For years economists have wondered whether the inevitable rising power of China was similar to Japan in the 1980s. If you remember (and that requires you to be over 22), people used to think that Japan was an unstoppable beast destined to take over the world. Movies and popular media frequently made reference to this, of in now-comical ways.
Among some of the most notable examples of this frenzy were Gung Ho (Ron Howard’s film), the scene in Back to the Future II when old Marty is talking to his Japanese bosses, and the hilariously out of date Rising Sun, which was a Michael Crichton book, turned into a movie only after Japan’s downfall had already become clear. The popular theory was that Japanese people were more dedicated to their work, and willing to put in longer hours than people in the West. This gap in work ethic meant that Japan was an unstoppable force in the global economy, and that we would all soon be working as mannies in Tokyo.
As it turned out, Japan was able to maintain its place as a superpower economically, but it is hardly hegemonic the way that people expected. People in the West were not quite as lazy as we thought (shout out to the French 35-hour work week. Way to continue to promote the theory!) Japan does not own the US or Europe. On the contrary, they are still digging themselves out of a decade-long recession that actually saw deflation, something rarely seen since the Great Depression.
Experts will generally tell you that China is a completely different situation. The common argument is that the sheer population size of the country makes it an inevitable economic power. However, it seems like this point, in isolation, falls flat, otherwise China surely would have become an economic titan years ago.
The second point is that the driving force is not only population. Rather the (relatively) newly open economy has helped shed the chains of communism that previously held the country back. In combination, these two factors are propelling China ahead of the pack.
Yet for all of the rhetoric that China is the heir apparent to economic hegemony, there has been no shortage
of reporting on the problems with its current policies. Most notably poor safety regulation, IP piracy (which hinders innovation), and the developing environmental disaster, all serve to set back the recent economic push. These factors should be tamping down on what some might label irrational exuberance.
Perhaps even more compelling is lack of underlying logic to why China will dominate the global economy (whereas there was a case with Japan, even thought the theory proved flawed). While there are Chinese entrepreneurs who have shown a knack for innovation and even brilliance, the greater work force shows more remnants of communistic tendencies than signs of a dynamic work ethic.
China backers will make the case that Japan’s unprecedented rise was based largely on an illusion, namely the absurdly inflated property prices that created vast amounts of paper money and spurred poor investment decisions. When this bubble burst it brought reality to the markets, and made Japan’s place as a strong, but not dominant economic player, all the more apparent.
It should be pointed out that China also shows signs of major flaws in its economy. Many have argued that there is a property bubble, although not on the scale of Japan in the 1980s. It has rampant corruption, fueling both the property problem as well as the massive amounts of NPLs (non-performing loans) that continue to raise red flags in the banking industry. And finally China’s economic system is not developed enough to reign in economic growth to curb inflation. Interest rates are essentially irrelevant when loans are not made on economic criteria.
None of this is to say that China will not become a major player in the world economy. Clearly it already has and there is no reason to believe that even a precipitous collapse, something that seems unlikely, would be so devastating the country could not recover. South Korea, for example, is in a strong position only ten years after an unmitigated disaster.
The question is not about whether China will be a power, it is about if the country will become an economic hegemon.
If you like Daily Tea Leaves you might also like Josh's personal blog Cup of Cha.