What China did and should learn from Japan

EPA/Kim Kyung-Hoon

China and Japan don’t get on. This is a problem for them and for the rest of the world given their economic and strategic importance.

It hasn’t always been this way, though. Japan once acknowledged China’s dominance via the tributary system. More recently, China has learned some important lessons from Japan’s remarkable economic development since the 19th century.

China’s leaders might not want to admit this influence. But there are aspects of Japanese history that they might want to note if they don’t want to repeat some of their neighbour’s mistakes.

The most striking difference between Japan’s and China’s (relatively) recent history is that Japan responded effectively and rapidly to the challenge of European imperialism. Japan modernised socially, economically, politically and – most tragically – militarily. China, by contrast, was plunged into dynastic decline and civil war.

Japan’s invasion of China also added to the latter’s problems, in what was a humiliating, bitterly resented symptom of a rapid reversal of the regional pecking order. Ironically enough, Japan was merely emulating the “European standard of civilisation”. Invading another countries and carving out empires was quite the done thing in the 19th and early 20th centuries.

We might have hoped that the lesson that territorial expansionism and militarism ultimately are fraught with danger and likely to end badly might have been well and truly learned. To judge by China’s increasingly assertive, even aggressive behaviour of the East and South China seas, we might be wrong.

More positively, China has undoubtedly copied some of the strategies that Japan employed when it re-emerged from the ashes of the second world war. Although it is now obligatory to condemn Japan’s contemporary economic situation, it is important to remember that Japan’s so-called developmental state oversaw what was then a historically unprecedented period of development. From irradiated wasteland to the second biggest economy in the world in the space of 30 years or so is no small achievement.

That China has managed to eclipse this achievement on an epic scale is in no small part due to Japan’s influence. For a number of Asia’s newly industrialising states – including Taiwan – Japan provided a template for state-led industrialisation and export-oriented development. In this regard, China is just the most recent – if the most consequential – example.

One new lesson that Japan offers China is that this model plainly has its limits. When an economy is underdeveloped and the task is to construct a modern industrial economy, the sort of powerful centralised state that Japan and to a lesser extent China created can be highly effective – even if many economists in the West are still reluctant to admit it. Orthodox economists may be on safer ground when they point to the models eventual limitations though.

Japan’s economy went off the boil at the beginning of the 1990s partly as consequence of domestic policy mistakes, partly because the US forced a policy of currency appreciation on them, and partly because its hitherto powerful and competent state planners proved incapable of running a developed economy at the technological frontier.

Policymakers are potentially good at trying to catch up with the rest of the world, especially when they can borrow the ideas and technology needed to do so. Once the developmental job’s done, though, close relations between policymakers and business are not such a good idea. Too much time hanging out with plutocrats in karaoke bars can corrupt even the most selfless bureaucrat.

In Japan’s case, much of the money in the enormous stimulus packages unleashed on the domestic economy were wasted on unnecessary and unproductive infrastructure projects that were doled out to favoured cronies in the construction sector. The recent resignation of economy minister Akira Amari demonstrates that such relationships remain pervasive.

There are big new lessons here too, though, if China’s elites choose to heed them. First, institutional reform is difficult but necessary. Xi Jinping’s crackdown on corruption is potentially welcome – if destabilising – but it needs to be accompanied by a more thorough reform of many of the institutionalised state-business relations that underpin it.

Whether Xi or anyone else has the appetite to seriously reform the powerful state-owned enterprises that still dominate what they used to call the “commanding heights” of the economy is far from clear.

Without serious reform, though, the old system of debt-fuelled infrastructure investment that caused Japan such problems is likely to persist. The transition to a more balanced economy increasingly driven by expanded domestic demand will be all the harder as a consequence.

Perhaps the big lesson from both Japan’s and China’s historical experiences, therefore, is that policy must fit the times. What works in one era may not in another.

This is becoming evident in China, where its economic model looks increasingly at odds with its economic circumstances and international role. We must hope that China’s leaders not only take that lesson on board, but also the even more important lesson that Japan’s history offers: military adventurism and expansion generally ends badly.