What path to take between America and Japan?

Jeong Jae-hong

The author is an international, diplomatic, and security news editor of the JoongAng Ilbo.

The Economist in the mid-April edition carried a feature titled “The Lessons from America’s Astonishing Economic Record.” The British journal listed the stunning advances the U.S. economy have attained and maintained over the past 30 years.

The records shed a different light to the general view that the U.S. economy was weakening and one day could lose its No. 1 status to the rising No. 2, China. In fact, many people have the feeling that the United States suffers from the deepening political and wealth polarization and has the shortest life expectancy among developed countries because of its complicated healthcare coverage system. But the U.S. economy has kept up an impressive run over the last three decades to leave “its peers ever further in the dust,” according to the Economist.

The share of U.S. GDP in the global economy remains unchanged over the last 30 years, taking up a quarter of the world output. It still maintains the share despite the leapfrog by China, as well as India and Brazil. It performance vis-à-vis other developed countries is even more remarkable. The U.S. accounted for 58 percent of the combined G7 GDP last year, jumping from 40 percent in 1990. The average per capita GDP in the U.S. was 30 percent higher than in Western Europe and 54 percent more than in Japan as of last year, soaring from 24 percent and 17 percent, respectively, in 1990. A trucker driver in Oklahoma earns more than a doctor in Portugal.

U.S. capitalism has been criticized for riding on neoliberalism and globalization. Still, the share of its welfare spending in GDP rose to 18 percent in 2019 from 14 percent in 1990. Poverty rate in the U.S. was 7.8 percent in 2021, the lowest since record was made from 2009.

A huge market, rich human capital, and business-friendly environment had fueled the stunning growth for the U.S. America’s labor productivity surged 67 percent over the last 30 years to beat the 55 percent in Europe and 51 percent in Japan.

U.S. universities also are top-rated. According to the Times, 11 among top 15 universities in the world are U.S. names. Research and development expenditure by the public and private sectors takes up 3.5 percent of the GDP, higher than most advanced economies. Innovation and start-up fever remains hot. In 2021, record 5.4 million enterprises newly opened for business. The cost of failure in starting a new business is also the lowest among 37 members of the Organization for the Economic Cooperation and Development.

On the other hand, the Japanese economy — once the most formidable rival to the U.S. economy — is shriveling. After giving up the No. 2 place to China, Japan may lose its No. 3 spot to Germany this year because of its protracted deflation and sharply-weakened yen. At its peak in the 1980s, Japan’s per capita GDP outsized America’s. Among the top 10 companies in terms of market capitalization, eight were Japanese. Due to lengthy lethargy, Japan’s per capita GDP in terms of purchasing power after adjustment for foreign exchange and inflation rates was less than South Korea’s in 2018. It is likely to be overtaken by South Korea soon in nominal GDP, too.

The turning point for the Japanese economy was the Plaza Accord in 1985, when Japan was forced to appreciate the yen against the U.S. dollar, and the U.S.-Japan Semiconductor Agreement aimed to weaken the predominance of Japanese chips. But that may be just an excuse. Japan was a chip powerhouse until the 1980s, but producers failed to respond to the digital revolution and demand for PCs, internet, and smartphones. Today, only one — Kioxia — remains as a major player in the memory field. Other major corporate players have not changed much over the last three decades. The country and its enterprises have failed to keep up with the dazzling speed of innovation across the board.

Korea has been faster than Japan in responding and adapting to the changes of the times. Samsung Electronics, Hyundai Motor and Kia have become global names because they have stayed ahead in innovation. Still, economic conditions for the country are not promising. Korea has been in a trade deficit streak for 14 straight months. Exports have declined for the seventh month due largely to the plunge in its mainstay chip exports. The country is devoid of an industry as competitive as the semiconductor sector while the overall economy faces a structural weakness from its thinning population.

Economic vitality should be restored to cope with the challenges. Korea must build up the legacies of the “creative destruction” championed by Joseph Schumpeter and the “animal spirit” coined by John Maynard Keynes. A society prizing stability over challenge has no future. If the government and the private sector work together to better the environment for business, where failures are condoned, it will help reinvigorate the dynamic gene in Koreans with a high education standard and a strong sense of challenge. Dynamism in the society will determine whether Korea goes down the successful path of the United States or the path taken by Japan.