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Out of Control Policy Blog

Japan's Economic Doldrums and Asia's Ascendance

Samuel Staley
January 2, 2011, 11:02am

Growing up in the 1970s, I heard a lot of talk about Japan's economic ascendance. This was a particularly powerful analogy for someone growing up in Ohio, where Honda established an economic foothold that allowed the company to emerge as a dominant player in the automotive industry. Honda now employs more than 15,000 people and is the largest manufacturer in Ohio ranked by employment. When I entered the employment market at the end of the last "great" recession, Japan's economic dominance of the global economy seemed like a foregone conclusion.

So, the fact Japan is entering a third decade of economic stagnation is a quite revealing, both about economic forecasts as well as analysis the presumes to understand the forces that inevitably make economies great. It's also a warning to China boosters and anyone predicting an inevitability to Asian ascendance: Growth is not inevitable in a globally competitive economy. Indeed, as my colleague Anthony Randazzo has pointed out in his analysis of Japan's "lost decade" (now decades), public policy can do a lot to derail economic prosperity.

While the fundamentals of China's economic growth are sound, it's far from clear that this nation's economic prosperity will continue. On the contrary, China's recent policy shift to bolster investment through state-owned banks and state-owned enterprises does not bode well for healthy economic growth. Most of China's recent growth has been through improvements in productivity that shifted employment from less productive rural economies to more productive urban economies. While this is an important source of growth, improvements in technical efficiency through entrepreneurship were not the key drivers in the sense (unlike recent growth in India, for example) indigenous Chinese enterprises have driven innovation. National economic policy continues to be riddled with contradictions and paradoxes that have not been resolved, including policies that both encourage car ownership (to simulate economic growth) and restricting car use (to manage congestion). Investment in the real-estate markets have created potentially volatile housing market bubbles and surpluses in major cities such as Shanghai and Shenzhen.

A worthy read for skeptics that outlines a host of challenges faced by China is John Lee's excellent and easy read Will China Fail? The Limits and Contradictions of Market Socialism published by the Centre for Independent Studies.

The bottom line is that U.S. competitive decline is not a foregone conclusion nor is China's rise as the world's dominant economy. U.S. global competitiveness in its core competencies--innovation, risk taking and entrepreneurship--will continue to be the key to its economic future. Policies that reduce the rewards to wealth creation, entrepreneurship and private investment may be the biggest threat to our ability to compete on a global stage.


Samuel Staley is Research Fellow


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