Lessons for China from Japan and America
The consequences are so momentous that these choices have changed the trajectories of the world's greatest powers. Japan's failure should have been the flashing red warning light for everyone else in the world.
Tokyo allowed Japanese real estate and share prices to build up unrestrained into a giant bubble.The world looked on this awestruck, seeing the ever-rising prices as a sign of immense strength. It was, in fact, a sign of disastrous misjudgment. When, in 1989-90, the bubble burst, it permanently enfeebled Japan's economy. The 10 years after the bust were known as Japan's "lost decade". That has now turned into a lost two decades.
Consider this contrast. In the 20 years before the bubble burst, Japan's economy grew at an average of 4.2 per cent a year. In the two decades since? It has barely managed to grow at all, with an annual average of just 0.6 per cent.
Did the US learn from Japan's mistake? Of course not. The world's biggest economy made the same error of the world's second-biggest.
The US allowed the unrestrained build-up of a huge bubble in real estate prices. The bust began in 2005 and gathered pace until, in 2008, it became so big that it brought down the US financial system. One result was the global financial crisis.
Another result is the damage to America's economic vitality. The US economy began recovering but the outlook isn't good in the short or longer term. First, the short term. The initial burst of American recovery is now spent. "In every recession, you accelerate out of it and then after a time you throttle back," says Anirvan Banerji from America's most accurate economic forecaster, the Economic Cycle Research Institute in New York.
"Typically that throttling back comes after a year. This time, guess how long it was? One year, exactly. That deceleration in recovery will continue in the near term. As for next year, the jury is still out but we think there is a significant risk of recession."
This - the dreaded "double dip" - should be no surprise, says Banerji: "If you look at the history of all US expansions in the postwar era, they have been stair-stepping down - every successive expansion gets slower.''
And this is the second point, the longer-term outlook: "The trend rate of American expansion will be slower right through the next decade. And you are much more likely to see growth below zero - a recession - than you were in the past."
Nobody predicts that America's enfeeblement will be as serious as Japan's. But as it struggles under a tremendous burden of private and public debt, it looks to be serious.
"China and India have surged ahead, almost as if nothing has happened," Banerji says. "The gap has closed dramatically. The Great Recession has slammed the Western economies so that their level of economic activity is still below where it was before the recession. A closing of the gap that would otherwise have taken a decade has now happened in two years."
History is accelerating. In just five years, the collective economic bulk of the developing countries will surpass that of the rich countries for the first time since the Industrial Revolution, according to a study published by the World Bank last week.
The biggest "if" attached to this assumption was always China. Beijing has found itself under the same threat that confronted Japan and America - a bubble in asset prices. China faced two big tests. First, would it deal with the problem or succumb to the temptation to simply let it run? After all, the run-up in China's real estate prices has made a lot of people feel very rich.
Overall, national average residential property prices leapt by 70 per cent from 2002 to mid-2010. And in some of the hottest hot spots, apartment prices were doubling in a year.
But Beijing learnt the lesson that Washington failed to heed. In April, the Chinese authorities imposed a double-fisted restraint on property prices at the more expensive end of the market while boosting supply for cheap housing.
China's second big test? Can this policy work? It had a marked effect initially. Nationally, sales of homes fell in May and June. But by August, the boom was back. Nationally, the price of new homes gained 11.7 per cent on average compared to the same period a year earlier.
And the hot spots were burning. China's biggest listed property developer, China Vanke, reported that its apartment sales were up by 84 per cent in Shenzhen and 56 per cent in Guangzhou. The authorities, however, have returned to the market with a new set of restraints. Last week Beijing tightened bank lending criteria. This signals a resolve to deal with the problem. The government seems determined to control the bubble.
If so, China can continue strong growth while the West stagnates under the weight of its own blunders. An adaptive and pragmatic power, China has learnt the big economic lesson of recent history.