Benjamin Bracher ’13 – “The Economic Rise Of Japan And China: Is China Following In Japan’s Footsteps?”
This honors thesis addresses a significant puzzle in comparative political economy: to what extent is there an East Asian developmental model of economic growth, and is China following in Japan’s economic footsteps? The use of in-depth case studies of Japan and China will answer this question, as they will provide insight into the causes and enabling factors of economic growth and will attempt to either link or uncouple the East Asian developmental model with an eventual economic decline. The question of China’s economic growth in the coming years is more relevant now perhaps than ever before, as growth in the mature economies of the world has been slow to re-establish itself after the financial crisis of 2008-2009. Subsequently, growth in the world economy has been led by the developing countries of the world, most notably China. If China is headed for its own financial crisis, similar to the one Japan faced in the beginning of the 1990s, then that has some serious implications for the global economy in coming years, as well as for the United States, as our economies are becoming increasingly intertwined and interdependent.
This honors thesis uses a most-similar systems case study approach in comparing the political economies of Japan and China within the context of an East Asian developmental model – Japan from the 1950s until the early 1990s (when it experienced its economic decline), and China from the 1970s until now. Japan and China are drastically different in a number of ways: China has a much larger domestic population, a much less democratic government, and different conditions under which it began its economic growth. However, it is useful to use the economic path of Japan as a predictive lens with which to view China’s development. Japan was the first East Asian country to experience an economic ‘miracle,’ and as such, subsequent East Asian countries seeking to follow suit have done so with tacit acknowledgement of Japan’s previous example. Furthermore, both Japan and China used state-driven capitalism and export-led growth to develop their economies at a tremendous pace. Using the process-tracing method to examine the factors that led to Japan’s economic decline and determine if they are currently present in China, this thesis will consider if China’s current political economy is comparable to Japan’s political economy just prior to its descent into the “lost decade” of the 1990s. After establishing a developmental model for China and Japan, this thesis will examine and compare the automobile and electronics industries within both countries as case studies, as well as examining the broader development of each economy to determine and compare how the economies are structured. The examinations of the different industries within each country will look at different indicators across the time period to attempt to establish a correlation between amount of economic growth and stages of development within the model.
The use of the case study method allows for hypothesis-generating (or exploratory) research, where the causal mechanism is sought after and established, and the cases are internally valid. Case studies, due to their in-depth nature, ideally allow for the location of intermediate factors between some structural cause and its supposed effect. Specifically, in this case study, the relationship between the developmental model of economic growth and a following economic decline will be examined. Rosenbluth and Thies posit that Japan’s economic decline resulted from the same characteristics which allowed for its tremendous growth. This thesis will first establish that Japan and China developed following the same model, and then will attempt to ascertain whether China, which presumably has developed under a very similar model, is also headed for an economic decline.
Although Japan and China have disparate forms of government and have developed in markedly different international economic environments, a most similar systems comparison is appropriate in this context. Despite Japan and China’s differing forms of government, they shared structural features which made their approach to industrial policy very similar: a system which incentivized cooperation between government and business, and where patronage was an important factor; an export-focused business model supported and guided by government; and a use of rapid economic growth as a tool to establish or maintain political legitimacy. These factors mean that in this case, it is less relevant that Japan is a democracy and China is not – the political incentives for economic growth and how to support it are related closely enough to justify a most similar systems approach. The differences in the international environment and foreign direct investment between China and Japan do not invalidate the most similar systems comparison either; the development path of these two countries, with respect to industrial policy, was not dramatically affected by these factors. Rather, these factors have had an effect on the outcome of these paths, which is discussed more in depth later in this paper. The examination of the factors listed above (comparison of the automobile and electronics industries, as well as the broader economic development), as well as political and institutional factors should provide the basis for an in-depth comparison of the trajectory of the growth of Japan and China, and reveal if certain indicators of impending decline are shared. The parallel examination of Japan’s economic development from the 1950s to the 1980s and China’s economic development from the end of the 1970s until the present will help to establish the validity of my usage of the most similar systems comparison and the statist model as an explanatory lens for their economic growth.
As China developed over the past few decades, it followed Japan’s path and the East Asian Developmental Model, often doing so deliberately (as one would expect within a statist model). As Matthew Goodman stated, “China is on a similar trajectory as Japan, just 30 years behind them, but there are a lot of things that aren’t equal.” These things that “aren’t equal” are what have the potential to make China’s economic trajectory different than Japan’s – namely China’s continued reduction of trade barriers and imbalances, as well as its (potentially) larger domestic market. However, this isn’t to say that China is on the right path yet – it needs to take further steps to rebalance its economy to avoid economic woes similar to the ones Japan experienced. China needs to begin investing more heavily in its own research, and needs to rebalance toward its domestic market, as the international community puts increasing pressure on China to reduce its trade surplus and appreciate its undervalued currency. This is where China’s biggest difference from Japan lies – it has a vast domestic market to turn to as international pressure puts a damper on its export growth, which has increased to approximately one-third of China’s GDP in recent years, dwarfing the 10% of Japan’s GDP which exports represented during its period of phenomenal growth.
To further illustrate the parallels (and differences) between China’s and Japan’s growth (and the sometimes explicit following of Japan’s example by China), this thesis delves more in depth into the development of these countries. The automobile and electronics industries were selected because they are industries which in both countries have fared quite well, have been or currently are engines of economic growth, and have both seen significant levels of government involvement. These also all have strong export sectors (with the exception of the automobile industry in China – this discrepancy is explained within the thesis).
The parallels with Japan’s growth, in the broadest sense, are clearly apparent. Despite a significantly different structure, China’s political system (relating to economic policy) was bureaucracy and consensus driven, and focused on growth. Ties existed between the bureaucracy, politicians and businesses in China, just like they did in Japan. Striking similarities exist even on the specific policy level, with China’s income-doubling plans for the 1980s and 1990s reminiscent of Japan’s income-doubling plan for the 1960s, as well as each country having high barriers to imported goods. Even after China’s 1994 reforms, where these barriers were significantly reduced, it is fairly straightforward to draw parallels between its deliberate targeting of specific sectors for growth and MITI’s support of specific sectors and industries.
The question is, as China moves forward, will it continue to protect weaker industries as its strong industries mature and grow out of state influence, as Japan did? If so, China may face a similar decline; however, due to the more open nature of China’s development, thanks to the WTO and international pressure, it seems as if China realizes the dangers of continuing to protect certain sectors and overheating its economy, and so is preparing for a “soft landing.” Data concerning the growth of China’s automobile and electronics industries and its per capita GDP also suggest that it will continue to grow at a significant pace. China also has a non-democratic government, and therefore should be more resistant to the sorts of political pressures which caused Japan to deviate from the ideal statist model and indulge in protecting its weak industries. If this is the case, then despite following Japan’s development path, China will take a metaphorical fork in the road and continue down a path of growth which, despite being less impressive than the growth it has managed over the past three decades, is a much better alternative than the path Japan found itself on – one of a nearly stagnant economy for decades.