No economy is ever on permanent cruise control. Regular government intervention is necessary and its required actions will change over time. Right now, the key to success for most of the large Asian economies is on increasing domestic consumption. No longer can they solely rely on foreign direct investment, or exports, to maintain solid, and continuous, GDP growth.
For the past two weeks I’ve traveled with two groups of Boston University business students to Shanghai, Bangkok, Beijing, and Tokyo, meeting with 20 companies in diverse industries about their business practices. Even though all three countries are in roughly the same geography, their stages of economic growth, and fiscal, monetary and governance policies couldn’t be more dissimilar. Thailand keeps revising its constitution to provide for better political harmony, Japan’s prime minister is on its third arrow of Abenomics, and China’s latest growth idea is to equally spread resource wealth amongst tier one, two and three cities.
The abolishment of term limits in China will give Xi Jinping more runway space to further improve the economy of the People’s Republic, without fear of political retribution or policy changes hampering his progress. Even in a one party system, politicians are not immune from exogenous factors interfering with their implementation. China’s situation is even more unique, however, as its one party is also closely tethered with central planning controls. But even that duopoly of sorts is not enough to necessarily guarantee positive GDP growth ad infinitum.
I’ve been fortunate to be leading these trips for nearly 20 years, and it’s been fascinating to see how each individual country has dramatically changed. Some of these governmental adjustments have been proactive, while in other facets, reactive. However, no single economic policy has generally ever worked for longer than five years. Ironically, all three countries are currently united by a laser-like focus on increasing domestic consumption. Currency (re) valuations, cost-of-living increases and other associated factors have dampened the ability to solely rely on external, international support. Right now, the only way to ensure stable, and ongoing, economic growth is to encourage their respective citizens to spend their way to prosperity, and as a home grown antidote against economic malaise.
Ironically, however, in the case of China and Japan, both countries are renowned for their high savings rates. Post WWII, this phenomenon might be in its 2nd or 3rd generation, but it’s also well routed in deep historical beliefs. It’s a tall order to effectively pivot, even in the hope of supporting national (economic) patriotism, and suddenly implore the populace to dip into their long term, economic safety nets.
Laws are enacted to promote harmony, provide for a country’s protection, and commercially support fair business and personal dealings. Government stimuli are available to jump start (or continue) economic growth. And this is where the second bit of irony lies. Especially in the case of China, there are a dizzying amount of laws on the books. But not a single one them mandates the individual spending of capital. Taxes might be progressive, or even regressive, but no body of laws currently requires the personal financing of government growth.
Given enough time, the hope is that economies will slowly do this on their own through gentrification, providing a spill over effect both in the broader economy, and for its individual citizens. To an extent, this has already occurred. All four cities we visited clearly have improved over the past 20 years. Especially in the case of China, high tariffed, luxury international automobiles have now become more numerous than those driven by the lao bai xing, or common folks. Betting on continued long-term gentrification is precisely why the Chinese legislature has pursued the political tack it has, in allowing Xi Jinping to stay in control. Up until now, China’s incredible economic success is irrefutable. The key unknown now, is whether it can proceed uninterrupted, in absence of foreign inflows.
Another challenge relying on domestic consumption is that the process might take years to have a material GDP improvement. In a traditional term limit system, a president or prime minister might be out of office three or four years later, when the fruits of their economic labors are just beginning to blossom. By that time, a new regime might be in power with a completely different set of priorities. But, fortunately, Japan, China and Thailand have centuries of patience at their disposal.
Greg Stoller is a Senior Lecturer, and is actively involved in building entrepreneurship, experiential learning and international business programs at Boston University’s Questrom School of Business.