Tag: Economic Reforms

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Analysis

A Look at Abenomics

Introduction

Japan’s longest-serving Prime Minister, Shinzo Abe, was shot twice on Friday while holding a speech at a political campaign event in the city of Nara. He has since died in hospital, and a suspect has admitted to causing the shooting with a homemade gun. During Abe’s time as the Japanese Prime Minister from 2012 to 2020, he followed an economic programme called Abenomics.

What is Abenomics?

When Abe became Prime Minister in 2012, Japan had been experiencing stagnation — a prolonged period of little or no economic growth — for two decades following an asset bubble collapse in the early 1990s. To revive Japan’s economy, Mr. Abe planned to use three “arrows”: loose monetary policy, fiscal stimulus, and structural economic reforms. 

Abe introduced negative short term interest rates, making it cheaper for consumers and companies to borrow money, which in turn is likely to lead to increased spending. Quantitative easing was also introduced. To increase the money flow in the economy, the government spent money on improving infrastructure and gave companies financial incentives, for example tax breaks. Lastly, many structural reforms followed. Abe introduced a corporate reform, policies to increase the number of women in the workforce, labor liberalization, and made it significantly easier for migrants to enter the workforce (this has long  been a point of conflict in Japanese politics).

Was Abenomics successful?

The BBC states although Abenomics was “certainly a success” in regard to political branding, it “fell short of Mr. Abe’s own key economic target.” After the policies that are now collectively referred to as Abenomics were put in place, the Japanese economy did grow. However, growth was not as fast as Mr. Abe hoped it would be. For example, the goal for 2020 was that the economy would be larger than 600 trillion yen, but this is still not the case.

The news agency Al Jazeera suggests that Abenomics was a “mixed success” as economic growth increased, exports rose, and unemployment rates reached the lowest level in decades. However, despite the eight consecutive quarters of positive growth between 2015 and 2017, John Power agrees with the BBC in that the economic growth achieved by Japan due to Abenomics was nothing compared to the rapid increase following World War II.

Abenomics: a lasting economic legacy?

In early 2020, Japan went back into recession, and Abe stepped down from his role as Prime Minister in the spring of 2020. Yoshihide Suga, who succeeded Abe as Prime Minister, continued Abenomics, while the current Prime Minister Fumio Kishida has “distanced himself from the strategy” (Al Jazeera).

Today, many economists give credit to Abe for putting Japan in a “more robust position” that enabled the Japanese economy to “withstand economic shocks” such as the COVID-19 pandemic (BBC Business), and the current Bank of Japan governor Haruhiko Kuroda also expressed his support of Abenomics. Therefore, one can conclude that Abenomics was an important step in lifting the Japanese economy out of decades of economic problems, but other economic policies are necessary to achieve all the hoped-for results.

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Analysis

The Flaws of the Chinese Model

Historical Context

In the 1970s, Beijing liberalized the economy, opening it up to foreigners, and adopting policies that promoted free trade. These were similar to glasnost and perestroika, which were implemented in the USSR. The hope was that millions of Chinese could be lifted out of poverty and into prosperity. While Deng’s reforms started in agriculture, he slowly branched out to include industry as well. A perfect example is Shenzhen, now a bustling metropolis, back then it was a shanty-town. He decided that the Pearl River delta should spearhead the liberalization. The PRC created special economic zones with little oversight, where foreign firms could trade freely with minimal interference from Beijing. This was adopted throughout China as the try-outs were successful, accelerating China’s economic growth.

Analysis

China progressed and grew — to the shock of many economists as no country on earth had ever grown at the rates China did. This raised the net output of firms in the economy, therefore increasing the GDP. As the Chinese adopted friendlier policies, the GDP rose further as China became a lucrative investment destination ceteris paribus. Mathematically speaking, as GDP is Consumer Spending, Investment, Government Expenditure, and Net Exports (Total Exports – Total Imports) added together, as China grew its reputation on the world stage and investments from abroad grew raised the GDP, imports remained stagnant due to an uncompetitive Yuan. Meanwhile, exports also increased, raising Net Exports (Total Exports – Total Imports), having a ripple effect on the GDP too.

GDP of China [PPP] from the World Bank Database (CC BY-4.0)

 As China started to industrialize, the wages grew at rates never seen before. It looked like China had the perfect deck of cards to become an industrialized nation, which it did — as China is a newly industrialized country. However, this came with many downsides: externalities and inequality.

Externalities are a cost or benefit placed on a third party. They can be positive or — as in China’s case —  negative. The costs to produce outweigh the cost to society from the production in markets. Therefore, there is a welfare loss. As there is a welfare loss, society is worse off — this can be in the forms of pollution, increased health risks, lower life expectancies, or otherwise. The welfare loss exposes the public to harmful particles and extreme air pollution. Now, this leads us to question how well-off are the Chinese?
Even though rapid economic growth has increased wages and lifted many out of poverty, and the effect of increased GDP has had direct consequences on the Chinese, nonetheless, one result of rapid unchecked growth is inequality. As The Economist reported in 2015 and 2019, education is highly unequal. Access to education helps individuals earn more due to the development of skilled labor and allows firms larger access to a larger pool of individuals with specialized skills. However, as stated in both the articles, most Chinese schools are now jam-packed with elite, wealthy kids; and uneven wealth distribution, like in the United States, has led to the degradation of the quality of education received by rural Chinese. This can cause them to struggle in the gaokao, an all-important university exam, viewed by many rural Chinese as their only way out. However, the government has been attempting to fix this. Beijing has suggested that educational reforms are needed. There is also the big North-South divide. Farmers in the north cannot earn enough to live, so they migrate to the south to become laborers or factory workers. As they live in poor neighborhoods, this increases the chances of their children scoring poorly on the gaokao.

Conclusion

Nonetheless, China has had tremendous success in eliminating poverty. Its people — once some of the world’s poorest — are now living in a modern country. However, many challenges are facing the Chinese. The ones discussed here are scratching the surface; some others include depopulation, firms’ inefficiency, unemployment, and an overheating economy.

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