Were Japan’s Lost Decades Worth It?

Just a quick follow-up to the earlier discussion on Japan. The main reason I first became interested at all in the Japanese economy was to repeatedly refute the common China/Japan comparison, where lots of people who seem to be confused about the dynamics of long-run catch-up growth think China’s growth will fall off a cliff just like Japan’s did, because, well, that’s what Asian economies do when they start to get big and scary. The very simple point is that if anything China today looks more like Japan circa 1960, when the country was still poor and in the early years of its rapid ascent, than Japan circa 1990, when the country was rich and entering its years of stagnation. So the Japanese experience is relevant to China’s path, but less as the cautionary tale everyone thinks of, and more as an inspiring example of how dramatically an economy can be transformed by sustained high growth.

And I still stand by that. But after giving a little more thought to the lost decade(s), I think it’s interesting to consider what lessons Japan’s entire post-war economic experience might hold for China (or other countries for that matter).

Japan was one of the first countries to experience dramatic convergence growth, and has been one of the most underperforming economies of the last 20 years. I don’t pretend to be an expert on the Japanese economy or the causes of its recent stagnation (one of the nice things about a blog is you can throw out speculative ideas for which you’re unwilling to do the leg work on and actually research), but it seems plausible that decades of a (successful) growth strategy centered on very high investment/industrialization increased the probability of entering a sustained period of overcapacity and the need to unwind lots of non-performing loans. I certainly wouldn’t say that the lost decade deterministically followed the boom years, or that there weren’t policy mistakes along the way (like too tight money), but I would guess that Japan’s recent troubles are in some senses a “natural” outgrowth of its earlier advances.

So the question is, if we take the whole post-war experience together, the good and the bad, should Japan be considered an economic success? If the later stagnation was the price to be paid for the earlier convergence, was it worth it?

I would say rather definitively yes. I think one key takeaway from Eammon Fingleton’s “the lost decades weren’t so bad” argument is that it’s possible for a rich country to endure a period of stagnation and still have its people do pretty well. Two decades of effectively zero growth for a poor country is a moral tragedy. For a rich country, it’s far from ideal, but it’s manageable (which isn’t to say that it always will be well-managed).

To bring this back to contemporary China, today there are a lot of complaints about how the Chinese economy is so unbalanced, that consumption is too low, that it can’t keep exporting cheap goods and under-pricing capital forever, etc etc. My problem isn’t particularly that I don’t think that these things are true, or that the Chinese shouldn’t try to correct some of these issues. It’s just that, relative to high sustained growth, they don’t seem all that important. The lesson from Japan: get rich quick, then figure out the rest.


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