The Limits of the China/Japan Comparison (hint: look at GDP per capita)

Yesterday the NYT ran an article comparing China’s tremendous recent economic expansion with that of Japan some two decades prior.  The basic story line is that, sure, today China looks poised to overthrow the  US and take over the global economy, but a generation ago this is what we were saying about Japan, and look how that turned out:

From China’s threefold economic growth in a decade to today’s swarms of five-star hotels and six-figure autos, it is a cliché to say that the world has never before seen anything like this juggernaut.

Actually, the world has. Twenty years ago, Japan was the juggernaut, a silky economic machine poised, according to conventional wisdom and more than a few best sellers, to dominate world trade and global diplomacy in the decades to come.

This has become a fairly frequent subject of discussion (see another NYT article from last year here, and earlier takes in the Christian Science Monitor and Independent), so I thought it was worth at least briefly addressing.  There are some similarities, of course: both are Asian challengers to US economic dominance, built on state-run mega corporations succeeding in international markets.  And there are important differences, including political systems and openness to foreign investment and global competition, which is much greater in China today than in Japan of twenty years ago.

To their credit, all of the articles cited mention these differences, and none claim that China is doomed to follow Japan’s path.  But there’s a much more fundamental difference between the two experiences that I think most people are missing, which can be explained with some very basic facts about economic development and some 3rd-grade level math.

Economic development, at its heart, is a story about GDP per capita, not GDP.  The process of going from a poor country to a rich country is best demonstrated by convergence in per capita income (and hence living standards, levels of technology, etc.) with developed economies.  Japan achieved this: in 1960 Japan’s GDP per capita was just 16 percent of that of the US, and by 1980 the two were equal.  By 1995, helped by a buoyant Yen, Japan’s GDP per capita was 150 percent of that of the US.

The reason Japan never took over the world economy (and with it global diplomacy) does have something to do with the economic malaise of the past 20 years, but it’s really about population size.  Japan’s population is less than half of that of the US; in order for Japan’s economy to overtake that of the US, it would therefore need to be twice as rich on a per capita basis.  This was never going to happen.

But now consider China, which, at 1.3 billion, has a population about four times that of the US, and hence will have the largest economy in the world when it’s per capita income hits one quarter of American levels.  (It’s currently less than 10 percent of that of the US.)

It’s true that in some ways China today looks like Japan of the late 1980s, poised to take over the global economy but with questions about its model of economic development.  But at a more basic level I think the China of today looks like the Japan of about 1950, at an early stage of development with great potential for catch-up growth over the coming decades.  Whether this is scary or reassuring I’ll leave up to you.


4 Responses to “The Limits of the China/Japan Comparison (hint: look at GDP per capita)”

  1. 1 seo adelaide June 3, 2013 at 7:59 pm

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  1. 1 Well, it’s official now… « Tomorrow's Economy Trackback on August 16, 2010 at 10:08 pm
  2. 2 J’accuse! (though mostly jokingly) « Tomorrow's Economy Trackback on January 16, 2011 at 11:28 pm
  3. 3 Were Japan’s Lost Decades Worth It? « Tomorrow's Economy Trackback on January 11, 2012 at 1:45 pm

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