Blomberg columnist William Pesek plays out a line of thought that may have occurred to some readers: what if the resolution of the credit crisis and global imbalances isn’t a nasty recession or punishing inflation but Japan-like protracted low growth, with stagnant to deteriorating living standards?
This idea may not be as much of a stretch as it sounds. Policy makers, in trying to avoid the depression/entrenched inflation extremes, may steer themselves into the Japan solution.
In the US, despite the brave talk of free markets, we have been socializing losses right and left and trying to shore up plummeting asset values. Although inflation is running at high rates in many countries, it is the product mainly of commodities price increases due to developing economy demand. If the banking system in the US, UK and Europe are in as bad shape as I think they are, demand for imports will slacken further, which will reduce growth, and in some cases, reduce consumption. Reader DownSouth reminded us that from 1979 to 1983, oil consumption fell from 67 million barrels per day to 58 million bpd. And high fuel price act as a tariff, again hurting exporters. We have already discussed that factories near Hong Kong are being shuttered at a rapid pace, and this is before the expected post-Olympics slowdown.
Similarly, the strain on food prices is due to biofuels, increased consumption of meat in third world, and poor harvests in Australia, have put pressure on foodstuffs. Biofuels subsidies may get undone (one can only hope) and similarly, higher food costs will have us all, not just people in developing countries, being more sparing of our meat consumption. A near-global slowdown will intensify that trend.
And there is the bigger question of whether we really have reached a crisis of capitalism, whether a system whose raison d’etre is growth and increasing standards, can adapt to a world of resource constraints. The optimists at the Milken Institute Global Conference felt that technology would provide and answer. But new technologies take time to be developed and implemented, particularly on a broad scale, while the needs appear urgent.
Count Hong Kong real-estate mogul Ronnie Chan firmly among those who think Japan’s 1990s experience is highly instructive. The reason: Lost decades may become the rule, not the exception.
“What if the lost decade in Japan becomes the global norm?” Chan, chairman of Hang Lung Properties Ltd., said at the Asia Innovation Initiative conference in Fukuoka, Japan, on July 8. “Can you imagine that? Perhaps we should. Perhaps people should get used to slower growth, or no growth.”
It’s not that Chan, who runs Hong Kong’s fourth-largest real-estate development company by market value, is a pessimist. Property developers don’t often relish 10 years of lost growth here and 10 years of declining asset values there. Chan sees a rare confluence of economic and demographic trends that bode poorly for a global rebound.
No one should be surprised by the rapid pace of economic expansion after World War II…. It began from a low base, following the devastation of economies in Europe and parts of Asia. Next came rapid population growth and a boom in innovation. Then there were new social and institutional paradigms as democracy spread and organizations such as the United Nations and the World Bank offered support.
Today, the picture looks vastly different. As everyone tries to stabilize growth, things are hardly at a low base. Population growth is fueling demand for commodities, driving up inflation and increasing poverty rates. Innovation may slow as investment dries up. And institutions such as the International Monetary Fund hardly seem up to today’s challenges.
Oddly, one of Asia’s potential failures is democracy, Chan says. It simply isn’t proving to be the panacea that leaders in the U.S. and Europe promised. Poverty rates remain stubbornly high in many Asian democracies, and so does corruption. The former is often a result of the latter.
It’s certainly not that democracy is bad. Yet there’s something to be said about what Chan calls “premature democratization” in Asia.
Elections matter only when nations build strong institutions such as independent courts, ministries, a free press, credible central banks and ample systems of checks and balances. Their absence means many governments don’t operate as transparently or successfully as expected.
Yves here. That is not a trivial point. My Communist college roommates would remind me that Russia and China were the only economies to industrialize in the 20th century (for the record, I was apolitical then and previously had a someone who appeared in the Ivy League Playboy issue and later a brilliant but highly wound poet as roommies).
Similarly, Japan with its one party system is not exactly a Western-style democracy. Singapore, an island with just about nothing going for it, and some serious disadvantages at the time of its independence, prospered under a far sighted nation-builder who bordered on being a benevolent dictator, Lee Kwan Yew. Yew in particular was concerned about corruption, and early on created tough watchdog agencies and implemented the policy that top bureaucrats would earn the same level of pay as top private sector professionals, both to make sure the government would attract good people and reduce the incentives to cheat.
Back to Pesek:
All this may be a problem for the region as it tries to avoid the worst of the credit-market crisis. Chan wonders if the type of prosperity during the decade before the 1997 Asian crisis will be more unusual in the future.
“Those 10 golden years of rapid growth and high returns may well have been an aberration,” Chan says.
The combination of surging energy and food prices will challenge economies with political rifts, such as Thailand and Malaysia. Nor does it bode well for high-poverty ones such as Indonesia and the Philippines, or those trying to compete amid China’s boom — South Korea, Singapore and Taiwan, for example.
Slower growth is absolutely necessary, of course. Economists, including Kenneth Rogoff of Harvard University, argue that accelerating inflation is a clear sign the global economy needs to cool to let commodity supplies and fuel alternatives catch up. Yet a sharp slowdown in Asia may be devastating.
Take China, which needs to expand about 10 percent annually to raise the living standards of 1.3 billion people. Slowing growth will place dangerous pressure on Asia’s second-biggest economy. For a nation at China’s level of development, 5 percent growth is essentially a recession…
Policy makers are merely putting off the inevitable and treating the symptoms of what ails the global economy. If they aren’t careful, Japan’s experience during the 1990s will become a familiar one.
“It’s not a scenario many expect for the West or for Asia,” Chan says. “But I’m not sure it can be ruled out.”