Japan and China: economic lessons for Ukraine

Let's start with a little riddle. In 2007, economic growth was 14% of GDP; in 2019, it was 6% of GDP, and now it is not even reaching 5%. What country are we talking about? It's all about China. The IMF's January forecast for China's 2025 GDP growth is 4.6%. The Economist Intelligence Unit estimated GDP growth in China in February this year for 2025 also at 4.6%. The World Bank, in its report on the state of the World Economy, gave a forecast for 2025 of 4.5% of GDP. Now let's look at the dynamics of another important indicator - total public spending. In 2001-2010, the average annual public expenditure was 18.6% of GDP, in 2011-2020, 29.2% of GDP, and in 2021-2024, according to the IMF, they accounted for 33.3% of GDP. In other words, the growth of the non-market sector and the state takeover of the Chinese economy are no longer in doubt.

To complete the picture, let us present the dynamics of China's public debt.

For a developing country like China, this amount of public debt is a much greater burden than for the United States, which has 120% of its GDP. The rapid growth of the Chinese economy occurred at a time when it was not seen as a significant competitor to the EU and the US. At that time, the idea of democratizing China by including it in the international system of labor division, global production chains, with the aim of placing the dirtiest industrial, energy-intensive industries with a high share of labor in China was popular. The EU and the US saw themselves as aristocrats of global value chains with a share of services in GDP of more than 70%. They say, let the Chinese turn the nuts, hammer the nails, assemble the parts, and we will provide them with design, marketing, branding, and consulting. American and European industrialists were excited about China's offer because the savings on taxes and regulatory costs compared to the over-regulated West were enormous. The Chinese did not just work at machines, doing the manual labor of the proletariat. Their bosses, children, and friends of bosses who had access to the administrative and commercial resources of the Chinese Communist Party learned to make technology themselves. They copied, compiled, sold, improved, added something, earned money, bought equipment, expanded, and so gradually turned into competitors for their Western teachers. Thus, in 20-25 years, i.e., in one generation, China has become a powerful, competitive producer of industrial goods not only for itself and Asia, but also for the whole world. In the late 2010s, the United States and the EU began to think about the balance of economic power and industrial potential with China, but the bureaucracy traditionally slowed down this process.

Japan after World War II was also a poor, war-torn country.

It began industrialization according to the templates of the IMF, the World Bank, and the theorists of the general interventionist state. At that time Solow/Svon model was only gaining popularity, but the belief that the state should be the center of economic development and commercial projects came from Western theorists and consultants.

Fortunately, Japan has retained a large private sector, which, by importing technology, initially working on the backing of American corporations, has become stronger and stronger, occupying niches in industrial and consumer goods not only in the country but also around the world. In 25-30 years, in the 1980s, Japanese corporations reached the level of direct competition with American and European industrial giants. But in the early 1990s, the Japanese miracle began to deflate. It was not an instantaneous piercing and explosion, but a quiet, gradual hiss and fading away. The government, business, and society did not dare to undertake a systemic, structural catharsis of capital, to bankrupt old financial and industrial organizations, as Japan had already assigned them the category of "too big/too important to fail". The state was becoming more and more involved in the country's economy. The old clan and corporate ties, cemented by the almost complete political monopoly of one force, decided to provide the country's economy with a soft landing for further take-off. Only the landing was not on a concrete strip, but on a swamp, which is gradually but surely pulling the country down, from the pinnacle of prosperity and progress...

The Japanese have driven themselves into a debt trap. The way out of it can be either a hara-kiri of creditors, who would say goodbye to the money they lent, or a hara-kiri of borrowers with the subsequent write-off of debts and the inevitable bankruptcy of dozens of financial institutions, as well as the state defaulting on its pension, social, and other obligations.

The Chinese Communists thought that they would be able to deceive the laws of economics because they would be smarter and more professional than the Japanese in managing economic processes. They looked down on the boom and bust of the Japanese property market, which was very painful for its insiders. But the Chinese repeated it with a lag of 25-30 years. The Chinese thought that their industrial base would ensure growth for at least another 20-30 years, but the US and EU became alarmed, came to their senses, and began to put up barriers to Chinese goods, in the production of which the state was actively involved in various ways.

Japan and China have much in common in investment and savings patterns. Savings have become a powerful source of domestic investment. The Japanese in the second half of the 20th century, like the Chinese since the beginning of the 21st century, fell in love with real estate. This sector is particularly prone to bubbles. In the late 1980s, the Bank of Japan sharply raised interest rates to cool the property boom. With a slight lag, its collapse came. China's central bank has also tightened monetary policy during the pandemic and major problems in the real estate market.

In the 2000s, Japan quickly accumulated a huge public debt. China is following the same path, albeit more cautiously. Alicia García-Herrero and Jianwei Xu, in their article “Will China's economy follow the same path as Japan's?” draw the following conclusions: