dependants to support. Starting in 2015, however, China will suffer the inverse -- a growing number of aged relying on a shrinking pool of young workers. "China has always been a demographic early achiever," quips a recent U.N. population report.

When China's working-age population peaks in 2015, it will be 20 years after Japan's crested the wave, but it will do so at a much lower level of prosperity than was Japan's at that time. The harsh reality is this: Japan got rich before it grew old, and China will grow old before it gets rich. _FP
In Japan, large parts of the country are shrinking due to low birthrates and continued urbanisation among the young. According to many analysts, Japan is almost past the point of no return, demographically (see Japan's population pyramid trend).

China is far more populous than Japan, and at least a few decades behind in terms of the population trend. But once the aging of the population begins to hit, the impact may be difficult for the top-down CCP to manage. China has little in the way of a social safety net. With the near-elimination of the extended family in China caused by the one-child policy, an increasingly alienated Chinese population will be drawn to various foci of organisation.

The CCP has attempted to maintain a near-monopoly on organised activity outside of the workforce, but the Chinese people have all the skills and tools they will need to form networks focused upon special goals or outlooks. The Falun Gong is only one of the widespread non-governmental organisations which the CCP is finding it harder to control.

China's economy still shows signs of strong growth, albeit largely stimulus-driven. But unless the global economy recovers soon, China will have to jettison the Japan model quickly and irrevocably, and set about making some very painful internal reforms.


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Blogger kurt9 said...

There is inaccuracy in the FP article. Japan's economy was indeed stagnant for 12 years following the crash in 1992. However, Japan's economy did rather well from the end of 2003 until the Lehman shock in september of 2008. Japan's economy grew an average of 2.5% during this 5 year period, which is not bad considering that they had a decline in their absolute population (not just working age population) during that time.

The reason why Japan's economy tanked after the Lehman shock was due to the collapse of the dollar-yen carry trade, not because of fundamentals in Japan's economy or demographics.

Japan has been slow to restructure their domestic economy. However, given the increased retirement of much of their workforce, Japan can slowly restructure its economy in lockstep with the attrition of their workforce and thereby avoid a large unemployment problem.

China can certainly do the same thing. The peaking and decline of their working age population will make it easier to shut-down their obsolete state owned enterprises without generating massive unemployment. The way to overcome a declining population is through increased productivity via robotics and automation. Its time for China's industry to ascend the technological value-added ladder anyways. A decreasing population will make it easier, not harder, for Chinese industry to do this.

India and the rest of the developing world (Latin America, Middle-east, South East Asia) are only 15-20 years behind China in demographics. The collective fertility of this part of the world is probably already below 2.5 and will be below replacement by 2015. The only region of the world that will still have a growing population at this time will be Africa.

Monday, 11 October, 2010  
Blogger PRCalDude said...

The US is more of a ghost nation than Japan by a long-shot. Half the babies under 5 are nonwhite. At least Japan is Japanese.

Also, the idea that population growth is necessary to keep nations alive is complete bunk. The population of Europe has waxed and waned severely over the past 1500 years. If you read through Samuelson's economics text, he shows numerous examples of the populations of the Western world have low birth rates, including the US, but here we still are.

What will definitely kill us though is replacing us with non-Europeans.

Monday, 11 October, 2010  
Blogger al fin said...

Kurt, it sounds as if you have the future well in hand. That makes me feel better, since for a minute there I was getting worried. ;-)

PRC: The US is still a federation of states, which means that it is not always accurate to refer to the US as a single entity. US demographics can be a bit tricky for that reason.

History may tell us a different demographic lesson than Samuelson's economic text. These are not academic questions, such that an academic can simply wave them away with his hands.

Kurt's ideas about using technology to balance a waning birth rate sounds reasonable but is likely to be very tricky to achieve in reality.

The US is certainly as vulnerable to some of the violent demographic turbulence that is coming as any country in Asia or Europe.

A bigger problem for the US than the loss of a European majority is the suicidally insane governmental and judiciary policies and destruction of constitutional safeguards -- all of which has been overseen and largely cheered on by a European majority.

Monday, 11 October, 2010  
Blogger PRCalDude said...

I don't think the majority cheered it on at all. Look at how well Ross Perot did in the 90s - he was opposed to all the things that we experience now and was leading George Bush until he dropped out.

The elites at the top push all these things on us. The reason we keep hearing about the need for a positive population growth rate is that the elites use it to validate their desire for unrestricted immigration. "If we don't get more immigrants in here right now our society will collapse!" is the subtext.

It won't. It might make wages rise and land less expensive though. I can't think of a single reason why more people are always better.

Monday, 11 October, 2010  
Blogger kurt9 said...

I just think the issues of population decline are over-hyped. A mild population decline does make economic reform easier in that it produces less structural unemployment, not that the Japanese are necessarily taking advantage of this fact.

The situation in Europe where you have an immigrant population hostile to the cultural values of the host society is a more serious one.

Tuesday, 12 October, 2010  
Blogger kurt9 said...

As you have pointed out many times, the biggest problem facing East Asian societies is the massive amounts of corruption. This is not only true for China, but also South Korea, Taiwan, and even Japan. The Japanese government debt, for example, is largely a result of "money" politics.

Tuesday, 12 October, 2010  
Blogger al fin said...

Kurt: True, Japan and Europe are dealing with the demographic collapse in different ways. As has been stated here many times over the year's, Japan's approach may work for a few decades before collapse. Europe's approach is doomed to explode at the first significant provocation.

PRC: I understand your frustration at the ruling class and what it is doing to a formerly promising nation and people. One of the purposes of this blog is to point out what is happening -- good or bad -- and to provoke a reaction in the reader such that he will take defensive action for himself. Blaming the ruling classes for being what they are while depending upon the society constructed by the policies of the ruling classes, is not rational.

Stalin Princes: Congratulations on your blog, and good luck with it. Unfortunately, our two blogs have very little in common at this time. If that situation changes, I will promptly create a sidebar category appropriate for placing a link to your site. Thanks.

Tuesday, 12 October, 2010  

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