The West Is Poised to Catch Japan's Economic Malaise
Philip Bowring International Herald Tribune
Tuesday, April 17, 2001
TOKYO Could the future be here? Japan's decade of snail's pace economic growth is usually seen by the outside world as a phenomenon caused by national peculiarities. The Japanese often accept this assessment because they like to see their country's situation, for good or ill, as the product of a singular culture. But it is just as likely that Japan is in the vanguard of the developed world, that a similar fate awaits Europe and North America.
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If that is the case the developing world, in particular, needs to take a much less fatalistic view of its own future and stop relying on the increasingly outdated assumption that it can only prosper if the old world continues to grow rapidly.
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Everywhere old economies are weak. The World Bank last week cut its global growth forecast to just 2.2 percent, with the United States down to 1.2 percent, Japan to 0.9 percent and Europe at 2.5 percent. International agencies have to look on the bright side, so the bank predicts, with an evident lack of conviction, a big rebound, especially for the United States in 2002.
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Is it realistic, however, to expect the core group, of Organization of Economic Cooperation and Development countries, to grow at more than 2 percent over the next decade? Japan will probably pick up a little but the outlook for Europe and the United States is worse. As they age it is likely that increasing proportions of household incomes in all these societies will be devoted to domestic services, at the expense of goods, many of which are imported.
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As the West's monotheistic missionary economists never cease preaching, there have been some specifically local causes of Japan's malaise. Tardiness in facing up to the bubble era's bad debts and failure to introduce more competition into the domestic service sector are the obvious ones. But how do Europe and the United States compare on fundamentals?
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Europe's demographics, the single most important determinant of long-term prospects, are barely any better than Japan's, and its track record of technological innovation is worse. America has better (but still deteriorating) demographics and a real but exaggerated technological prowess. Its domestic and foreign debts are, in the medium term, a bigger obstacle to continued expansion than was Japan's financial bubble. They still grow as the Federal Reserve accommodates Wall Street's demands for ever increasing credit to bail it out of its excesses.
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Meanwhile the world is facing the consequences of overinvestment in manufacturing, which began in Japan in the late '80s, shifted to the rest of East Asia in the mid-'90s and has since moved to America. Credit-induced overinvestment continued in Asia well after the crisis because international investment banks could make huge profits from loan arranging while passing the risk to naive Western pension and mutual funds. The profits "ice age" is now spreading from Asia to the West.
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Almost every economy outside the United States needs a consumer demand boost but the places from which it can most easily come must cope with a monetary system dominated by the three currencies of the old rich. While no one can complain that there is a shortage of global liquidity - quite the opposite - there is a reluctance on the part of smaller countries to stimulate their economies if that involves taking on additional currency risks.
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Lack of imagination on the part of governments and international institutions has largely precluded international issues of domestic currency debt even though currencies such as the Thai baht, the Korean won and the Malaysian ringgit have at least as good 30-year track records as sterling or the Australian dollar. Meanwhile the U.S. dollar's role in cross-border investment has grown even as governments in Asia have shifted to more flexible currency policies.
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Asia's obsessions with investment and exports at the expense of domestic consumption are a further negative factor. So is the widespread belief that developed country markets are all that matters while potentially faster growing non-OECD markets are seen as of marginal importance.
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Europe and the United States should acknowledge that they have scant scope to outperform even an aging Japan over the next decade. Younger economies should be stimulating consumption at home and taking trade and financial sector initiatives abroad to offset the sclerosis of old economies and imbalances in capital markets.
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