Thank you very much for a kind introduction, Dr Chipman. Good morning, Your Highness, Your Excellencies, Distinguished Guests, and Ladies and Gentleman. It is my great pleasure and great honour to speak in front of such a distinguished group of people as the first speaker of the session. I was invited here today as an economist from Asia and I would like to focus on Asia, especially on the East Asian situation. In Asia, there are two major economic powers, China and Japan, as well as Korea, Singapore, and so on, but the economic power balance is changing greatly. China’s GDP, for example, is going to exceed that of Japan this year. The GDP of the city of Shanghai will perhaps exceed that of Hong Kong this year, and China’s presence is increasing very rapidly in Asia as well as in the whole world.
After the Lehman shock, you are familiar with the economic experiences, and after that a pattern of economic recovery emerged that can be characterised into three types: L-shaped, U-shaped, and V-shaped. L‑U‑V – love – my favourite word actually. LUV is an important key word. Most European countries belong to the L-shaped recovery at this moment; the growth rate is not very high. The United States is experiencing a U‑shaped recovery with growth accelerating, and this will be explained by Dr Cooper. Finally, emerging countries and most Asian countries belong to the V-shaped recovery, especially China where the growth rate last year was 8.7% and in the past two quarters the growth rate exceeded 10%.
The IMF and other organisations expect that China’s growth rate will exceed 10% this year also. Neighbouring countries, which are very much influenced by China, for example Korea, Singapore, and so on, are also realising high economic growth at this moment. Regrettably, the only exception in Asia is Japan. In the short run, the economic growth rate of Japan is not so low – 2-3% growth is continuing – but the expected rate of growth in the medium term still remains low, reflecting the lack of political leadership and the political mess, which I will touch upon later on.
Let me first focus on China. As I mentioned, in the process of the world economic recovery, the presence of China is growing dramatically. The economic management of China should be appreciated in the sense that high growth continued even after the Lehman shock. At the same time, we should recognise three important changes that can be seen in China which have some geopolitical implications for the region and the world. The first change is the pattern of China’s economic growth. So far, Chinese economic growth has mostly been realised by a rapid increase in factor inputs, by which I mean an increase in labour input, an increase in capital input, and an increase in energy input etc.. These are the main sources of rapid growth so far. According to one piece of recent research, however, about one-third of Chinese growth comes from technological progress or an increase of total factor productivity. In other words, the economic growth pattern of China is changing and becoming something like that of industrialised economies. Perhaps this indicates that China’s economic growth will continue from now based upon this type of mature economic mechanism.
The second change is the exchange rate of the Chinese renminbi (RMB) is expected to appreciate substantially over the coming several years. China is under pressure from some foreign countries to appreciate the RMB because of its huge trade surplus. Considering the importance of exports to economic development, the Chinese government has been regarded as reluctant so far to allow RMB appreciation. However, even from the viewpoint of China, currency appreciation is needed in order to stop or cope with inflation. This is now well-understood by the Chinese government. In my understanding, the Chinese government is ready to appreciate the RMB gradually; the problem is how rapidly or how slowly this appreciation will be realised.
In this regard, we should not forget that before the Tiananmen Square incident of 1989 the RMB was higher than the current weight by about 45%; many people in the market now believe that the RMB will be allowed to appreciate to this level sooner or later. Between 2003 and 2005, before the Lehman shock, the RMB appreciated by 20% in three years. Considering the rapid economic growth and continuous RMB appreciation, it can be predicted that Chinese GDP will exceed even that of the United States much earlier than we have been expecting. At the soonest, this could happen around 2015 or 2016. I understand that this story is a little bit exaggerated but, if so, this will change the economic power balance tremendously.
However, around the year 2015, another change will affect China, and that is the unavoidable demographic change caused by the one-child policy. China’s total fertility rate is estimated to be around 1.5; consequently, it is predicted that the working-age population will start to decline around the mid-2010s. This indicates that Chinese domestic problems, for example income inequality and the issue of democratisation, will emerge more seriously, as well as a decline in the trend of economic growth. Under such circumstances, the role of political leadership will increase significantly. The current president of China, Mr Hu, will step down in 2013 but he will continue to hold power over the military. A complete succession of power will be realised around 2015. Considering all these factors together, a new geopolitical landscape will appear in the mid-2010s around 2015-16, which is in five or six years.
Reflecting the influence of China, some changes are already happening in Asia economies and economic policies. Chinese GDP is large enough, as I mentioned, but part of the income is not high enough at this moment, so the policy style of China is still very different from the OECD countries. Asian countries are very much influenced by the Chinese style of policymaking. In China, you can imagine that business is strongly support by the Government. Of course, this is not unique to China; Japan, Korea, and Singapore also had a similar policy style in the past but these countries have been rectifying or changing their styles. However, now so-called industrial policy or industry-specific policy is being restored in Asia and one reason, as I mentioned, is because China’s influence is growing. Another reason is the Lehman shock gave a strong rationale for restoring government intervention.
Let me give you some examples. In Japan, Japan Post, which was once privatised, as Dr Chipman mentioned, is going to be renationalised. I was in charge of the Ministry for Postal Privatisation; it was very hard work and we did it but now it is going to be renationalised – that is politics actually – and the role of government finance, the public finance, is growing rapidly again. In the case of Japan, Japan Airlines, which almost went bankrupt, was rescued by the government without any serious discussion. This kind of bailout is now increasing in Asian countries. Whilst many Asian countries have sovereign wealth funds, the Korean government is establishing a new type of fund to support the export of construction businesses to foreign countries. A very strong business-government relationship is being restored in the region.
A second change can be seen in politics. In Japan, there was a regime change last year. This was the first to be experienced in the post-war history of Japan. The new government, led by the Democratic Party of Japan, is in place but so far it is regarded as not being very friendly to the United States. I understand that Prime Minister Hatoyama is ready to have very good relations with the United States but the government has been regarded as not very friendly to the United States. The government is increasing the fiscal deficit very rapidly, reflecting the larger role of the government. Consequently, almost all Asian countries are carrying a huge fiscal deficit. This will also change the investment-savings balance in the world. Last night, Montek Singh Ahluwalia made an excellent speech here and he mentioned that the source of investment is savings and the source of savings mostly came from these countries, but the national net savings rate is now reducing.
This is a problem of collectivism I think rather than individualism, and a kind of collectivism is prevailing economically and politically. People are becoming very nervous about the income gap and income inequality, and this sense of income inequality is fuelling support for collectivism. Also, the influence of China will grow much more quickly than we have been expecting. Under these circumstances, we have to prepare for the new situation that will happen in about five or six years. It is not easy to say what must be done but at least we can say that the role of intellectual exchange between emerging countries and the industrial countries is a very important base for further development. In that sense, I appreciate this kind of conference. I understand that the role of the first speaker is to stress the importance of the conference and appreciate the efforts of the organisers, so let me do that.
Finally, let me mention some issues concerning Japan. Japan has technology, as you know, Japan as capital, and Japan has human resources. Regrettably, in the past three years or so, the economic performance has not been very good. Last year, as I mentioned, there was a regime change and many people expected the new government but still the confusion is continuing. The basic reason is that the new government does not have at this moment the framework for macroeconomic management. In the past, we had a very special policy board in the government called the Council on Economic and Fiscal Policy but the new government abolished this policy board. They have promised to create a new policy board to fulfil this kind of role but it has not been created yet. That is a basic reason why economic policy is very inconsistent at this moment, but still the new government will have a chance. This government will continue for almost three years so it is quite important for them to restructure the policymaking process.
It is not difficult, in my view, to revitalise the Japanese economy because we have technology, capital, and human resources. Considering the emerging presence of China, the role of Japan is very important and so I think they are ready to make these kinds of preparations. What is needed is very strong leadership. Who will be the next leader? No one knows but I would like to introduce an important fact. Between 2001 and 2006, we had a very strong prime minister, Prime Minister Koizumi. He was a very special and unique prime minister in the history of Japanese politics. All of a sudden this kind of a leader appeared. How special he was – he nominated me as a minister. He continuously supported my policy. This year, the upper house elections will be held in Japan. No one knows what the outcome will be but from now on some kind of political re-shuffling will start based upon that new government. A new political leadership will appear.
In that sense, we have to learn something from the experience of France. In 1981, President Mitterrand appeared and then all of a sudden he changed his policies based on cohabitation with Mr Chirac, a different kind of policymaker. So I am expecting that Mr Hatoyama will take this kind of action beyond the upper house elections. I would like to say again that the intellectual exchange is an important base since we are going to have a completely new geopolitical situation after about five or six years. Thank you very much.
