Comparative Economics: U.K. vs. Japan
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The economy of a nation is a major indication of its success. One aspect of a nation's economic success or failure is the system of government. Whether a nation is socialistic, communistic, ruled by absolute sovereignty, or based on capitalistic principles can be a key factor in a country's economic success or failure. Government is the foundation of an economy but it is not what determines its success. Issues that determine a nation’s economic success include growth strategies, improved or increased resources, investment and savings, government policies, trade, foreign direct investment, income distribution, labor allocation, innovations in technology, and several other economic issues. I feel that economic growth is the main indicator of economic success. Additionally, innovations in technology, improving human capital, and improving foreign direct investment (FDI) are three issues that can lead to economic growth.
In the following essay I will try to compare two highly developed economies, Japan and The United Kingdom. I will emphasize the success of their economies and how human capital, advancing technology (innovation), and FDI have contributed to their current success or failure. I will briefly discuss the contemporary history of each country, thoroughly cover their current conditions, and end with expectations for their future.
Introduction: Comparison of Japan and the United Kingdom
The U.K. and Japan seem natural subjects for comparison. British and Japanese observers alike have long been fascinated by the many parallels (and the even more numerous divergences) in the histories of these two island nations. Particularly interesting about these two was the "economic role reversal” which occurred between Japan and Britain over the course of the twentieth century. In 1900, the United Kingdom was the world's dominant colonial, financial and naval power, as well as a center of industrial production and technological innovation. Japan was a mere up-start, a precocious and aspiring, but still unthreatening, economic competitor in East Asia. The beginning of the twentieth century, and more accurately the 1950s, saw Japan and Great Britain’s economic “role” reverse. Although Britain has enjoyed healthy growth rates and rising standards of living over the past 100 years, it has been progressively eclipsed by Japan as an economic superpower and an international model. Indeed, Britain's accomplishments have paled in comparison to Japan's meteoric rise: while Japan has emerged as the outstanding economic "success story" of the twentieth century, Great Britain's relatively modest performance has been both discouraging and confounding.
Brief Contemporary History:
Over the past 40 years, Japan’s strong work ethic, mastery of high technology, emphasis on education and a comparatively small defense allocation (1% of GDP) have helped them advance with extraordinary speed to become one of the largest economic powers in the world along with the US and the European Union. For three decades, overall real economic growth had been spectacular: a 10% average in the 1960’s, a 5% average in the 1970’s, and a 4% average in the 1980’s. Growth slowed considerably in the 1990’s largely because of the after effects of overinvestment during the late 1980’s.
Since 1973, the U.K. has been a member of the European Union, and various British governments have signed on to measures which have been aimed at improving economic conditions, such as the Single European Act (SEA), signed by Margaret Thatcher. This act allowed for the free movement of goods among members of the European Union. The British pound was tied to EU exchange rates, using the Deutsche Mark as a basis, as part of the Exchange Rate Mechanism(ERM); however, this resulted in disaster for Britain. “Black Wednesday” in 1992 ended British membership of the ERM but also brought about a deep recession, affecting many who had benefitted from the economic boom of the late 1980’s. Since 1979, the British Government has privatized most state-owned companies, including British Steel, British Airways, British Telecom, British Coal, British Aerospace, and British Gas. It also ended the Conservatives' credibility of economic management, a mantle currently held by the Labour Party under chancellor Gordon Brown. The U.K. continues its membership in the EU, but remains stubborn with changing the currency to the Euro.
Current Economic Conditions
Japan's industrialized, free-market economy is the second-largest in the world after the U.S. in terms of international purchasing power. Its economy is highly efficient and competitive in areas linked to international trade, but productivity is far lower in areas such as agriculture, distribution, and services. While Japan's long-term economic prospects are considered good, Japan is currently in its worst recession since World War II. The impact of the Asian financial crisis also has been substantial. Real GDP in Japan grew at an average of roughly 1% yearly between 1991-98, compared to growth in the 1980’s of about 4% per year. Although the 90s were difficult for Japan, growth rates have been increasing since the turn of the century. Today, Japan’s GDP growth rate is approximately 5.3%.
The United Kingdom saw GDP growth slip in 2001–2002 as the global downturn, the high value of the Pound Sterling, and the bursting of the "new economy" bubble hurt manufacturing and exports. The U.K.’s economy, however, is one of the strongest in Europe; inflation, interest rates, and unemployment remain low. Growth is now at 3.0% per annum, which is higher than that of France, Germany and many other European countries. The U.K.’s economy grew faster than expected in 2003, with real gross domestic product (GDP) expanding 2.3%, above the 2.1% goal that the U.K. government had set in its 2002 pre-budget statement. This economic expansion was considerably higher than in the overall Eurozone (the 12 EU members which have the Euro as an official currency), which grew a combined 0.4% in 2003. According to the government's 2004 budget (March 17, 2004), the U.K.’s economy is expected to remain relatively robust in 2004, with initial forecasts ranging between 3.0% and 3.5%.
Changes in Unemployment
Higher labor costs, yen appreciation resulting in the outsourcing of production facilities, and growing computerization all point to a long-term structural increase in Japan's unemployment rate. Currently, Japan’s unemployment rate is 5.7%, which is high for their standards. Due to heavy losses in labor-intensive sectors, Japanese companies are planning further outsourcing of their production facilities to countries where labor costs are much lower. High unemployment implies low real Gross Domestic Product: a country is not using its resources as completely as possible and is thus wasting its opportunities to produce goods and services that allow people to survive. Japan is regressing with future unemployment rates expected to increase.
Unemployment in Britain has fallen from high European-style levels to US levels in a short time span. Key reasons are the reform of monetary policy in 1993, the adoption of inflation targeting, the establishment of the independent Monetary Policy Committee in 1997, and finally, the decline of trade union power. Contrary to high unemployment, excesively low unemployment — called deficient-demand or cyclical unemployment — thus represents a profound form of inefficiency in production.
Recent Changes in FDI
Foreign Direct Investment is a catalyst for economic revitalization; not only does it increase consumer benefits and choice, but it also promotes structural reforms by introducing new technologies and management expertise, maintaining and creating employment, and providing a broader mix of goods and services.
During the last few years, Japan has undergone dramatic changes in many long-standing systems and practices — ranging from industry regulation and labor mobility to foreign business presence. As the world's second-largest economy, Japan provides an attractive market complete with high productivity and purchasing power. Additionally, the costs of doing business in Japan - land prices, public utility charges, labor costs, and interest rates, among others - have decreased dramatically. Taxes have also decreased to a level that compares well with other countries. Japan's labor market boasts an abundance of highly skilled human resources. The quantity and quality of highly-skilled workers in Japan is an asset in itself, Japan possibly has the most valuable labor force in the world.
In 2002, Britain introduced significant new measures of luring foreign investors, including: changes to corporation tax rates. The corporation tax starting rate was reduced from 10 percent to zero, meaning that, approximately, 150,000 companies no longer pay any corporation tax; and the small companies' rate was reduced by 1 percentage point to 19 per cent, benefiting over 335,000 additional companies. Britain is booming outside the euro with a record surge in foreign firms investing on the island nation. In the last two years, the number of overseas companies that chose Great Britain jumped by nearly 25 percent. More than a quarter of foreign firms now in the UK are offshoots of US companies. Britain's forward movement in FDI relies on sensible labor laws and competitive taxation.
Incentive for Innovation and Entreprenuership
In Japan, from the 1950s until the early 1980s, innovation took the forms of already existing technologies and goods that had to be improved in quality (examples are: cars, stereo systems, photographic equipment, and other consumer electronics goods). The Japanese were best at doing this, with expertise in “process innovation”, “quality improvement”, and “product imitation.” Today, technological innovation is very different because of qualitative changes in technologies and the rapid appearance of new and very different products (computers, software, Internet and information technologies, advanced chip technologies, telecommunication goods and services, new financial instruments and services). These products are appearing and changing at such a dizzying pace that an imitator cannot catch up with the product and technological leaders.
Innovation is a key mechanism for growth in increasing a countries’ productivity. To improve the U.K.'s innovation performance, the government introduced a new tax credit, in 2002, to boost research and development by larger companies. The new relief included a simple volume credit based on the total amount of R&D companies undertake and provides a 25 percent rate of super-deduction for qualifying R&D expenditure against taxable profits. Despite recent incentives for innovation, the UK continues to lack the successful exploitation of new ideas – incorporating new technologies, design and best practice is the key business process that enables markets to grow.
The amount of history these two countries have accumulated over time is enough to scare one away from even trying to compare them. If I were asked, do you think Britain and Japan are likely to converge to a common level of development and income? I would answer, probably not, mainly because of their differences in resources and social norms (but really, I don’t know). It took over 100 years for the opposite economies to reverse economic roles. Over long stretches in time, such as a century, I do believe two comparable economic systems may experience the same levels of development and relative incomes. However, because time is a constraint to economic reforms, it is very hard to say Britain and Japan will be at the same level of development at the same point in time. Furthermore, The UK and Britain, in my lifetime, have been recognized as economic giants. This entire situation is out of my scope, I need a few Presidents to come and go, Alan Greenspan audio tapes, and several years of living in an economic system to really understand and comprehend the comparison of two economic systems.
1. The World Factbook: United Kingdom
2. Japan Ministry of Affairs Official Website