Why China 2009 Isn’t Like Japan 1989

When I in 2005 predicted that China would eventually become the world’s leading economy, I was asked why the bullish view on China wasn’t like the bullish view of Japan in the late 1980s and early 1990s, when some people believed that Japan would overtake America as the world’s biggest economy, something which hasn’t happened (or even come close of happening as the U.S. economy is nearly 3 times larger than the Japanese).

My answer in short was, because there are about 10 times as many Chinese as Japanese. And has been demonstrated in majority Chinese countries like Hong Kong, Taiwan and Singapore, the Chinese aren’t incapable of high productivity and with China gradually moving away from communism, mainland Chinese per capita income levels should approach those in Hong Kong, Taiwan and Singapore. Something which given the size of China’s population will make it the world’s biggest economy.

Via the Naked Capitalism blog, I now however again see the assertion that China is the new Japan resurface.

One argument is that the Chinese government statistics are manipulated. That is probably true, but there still exists overwhelming evidence that the Chinese economy is indeed growing, and that moreover during some periods of time, official statistics have underestimated growth.

The second key argument is that there is currently excessive credit- and money supply growth. That is also true, and that means that there is a high risk of future cyclical slumps in China. But cyclical slumps don’t necessarily mean a permanent decline. America in the late 19th century experienced several cyclical slumps, but nevertheless quickly recovered and experienced rapid long term growth.

And China 2009 is in fact more like America 1879 than Japan 1989. The reason why the Japan stagnated in the 1990s (and 2000s) was first of all that they responded to the crisis with bad policies that inflicted permanent damage on the Japanese economy. And secondly because Japan later experienced a demographic implosion with a shrinking work force and rapidly increasing elderly population.

Now, while China’s current population policies risks creating similar problems in the future, which is likely decades away. And more importantly, in 1989, Japan had almost its entire population employed in relatively high productivity urban economic activities. In China, by contrast, a significant portion of its population is still employed in low productivity rural economic activities. Moreover, even much of its urban population has the potential to move significantly up the value chain, something which was not the case in Japan in 1989.

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Technorati Tags: 19th Century, 2000s, America, assertion, capitalism, China, China Population, China S Population, Chinese Economy, Chinese Government, Communism, Early 1990s, economy, Government Statistics, High Risk, Hong Kong, hong kong taiwan, Japan, japanese economy, Mainland, money supply growth, Official Statistics, Overwhelming Evidence, Permanent Damage, Population, Singapore, Slumps, Taiwan, U.S., world

Related posts:

1. Why The Japanese Economy Will Continue To Decline
2. Cantillon in China
3. China Lifts Asia
4. China Lifts Asia
5. Cantillon in China

Tags: 19th Century, 2000s, America, assertion, capitalism, China, China Population, China S Population, Chinese Economy, Chinese Government, Communism, Early 1990s, economy, Government Statistics, High Risk, Hong Kong, hong kong taiwan, Japan, japanese economy, Mainland, money supply growth, Official Statistics, Overwhelming Evidence, Permanent Damage, Population, Singapore, Slumps, Taiwan, U.S., world

This entry was posted on Tuesday, September 1st, 2009 at 10:33 pm and is filed under Austrian Economics. You can follow any responses to this entry through the RSS 2.0 feed.