Ghost Nations: China's Drift After Japan's Fade

China's adoption of the Japanese growth model in the 1990s was widely praised for deregulating and opening up China. This new economic model took shape under the leadership of President Jiang Zemin and Premier Zhu Rongji. Engineers by training, both had been mayors of Shanghai and were seasoned technocrats by the time they rose to national power in 1989 and 1991, respectively. During their tenure, China's GDP soared thanks to what Massachusetts Institute of Technology economist Yasheng Huang calls "a growth strategy centered on large-scale infrastructural and urban investment projects." _FP

Ghost Nations

Nations and empires pass through various stages, during their rise and fall. A policy which led to dynamic growth in one stage of development, may set the stage for decline into oblivion in a succeeding stage.

Japan's triumphant march from the 1970s to the 1980s, turned into a demographic and economic decline in the 1990s and 2000s. China's successful rapid growth, export-heavy policies were modeled after Japan's earlier export-driven rise. But as conditions inside and outside China settle into a long-term state of dynamic uncertainty, China may be learning the limitations of a one-trick pony economy.

...China borrowed much of its economic model from Japan: producing low-cost exports to fund investment at home while aggravating trading partners. At times, it seems like only the names have changed. Where Detroit automakers once denounced Honda and Toyota for dumping cheap, fuel-efficient sedans on American housewives, Treasury secretaries now wring their hands about the undervalued renminbi while China's trade surpluses yawn.

As pleasurable as it must be for China's leaders to have beaten Japan at its own game, the joke might soon be on them.

...In both China and Japan, finance, media, and other key service sectors are seen as too sensitive for free competition, so players with government ties are protected by onerous regulatory barriers to entry. It is not a coincidence that Japan has the lowest service-sector productivity in the G-7 and one of the lowest in the OECD. For their part, China's heavily protected and state-owned banks not only seek to limit their own competitors, but, through their lending practices, also hamper competition in other sectors by giving lower rates to favored, often state-owned, companies. A recent study by Li Cui of the Hong Kong Monetary Authority found that small businesses in China have less access to credit and pay much higher rates than larger companies. A recent article in the IMF's Finance and Development magazine concludes that opening up China's banking market to foreign competition could have sweeping positive effects throughout the economy.

While none of these reforms is easy, China's ticking demographic clock makes them urgent. China's one-child policy produced a large demographic dividend in the 1980s and 1990s as those of working age had fewer dependants to support. Starting in 2015, however, China will suffer the inverse -- a growing number of aged relying on a shrinking pool of young workers. "China has always been a demographic early achiever," quips a recent U.N. population report.

When China's working-age population peaks in 2015, it will be 20 years after Japan's crested the wave, but it will do so at a much lower level of prosperity than was Japan's at that time. The harsh reality is this: Japan got rich before it grew old, and China will grow old before it gets rich. _FP

In Japan, large parts of the country are shrinking due to low birthrates and continued urbanisation among the young. According to many analysts, Japan is almost past the point of no return, demographically (see Japan's population pyramid trend).

China is far more populous than Japan, and at least a few decades behind in terms of the population trend. But once the aging of the population begins to hit, the impact may be difficult for the top-down CCP to manage. China has little in the way of a social safety net. With the near-elimination of the extended family in China caused by the one-child policy, an increasingly alienated Chinese population will be drawn to various foci of organisation.

The CCP has attempted to maintain a near-monopoly on organised activity outside of the workforce, but the Chinese people have all the skills and tools they will need to form networks focused upon special goals or outlooks. The Falun Gong is only one of the widespread non-governmental organisations which the CCP is finding it harder to control.

China's economy still shows signs of strong growth, albeit largely stimulus-driven. But unless the global economy recovers soon, China will have to jettison the Japan model quickly and irrevocably, and set about making some very painful internal reforms.