Marginalia are brief notes written in the margin of a book or article. John Vandenbrink, Deputy Dean of GLOBIS University, will share his notes on topics that have caught his attention in his readings on finance, business, and economics.
In January CNN television commentator Fareed Zakaria reported that Japan had just recorded a trade deficit for the first time in 31 years. He interpreted the event in very dramatic fashion:
"Well, this week marks a turning point - one of the world's great export engines has run out of gas."
I remember reading the blog posting and thinking Zakaria had missed the mark.
This month, Financial Times journalist Mure Dickie, writing the lead article for a special report on investment in Japan, quoted Zakaria's declaration and used it as a foil, arguing that it was far too soon to write off Japan. Dickie listed a number of hopeful signs for Japan, but he didn't address what I remembered to be the sources of my discomfort with Zakaria's report. That sent me back to the original, which I found contains a good, quick distillation of commonly asserted causes for the presumed waning of Japan:
(1) Declining competitiveness due to
- Growth of low cost producers in East Asia
- The strong yen
- Political unwillingness to open closed sectors, reform labor laws, and allow more immigration
(2) Aging of the population, with declining numbers of workers and promises of excessive benefits for the elderly
(3) Huge national debt that, at 211% of GDP, raises the specter of default should interest rates rise
Zakaria's report hints of frustration with Japan. I can't disagree with his analysis per se. Some points—particularly the level of national debt—are serious indeed. However, it is oversimplified. Facts could be aligned for and against each point, but that would be a very long exercise. It's more useful, I believe, to comment on the assumptions about economic growth that underlie this common line of thinking about Japan. Zakaria's report provides a useful point of departure. Let's go back to some of the things he said.
On demography, Zakaria stated,
Between 1990 and 2007, Japan's working population dropped from 86 to 83 million. At the same time, the number of Americans between the ages of 15 and 64 rose from 160 million to 200 million. In a global marketplace, this is a major handicap for Tokyo. Between 2001 and 2010, Japan's economy grew at seven-tenths of one percent - less than half the pace of America's. It was also well behind Europe.
Contrast that with growth per person - or GDP per capita - and Japan actually outperforms America and the Euro Zone. So while Japan's economy in aggregate has been hurt by this lack of workers, for the average Japanese worker income is still up and quality of life is still very high.
That would seem to be a very good outcome for Japan—one assessed on the criterion that ultimately matters most, in fact. Nevertheless, Zakaria interpreted it otherwise:
That's partly why the country has not felt the pressure to reform.
Zakaria went on to argue that Japan's industry is becoming less competitive and that eventually per capita incomes will start slowing. This may turn out to be true, or it may not. What he failed to note—and what many others have missed as well—is that Japan has achieved something enviable: even amid the pessimism of the second of its so-called lost decades, it has sustained the high standard of living of its people in a rapidly changing, increasingly competitive world. This is not Japan the export engine, and no one is more frustrated than the Japanese themselves that their economy is not growing by leaps and bounds as it once did. Japan's place in the world has changed, and expectations for Japan must change as well.
Advanced economies like Japan and the United States need to accept that low growth will be part of their future. The extraordinarily rapid growth of Japan in the 1960s, 70s, and 80s that Zakaria refers back to was that of a catch-up economy industrializing along patterns already established, even able to take shortcuts along the way. For roughly two decades now, Japan has been a fully advanced economy with no precedent paths for growth. Over the same period, the post-World War II effort to create a world of free trade has produced ever-greater opportunities for less developed economies to join in global prosperity. Rapid growth has moved to these countries. Zakaria wrote a book about how this has affected the United States. It has affected Japan as well, and Europe.
On another note, Zakaria argues, as do many other observers, that Japan's demographics present a severe challenge to its future, suggesting that population growth like in the United States is a great advantage. However, population growth coupled with economic growth brings with it other problems, notably environmental damage. We can now envision a world in which the developing economies will use increasingly larger amounts of fossil fuel, creating greater pressures on the world's ecosystems. Population-linked economic growth in advanced economies will continue, worsening the situation. While no advanced economy is eco-friendly, Japan at least presents an example of an economy with the potential to sustain standards of living without increasing the environmental damage.
Fareed Zakaria is an exceptionally perceptive commentator, whom I respect greatly. His analysis of Japan, like that of many other contemporary observers, contains elements that cannot be dismissed. However, "out of gas" is the wrong metaphor. Prescriptions for change and growth in Japan require a subtler treatment of what Japan has achieved and what remains possible.