China / Japan? History repeating itself?

japanchina2

Too far fetched?

Let’s consider briefly the facts and also some important caveats.

Population demographics

The results of a census taken in 2015 has placed Japan’s population at just over 127 million – a decline of about 1 million in about 5 years. Japan’s birth rate has been long below the total fertility ratio of 2.1 (currently 1.4) and nearly a third of all Japanese citizens are now over 65. This is already a source of policy and economic challenges for Japan and one that is likely to keep growing.

China’s one-child policy starting in the 70s has had a major impact. Whilst the policy has now been relaxed, the population control genie, once out of the bottle can rarely be controlled. Changing economic trends, mindset shifts, and a movement towards an urban citizenry means less people are keen on having children. The United Nations estimates that that the number of Chinese over 65 will increase by 85% to 243 million in 2030 (from the current 131 million). The Chinese working population saw its biggest decline in 2015 – a fall by a record 4.87 million.

Both Japan and China have very restrictive and insular immigration policies which will only serve to further exacerbate the population and demographic challenges. These demographic issues will also impact economic growth and development as in time both economies will have inverted population pyramids, where one active working individual will be supporting two parents and four grandparents – and better medical facilities and healthcare will lead to a greater demand on the working population.

Perhaps the spur in investment in robotics will help alleviate these challenges?

Economic growth history

Japan’s economic growth started with the development of its manufacturing base following World War Two with support from the USA and other Allied nations. Japan’s growth was an average of 9% between 1955 and 1973 (when the first ‘oil shock’ impeded growth).

In the case of China, following a debilitating post-war economic situation and the challenges of the Cultural Revolution, the opening up and reformation of the economic system from 1978 was instrumental in China’s economic story. China’s growth has averaged between 7% and 10% since.

The main engine of growth both in the case of Japan and subsequently China was manufacturing. It will surprise users of top-notch Japanese products today to learn that from the 1950s to around the 80s, ‘Made in Japan’ meant low-quality and cheap and people preferred to use American or European produced goods. However, the Japanese investment into their manufacturing processes, research and development over time meant that they started developing high-value and high-quality goods and products. It’s a process that took decades and systemic investment into innovation.

In the case of China-made products, there are still some challenges around quality and value, but this is something that is being addressed as we now increasingly see greater investment into research and innovation.

Funding world’s developing needs

Japan became development donor from as early as the mid-50s and by the early 90s, Japan became one of the largest officual development assistance (ODA) providers in the world. Grants, aids and soft loans were provided through agencies such as the Japan International Cooperation Agency (JICA) to countries across Asia, Latin America and Africa.

Japan then became instrumental in the establishment of the Asian Development Bank (an institution for which it has maintained presidency since inception in the 60s).

This allowed Japan to project its soft-power and help foster policies favourable to Japan across recipient nations.

If we examine China’s development assistance, aid and grants – it has grown from less than US$1 billion in 2002 to over $25 billion in 2007 to currently over US$100 billion. Due to differences in the way ODAs are valued, it is possible that China’s current aid and grants may be undervalued.

China also was instrumental in the set-up of the Asian Infrastructure Investment Bank (AIIB) with an express aim of building infrastructure across Asia-Pacific. Whilst both ADB and AIIB officials have been at pains to stress that they do not see each other as competitors (indeed they have already co-financed a number of projects), a primary reason why the AIIB was set up so as to have greater autonomy by China and other partners in multilateral banking institutions.

Slowing growth and liquidity trap

In the late 80s, Japan was running a very large trade surplus and the stock market and property prices were booming (there were properties which were valued at US$1.5 million per square meter – or ten square feet in Ginza!) which collapsed in the 90s. There was an asset bubble across both the stock and property markets and when the bubbles burst, it led to the loss of trillions of dollars of value.

Deflation set in and whilst the Japanese government tried its best to promote spending (including setting interest rates at near zero levels), there was little effect. Growth has been anaemic and in 2009 the GDP fell by 5.2%.

Japan found itself stuck in a classic liquidity trap where where its monetary policy had little or no impact on economic output and production levels. This led to the ‘tragedy of Japan’s lost decades.’

Let us now consider China. Relatively easy loans made by banks? Check. Booming property prices? Check. Booming stock market? Check. Corrections across all three areas? Check.

China’s economy has been slowly significantly and it’s GDP growth rate has fallen to a level not seen since 1990. A report from the Wall Street Journal indicated that investors are hoarding cash rather than investing – a classic sign of a liquidity trap. The stock market debacle in Shanghai in 2015/2016 has also dampened investor enthusiasm.

The Chinese Communist Party Politburo has also cautioned against debt-fuelled growth and rising asset bubbles. There is also evidence to suggest that the stimulus packages initiated by the government are having little impact.

Some key differences.

Whilst there are some similarities, it is important to note a number of major differences and caveats before any quick conclusions are made. Firstly, China starts off with a much bigger population base and the reverberations from the impacts will take a much longer time before they are felt.

Secondly, China’s political system lends itself to a greater continuity in policies which may be effective in warding off economic downturns and avoid ‘lost decades’ the likes which Japan went through. Japan on the other hand went through nine prime ministers in the 11 years between 1989 and 2000 which hardly allows for lasting measures and policies.

In order to avoid the liquidity trap challenges, the Chinese government will need to focus on its war against graft and corruption and instil trust in the public institutions. Long-term and difficult policy decisions in the areas of state-owned enterprises reform need to be made in order to boost productivity. There needs to be continued efforts to keep narrowing the inequality gap and create greater employment opportunities which will in turn boost spending and help deter deflation.

The road ahead is a difficult one but there is no reason for history to repeat itself as long as the mistakes of the past are not repeated.

 

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Finland’s progressive philosophy to education

Having just visited Helsinki, a city I would strongly recommend visiting, I learnt a fair bit about Finland’s overall philosophy to education, learning and development. This came through discussions I had with a number of people whom I met whilst travelling there.

Learning to skate in Helsinki city centre

Introduction

Finland provides a great blueprint for establishing a world-class education system that instills a philosophy of holistic development, lifelong learning and an ethos geared towards the progress of not just self, but of society as a whole.

The Finnish education standards are also amongst the highest in the world, under most global indicators, from the Education Index produced by the UN Human Development Index, to the Programme for International Student Assessment (PISA), to surveys conducted by the World Economic Forum (WEF).

I think it will be useful to start this short discourse on Finland’s education system with this quote:

“Finnish early childhood education emphasizes respect for each child’s individuality and the chance for each child to develop as a unique person. Finnish early educators also guide children in the development of social and interactive skills, encourage them to pay attention to other people’s needs and interests, to care about others, and to have a positive attitude toward other people, other cultures, and different environments. The purpose of gradually providing opportunities for increased independence is to enable all children to take care of themselves as “becoming adults, to be capable of making responsible decisions, to participate productively in society as an active citizen, and to take care of other people who will need his [or her] help.” – Anneli Nikko.

This pretty much encapsulates the overall philosophy the Finns have adopted towards education and learning.

It is worth noting the following points about education in Finland:

  • All education is free (including fully subsidised hot meals for all students).
  • Parents of new born babies are given books to read to the children – to inculcate a habit of reading!
  • There are no university tuition fees and benefits are provided for university students.
  • All children have to learn 2 foreign languages in addition to Finnish.
  • The values of living in harmony with one another and respect for all cultures, traditions and faiths are taught very early on in a child’s life.

A happy, multicultural childhood

The advent of ‘phenomenon’ teaching

Finland’s leading educators, despite their formidable achievements, have not sat on their laurels. They have continued to identify the changing trends taking place within the wider global economy and labour trends and are adapting to meet the rising challenges.

Across most parts of the world, there is a pressing issue of youth unemployment, which ranges from 25 to 50%, across Spain, Greece, Saudi Arabia and major economies. This is partly due to ‘skills mismatch’ that occurs as a result of employers not getting the skills they need from individuals who leave the schools’ systems.

What Finland is undertaking now is a radical reform that is scrapping, in a phased manner, the traditional teaching by subjects (such as learning maths, English, history, etc discretely) and instead focussing on teaching by topic areas.

For instance, students may learn about ‘business planning’ which will be a combination of languages, Maths, communication skills and writing skills. Some students may learn about the European Union, which will be a combination of history, economics, languages and geography. This inter-disciplinary approach will also help students make the links between the subjects they learn and how it can be applied in the real world rather than learn them as mere abstract subjects without necessarily viewing why they are important.

As part of the reforms, students are also working in smaller groups from an earlier stage to improve communication skills, embed a spirit of collaboration and solving problems and thinking of new ideas.

Interestingly enough, pupils, under this new education framework, will also be more involved in the planning and assessment of these phenomenon-based lessons, encouraging pupils to take ownership of their education and development.

Marjo Kyllonen sums it up best: “We really need a rethinking of education and a redesigning of our system, so it prepares our children for the future with the skills that are needed for today and tomorrow”

Best education in the world

There is a significant amount for the rest of the world, and particularly Asia, to learn from the Finnish education system. The education systems across most parts of Asia do produce technically competent and highly skilled individuals, but are more geared towards exams and merely scholastic achievement when learning should be more holistic.

As I said at the start, Finland – a great country and a great place to live and learn!

Banks – the regulations that govern them – and what happens when they are not governed.

In addition to my Facebook posting previously on the issues that have been faced in the aluminum markets, banks are generally now increasingly involved in a number of markets from energy to aluminum.

I was reading an excellent article in Bloomberg which very neatly explained the connections. Banks are now subsidized by the government. The Federal Deposit Insurance Corporation and the Federal Reserve (both backed by the taxpayers) provide a subsidy to banks – allowing them to draw on reserves during times of market instability.

 

This means that the banks which are too big to fail (and can cause catastrophic consequences should they go under) are effectively allowed to borrow at low or cheap rates.

 

What this means is that banks who can borrow at a lower rate than most other corporations, start investing in markets such as energy or the metal markets such as the aluminum markets, create stockpiles and cut supply which in turn creates a higher price from which they benefit from when they then sell the commodities in the open market.

In the event they bet wrongly, and the prices of the commodities they are stockpiling drop and lead to financial distress at the banks, then the government (and taxpayers) are obliged to provide emerging funding reserves to tide them through.

This creates similar risk-incentive situations which caused the 2008 financial crisis in the first place.

It will be also useful to learn about some of the existing regulations which are in place or which have been lifted but which may need to be considered to prevent the type of problems we had/have now.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Link: in full here) –

This is an act that has polarised America with one faction arguing that the Act does little to prevent another financial crisis or stop risky behaviour that will lead to another bailout whilst another faction argued that it was too restrictive and draconian.

The volcker Rule – Within this Act, under the section of “Improvement to Regulation” is the Volcker Rule – which essentially restricts US banks from making a number of speculative investments that do not benefit their customers and only seeks to boost the banks and bonus payouts of senior management at the banks.

With the aim of reducing the amount of speculative investments on large firms’ balance sheets, it limits banking entities to owning no more in a hedge fund or private equity fund than 3% of the total ownership interest.The total of all of the banking entity’s interests in hedge funds or private equity funds cannot exceed 3% of the Tier 1 capital of the banking entity. Furthermore no bank that has a direct or indirect relationship with a hedge fund or private equity fund, “may enter into a transaction with the fund, or with any other hedge fund or private equity fund that is controlled by such fund” without disclosing the full extent of the relationship to the regulating entity, and assuring that there are no conflict of interest

 

Glass-Steagall Act (Link to Act here)

This was an Act that was around from the time of the Great Depression in the 1930s until the Clinton Administration repealed it at the turn of the century.

Established as a part of President Franklin D. Roosevelt’s New Deal following the Great Depression, the Glass-Steagall Act actually refers to a handful of provisions sponsored by Sen. Carter Glass and Rep. Henry B. Steagall, which were a part of the larger Banking Act of 1933.

These provisions accomplished a number of things, but most notably prohibited commercial banks from participating in investment banking; this includes activities such as underwriting securities (except for certain treasuries), providing services by brokers or dealers in transactions in the secondary market, as well as facilitating mergers, acquisitions and other forms of restructuring. Investment banks were likewise prohibited from accepting deposits.

The ending of Glass-Steagall removed the distinction between investment banks and commercial banks, leading to a scenario where banks started making risky investments with government-guaranteed deposits.

However, in the last few months, a bipartisan group of senators put forward a proposal for new Glass-Steagall legislation that would restore a strict separation between commercial banks and speculative trading. It is argued that this will inhibit the excessively risky behaviours demonstrated by a number of banks and help prevent the next financial catastrophe.