The Unbearable Smallness of Japan's Economy (part 2)
Akio Kawato, Newsweek Japan Columnist
Part 2:

The weak yen makes Japan's economy look smaller, so it is said that Japan was overtaken by Germany in dollar GDP terms last year. It is slated to be overtaken by India next year, which cannot really be helped given that India's population is 15 times that of Japan.

What is more problematic in the world economy these days is that the developed countries as a whole, which have represented "progress" in the world by practicing the "modern" model of free economy and democracy, may be overtaken by China, India, Brazil, and other emerging economic giants.

But will this really happen? Probably not. Rapid economic growth in any country will come to a halt at some point. The governments of developed countries are imitating China by increasing their intervention in business activities and lavishing subsidies. However, it is not wise for them to be overly alarmed by China's controlled economy and end up curbing the vitality of their own free economies.

China's economy--a hollow success

China's economy sounds hollow inside when you knock on the wall of its ostentatious numbers. Originally, in the 2000s, there was a massive influx of foreign capital helped by preferential treatment of foreign investment. This inflow, combined with the trade surplus earned by the factories built by Japan, the U.S., Europe, and Taiwan, amounted to about 10% of China's GDP at the time. In 2007, foreign direct investment in China was about $80 billion and its trade surplus was about $180. In the context of today's Japan, this would be equivalent to about 50 trillion yen coming from abroad in one year.

Chinese companies convert this income into yuan and deposit it in banks, which then use it as capital to finance land development and infrastructure construction. Since land in China is either nationally or publicly owned and inexpensive, the added value generated by the investment is enormous. This has immeasurably swelled China's GDP.

Today, many infrastructure investments have turned out to be unprofitable, creating a mountain of bad loans, and many real estate companies are on the verge of bankruptcy. And China still relies upon foreign-affiliated companies for 35% of its exports.

Chinese EVs are now dominating the global market, but this is because of their low prices supported by government subsidies. Had it been in a foreign country, they would wither quickly because of the lack of dealer networks and power supply networks.

Trump's imposition of high tariffs was followed by the European countries erecting barriers to Chinese products. Thus, as China's external demand is at a standstill, its domestic demand is not doing particularly well.

Although China has always been considered a large market, its domestic consumption in 2023 was merely 40% of that of the United States. Since Chinese companies are competing for larger shares in that market, excessive competition is generated, forcing out Western companies.

In 2023, China's growth rate has fallen to just over 5% even in its official statistics. China managed to achieve high growth with the huge inflow of foreign capital, but its system is not up to sustaining high growth on its own.

Japan is similar in this respect. But China has been faced with the problem of an aging population far beyond that of Japan before it can accumulate enough capital for pensions and other purposes. Private companies such as Huawei and Haier can grow autonomously, but they alone cannot support the Chinese economy. The majority of Chinese big enterprises are state-owned and depend on government orders and subsidies. Even if the "Cultural Revolution generation" of Xi Jinping and his ilk, who were sent to the countryside during the Cultural Revolution and brainwashed in the ideology of socialist economy leave the leadership positions, and those who grew up during Deng Xiaoping's reform and opening-up period come in to take charge, foreign capital will no longer come in droves, nor will domestic companies change their behavior.

Waiting for Godot--a Rise of India

The current economic boom in India also lacks substance. Certainly, the middle class has grown, and cows hardly ever roam the boulevards of big cities. Consumption of passenger cars and other products has also increased dramatically. But the "India boom" has come and gone many times.

The economic growth of the 18th century Britain was supported by investments from the Netherlands and other countries (which purchased a large amount of British government bonds), and the rapid growth of postwar Japan was triggered by the huge procurement by the US Army during the Korean War. The rapid growth of the Chinese economy since the late 1990s has also been driven by "foreign investment," as already mentioned.

In India, a comparable massive inflow of foreign capital has not yet begun.
As can be seen from the World Bank statistics
"https://data.worldbank.org/indicator/BX.KLT.DINV.WD.GD.ZS?locations=IN", foreign direct investment is hovering around 3.5% of GDP, not on a trajectory of steady increase like in China in the 2000s. What is more, India's trade balance is in deficit. This is a far cry from China in the 2000s, where foreign capital inflows and trade surpluses combined reached about 10% of GDP.

And India is entangled in a web of vested interests that tend to discourage foreign investment and imports. Even the Tata conglomerate gave up building a factory in West Bengal in 2014 because of difficulties in expropriating land. This difficulty in land expropriation is also an obstacle in the construction of railroads and highways. The ruling party does not have a majority in the upper house of parliament, which makes it impossible to amend the related laws.

The high import tariff rates, demanded by the country's weak manufacturing sector, are an obstacle to foreign manufacturers investing in India, when they import machineries and components for assembly of their products. The government asks foreign companies to invest, saying "make in India," but officials with licensing authority reportedly refuse to budge, or often demand bribes. And relevant laws are suddenly and arbitrarily changed.

Because of inadequate primary education, many young workers are not literate or even able to start work on time. Indians are active as executives in large corporations around the world, but in India there are family feuds within companies, and many managers engage in accounting frauds and stock price manipulation. Such things also happen in Japanese and Western companies, but the prevailing atmosphere does not allow such misconducts.

The hype around the "Global South"

This is why there are limits to the growth of China and India. It is only with a massive influx of foreign capital that the countries of the "Global South" can begin their rapid growth. They may be able to obstruct the moves of the developed countries at the United Nations and elsewhere, but, as things stand now, they do not have the power to initiate changes in the world.

The "rise of the Global South, led by China and India," is a media hype. If governments and businesses in developed countries are misled by this, they will make a big mistake in their policies.

(This article was first posted on the site of the English-Speaking Union of Japan)