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|The world crisis and its impact on Japan|
Voice - 2009
If we can trust the economic statistics, then the global economic crisis of 2007-09 has come to an end. As 2010 began, output was rising again in
Based on that description, someone who fell asleep in early 2007 and woke up now, in a modern version of the American story (by Washington Irving) of Rip Van Winkle, might think that nothing had changed—except in domestic politics. He would see a black president in the White House, in the person of Barack Obama, he would see the first proper and strong non-LDP government in Japan since 1955, in the shape of Hatoyama Yukio´s DPJ-led coalition, and he would see a re-elected female Chancellor of Germany, in the person of Angela Merkel, forming a new centre-right coalition with the small pro-market Free Democratic Party. But in economics and in the capitalist system, our awakening sleeper would struggle to spot anything much that was new, while he was rubbing the sleep from his eyes. Many things would just look normal to him. Greedy bankers, greedy oil producers, rising economic strength in
Yet that first impression would be wrong—or at least highly misleading. Many of the big long-term trends are indeed intact. But as a result of these two years of crisis, the world really will be different in many ways. It will not be as utterly different as some rather hysterical analysts or commentators predicted when the financial crisis was at its most shocking and scary: capitalism is not dead, and neither is globalization. The state is not going to take over leadership of the economy from the market system. Banks are not going to disappear, and the people who run them and trade securities for them will still be paid extraordinarily large sums of money. But that does not mean that life will be unchanged.
After all, although the global recession of 2007-09 was nowhere near as severe as was the Great Depression of the 1930s, to which it was often compared, it has nevertheless been worse on many measures than any other recession since 1945. In the United States, the drop in real GDP, the fall in industrial production and the reduction in employment have all been worse in this slump than in the previous worst, that of 1957-58—though only just. The drop in real GDP from peak to trough was 3.8% in 1957-58 and on the latest figures has been 3.9% this time. So far, the unemployment rate in America has not reached as high a level as it did in the 1981-82 recession (10.8% against 2009´s peak of 10.2%), but the total loss of jobs has been greater since unemployment began this recession at a lower level.
For Westerners, the past offers no real guide to how the future will unfold. And if they look at
Psychology and globalization will hold the key
Whether or not
In Japan during the late 1990s, a deflationary psychology set in among corporate managements, consumers and even policy-makers: companies kept on cutting their debts, for fear that deflation would make those debts harder to service and repay; consumers deferred spending once prices began to fall, and then found themselves forced to cut their spending once their wages began to fall, too; and government policy-makers encouraged wages to fall, though they may not have realized they were doing so, by reforming the labour laws in order to permit a large increase in the use of part-time and irregular workers, on lower wages and fewer employment benefits than full-time regular workers. They did this in the belief that what was needed was a boost to corporate competitiveness, by helping firms reduce their labour costs. But the result was a continual decline in domestic demand, as household incomes also declined. The saving grace for
This interplay is now again going to be critical in
When a big shock occurs, human behaviour can change in essentially unpredictable ways: trust can disappear, caution can replace confidence. The disappearance of trust explains why the credit markets froze up in the way that they did; the shift to caution explains why consumer and corporate demand suddenly slumped after the collapse of Lehman Brothers, as households and corporate managers both decided that the prudent course of action was to suspend purchases of things like new cars, TVs, computers or machine tools. The severity of those reactions, of loss of trust and of confidence, could not be predicted in advance.
Now, the extreme need for caution has gone: economies are not collapsing, and no apocalypse looks near. With economic growth resuming in so many rich countries and rebounding in
American households, for example, borrowed more than they were earning in the years running up to 2007: in technical terms, their savings rate was negative. Since the Lehman shock, they have cut borrowing and resumed saving: by September 2009 they were saving on average nearly 5% of their disposable incomes. A similar trend can be seen in
The long-term average savings rate in the
This psychological question must be linked to globalization because the truly original, special characteristic of the 2007-09 crisis is that it has been genuinely global.
Yet that downside consequence of globalization should also point to an upside: that global linkages through trade and capital ought now to mean that the recovery can and will be shared, too, and that each country´s recovery could serve to reinforce those of others. Having been a cause of pessimism and some recrimination, globalization ought now to bring hope and the chance of a collaborative recovery, as capital flows across borders seeking good investment opportunities and as rising demand is quickly transmitted around the world through growth in trade.
If governments had responded to the shock by closing their borders, increasing trade protectionism and imposing capital controls, this optimism would not have been possible. But they have not done so, at least not yet. The existence of the World Trade Organisation and all the treaties that created it is a main reason why protectionism has not spread more widely and quickly. There has been some protectionism, but it has not been substantial and has not yet sought really to challenge the WTO treaties.
A second barrier to protectionism has been the creation of the G20 (Group of 20) global summits, which have meant that any major economy that introduced severe protectionist measures would have faced public embarrassment at the G20, in the full glare of the global media. Ultimately, though, the main reason why trade and capital have been left fairly free is that countries and their governments still seem to believe that globalization brings them more opportunities than costs. They hope that globalization will reinforce their recoveries, that export growth will substitute for weak domestic demand.
On the face of it, this cannot be true. Not everyone can export their way out of trouble. Some countries have to be buyers, replacing the buying role previously played by American consumers. This, though, is where global capital freedoms are just as important as free global trade. For capital inflows, to finance domestic investment and consumption, can substitute for a growing trade surplus as a promoter of economic growth. A country that does not benefit from a rising trade surplus can benefit from capital inflows instead. Or at least, it has the potential to do so.
The world badly needs to achieve a better economic balance, between deficit countries and surplus countries. The financial crisis of 2007-09 was not triggered off by the imbalances, but it was made far worse by them. The need for a better economic balance means that the excessive borrowers and importers of the past decade, such as
That is why it is essential that
A Chinese revaluation would be good for Japanese exporters: it ought, in principle, to make imports from
This is going to expose, quite cruelly, the failings of
The attack was wrong, firstly, because there has never been any "market fundamentalism" in
The biggest economic or social change that occurred was the creation of a two-tier labour market, a process begun in the 1990s but greatly accelerated under Koizumi. This reform, which has resulted in 34% (in 2008) of the labour force being in part-time and irregular employment, while high protections and employment rights have been preserved for full-time, regular workers, has been responsible for the long-term decline in household incomes, for deflation, and for the huge rise in both poverty and inequality. But this is not "American-style market fundamentalism". Indeed, such dual labour markets do not exist in
Such two-tier labour markets are not the result of brutal market fundamentalism. Instead, they are the result of the power of established interests in the form of today´s full-time, often unionized workers; and they are the result of political cowardice in refusing to confront those established interests. It is easier to victimize a minority than to confront the majority, and that is what has happened in
Mr Hatoyama´s attack was wrong, secondly, because the basic nature of Japan´s economic expansion from 2002-07, its longest but not strongest post-1945 period of growth, was determined by the combination in that era of pro-market, liberalising reform abroad and the lack of liberalization in Japan. In 2002-07, fully two-thirds of
Manufacturing, the sector that benefits most from rising exports, accounts for 20% of
Better to make things, or to provide services?
To stick to that aircraft metaphor, what is now clear is that the manufacturing engine is unlikely to regain its power very quickly or strongly. What is also clear is that the huge weight of public debts inherited from the 1990s and now made larger by this crisis, will make the aircraft harder to get into the air. So too will the ageing of Japan´s population, which is going to carry on increasing medical and pension costs, while reducing the number of workers paying the taxes to finance those costs and to service the public debt.
What this situation ultimately means is that a traditional assumption, the idea that
In truth, this assumption ought already to have been put into doubt, thanks to the way the crisis itself has evolved since it began in 2007. For since that time, perceptions of which sorts of country were being worst affected have continually changed: service countries, those led by "financial capitalism" or by manufacturing? Initially, it was assumed that the greatest pain would be felt in countries where banks had expanded most dramatically in the credit derivatives markets and where households and companies had become most indebted: in other words, America and Britain first of all, and then Ireland, Spain and Eastern Europe once the problem of high debts came into focus.
Yet things did not work out that way. The financial dramas were centred on Wall Street and the City of
That is why, in 2009, as was previously mentioned, the biggest falls in real GDP were in
As economic recovery began, during the summer months of 2009, that perception of vulnerability started to change again. The first rich countries to move out of recession were also the bigger manufacturers:
Yet this sort of short-term comparison is fairly meaningless. Short term comparisons between manufacturers and service economies are meaningless because they mix up the natural effects of economic cycles with the true, underlying sources of wealth and rising living standards. An economic cycle in which consumers and corporate investment suddenly stopped, as in 2008, was a type that was bound to hurt manufacturers the most, in the short term. The reason is that the slow decline in demand that preceded the Lehman shock in September 2008 had already left factories holding inventories of goods and parts that were larger than they needed. So when demand really began to slump they found they had to cut output by even more than that, in order to get their inventories back into balance. If "inventories" sounds rather abstract, think of
Yet when demand starts to revive, the effect of inventory adjustments works in the opposite way. Manufacturers find that their inventories have fallen too far: they start to think they might not be able to supply the market properly. So they increase output by even more than the rise in demand, in order to rebuild their inventories. They need to refill those parking lots.
That is why countries in which manufacturing still accounts for quite a large share of GDP had a worse slump than the service-led economies but also a faster rebound. In
That is especially true in a "rebalancing" world, in which the previously strong export markets of