China looks to Japan's past for clues to future

BEIJING Mon Sep 1, 2008 12:50am EDT

Cars are driven in Beijing's city center in this January, 15, 2008 file photo. REUTERS/Reinhard Krause/Files

Cars are driven in Beijing's city center in this January, 15, 2008 file photo.

Credit: Reuters/Reinhard Krause/Files

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BEIJING (Reuters) - Now the Olympics are over, a new game is under way: telling China's economic future by reading the tea leaves of Japan's past.

Teasing out economic parallels is a favorite academic pastime, but it can be just as treacherous as extrapolating prevailing trends into the indefinite future. In the 1960s the Philippines was the second-richest economy in Asia after Japan. Now it is bringing up the rear.

Still, looking at Japan provides some useful pointers as the world ponders how long China can keep up the growth of nearly 10 percent a year that it has enjoyed since it embarked on market-oriented economic reforms in 1978.

Albert Keidel at the Carnegie Endowment for International Peace in Washington says that when Japan was at China's current level of GDP of just over $2,000 per capita, and headed for $10,000, it sustained growth rates of 8-10 percent.

So did South Korea and Taiwan.

In keeping with a long-observed principle that the later a country begins its catch-up, the more rapid its modernization drive will be, Keidel expects China to grow more swiftly than its three neighbors did at the same stage of development.

The result, he says, is that China will match America for economic size by 2035 and be twice as big by mid-century.

"Because its success in recent decades has not been export-led but driven by domestic demand, its rapid growth can continue well into the twenty-first century, unfettered by world market limitations. Nor do other problems China faces jeopardize long-term growth prospects," Keidel wrote in a recent paper.

POLLUTION AND POPULATION

One such problem is that rapid industrialization of a country of 1.3 billion people is generating so much pollution that it risks literally choking off growth.

But we've been here before. The Organization for Economic Cooperation and Development, Keidel notes, called Japan in the late 1960s "one of the most polluted countries in the world".

Japan, however, started to tackle its pollution, giving its environmental agency de facto cabinet status in 1971. China, now following suit, did the same earlier this year.

By some measures, China is even ahead of the game, Keidel argues. By 2004 in Beijing, ambient sulfur dioxide had already fallen far below Japan's peak levels in the mid-1960s.

"Shifts in China's environmental policies mirror those in Japan in the late 1960s and early 1970s," he says.

And in respect of one important driver of growth, he adds, China is well ahead of the curve described by its neighbors: "China encouraged early improvements in the business climate for foreign investment that Japan and South Korea never allowed."

Another U.S. scholar, Derek Scissors of the Heritage Foundation, draws a much gloomier lesson from Japan's experience.

The population boom that has powered Chinese growth will give way over the next decade to a rapid ageing of society that will usher in weaker economic growth, as it did in Japan, he says.

The number of Chinese in the industrious 15-24 age cohort grew by 20 million between 2000-2005, but the increase in 2010 will be just 1 million on U.N. projections. It will then drop sharply, as a consequence of China's one-child policy, and the country's overall working population will shrink after 2015.

"Among other things, export competitiveness will erode, weakening a cornerstone of expansion and testing the party's capacity for innovative policy," Scissors said in a report.

After four decades of a young population and rapid export-led growth, Japan was also projected by many to challenge the United States for global economic pre-eminence, Scissors noted.

"Instead, Japan is now approaching 20 years of starkly inferior performance, coincident with an ageing population and much lower birth rates than those seen at the outset of that earlier 'miracle'," he added.

Dong Tao of Credit Suisse also cites Chinese demographic trends as a key reason why Chinese GDP growth is likely to head down to 7.5 percent in 2011-2020 from around 10 percent now.

INVESTING ABROAD

Arthur Kroeber, head of the Dragonomics consultancy in Beijing, is convinced that urbanization, productivity gains and fast-rising incomes bode well for continued growth in China.

"Put all that together and you can certainly get 8 or 9 percent GDP growth in China for the next few years," he said.

But one risk he sees, drawn from Japan's outbound investment two decades ago, is how China spends its wealth overseas.

In the late 1980s and early 1990s, Japan bought trophy assets such as Rockefeller Center in New York and Pebble Beach golf course in California.

Yet the investments were all by private companies. So while Americans fretted about rising Japanese power, there was no legislative backlash.

In China's case, by contrast, it is banks and firms ultimately controlled by the Communist party that are buying into Western rivals.

"It's never clear exactly what their relationship is with the government. Are they pursuing commercial motives or some political motive? No one can tell, and that makes people nervous," Kroeber said.

The risk of a protectionist reaction is all too real, especially in a global economic downturn. "There's real scope for some pretty serious political friction," he said. "If people are looking for scapegoats for things that have gone wrong, China is an obvious target."

(Reporting by Alan Wheatley, Editing by Sonya Hepinstall)

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