Today's talk about US being replaced by another World Hegemon is not new. Back in 80's Japan was pushing some guys' nerves in Washington. Today China is blamed for industrial espionage, "stealing US jobs" and polluting. Back in the 80's Japan was blamed for killing the competition in automobile, semiconductor and consumer electronics industry and simply dominating US. It was suspected that Japan will takeover the world not by bullets but by it's unprecedented technological development and robust economy. So the question is what went wrong and Japan got itself into a never ending economic recession? Why weren't they able to get out of Heisei Period? Was this the result of a financial crisis? Was this because their economy was too dependent on certain sectors? Or was it because they missed the silent IT revolution which created tech giant companies like Apple, Microsoft, Amazon, Google, Yahoo, Facebook etc and resulted huge economic activity. Or was it the result of something much deeper that is burried deep inside Japanese economic structure. And of course the main question is, will other somewhat developed asian economies like South Korea, Taiwan, Singapore, Hong Kong will share the same destiny? Are there any lessons for developing Asian giant China?
First of all we should look at what's the current problem in Japanese economy. Well the problem is similar to that of Greece actually. Of course Greece is in much more severe condition. However the problem is the same : Government overspending resulting from government overreach in economy. Today Japanese public debt is 10.46 trillion dollars, makes around 2.5 times of it's GDP. Clearly there is very little room left for debt growth, because it's very close to a point where Japanese governments' entire yearly tax income would be insufficient to pay the yearly interest (yeah only interest not the actual debt) of it's debt. At this point government simply goes bankruptcy and expects bailout from 3rd parties to save itself either from it's own private sector (financial institutions) or other countries (if private sector can't save the government).
The paragraph above seems pretty depressing and shocking right? I mean Japan is the largest creditor nation in the world, yet still it's about to go bankruptcy. Do they have any correlation? Well no. Not really. One should be able to divide the public sphere and private sphere in a capitalist economy. Private sector might be in a great shape, yet public sector might be going down. Normally what is expected in an ideal situation is that the private sphere of the economy should be going on it's regular activity, the economic growth should be on it's own track since it's actually driven by the market dynamics(not by bureaucratic decisions, UK government does not publish any official growth target since 1970's). But of course bad public economic management actually effects the private sector. How? Government is a big spender in the economy. If government spending is cut for the austerity measures, government can't spend like it used to resulting a slower business in private sector. Japanese government spent 2.13 trillion dollars in 2013. So if Japanese government cuts spending, the economy will surely get effected very bad. So is Japanese economy overdependent government spending? Not really no. If we compare government spending in terms of percentage of GDP Japan (42%) and US(41.6%) is very close and many European countries actually exceeds (Germany 45.4%, France 56.1%) these levels. (source : wikipeadia)
Okey then whats wrong with Japan? Why it's government is so indebted and how the result of this debt actually creates a recession? Government being indebted has many populist reasons and the answer is clear. Japanese government increased public spending to make people happy, yet it also did not collect enough taxes to actually finance those spendings, again to make people happier. Since you can't conjure money, you should issue government bonds to finance those spendings. However government being indebted results an economic recession is hard to find a good answer. It's clearly -somehow, for some sociological reason- resulting from a limited private consumption. I mean Japanese government is a big, flamboyant spender, but on the other hand spendings on the private sphere tends to stagnate. Household consumption in Japan generates 60% of the overall economic activity. On contrary in USA household consumption generates 68% of the overall economic activity (source : CIA Worldfactbook, US, Japan)
This means that the problem is much more structural. Japanese government is the spending monopoly in the economy and economic expansion dependent on the increase on the government spending. If government can't spend, the economy stagnates since private consumption won't be able to become the driving force for the economic growth. And Japan is currently doing the exact same thing. (article : Japan Unveils Record 2014 Budget Draft as Debt Burden Mounts - Bloomberg Business
However this medicine for Japanese economy is pretty symptomatic. But does not cure the actual disease. No economy in the world can survive without proper private spending. Export driven economies are always fragile because of international events. Investment driven economies are fragile because a country can't always build roads, bridges, cities, factories etc. The most robust thing that is known for an economy to rely on for economic growth is the increase in private consumption.
So why does Japanese people don't consume? Is it something cultural? Well, it's something structural that's for sure. Karl Marx invented the theory of Asiatic Mode of Production. By this theory he was trying to explain the underdevelopment of the Asian Nations. He simply said feudalism did not develop in the same way in Europe in Asia. State seemed to be the ultimate feudal land lord "managing" the entire producing class. Most of the surpluses were accumulated by some despotic ruling elite. On contrary in European example surplus was distributed to quite a few land lords whom were "managing" small portions of the land/population. Thus there was no economic competition and there was no development, most rural places were living in autarky. Trade was limited compared to Europe since there was mainly farmers and despots and nothing in between, no one to spend. Altough Marx hated capitalism, he offered capitalism as a solution for development to Asiatic Nations.
We have seen a fast development of Japan from 50's to 80's. This fast development phase was mainly state sponsored and state planned. But after this development phase is completed a nation needs the private driving force to get back a track of natural development. UK economy grows somewhere between 1% to 3% -rarely- for centuries. This is the actual speed of development for nations. The economic growth comes partially from increase in population and partially from increase in value addition (development) and a country grows somewhere around 1% in the business as usual scenario.
I won't be able to provide any solution for how can the economic growth in Japan gets back to it's own track. However I know something that relying on government spending for the economic growth is not much of a reliable option in a capitalist economy. Therefore Japanese government should actually do the complete opposite and try to promote private spending, while it's actually shrinking itself and paying the debt. That's the problem with the democracy. Government goes to a spending spree and does not collect proper taxes to finance itself for populism. People adore the ruling party and elects it repeatedly. So the problem might be some form of toxic combination of democracy with the spirit of Asiatic Mode of Production
First of all we should look at what's the current problem in Japanese economy. Well the problem is similar to that of Greece actually. Of course Greece is in much more severe condition. However the problem is the same : Government overspending resulting from government overreach in economy. Today Japanese public debt is 10.46 trillion dollars, makes around 2.5 times of it's GDP. Clearly there is very little room left for debt growth, because it's very close to a point where Japanese governments' entire yearly tax income would be insufficient to pay the yearly interest (yeah only interest not the actual debt) of it's debt. At this point government simply goes bankruptcy and expects bailout from 3rd parties to save itself either from it's own private sector (financial institutions) or other countries (if private sector can't save the government).
The paragraph above seems pretty depressing and shocking right? I mean Japan is the largest creditor nation in the world, yet still it's about to go bankruptcy. Do they have any correlation? Well no. Not really. One should be able to divide the public sphere and private sphere in a capitalist economy. Private sector might be in a great shape, yet public sector might be going down. Normally what is expected in an ideal situation is that the private sphere of the economy should be going on it's regular activity, the economic growth should be on it's own track since it's actually driven by the market dynamics(not by bureaucratic decisions, UK government does not publish any official growth target since 1970's). But of course bad public economic management actually effects the private sector. How? Government is a big spender in the economy. If government spending is cut for the austerity measures, government can't spend like it used to resulting a slower business in private sector. Japanese government spent 2.13 trillion dollars in 2013. So if Japanese government cuts spending, the economy will surely get effected very bad. So is Japanese economy overdependent government spending? Not really no. If we compare government spending in terms of percentage of GDP Japan (42%) and US(41.6%) is very close and many European countries actually exceeds (Germany 45.4%, France 56.1%) these levels. (source : wikipeadia)
Okey then whats wrong with Japan? Why it's government is so indebted and how the result of this debt actually creates a recession? Government being indebted has many populist reasons and the answer is clear. Japanese government increased public spending to make people happy, yet it also did not collect enough taxes to actually finance those spendings, again to make people happier. Since you can't conjure money, you should issue government bonds to finance those spendings. However government being indebted results an economic recession is hard to find a good answer. It's clearly -somehow, for some sociological reason- resulting from a limited private consumption. I mean Japanese government is a big, flamboyant spender, but on the other hand spendings on the private sphere tends to stagnate. Household consumption in Japan generates 60% of the overall economic activity. On contrary in USA household consumption generates 68% of the overall economic activity (source : CIA Worldfactbook, US, Japan)
This means that the problem is much more structural. Japanese government is the spending monopoly in the economy and economic expansion dependent on the increase on the government spending. If government can't spend, the economy stagnates since private consumption won't be able to become the driving force for the economic growth. And Japan is currently doing the exact same thing. (article : Japan Unveils Record 2014 Budget Draft as Debt Burden Mounts - Bloomberg Business
However this medicine for Japanese economy is pretty symptomatic. But does not cure the actual disease. No economy in the world can survive without proper private spending. Export driven economies are always fragile because of international events. Investment driven economies are fragile because a country can't always build roads, bridges, cities, factories etc. The most robust thing that is known for an economy to rely on for economic growth is the increase in private consumption.
So why does Japanese people don't consume? Is it something cultural? Well, it's something structural that's for sure. Karl Marx invented the theory of Asiatic Mode of Production. By this theory he was trying to explain the underdevelopment of the Asian Nations. He simply said feudalism did not develop in the same way in Europe in Asia. State seemed to be the ultimate feudal land lord "managing" the entire producing class. Most of the surpluses were accumulated by some despotic ruling elite. On contrary in European example surplus was distributed to quite a few land lords whom were "managing" small portions of the land/population. Thus there was no economic competition and there was no development, most rural places were living in autarky. Trade was limited compared to Europe since there was mainly farmers and despots and nothing in between, no one to spend. Altough Marx hated capitalism, he offered capitalism as a solution for development to Asiatic Nations.
We have seen a fast development of Japan from 50's to 80's. This fast development phase was mainly state sponsored and state planned. But after this development phase is completed a nation needs the private driving force to get back a track of natural development. UK economy grows somewhere between 1% to 3% -rarely- for centuries. This is the actual speed of development for nations. The economic growth comes partially from increase in population and partially from increase in value addition (development) and a country grows somewhere around 1% in the business as usual scenario.
I won't be able to provide any solution for how can the economic growth in Japan gets back to it's own track. However I know something that relying on government spending for the economic growth is not much of a reliable option in a capitalist economy. Therefore Japanese government should actually do the complete opposite and try to promote private spending, while it's actually shrinking itself and paying the debt. That's the problem with the democracy. Government goes to a spending spree and does not collect proper taxes to finance itself for populism. People adore the ruling party and elects it repeatedly. So the problem might be some form of toxic combination of democracy with the spirit of Asiatic Mode of Production
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