Japan’s Age of Plenty

Entrepreneurship has kept Japan’s economy from getting caught in the effects of demographic changes – and it can do the same in China.

With China set to rocket past Japan to become the world’s second-largest economy it’s a good time to look at the lessons the island nation holds for China. It was after the Meiji Restoration in 1867 that Japan decided to borrow from the West in order to provide the scientific development for its unique development. Deng Xiaoping’s 1978 opening up had much the same aim, using science and the market to unleash the enormous energy of China’s people.

Both Japan and China are among the greatest examples of economic latecomers. Hard as playing catch-up is, Japan’s experience shows that taking leadership is even harder.

For now, China looks unstoppable. But it was only 25 years ago that Japan, too, looked invincible. American auto, steel and machinery makers struggled to compete against Japanese imports. Japanese used their trade surpluses to buy up trophy properties like Rockefeller Center and Pebble Beach as well as a share in Goldman Sachs. Japanese banks ranked among the world’s largest. The book Japan as Number One seemed right on the mark.

But Japan’s economic might proved an illusion. Michael Schuman has an excellent piece in this week’s edition of TIME chronicling Japan’s many economic woes over the past twenty-plus years. It makes for grim reading. Indecisive political leadership and an unholy alliance between government bureaucrats and industry are key factors that have stymied economic growth.  Lower growth has led to low tax receipts. Coupled with generous spending, especially on infrastructure, the result has been debt that total almost twice GDP, one of the highest in the developed world.

I agree with Michael in many regards, although I have written a counterpoint that takes a more positive view. Japan is a safe, rich society, with some of the healthiest and longest-lived people in the world. Twenty-five years ago the U.S. was badgering Japanese to work less and enjoy life. They’ve started to do just that.

Whichever side of the debate you’re on, there’s no doubt that Japan is undergoing a momentous experiment of a sort that the world has never seen. A healthy, affluent nation, is deciding to shrink. In fact, this trend looks like something close to national suicide: By the end of this century Japan’s population will have shrunk by more than half, to fewer than 50 million people, about the same population as in 1900. The babies who are on the streets of Tokyo today will spend their last years in a country that has fewer than half as many people as today’s 127 million.

For a world whose economic system has been based on relentless growth this is a sobering thought. In theory, a nation’s economy could grow even if its population is shrinking if productivity keeps growing. Higher productivity is the magic elixir of economic growth, what allows us to do more with less. That could be through new products, expensive robots or just old-fashioned common sense. But no sizeable economy has ever tried to grow while it is dramatically shrinking in size.

For now, Japan’s experience has no relevance to China. But soon China may face a similar kind of malaise. China is, of course, getting old before it gets rich. Twenty years from now it will be an aged society, as Germany is today. How will an aged China keep its vitality, its innovation, its drive?

Japan has famously turned its back on immigration. It is among the least friendly toward immigrants of any major economy. Countries as diverse as Singapore, Canada and the United States have used immigrants not only to bolster their labor forces but to bring a new spirit of energy and entrepreneurship to their economies. Strange though it may seem today, China will have to grapple with the issue of immigration two decades or less from today. Coincidentally, in about 2030, about the same time China’s aging demographic profile makes it look like Germany today, India will overtake China in population.

Today, with a youthful population, it may be hard to imagine China needing vitality. But look at Germany and imagine a China with that age profile, but much, much poorer than Germany is today. I am more optimistic than many commentators; I don’t think that there will be a pension crisis. I think that there is enough unity of national purpose that Chinese people will work as long as needed. But just sticking together won’t be enough.

What worries me is that the entrepreneurial spirit in China is already under an extraordinary degree of pressure. Sizeable, independent companies are far too rare in China. Yet if entrepreneurship is not nurtured during these high-growth decades, there’s little hope that entrepreneurs can be an engine of the economy in 2030. But it is new, small, private businesses that usually drive economies.

China’s demographic clock is ticking. China’s officials are often credited with taking a long-term view. Laying the foundations for growth decades from now will require a visionary approach, one that can think beyond economic growth driven by state-directed five-year plans. The 30-plus years since the reform and opening started have been incredible. But the next 20 to 30 years will be the true test of China’s development.

Originally published in Caixin. Can be accessed at english.caixin.com/2010-07-27/100164553.html