Drifting toward decline

I have just returned from a week visiting Hong Kong and Japan.  What I found there was inspiring and somewhat hopeful in Hong Kong, but distressing in Japan.

In Hong Kong — which in many ways represents China’s best hope for a place where pluralism and free speech and free markets can produce the innovations that China needs to move its economy up the ladder to breakthrough products, instead of labor-intensive manufacturing and local services — China has commendably refrained from harsh repression.  Yet while waiting out the protests, instead of seeking to build trust with the youth of Hong Kong through discussion and some half-measures, it has condemned them as traitors to China’s harmonious order, accusing them of following the promptings of Britain and the US to undermine China.

The courage of the young people of Hong Kong and those who have supported them is inspiring, as was their orderly, disciplined and non-violent protest;  Beijing’s response, while perhaps predictable, is disappointing nonetheless.   My hope is that the determination of Hong Kong’s youth to continue to strive for democracy, but doing so with order and reasonableness, will eventually produce some modest improvements to support Hong Kong’s democracy, such as stronger political parties, or a more effective legislative council.  But my fear is that China’s new leader Xi Jinping will see Hong Kong’s freedoms only as a threat and not appreciate what it can offer to China.  It would be a tragedy, not only of risks of confrontation and clashes, but of lost potential for China, if Hong Kong is slowly drained of its freedoms.

And in Japan, which remains a model of freedom and prosperity, one sees a desperate race with time, technology and culture to adjust to dramatically changing circumstances.   The race with time is against the rapid aging of Japan’s population, which has already begun.  Within another fifteen years, the large post-war cohort, which propelled Japan’s economy and society through economic reforms which made Japan one of the world’s largest economies and the dominant power in East Asia, and in return enjoyed secure employment for life, will enter their seventies.  At the same time, entering the work force will be the smallest cohort of 20 year-olds in history, and moreover a cohort that has already experienced a shift toward temporary employment instead of stable careers, young men who have opted for video games over dating and marriage, and young women for whom work is a greater priority than families.  On current trends, Japan’s working-age population (15-64) will decline by one-quarter in the next thirty years.

With a very low birth rate, and high longevity, after 2030 Japan will have more people aged 80 and over than aged 15-24; this raises the question of who will care for the elderly, and whose wages will be taxed to pay for their health care and pensions.  Japan has responded to increasing government expenses for its aging population by borrowing rather than raising taxes; at over 200% of GDP it now has the highest debt of any developed nation.  This is an awkward situation from which to face another doubling in the ratio of elderly to workers that will come in the next two decades.

While the obvious solution is to encourage immigration of young workers from the still growing nearby populations of the Philippines, Indonesia, and Vietnam, the Japanese population has rejected that solution.  As I was told, the view in Japan of a population facing a decline in workers and rapidly growing needs for elderly care is “We would rather be taken care of by robots than foreigners.”   The distrust and anxiety regarding foreigners is so great, the Japanese would rather gamble their future on technical breakthroughs than recruit willing workers from abroad.

Will it work?  For the technological gamble to pay off, two things have to happen.  First, Japanese companies need to find technology to replace workers and upgrade technology fast enough to generate positive economic growth despite a workforce that will decline by about 1% a year.  This means the productivity of the existing workforce has to increase by 2-3% per year.  Only this will keep the economy growing and provide the resources to care for the fast-growing ranks of the elderly without punitive taxes on the working population.  Second, Japanese companies need to find technology for care of the elderly – everything from providing medical and surgical care to nursing home and companionship – with robotics instead of human workers.  And they need to have all this move from experimental stages to real-world deployment, at affordable cost, within fifteen years!

While one cannot dismiss the possibilities of such breakthroughs out of hand, the past decade does not inspire hope.  In the last few years Japan’s economy has stagnated, with real GDP and GDP/capita flat or declining; productivity has risen but only because hours worked have fallen so that the existing capital stock has been deployed by fewer workers.  Japanese companies have lost market share to Korean and Chinese competitors (and even US and European competitors in autos and computing), as they no longer are producing world-beating advances in quality or design.

Japan has made  huge advances in producing humanoid robots (with smiling faces and the ability to hold simple conversations) and pet robots (which do produce an emotionally positive response).  Humanoid robots that can lift elderly humans start at about $80,000, but a humanoid robot that can climb and descend stairs costs over $2,000,000.  Perhaps crash development for what will clearly be a big market will lead to breakthroughs that allow a robot in every home by 2040!

Could robots be to the Japan of the 2030s what automobiles were to the Japan of the 1970s and 1980s — a world-beating export industry that establishes Japanese industrial leadership and economic power?  That is clearly the hope and prayer of Japanese business and political leaders.  The difference is that automobiles were a well-established consumer good with a simple design; Japan only had to learn to produce them with higher quality and lower cost than inefficient competitors to take over a large portion of the world market.  Here Japan has to pioneer an entirely new product, establish its safety and desirability for different markets, and produce it in large volumes at low costs.  Perhaps a better analogy is the Walkman or SLR camera; new products in which Japan became a world leader.  But again for those products Japan’s global leadership was brief, before I-pods and digital cameras made the Sony’s and Pentax’s of the world also-rans instead of global leaders.

Meanwhile, Japan’s youth avoids marriage, struggles to find secure work, and takes refuge in video games; and its politicians and older generation stick to xenophobic Japanese nationalism.

Japan has a further cultural problem to overcome — it’s traditional attitudes toward women.  Japan has the lowest rate of female labor force participation in the developed world; and women’s prospects for executive positions remain slim.  Japan thus is seeking to rebuild its future with gender bias effectively tying one hand behind its back.  To be sure, women are highly educated and effective workers; the problem is corporations’ reluctance to promote them and trust them as leaders.

So Japan has to overcome technical and cultural obstacles, and soon.  Otherwise, its slide will accelerate and its time as a dominant power in East Asia will be a memory by the second half of this century.

 

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About jackgoldstone

Hazel Professor of Public Policy at George Mason University
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