TOKYO – Once again, Japan is Asia’s odd country out. For two decades, as one Asian economy after another boomed, Japan’s economy remained virtually stagnant. Now, with GDP growth in Asia’s two giants, China and India, slowing precipitously – a decline that appears to be contributing to diminishing economic performance in much of the rest of Asia – Japan is recording its strongest growth since its 1980’s boom.
But, just as Japan’s post-war economic model became the template for the Asian economic miracles of recent decades, the reforms currently being implemented by Prime Minister Shinzo Abe (“Abenomics”) may offer Asian economies a path back to strong growth. If the fallout from China’s slowdown is not to hit the entire region and jeopardize the economic integration that has already taken place, Asia’s governments – beginning with China – will need to embrace similar reforms.
How did Asia’s boom fade so quickly? Economics is supposedly a cold-blooded subject. Yet successful economies are prone to one of the most dangerous emotions of all: self-satisfaction, that excessive pride that Confucius condemned, which makes governments wary of reforming what has been a winning model, even when stresses begin to appear.
Japan has paid a high price for this attitude. Even after its property bubble burst 24 years ago, the authorities continued to believe that the country’s growth model needed no adjustment. The result was two lost decades of deflation and introspection before Japan finally embraced the reforms needed to kick-start a new, more open – and hence more vibrant – economic model.
China and India, it seems, have also succumbed to economic hubris. Three decades of success in China, and a decade in which India supposedly overcame the old, slow, “Hindu rate of growth,” are ending with both economies slowing precipitously. And both are slowing for the same reason: stalled reform, which is a direct result of governments being so satisfied with today’s conditions that they fail to address tomorrow’s rising dangers.
China’s government continues to turn a blind eye toward banks that lend to the politically well connected, or that tolerate companies – mostly state-owned – with poor financial discipline. Indeed, total public- and private-sector debt in China is now around 200% of GDP, up by more than one-third in five years. Reckless lending is undermining efficient allocation of capital and preventing China from drawing a line under the investment- and export-led growth model of the past three decades and basing future growth more on domestic consumption.
Likewise, India’s government, having embraced economic liberalization, has essentially pulled back from it in recent years. Plans to allow foreign investment in retailing and other key economic sectors have been put on hold. In critical industries – mobile communications and mining are perhaps the two most important examples – privatization has been corrupted by cronyism.
Moreover, India remains an inward-looking economy that attracts relatively little foreign investment and plays a much smaller role in world trade than it should. Notwithstanding its renowned software industry, India plays little part in the production chains that underpin Asia’s regional trade patterns. The result – as visible as it was predictable – has been a sharp slowdown in economic growth.
To be fair, there is a growing recognition in some countries of the need for change. The need to restore economic dynamism was the focus of South Korea’s presidential election in 2012, which brought the country’s first-ever female president, Park Geun-hye, to power. Today, the country is gripped by an important debate about how to reform the chaebol, the mammoth industrial conglomerates that did so much to lift the country out of poverty and into the front ranks of the world’s economies. Park’s status as the daughter of former President Park Chung-hee, who put the chaebol at the center of South Korea’s economy, could give her the credibility needed to recast their economic role.
Elsewhere in Asia, including in China, the debate is only beginning. But progress on reform, particularly in finance, must come quickly, because in most countries – India is the main exception – the demographic window of a growing working-age population is closing, if not already shut. It is not necessarily bad for Asia’s traditionally high savings rates to fall; after all, consumption typically rises with an aging population. But savings will need to be allocated far more efficiently than in the past. Japan’s lost decades provide a grim lesson of the economic cost of neglecting such reform.
Moreover, borrowing in US dollars to finance current investment spending – as many emerging economies have done in recent years, as the US Federal Reserve’s policy of quantitative easing flooded emerging markets with cheap funds – is no substitute. Indonesia, Thailand, and others are now finding it difficult to service these loans as their exchange rates fall against the dollar in the wake of the Fed’s plans to “taper” its policy. Indeed, the debt build-up is so large that markets now fear a repeat of Asia’s financial crisis.
The Japanese precedent matters all the more, given that, 16 years after the Asian financial crisis nearly wiped out decades of hard-earned growth, Asia’s banks and capital markets remain inefficient. Asia’s economies need deep, well-regulated capital markets, so that savings can be allocated to where they yield the highest returns. Instead, today’s poorly regulated financial sectors – China is the biggest culprit – misprice capital. Moreover, banks are too dominant: Asia (including Japan) accounts for more than half of the world’s population but barely a quarter of global capital-market capitalization.
Sixteen years ago, the Asian financial crisis erupted, following the Thai government’s decision to float the baht in the face of speculative attacks. The response of governments to that crisis has shaped much of the region’s economic policymaking ever since. If Asia is to avoid another crisis on a similar scale, or lost decades of growth, its governments will need to embrace the type of all-encompassing reforms that Japan is undertaking. Abenomics, it seems, is for everyone.