Japan has struggled with a decade of stagnation. There is relevance in considering Japan’s problems with respect to China’s economic prospects going forward. Yesterday, I outlined how certain rigidities in the Japanese economy rendered it incapable of quickly responding to an economic crisis brought on by the bursting of a speculative bubble in commercial real estate prices. Banks, due to their ownership structure, carried excessive bad debt way too long. (Banks had equity stakes in the companies they were supposed to be monitoring and vice versa.) But this wasn’t the only problem.

There were other structural barriers in Japan that prevented the infusion of ideas and capital that would have caused an economic turnaround sooner. The Land of the Rising Sun has been essentially closed to immigration (despite having an aging workforce); it has restricted imports; and its stock markets have discouraged foreign listings and foreign ownership of Japanese firms.

Now consider China. Many of the same conditions seem to apply. In some areas, China is even more restrictive, on account of a pervasive government presence. Where China may have a step up is in being more open to foreign investment.

China is racing towards modernization and some liberalization. However, there may be some formidable walls that need crashing through before long-term economic prosperity and stability can be achieved.

Time and again, it has been demonstrated that free market economies can self-correct – through currency fluctuations; through immigration; and through re-invigoration by injections of foreign capital and entrepreneurial spirit. Closed economies risk sinking.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

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07/07/2008 - posted by marcus

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