William Tait MacDonald, Over a decade and counting in the land of the rising sun
This is an interesting question, because it underlines some major problems with the way that modern economies are valued.
In industrial economies calculating the value of an economy is simple – take the value of the items sold in the country, plus the value of items exported and you have a number.
But the modern world is much more complex than that, especially for post-industrial economies. Let’s take a real situation, the iphone. It was designed by Apple in Silicon valley, so you’d think the US economy would be cheering, right? But actually it is making the US economy look very bad. Why? Let me explain.
The design is emailed to a factory in China where the phone is made for pennies on the dollar, and the exported to the USA with a fat price tag of hundreds of dollars. From a balance of trade perspective it looks like the USA’s balance of trade is terrible! They’re importing these valuable iphones by the bucketload, but not selling much to China!
… ahh, but you’re probably asking, “Wait, surely Apple is making the difference between the production cost and the sales price, right? So that must help the U.S. economy, right?”
But that money isn’t necessarily showing up on their U.S. books, because Apple is a global corporation and has a very specific allergy common to all huge corporations, namely an allergy to paying tax. So yes, a portion of that money does appear on Apple’s books, but they make it as small as possible because US taxes are much higher than, for example, countries where you pay no tax. What doesn’t help is that countries like the U.S. actually charge additional tax on bringing foreign money back into the country (Apple Leads These Companies With Massive Overseas Cash Repatriation Tax Bills)… so companies just don’t do it.
So this naturally makes the country look like its economy is terrible! They’re not producing much inside the country, not exporting much, and not bringing money back home….
Yet mysteriously these huge corporations are flourishing (despite beating their breasts and wailing about how they’re operating at a loss – year after year after year without ever going under).
Japan’s economy, which has a huge service sector, is a prime example of this phenomenon. Services, ideas, designs and other intellectual property are generated in huge quantities, but the tax rate is high so just enough money trickles back in to hit the sweet spot on maintaining the company and investor confidence while minimising tax.
Japan is doing fine economically, but much of it is invisible to the bean counters trying to figure out the value of the economy, and this is deliberate, because if the money was easy to count it would be easy to tax.
And there you have it. The problem isn’t that Japan’s economy is in decline, it is quite simply that all our measures of economic power, size and value are based on an industrial era logic that simply doesn’t work in a post-industrial world.
This is no great secret by the way, it is common knowledge, in fact I recall hearing a segment about it on BBC 4’s “More or Less” recently – a slightly different facet of the problem, but the same general issue. I looked but I can’t find the specific episode, however I do highly recommend listening to all the episodes… then when you find it you can tell me 😉
Hernanday Oleary, Mba from Harvard, undergrad in business adminstration
Japan’s economy was centered around window guidance. Japan had billions in exports and surplus foreign dollars which they had re-invested in their own economy using the banks to direct loans into commercial industries which were export focused. In the 1990s and 1980s it was not uncommon to run a business who should have only qualified for a $2 million loan and only needed $2 million but got $6 or $8 million because the banks HAD to meet a lending quota so were pressured to over lend. Obviously this over time resulted in bad loans. However the real reason Japan has stopped growing economically is quiet simple, the US told it stop growing in the 1990s as US had felt threatened by Japan’s growth once it got to a certain level. The US made it end its window guidance policy and directed economy from bureaucrats who had made Japan’s economy grow the way it did.
This may seem unrealistic. In 1965 Japan’s economy was about the same size as Canada’s overall. By 1980 it had a 1 trillion dollar economy compared to USA 2.8 trillion dollar economy. By 1990 Japan’s economy had tripled to 3.1 trillion compared to the US doubling to about 5.9 trillion. By 1995 Japan had moved up to 5.3 trillion compared to US 7.6 trillion In the span of 5 years, Japan added almost as much production in 5 years than the entire German economy of 2.5 trillion (which by the way added East Germany over this period). At that high growth rate Japan would have surpassed USA economically.
USA had pressured Japan to “liberalize” its economy and let its bad loans fail where the USA bailed out its own banks when they had a similar crisis in 2008. So Japan economy went down from $5.3 trillion to 4.7 trillion dollars between 1995 and 2000. Japan had larger reserves than the IMF in the 1990s and USA told it don’t bailout Thailand, make Thailand take loans from the IMF because they did not want Japan to have more control or power over the region.
That is why Japan’s economy went bad.