The End of the East Asian Growth Model

By Ichiro Suzuki In the latter half of the 2010s, speculations grew on successor to China as the world’s workshop due to rising wages in the People’s Republic. China displayed a strong interest in moving up the ladder of value chains, advocating ‘Made in China 2025’. China followed its East Asian neighbors going this direction, a trajectory that began with Japan in the 1950s. However, is it still possible to follow this growth model to prosperity in the 2020s and beyond? It looks the underpinning factors of this export-driven model has been fading through the last decade. While a number of countries would still try to emulate the model, chances of their success look less certain for a variety of reasons. 1. Growth in the export markets A few decades that followed World War II were the golden age of the global economy, which basically meant the United States and Europe at that time. The U.S. came off WWII essentially unscathed. The war time economy focused on production of goods necessary for military efforts at the expense of private sector demand. The war brought the U.S. economy to full employment, rescuing it from the nadir of the Depression-plagued 1930s. The household sector built savings in the form of war bonds. When the war was over, American households unleashed their newly acquired financial power, going on a buying spree of consumer goods whose supply was limited till the war was over. Consumers drove the post-war economy. Later Western Europe took off amid reconstruction activities on the devastated economies. Growth rates were high in the regions that carried the global economy. This was exporters’ paradise, due to these economies’ greater capacity to absorb imports. Japan as an exporter found itself right in the middle of the golden age. 2. Geopolitics The Cold War in a sense was a Godsend to the Japanese economy. The 1950 outbreak of the Korean War bought an unexpected boom to the Japanese economy that supplied U.S. armed forces. Later, amid intensifying rivalry against the Communist bloc, the U.S. remained relatively tolerant on its growing trade deficits against Japan, a major Cold War ally, until the country became the world’s second largest economy at around 1970. By then, the U.S. faced an external account crisis that led to breaking the link between gold and the greenback. Later, the U.S. did not raise its eyebrows against the Asian Tigers that followed Japan’s success, in a way it did against Japan, primarily because the Tigers were much smaller economies. (On the other hand, China is a big country, widely expected to overtake the U.S. in its size and became the center of American attentions in the 2010s.) 3. Demography There was a worldwide post-war baby boom that made population grow, sending more young workers into factory production lines and turning them into consumers at the same time. Demography contributed immensely to strong growth rates in the post war era, on top of unleashed pent-up demand in the U.S. and reconstruction activities in Europe and Japan. In addition, population growth boosted the demand side of the exporter’s economy, too. Japan benefited from a post-war baby boom both at home and abroad. Today, all the developed countries are running a birth rate well below 2.1, the replacement rate, and this is working against their economic growth. East Asia is leading the world as a region of low birth rates. Even India that is widely expected to overtake China as the most populous country, its population is projected to peak out some time after 2050. Population still grows in the latter half of this century only in the Middle East and Africa, the regions that always had a problem of job shortages for a growing number of young people. 4. Quality of work force Japan’s population in the post war period was not only young and growing but also was gifted with its 100% literacy rate and strong work ethic. Such quality was considered ideal for workers at factories that cranked out standardized export goods to the western markets. South Korea, Taiwan, Hong Kong and Singapore also had such attributes, when they got onto the path of high growth. On work ethic of their workers, East Asia was once called the ‘Confucius economic sphere’ since it was thought that the teachings of Confucius gave people discipline. Of course, China, the home of Confucius, was no exception to this. Japan’s super normal growth in a generation that followed the end of WWlI was made possible by a miraculous combination of these four factors. The Asian Tigers that emulated the Japanese growth model after 1980 still benefited from favorable conditions externally as well as on the domestic front. Though never having been a U.S. ally, China initially received immense good will from the developed world when the country got back into the system of global trade. Like other East Asian forerunners, China also boasted of very well educated population and the government that is capable of long-range planning in industrial development. However, it looks that China caught the last train that still carried this growth model. The third decade of the 21st century is proving to be a tough world for aspirants of export-driven growth, as the pandemic is bringing down the growth rates of the developed world to levels last witnessed in the 1930s. In fact, the 2010s already proved unkind to exporters. The 2008-09 global financial crisis caused immense dislocation to the global economy, which at that time was dubbed as the deepest recession since the Depression. As slowing growth makes the pie smaller than was believed earlier, politics become increasingly hostile to imports and immigrants. Even before the outbreak of the pandemics, multi-national corporations have been slowly realigning their supply chains in order to serve increasingly diverse consumer needs in the developed markets, either in North America or Europe. The 2020s no longer give developing countries an easy path to move up the ladder In the order of labor costs. Very basic items like textiles and toys are likely to remain in the hands of lowest cost producers, but chances are smaller for the products that require greater engineering skills. Vietnam offers well-educated work force at lower cost than China and is the main beneficiary of factories moving out of China, to represent some small number of beneficiaries. However, the list is not long beyond Vietnam, as it is becoming increasing difficult to materially change long-term growth prospects of a country trlying on relocated factories. The Indian subcontinent is too big in terms of population for their fortune to be vastly altered by hosting some factories. Making iPhones in India is great. But the future most populous country needs many, many more announcements like that if India wishes to grow on export-oriented manufacturing industrIes. In addition, a third of the Indian population cannot read, as opposed to the almost 100% literacy rate in East Asia. It doesn’t seem likely that India moves up the ladder the way East Asians did. As for others on the subcontinent, Pakistan and Bangladesh, it does not seem they are moving beyond textiles. A few countries in sub-Sahara Africa may have a chance, given their geographical proximity to Europe, a major consumer market comparable to North America. Nonetheless, it is still too much to expect for them to move beyond textiles. For the majority of countries on the continent, their chances are not high because of unstable politics, low literacy rates and work ethic not comparable to East Asians’. All these headwinds weigh on them amid weaker demand for their products than in the past. For China, it is becoming evident that export-driven growth does not move the country beyond the middle income trap band, with its per capita GDP reaching $10,000. A number of countries, notably those in Latin America, got caught in a band of $10,000 - 12,000. They got stuck there in part because their main export items were natural resources and agricultural goods not industrial goods. Exports still drove Japan and the Asian Tigers to grow out of the band. China would have to grow on domestic demand to become a high income country. The renminbi could give an additional headwind to China’s quest for materially higher per capita GDP. Japan and the Asian Tigers grew past the middle income band driven by marked rise in their currencies, too. China’s renminbi may have already seen its best days on its way to $10,000. It no longer rises as it once did, due in part to varnishing currency account surplus from what was once double-digit figure against the size of the economy. About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.

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