Friday, November 05, 2010

Mysteries Of The Orient


A lot quicker than reading the book

[NB This is a bit tangential to the main business, and it's definitely in the thinking aloud category, but Tyler finds it interesting]

Tyler's bookshelves are crammed with unread books. Books that he always meant to read but somehow never got round to.

Quite a few of those books are on matters of huge economic, political, or social importance. They are books that demand to be read by anyone with pretentions to understanding the world around us.

But the funny thing is, if you leave them to mature for a few years, you find that even the most critical finger-on-the-pulse books don't actually need to be read at all.

An excellent example is in Tyler's sightline right now. It's called Nippon: New Superpower and it was penned by the BBC's "bureau chief" in Tokyo, William Horsley. Published by the BBC in 1990 (on the back of a "landmark" documentary series), it rode the then fashionable view that the Japanese were set to dominate and destroy the West's effete economies, and that we'd better shape up and adopt Japanese practices pdq.

Back in 1990, Tyler certainly needed to know about that - it was clearly vital to our very existence. Except that within weeks of publication, the book's central thesis was shot to pieces. Instead of becoming a superpower, Japan collapsed into its famous Lost Decade. The 80s asset bubble went pop, Japan's banks became zombies, and its miracle economy slumped into a jibbering heap.

These days, far from being portrayed as that unstoppable bogeyman coming to get us, Japan is held up by the BBC and many others as a terrible warning. A terrible warning of what happens when the government doesn't do enough to prop up the economy, and the central bank doesn't run the printing presses 24/7.

So what actually happened in Japan? Let's look at a few facts.

Here's what the OECD says happened to Japanese GDP over the last 30 years (we've made 1991 = 100 because that's when the lost decade kicked off):


As we can see, Japanese GDP growth did indeed slow sharply around 1991. In the previous 11 years it averaged around 4% pa, and in the subsequent 11 years it averaged just under 1% pa.

But the economy hardly fell into a Black Hole. It certainly wasn't a repeat of the 30s depression or anything like it. What the Japanese experienced was a slow-down from the very fast growth during the asset bubble years of the 80s to something more sustainable over the longer term. Over the last 30 years as a whole, Japanese growth has averaged 2% pa (around an 80% increase over the period as a whole).

And there's something else about Japan that isn't always pointed out: for most of the post-WW2 period, they were catching up with the West. Starting with the advantage of hunger (aka lower labour costs), they were able to copy Western technology and apply fiendish oriental improvements to it, often producing more reliable products than say Coventry into the bargain. During that period of catch-up their economy grew very rapidly.

And yes, their catch-up was certainly boosted by an undervalued currency which artificially improved their competitiveness.

But once they'd caught up - which they'd done by the 80s - it got much tougher. Now they were in the same position as their Western competitors had been in the 50s, 60s, and 70s. Other hungry countries, especially other oriental countries, were pulling the same catch-up stunt on the Japanese. Moreover, with their own undervalued currencies, they were undercutting the Japanese in the very same export markets that had fueled Japanese growth from the 50s to the 80s.

Take a look at the following chart. It shows how Japanese average income has stacked up against ours since WW2.


Coming out of WW2 we were far ahead of Japan, with GDP per capita five times theirs. But by the 70s, we were already riding their motorbikes, and starting to ditch our Austin Allegros for their Datsun Cherries - they had caught up.

In the 80s - despite the best efforts of Mrs T - they actually surpassed us. But that was really a reflection of their bubble, and couldn't last. Their "lost decade" simply brought them back into line with the kind of GDP we have here in the UK - ie around the average for leading western economies outside the US.

And now it's China's turn. No end of predictions that they will bury us. No end of charges that their currency is hugely undervalued. And no end of books for Tyler to add to his unread pile.

Yet at the end of the day, they are really doing no more than catching us up.

Yes, they have battered volume manufacturing in the West. Yes, they are holding their currency down too low. And yes, they have accumulated huge foreign currency assets in the process.

But just like the Japanese, they are going to find that reliance on foreign consumers can lead to serious problems.

For one thing, catch-up technology is ultimately transferable to even cheaper producers elsewhere. And those even cheaper producers are quite prepared to run even more undervalued currencies to boost competitiveness even further.

Moreover, surplus countries accumulating huge foreign currency assets to depress their exchange rate, have always eventually incurred huge foreign currency losses. We don't know quite how much the Japanese have lost on theirs, but we do know the Dollar has fallen by nearly 80% against the Yen over the last 40 years - which sounds like one helluva whack.

So what does this all mean for us here today?

Ummm... actually, that's a bit of an oriental mystery.

But we certainly shouldn't accept wholesale the line that Japan in the 90s shows we need to print more money than they did - their slow-down wasn't nearly as bad as is sometimes claimed, and anyway it reflected much more than just a shortage of cash.

And we should try not to panic about China. Just like Japan back in the 70s and 80s, they have given us lucky western consumers a wealth of cheap quality products. And just like Japan in the 90s, they are going to find that they cannot prosper for ever on underpriced exports and catch-up.

Lending us money to buy their underpriced goods, and then seeing that money slashed in value, is not a sustainable plan for long-term Chinese prosperity. The ultimate goal of all this growth is not to provide us with cheap computers, but to improve the material living standards of the Chinese people (if only so they don't kick out the ruling elite).

And these are not dumb people. They must know which way their bread is finally buttered.

Well, they would if they ate buttered bread, anyway.

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