Population vs Productivity: Growth Drivers Change as China Surpasses Japan

Mass versus motion; it is an elemental factor in physics and may now being playing more of a role in global economic growth. Economists, policy makers and business people have focused on productivity as the primary driver of growth because of its accelerant impact on financial outcomes and, frankly, because it can be managed more neatly than population growth. China's rise as an economic power may now recase some of the hidebound calculations of national wealth and prosperity due to the impact of its sheer size. The implications for other countries with large populations: Vietnam, India, Pakistan, Brazil, Egypt - to name but a few - suggests that pollicy makers may begin to rethink the focus of government investments in order to optimize their natural advantages on this score:

The Wall Street Journal provides context and commentary by Chester Dawson in Tokyo and Jason Dean in Beijing:


"China passed Japan in 2010 to become the world's second-largest economy after the U.S., a historic shift that has drawn mixed emotions in the two Asian powers: resignation tinged with soul-searching in long-stagnant Japan, pride but also caution in an ascendant China wary of shouldering new global responsibilities.

The Japanese government made official the long-expected flip Monday morning in Tokyo, reporting that the economy shrank at a 1.1% annual rate for the last three months of the year, a period when China's gross domestic product surged 9.8% from a year earlier. With those figures, Japan's full-year GDP was $5.47 trillion—about 7% smaller than the $5.88 trillion China reported in January.

Both still remain considerably smaller than the American economy. Japan and China combined are still worth less than the U.S.'s 2010 GDP of $14.66 trillion. But the news marks the end of era. For nearly two generations, since overtaking West Germany in 1967, Japan stood solidly as the world's No. 2 economy. The new rankings symbolize China's rise and Japan's decline as global growth engines.

For the U.S., while Japan was in some ways an economic rival, it also has been a geopolitical and military ally. China, however, is a potential challenger on all fronts.

China's ascent has been the main source of popular legitimacy for the ruling Communist Party. But Beijing worries that the mantle of economic titan comes with unwanted obligations for a country still in many ways poor. "China Surpassing Japan to Become World's Second Biggest Economy—But Not the Second Strongest," said the headline on a recent article on the website of the People's Daily, the party's flagship newspaper.

In Japan, the moment is seen as another marker of an extended weakening. "It's only natural that Japan would be overtaken considering China's ballooning GDP and larger population," Tokyo Gov. Shintaro Ishihara told reporters recently. The outspoken nationalist was once the proud voice of a cocky nation, co-authoring the bubble-era 1989 book, "The Japan That Can Say 'No.'" Now, he talks about his country's standing with a tinge of sadness. "It's just unfortunate that various other signs of Japan's decline stand out so much against that backdrop."

The complex reactions in both countries reflect the fact that China still lags behind Japan in many respects—and the reality that their growing interdependence makes them partners as much as rivals.

China's per capita income is still only a tenth of Japan's. The World Bank estimates that more than 100 million Chinese citizens—nearly the size of Japan's entire population—live on less than $2 a day. Robin Li, chief executive of Chinese Internet search giant Baidu Inc. notes: "There's still the undeniably awkward fact that China still has yet to produce an enterprise with truly global influence commensurate with China's rising power," such as Toyota Motor Corp. or Sony Corp.

As many Japanese business leaders note, Japan's economy would have been even weaker without exports to China and an influx of Chinese tourists. China surpassed the U.S. as Japan's largest trading partner in 2009. "I expect China's GDP to be double Japan's" in about eight years, said 53-year-old Masayoshi Son, spokesman for a new generation of Japanese leaders as CEO of Softbank Corp., which has managed to grow amid the country's decline. China's rise also presents an opportunity: "If more Japanese companies also viewed this situation as something positive, Japan's economic prospects would also brighten up."

Japan's economy minister Kaoru Yosano on Monday welcomed the Chinese ascendancy to No. 2. "For a neighbor country like us, it is something to celebrate that the Chinese economy is making a leap forward," the minister said. He called China's expansion "one of the cornerstones for simultaneous growth in the region."

Still, there are clear strains, with historical tension lingering from Japan's brutal wartime occupation, and China flexing newfound muscle against a weakened neighbor. The recent defining moment: last fall's standoff over disputed islands near Taiwan, ending in Japan's sudden release of an arrested Chinese fishing captain under pressure from Beijing, despite video evidence that the captain had violently charged a Japanese coast guard vessel.

The contrasting outlooks of an ascendant China and a declining Japan was evident in Nielsen Co.'s latest international consumer confidence survey of 52 countries released last month. Chinese consumers were among the most optimistic, with a "confidence index" of 100, compared with the global average of 90. Japan's consumers tied with Romania's for fourth most pessimistic, with an index of 54. (Americans stood between the two, with an index of 81.)

For Beijing, being No. 2 means, among other things, new clout. China has trumpeted its willingness to use its $2.85 trillion hoard of foreign-exchange reserves to help stabilize struggling countries such as Greece by purchasing their bonds. Officials have chastised Washington for monetary policies they say could endanger the value of China's massive holdings of U.S. government debt.

But Beijing also suspects that developed countries want to use its rise to foist on it greater responsibilities in areas like carbon-emissions reduction and currency policy. When China's GDP passed Japan's on a quarterly basis last summer, official media outlets ran commentaries rebutting what they called "China responsibility theories" in the West exaggerating the country's global role. The theories, one Chinese expert told the Xinhua news agency, "are fabricated to slow down and check China's development."

At home, the rise to No. 2 complicates the Communist Party's national narrative, steeped in a sense of victimhood at the hands of foreign powers—not least 1930s Japan—that China is now overtaking. Party leaders are aware that China's image as an economic powerhouse risks calling attention to the shortcomings of a country both powerful and poor.

So the government takes credit for China's economic accomplishment while playing it down. When the National Bureau of Statistics reported China's 2010 GDP last month, director Ma Jiantang was asked about the looming No. 2 milestone. The rise "is the result of hard struggle and continuous progress of the Chinese people under the leadership of the Communist Party," he said—adding that China remains one of the world's poorer countries on a per capita basis.

The official ambivalence is mirrored in China's public reaction. "There might be people feeling thrilled about this, but I'm not one of them," said Zheng Maohua, a 65-year-old retired government official in Beijing. The GDP landmark "can't reflect the true situation of this society," which he described as "rich country, poor people."

In the 1980s and 1990s, Japan faced the same pressures China now fears, of global demands to shoulder extra responsibilities. China's official rise to Asia's top economy takes the spotlight off Tokyo. While still the oldest liberal democracy in East Asia and a cornerstone of the U.S. defense umbrella, Japan no longer faces the same pressure from Western peers to exercise "checkbook diplomacy" or open its markets—even though Japan's trade surpluses with the U.S. remain high.

Some Japanese elites are wistful for those demands. "Some of us look back to the era of Japan-bashing with nostalgia," says Takatoshi Ito, an economics professor at Tokyo University and a former top finance ministry official. "We were frustrated back then, but ignored is worse than being bashed."

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.For others, the debate is on to define Japan's role and image for the era of No. 3. One influential Japanese ruling-party politician, Renho, who uses only one name, touched a nerve last year with her book titled "Do We Have to Be No. 1?" It encouraged Japanese to take comfort in the notion that Japan need not be a leader in everything—or anything—to be considered successful.

Japan now is more focused on different, less-quantitative, ways of defining success. Its influence abroad remains extensive, and in some ways has grown. But it is more low-key, less directed in contentious areas of strategic technology and more in the realm of cultural diplomacy.

The notion of Japan as a center of creativity and innovation—in hybrid-engine-powered cars or 3-D videogames—contrasts with its image 20 years ago as a copycat that mimicked design and technology pioneered elsewhere, and then outpowered the original makers with superior manufacturing. That label is now attached more to China.

The Ministry of Economy, Trade and Industry—once famous for crafting an industrial policy that helped Japan's manufacturers rule the world— has a new Creative Industries Promotion office designed to spread the appeal of anime cartoons, manga comics and Japanese videogames. "We see it as a matter of quality over quantity," said Motohisa Ikeda, a vice minister for trade, noting Japan's enduring prowess as a maker of high-value-added goods. "Japan is still a wealthy nation in many senses of the word."