Part I: China’s Future – a Japanese Repeat?Posted: January 28, 2010
In the 1970s and early 1980s, Japan was the world’s fastest growing industrial economy. With growing competencies if not leadership in manufacturing and high-value financial services, many predicted it would surpass the United States as the world’s great economic power, despite a population half the size.
And Japanese companies didn’t just export. As their success grew into the 1980s, they increasingly sought to purchase American assets in industries once marked by American dominance, such as cars, steel and electronics. Japanese banks increased their share of the American lending market to near 20%.
Japan was taking over.
Fast forward 20 years and that same economic concern is being voiced about China’s meteoric economic growth since its market reforms in 1979. China is now viewed as the likely successor to the United States as the world’s economic power. It has averaged economic growth of 10 per cent per year since 1979, trend that has seen its economy catapult to third largest in the world, despite a per capita income that ranks in the lower half of the worlds economies. And thanks to its near unbeatable wage rates and artificially low fixed rates of exchange, China will soon become the world’s largest exporter, a status that explains the over $2 trillion in foreign reserves sitting in its bank account.
Like Japan in the 70s and 80s, China’s manufacturing prowess is now making its way into higher value-added activities in finance, science and technology. Add to it a willingness to invest abroad, and the foreign panic is back.
However, like the panic created by the launching of the Sputnik by the Soviets in 1957, panic aimed at future Japanese dominance eventually caught wind of reality. Japan, while not quite the Potemkin-esque Soviet economy, was based on investment inputs rather than efficiency. And once the returns on those investments started to show their glaring holes, the Japanese hybrid began to stall.
China has grown in large part thanks to the same factors that propelled Japan: large investment inputs, cheap labour, fixed exchange rates, and readily available capital.
So does the same fate await China’s rise as did Japan’s? Or has China learned from its neighbour and one time Colonial master?