China looks to Japan's past for clues to future

By Alan Wheatley, China Economics Editor - Analysis

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."