New regional leaders face myriad challenges

China needs new growth inputs while Japan must regain political stability, experts say

by Takashi Kitazume

Staff Writer

What Japan needs the most as it emerges from the Lower House election is a more stable political leadership, after having six prime ministers in as many years, so that it can tackle mounting domestic challenges and manage its shaky ties with neighboring countries.

China, under the new leadership chosen at the Communist Party Congress in November, will continue to prioritize economic growth, keeping political reforms on the back burner. But China will face increasing difficulties in maintaining the rapid growth of the past decade.

These were among the topics discussed by experts from Japan, the United States, South Korea and Hong Kong during a symposium organized in Tokyo on Nov. 28 by The Brookings Institution and the Japan Center for Economic Research in cooperation with the Keizai Koho Center.

Under the theme of “Managing transitions in Northeast Asia, the global economy and U.S.-Japan relations,” the participants discussed the challenges for these countries just as they experienced — or were anticipating — leadership change this year, starting with President Barack Obama’s re-election in the U.S. and the appointment of Xi Jinping as the new Chinese leader, to the Lower House election in Japan and the presidential race in South Korea on Dec. 16 and 19, respectively.

2012 was a special year in that the leadership change in these countries aligned themselves for the first time in 20 years, said Richard Bush, director of the Center for Northeast Asian Policy Studies at The Brookings Institution.

“This creates a great potential for change. New leaders say things during their leadership campaign, and when they take office, can pursue new policies. This creates new context for bilateral relations and relations among countries in East Asia. It’s a source of uncertainty, but it’s also a source of opportunity,” he said.

During the campaign for the Lower House election in Japan, parties pitched a variety of agenda including growth strategy, energy policy and nuclear power, consumption tax hikes and the Trans-Pacific Partnership free trade talks.

“But what many people really want to see is an end to the situation where the nation has had six prime ministers over the past six years,” said Shotaro Yachi, a former vice foreign minister and now a visiting professor at the Organization for Japan-U.S. Studies at Waseda University. A lot of voters believe, he said, that Japan can no longer move forward if politicians remain unable to make decisions, postpone what needs to be done or turn away from difficult agenda.

Japan’s recent strained ties with China and South Korea over territorial and other issues are not unrelated to the fact that its relations with the U.S., its key ally, were rocked in the early phase of the government led by the Democratic Party of Japan, which took power from the Liberal Democratic Party in 2009, Yachi said.

Japan also has a long-standing territorial row with Russia, but even as Tokyo tries to resolve the dispute over the Russian-held islands off Hokkaido, President Vladimir Putin “would never take seriously” a Japanese prime minister who may be quitting in a year, Yachi noted.

Meanwhile, under the leadership of outgoing President Hu Jintao and Premier Wen Jiabao over the past decade, China achieved rapid growth that turned the nation into the world’s second-largest economy. But the growth created a rising inequality in Chinese society, the wide gap between the rich eastern coastal regions and the poorer island parts of the country, and domestic tensions continue to rise as discontent erupts in the form of increasing protests, said Ray Yep, a professor of politics at the City University of Hong Kong. “The problem is, will there be demand for political reforms?”

Yep said that momentum for political reforms does not exist among the new Chinese leadership “because they still believe that economic growth can buy time for themselves” before introducing reforms.

So the formula remain the same — GDP growth comes first, Yep said. What is different, he said, is that the new leaders face new obstacles to growth, in particular the sluggish global demand.

They cannot rely much longer on the export and investment-led growth and have to increase domestic consumption, but there are various hurdles to the urbanization of Chinese society. These need to be overcome for the shift toward consumer spending as the key element of growth, Yep said.

Yep said China-U.S. relations will not necessarily become more contentious. The Chinese leaders “believe that as long as China becomes stronger and more important in the global game of economy and politics, America will look away when there are human rights problems,” he said.

But unlike the Hu-Wen leadership duo, who came to power a decade ago when the U.S. was preoccupied with the “war on terrorism,” the new leaders will be facing President Obama with a declared priority on Asia in his “rebalancing” of America’s global focus, he noted.

As in many other powers in the region, the close presidential race in South Korea between the conservative Park Geun Hye and the liberal candidate Moon Jae In has also been mostly about domestic economic issues, said Lee Sook Jong, president of the Seoul-based think tank East Asian Institute.

Lee pointed to the rising social discontent due to the rich-poor gap in the country. There is also a huge gap between the giant conglomerates like Samsung, which are globally competitive and account for much of South Korea’s value-added domestic production but employ less than 10 percent of the labor force, and the small and medium-size businesses that are domestic market-oriented, she noted.

While both Park and Moon emphasize welfare in response to rising voter demand, they differ on how they are going to regulate the dominant conglomerates as people’s discontent rises over big business, she said.

In the United States, President Obama continues to face the same tough domestic economic challenges even before his second term begins, including the standoff with the congress over the “fiscal cliff” issues. The U.S. needs to make a transition from slow growth and recovery to a more robust growth, and that will require dispelling uncertainties over the domestic fiscal situation and global economic conditions, said Donald Kohn, a former vice chairman of the U.S. Federal Reserve Board and now a senior fellow of economic studies at Brookings.

Since the bubble burst in the 2008-09 crisis, much progress has been made in the deleveraging process as households have considerably reduced their debts, while banks and other lenders have rebuilt their capital base damaged in the financial crisis, he said. But although there is substantial pent-up demand for housing and consumer durables, income growth in the household sectors has been very sluggish, Kohn said.

Capital spending by U.S. firms has also been very weak since the spring of 2011, he noted. In addition to the lingering European debt crisis, fiscal uncertainties in the U.S. — particularly over the tax cuts set to expire and massive reduction in government spending at the end of the year — dampen business willingness to make investments, he said.

The future course of the U.S. economy “will depend on how these uncertainties work out,” Kohn said. “Unless we can find a way to come to terms in a sensible way with our fiscal policy, to get our debt in a more sustainable track, to reduce the uncertainty about what tax and fiscal spending would be, I think the chances of a greatly stronger U.S. economy are much diminished.”

Uncertainties over the global economy also need to be relieved, and part of that will require the rebalancing of the global economy. “We cannot do what we were doing (in the U.S.) in the early 2000s — relying on consumption, spending well beyond what we were producing, running current account deficits, and accumulating debt to pay for those purchases.

“The U.S. economy needs to rebalance — away from consumption towards investments and net exports. But if the U.S. is going to cut down its domestic demand, something else has to take its place, and that’s domestic demand from the surplus countries,” Kohn said. “Emerging market economies and other surplus countries trying to maintain export-led growth are going to have to shift away from exports to domestic demand.”

But the growth potential of China — the leading powerhouse of Asia as the new engine driving the world economy — may be in question as its rapid growth is likely to slow down in the coming years, said Kwan Chi Hung, a senior fellow at the Nomura Institute of Capital Markets Research.

China’s economic growth in the third quarter came to 7.4 percent, the slowest since the first quarter of 2009, and Kwan said it is not just the result of a cyclical slowdown, but appears to reflect a long-term trend for slower growth due to the anticipated fall in labor supply. While the economy is believed to have hit bottom and is expected to pick up speed in the fourth quarter and into 2013, it is not likely to be a V-shaped recovery like the one China experienced after the early 2009 setback, he said.

Three decades after the introduction of the “one-child” policy, the United Nations estimate indicates that the working-age population in China will stop increasing and begin falling around 2015, he said.

Also, statistics show that around 160 million people have already moved from farming areas — long believed to be the source of surplus labor — to urban parts of the country as migrant workers, he said, noting that he believes that China has passed a point in its economic development where supply of excess labor from the farm sector runs out, creating a shortage of labor supply.

What it means for the medium- to longer-term growth potential of China, he said, is that a double-digit growth of the past decade will make way for a more modest growth, given the anticipated decline in labor input — one of the key components of growth. Expansion of another component — capital input — could also be in doubt as the high savings rate of the Chinese people may fall with the aging of the population, he noted.

That leaves raising productivity as the way forward for China, Kwan said. In fact, the Chinese government, in its bid to shift from the old economic model relying on expanding labor and capital input, has advocated increasing indigenous innovations as a key policy goal, he noted.

China can also shift resources from less productive sectors to more productive sectors, and it has indeed been quickly shifting industrial production from labor-intensive manufacturing to higher value-added segments such as the auto and steel industries, Kwan said. On the other hand, the less productive state-owned enterprises have in recent years been accounting for a growing share of China’s economy, he said, noting that lagging reforms of the state-owned sector will be a major challenge for the country’s new leadership.