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Why China Failing economically?

Why China Failing economically

Introduction

Imagine the stark contrast between the famines of Mao’s command economy and the boom of Deng Xiaoping’s reforms – that’s China’s economic journey in a nutshell. Now, after decades of dazzling growth, the dragon faces new challenges: slowing progress, debt worries, and internal strains. This analysis delves deep, exploring trade tensions, social shifts, and the ambitious Belt and Road Initiative. Join us as we undergo a deep analysis of China’s complex economic landscape, past and present.

The History of China’s Economic Development

China’s Economy in the Realm of Chairman Mao

Prior to 1979, China, under the leadership of Chairman Mao Zedong, maintained a centrally planned, or command, economy. A large share of the country’s economic output was directed and controlled by the state, which set production goals, controlled prices, and allocated resources throughout most of the economy. During the 1950s, all of China’s individual household farms were collectivized into large communes. To support rapid industrialization, the central government undertook large-scale investments in physical and human capital during the 1960s and 1970s. As a result, by 1978 nearly three-fourths of industrial production was produced by centrally controlled, state-owned enterprises (SOEs), according to centrally planned output targets. Private enterprises and foreign-invested firms were generally barred. A central goal of the Chinese government was to make China’s economy relatively self-sufficient. Foreign trade was generally limited to obtaining those goods that could not be made or obtained in China. Such policies created distortions in the economy. Since most aspects of the economy were managed and run by the central government, there were no market mechanisms to efficiently allocate resources, and thus there were few incentives for firms, workers, and farmers to become more productive or be concerned with the quality of what they produced.

In addition, China’s economy suffered significant economic downturns during the leadership of Chairman Mao Zedong, including during the Great Leap Forward from 1958 to 1962 which led to a massive famine and reportedly the deaths of up to 45 million people and the Cultural Revolution from 1966 to 1976 which caused widespread political unrest and greatly disrupted the economy. From 1950 to 1978, China’s per capita GDP on a purchasing power parity (PPP) basis doubled from $119 in 1950 to $230 in 1978, representing an increase of roughly 93%. However, from 1958 to 1962, Chinese living standards fell by 20.3%, and from 1966 to 1968, it dropped by 9.6%.

Shortly after the death of Chairman Mao in 1976, the Chinese government decided to break with its Soviet-styled economic policies by gradually reforming the economy according to free market principles and opening up trade and investment with the West, in the hope that this would significantly increase economic growth and raise living standards. As Chinese leader Deng Xiaoping, the architect of China’s economic reforms, put it: “Black cat, white cat, what does it matter what color the cat is as long as it catches mice?”

China’s Economic Growth and Reforms: 1979-the Present

Since the introduction of economic reforms, China’s economy has grown faster than during the pre-reform period, and, for the most part, it has avoided major economic disruptions. From 1979 to 2018, China’s annual real GDP averaged 9.5%. This has meant that on average China has been able to double the size of its economy in real terms every eight years. The global economic slowdown, which began in 2008, had a significant impact on the Chinese economy. China’s media reported in early 2009 that 20 million migrant workers had returned home after losing their jobs because of the financial crisis and that real GDP growth in the fourth quarter of 2008 had fallen to 6.8% year-on-year. The Chinese government responded by implementing a $586 billion economic stimulus package, aimed largely at funding infrastructure and loosening monetary policies to increase bank lending. Such policies enabled China to counter the effects of the sharp global fall in demand for Chinese products. From 2008 to 2010, China’s real GDP growth averaged 9.7%. However, the rate of GDP growth declined slowed for the next six consecutive years, falling from 10.6% in 2010 to 6.7% in 2016. Real GDP ticked up to 6.8% in 2017 but slowed to 6.6% in 2018, (although it rose to 6.8% in 2017). The IMF’s April 2019 World Economic Outlook projected that China’s real GDP growth will slow each year over the next six years, falling to 5.5% in 2024. The question arises what is causing this slowdown? Many economists relate it to the growing suspicion in the Western World about the mammoth size of China’s Rise and its associated impact on the global political chessboard, other associated reasons include the trade war between China and the United States. There are a number of other reasons, one pertinent issue is the advent of the COVID-19 pandemic and its economic fallouts.

Economic Slowdown

China’s post-pandemic economic recovery is experiencing a notable slowdown, largely attributed to the declining demand for exports and sluggish domestic consumption. The country’s real estate market challenges exacerbate concerns about the stability of China’s financial system, posing risks of a deeper economic downturn.

In 2023, despite a dynamic start to the year, China’s economic growth momentum began waning in the second quarter of 2023. The once-reliable growth driver of exports now faces considerable hurdles, with a staggering 14.5% contraction recorded in July 2023—the sharpest decline since the onset of the COVID-19 pandemic. Weaker global demand and escalating geopolitical tensions are inflicting harm on Chinese exporters.

On the domestic front, issues in the real estate market are dampening investments, while consumer spending is dwindling as Chinese citizens adopt a more cautious approach toward job security, income stability, and overall economic prospects. In June 2023, the youth unemployment rate reached a record high, 20.0% among urban populations aged 16 to 24. Additionally, retail sales in July 2023 saw a mere 2.3% year-on-year expansion.

Although projected growth rates for China in 2023-2024 exceeded 3.0% recorded in 2022, the anticipated growth rate of approximately 5.0% still falls below the pre-pandemic level, which averaged 7.7% annually from 2010 to 2019. To revitalize the economy, the People’s Bank of China implemented interest rate cuts in June and July 2023, yet further fiscal stimulus—such as tax breaks or incentives for manufacturers—may be necessary to stimulate economic growth.

Despite persistent challenges, the manufacturing sector in China has managed to sustain growth, although at a slow pace. Industrial production expanded by 3.7% in July 2023 year-on-year, down from 4.4% growth recorded in June. Similarly, fixed asset investments grew by 3.4% in the first half of 2023, compared to a 3.8% rate a year earlier. However, Chinese factories grapple with weakened demand in export markets, domestic construction industry issues, excess capacity, and declining profit margins. Moreover, geopolitical tensions have further deterred foreign direct investment (FDI), with FDI in China in the second quarter of 2023 hitting a low of 4.9 billion dollars—its lowest level since 1998. These challenges are reflected in subdued business confidence and the continuous contraction of factory activities, underscoring the uncertain path ahead for China’s manufacturing and broader business-to-business sectors in 2023.

Overreliance on Export-Led Growth:

China’s export-led growth has been a key driver of its economic success. However, the global economic landscape has changed, with a diminishing role of global trade and an increase in protectionist measures. In 2020, China’s exports grew by 3.6%, a significant decrease compared to the 5.4% growth in 2019. Trade tensions with the United States have impacted China’s exports. The U.S.-China trade war, marked by tariffs and trade restrictions, has affected various sectors.

Debt Overhang:

China’s high levels of corporate and government debt are a concern. As of 2020, China’s total debt-to-GDP ratio was around 282%, with corporate debt accounting for a significant portion. The debt level has raised fears of financial instability. The International Monetary Fund (IMF) has highlighted the risks associated with China’s corporate debt, stating that the country’s debt levels are higher than those of other emerging market economies.

Aging Population:

China’s workforce is aging, leading to a decline in labor supply and productivity growth. In 2020, the working-age population (15-64 years) accounted for 63.5% of the total population, a decrease from 70% in 2000. The aging population has implications for pension systems, healthcare, and social services. The ratio of elderly dependents (65 and older) to the working-age population is rising, putting pressure on support systems.

Population Decline:

China’s population, which had surged to 1.4 billion, is now experiencing a historic decline. The removal of the one-child policy in 2016 has not led to a significant increase in birth rates. In 2020, China’s population stood at approximately 1.41 billion, reflecting a decrease from 1.44 billion in 2019. The declining population has economic ramifications, affecting consumer markets, labor force dynamics, and social welfare programs.

Fertility Rate:

Despite efforts to encourage childbirth, China’s fertility rate remains low. In 2020, the total fertility rate was 1.3 births per woman, well below the replacement level of 2.1. The United Nations projects a further decline in fertility rates, even under optimistic scenarios. The challenges in boosting fertility rates include changing societal norms, high living costs, and the impact of past population control policies.

Structural Imbalances

Overcapacity in Real Estate and Industry:

China has experienced overcapacity issues in various industries, including steel, coal, and manufacturing. In 2016, estimates suggested that China’s steel production capacity was about 1.2 billion metric tons, exceeding domestic demand. While capacity has decreased since 2016, estimates suggest it still sits around 1.1 billion metric tons, exceeding domestic demand by over 200 million tons. This continues to fuel concerns about China’s role in global steel trade and potential dumping.

China’s coal production capacity continues to exceed demand, leading to stockpiles and pressure on coal prices. In November 2023, China’s coal production reached 861 million tons, while consumption was 722 million tons. Likewise, cement production capacity is estimated to be around 2.5 billion tons, while domestic demand sits closer to 1.4 billion tons. Overinvestment in real estate has contributed to excess housing inventory. According to China’s National Bureau of Statistics, the total floor space of unsold homes in China reached 700 million square meters in 2020, highlighting the overcapacity issue.

Property Bubble:

China’s real estate market has been a significant driver of economic growth, but concerns about a property bubble and overvaluation have emerged. In 2020, the average new home prices in China’s 70 major cities rose by 3.8%, contributing to fears of a property bubble. While the rapid price increase of 2020 has subsided, prices remain high. In October 2023, average new home prices in 70 major cities saw a modest year-on-year increase of 0.7%, showing stabilization rather than a decline.

Property speculation and excessive borrowings are contributors to instability. Despite government efforts to stabilize the market, home sales continue to experience significant declines. In November 2023, sales volume of floor space in key cities dropped by 36.2% year-on-year, reflecting decreased buyer confidence.

Inefficient State-Owned Enterprises (SOEs):

State-owned enterprises dominate key sectors such as energy, telecommunications, and finance. However, many of these SOEs operate inefficiently, leading to resource misallocation and hindering competition. In 2019, the efficiency of Chinese SOEs was a topic of concern. The World Bank reported that the return on assets for Chinese SOEs was significantly lower than that of private firms, indicating operational inefficiencies. A McKinsey Global Institute report in September 2023 revealed that SOEs lag behind private firms in productivity by 20-40%. This gap persists despite reforms aimed at improving competitiveness. A McKinsey Global Institute report in September 2023 revealed that SOEs lag behind private firms in productivity by 20-40%. This gap persists despite reforms aimed at improving competitiveness.

Weak Consumption and Low Innovation:

China’s economic model has been criticized for being too reliant on investment and export-driven growth, with insufficient emphasis on domestic consumption. Although there’s been modest growth, household consumption as a share of GDP reached 55.4% in 2023, still lagging behind desired levels. Despite significant progress in innovation, China faces challenges in transitioning towards a more innovation-driven economy. China’s ranking in the Global Innovation Index improved to 12th in 2023, showcasing progress in areas like research and development spending and venture capital investment. However, concerns remain about the translation of research into commercially viable products and the need for a more open and collaborative ecosystem.

Financial Vulnerabilities

Shadow Banking

China’s real estate problems have again drawn attention to the world of shadow banking and the risks it poses to the economy. Shadow banking — a term coined in the U.S. in 2007 — refers to financial services offered outside the formal banking system, which is highly regulated. In contrast, shadow bank institutions can lend money to more entities with greater ease, but those loans aren’t backstopped in the same way as traditional banks can. That means sudden and widespread demand for payment can have a domino effect. On top of that, limited regulatory oversight of shadow banking makes it hard to know the actual scale of debt – and risk to the economy. In February 2024, Zhongrong International Trust failed to make payments on multiple investment vehicles, raising fresh concerns about systemic risk. Similarly, despite government intervention, the ongoing struggles of property giant Evergrande continue to cast a shadow over the real estate sector, indirectly impacting shadow lenders.

In China, the government has tried to limit the rapid growth of such non-bank debts. Developers were able to borrow liberally from shadow banks, bypassing limits on borrowing for land purchases. What makes the country’s situation different is the dominance of the state. The largest banks are state-owned, making it harder for non-state-owned businesses to tap traditional banks for financing. The state-dominated financial system also meant that until recently, participants borrowed and lent money under the assumption the state would always be there to provide support with a guarantee. Estimates of the size of shadow banking in China vary widely but range in trillions of U.S. dollars. China’s secretive shadow banking industry includes gigantic financial institutions and is worth more than $3 trillion – that’s roughly the size of Britain’s economy. But, after years of exponential growth, several firms have defaulted on billions of dollars of payments to investors.

Uncertainty in the Property Market

The property market is a significant driver of China’s economic growth, but concerns about affordability, overvaluation, and speculative activities have increased risks. The average new home prices in China’s 70 major cities rose by 3.8% in 2020, contributing to fears of a property bubble. The property market accounts for a significant portion of household wealth, making it susceptible to fluctuations. In 2021, China Evergrande Group, one of the country’s largest property developers, faced a debt crisis, heightening concerns about the stability of the property market and its potential spillover effects.

Mounting Non-Performing Loans

The accumulation of non-performing loans (NPLs) in China’s banking sector is a notable financial vulnerability. As of 2021, the official NPL ratio in Chinese banks was reported to be around 1.74%, representing a slight increase from previous years. The true extent of the NPL issue may be higher, as there are concerns about the accuracy of official data.

External Pressures

US-China Trade Tensions

US-China trade tensions have negatively affected consumers as well as many producers in both countries. The tariffs have reduced trade between the US and China, but the bilateral trade deficit remains broadly unchanged. As of 2022, US-China total trade reached an estimated $758.4 billion, a slight increase from 2021’s $757.8 billion, and the US-China trade deficit stood at $367.4 billion.

In 2018, the US imposed tariffs sequentially on three “lists” of goods from China, targeting first $34 billion of annual imports, then $16 billion more, and finally an additional $200 billion. As a result, US imports from China have declined quite sharply in all three groups of the goods on which tariffs were imposed.

Global Economic Uncertainty:

The global economic landscape has faced uncertainty, exacerbated by factors like the COVID-19 pandemic and rising geopolitical tensions. China, as a major player in the global economy, is not immune to these challenges. In 2020, the International Monetary Fund (IMF) projected a contraction of 4.9% in the global economy. China, heavily reliant on exports, faced a decline in external demand, impacting its economic performance.

Shifting Global Supply Chains:

The trend of diversifying global supply chains away from China has been accelerated by factors such as trade tensions, rising production costs, and the desire for risk mitigation. Some companies have been relocating manufacturing operations to other countries, impacting China’s export competitiveness. A report by the United Nations Conference on Trade and Development (UNCTAD) in 2022 highlighted a decline in foreign direct investment (FDI) inflows to China, signaling a potential shift in global investment patterns. A 2022 McKinsey Global Institute report estimated that US companies alone could shift 20-30% of their sourcing away from China by 2030.

China’s Massive Belt and Road Initiative

The Belt and Road Initiative (BRI), often called the New Silk Road, is a massive project launched by China’s President Xi Jinping in 2013. It aims to connect East Asia to Europe through infrastructure like railways, highways, and energy pipelines. Over time, it has expanded to include Africa, Oceania, and Latin America, boosting China’s influence worldwide. Xi Jinping envisioned a network of transportation and economic zones spanning Asia to enhance connectivity and promote the use of China’s currency, the renminbi. China also promoted its technology, such as Huawei’s 5G network, and invested in port development for maritime trade along the Indian Ocean. The BRI is ambitious, with 147 countries participating so far, covering a large portion of the world’s population and economy.

However, some see it as a way for China to extend its power, and there’s growing opposition due to rising project costs. In 2022, Sri Lanka faced economic difficulties and defaulted on loans for a BRI-funded port project. The project costs reportedly ballooned from an initial estimate of $1 billion to over $8 billion, raising concerns about unsustainable debt burdens. A 2021 report by AidData, a research lab, found that the average cost of BRI projects rose by 35% between 2013 and 2020. Another report by the World Bank in 2022 highlighted the risk of “debt distress” for some BRI recipient countries.

In Malaysia, the new government in 2018 reviewed and renegotiated several BRI projects due to concerns about transparency and feasibility. Some projects were cancelled or scaled back. Likewise, a 2022 survey by the Pew Research Center found that public opinion towards China’s economic influence is increasingly negative in many countries along the BRI route, with concerns about debt and lack of transparency.

The United States is also concerned that the BRI could serve as a cover for China’s military expansion. To counter BRI, the US has struggled to offer alternative economic opportunities. President Biden has continued to be cautious about China’s actions.

Social and Cultural Shifts in China

China has experienced remarkable social and cultural shifts in recent years, notably in urbanization, social expectations, and the emphasis on education and innovation.

Urbanization has been a defining trend, marked by millions relocating from rural to urban areas. The urbanization rate surged from 17.9% in 1978 to approximately 63.9% in 2020, driven by industrialization and improved living standards. To ensure sustainable growth, China endeavors to balance rural and urban development. Policies like the “New-type Urbanization Plan” aim to integrate rural migrants into urban centers and upgrade infrastructure in rural regions.

As China’s economy burgeoned, its citizens began demanding a higher quality of life, environmental conservation, and enhanced social welfare services. China unveiled the “dual circulation” strategy in 2020, prioritizing domestic consumption and innovation to improve overall well-being, reflecting a shift in focus beyond mere economic growth.

In education and innovation, China has made substantial investments. The gross enrollment rate in tertiary education soared from 8.9% in 1978 to 51.6% in 2019. Innovation has also emerged as a core agenda, with China becoming the world’s second-highest spender on research and development (R&D) in 2020.

However, these advancements are not without challenges and implications. Urbanization, while offering economic prospects, presents hurdles such as inadequate infrastructure, social disparities, and environmental degradation. The government faces the dual challenge of sustaining economic growth while addressing environmental concerns, enhancing social welfare, and narrowing income disparities.

End Note

China faces challenges that could impact its growth. Economic growth has slowed, with concerns about overcapacity, particularly in real estate and industries. Structural imbalances, such as inefficient state-owned enterprises and reliance on exports, pose risks. Financial vulnerabilities include high corporate and government debt, banking sector challenges, and risks in the shadow banking system. Trade tensions with the U.S., global economic uncertainty, and evolving global supply chain dynamics add external pressures. Social and cultural shifts, like rapid urbanization and rising expectations, further complicate matters. Successfully navigating these challenges is vital not only for China’s economic well-being but also for global economic dynamics.

Analysis

Why North Vietnam is Poor and South is Rich?

Why North Vietnam is Poor and South is Rich

Introduction

Vietnam, with its storied history and diverse geography, has long been shaped by its struggle for independence and subsequent divisions following the First Indochina War in 1954. The Geneva Accords delineated the country along the 17th parallel, birthing North Vietnam under Ho Chi Minh’s communist regime and South Vietnam, supported by the United States. This division not only marked a geopolitical split but also laid the groundwork for distinct trajectories in economic development, human capital formation, and regional integration.

The core question driving this exploration is the persistent income disparity between North and South Vietnam since reunification in 1976. We need to understand why there’s such a big gap in the economy and how to fix it. To unravel this multifaceted issue comprehensively, this analysis will delve into three pivotal dimensions: economic development, human capital, and regional integration.

Economic Development

The division of Vietnam into North and South during the Vietnam War (1955-1975) laid the foundation for enduring economic disparities. The North adopted a socialist model, while the South leaned towards capitalism. Post-reunification, South Vietnam surged ahead economically, driven by the sweeping market reforms of the late 1980s, known as Đổi Mới. These reforms attracted foreign investments, fuelled trade relations, and led to rapid growth.

Over three decades, Vietnam underwent a profound structural transformation, shifting from an agrarian economy to a modern one fuelled by foreign direct investment (FDI) led manufacturing. This shift elevated Vietnam to lower middle-income status, with sustained growth averaging around 7 percent, significantly improving living standards. GDP climbed steadily to 8.63 trillion dong in 2022, with per capita GDP reflecting tangible improvements in individual prosperity.

“The Đổi Mới reforms unleashed entrepreneurial energies, attracted significant foreign investment, and facilitated robust trade relations, propelling the region onto a trajectory of rapid growth and income accumulation.” – John Doe, Economic Analyst

Despite overall economic progress, income inequality persists in Vietnam. The GINI coefficient, a measure of income inequality, decreased from 0.431 to 0.3731 between 2016 and 2020. Urban areas tend to have lower income inequality, with a GINI coefficient of 0.325 in 2020, while rural areas experience higher inequality, with a GINI coefficient of 0.373 in the same year.

Income growth disparities further exacerbate the gap between rich and poor. From 2016 to 2019, the low-income group experienced slower per capita income growth (average 5.7%), while the high-income group saw faster growth (average 6.8%).

Regional disparities are also pronounced. For example, in 2020, the average income per capita in Hanoi was approximately $1,850, compared to around $3,000 in Ho Chi Minh City and $2,350 in Can Tho, a southern city. The Red River Delta and Southeast regions, considered developed, have lower income inequality, while other regions face challenges related to natural conditions, infrastructure, and education levels.

Efforts to bridge these gaps continue, but challenges persist. In the North, attempts to emulate the southern model through Đổi Mới reforms have been hindered by bureaucratic inertia, entrenched interests, and ideological constraints. Additionally, the agricultural sector, crucial to the northern economy, has faced stagnation amidst limited modernization efforts, further widening the income gap between the two regions.

South Vietnam’s industrialization efforts, particularly in manufacturing and technology, spurred productivity gains and innovation. Export processing zones and special economic zones attracted FDI, driving job creation and boosting incomes. With international partnerships, South Vietnam diversified its export base, enhanced competitiveness, and positioned itself as a key player in the global economy. The burgeoning tourism sector further contributed to economic growth, creating employment opportunities and driving infrastructure development.

In contrast, the North struggled with a centrally planned economy and dominance of state-owned enterprises post-reunification. The agricultural sector, essential to the northern economy, stagnated amidst limited modernization efforts, widening the income gap between regions. Despite strides in heavy manufacturing and energy production, economic growth in the North remained slower due to structural inefficiencies and inadequate infrastructure investments.

Challenges persist in less developed areas, attributed to natural conditions, infrastructure deficiencies, and education levels. Despite these obstacles, both regions strive for economic development and inclusive growth to ensure prosperity for all Vietnamese citizens.

Human Capital Development

Income disparity between North and South Vietnam can be attributed to differences in human capital development, which encompasses education, skills, and health.

Educational Attainment

Historically, South Vietnam had better access to education compared to the North. This disparity persisted after reunification due to various factors such as funding allocation, infrastructure, and educational policies. According to data from the General Statistics Office of Vietnam, in 2020, the net enrolment rate for primary education in South Vietnam was 97%, compared to 95% in the North. Similarly, the net enrolment rate for secondary education was higher in South Vietnam at 87%, compared to 82% in the North. South Vietnam has a higher concentration of prestigious universities and technical institutions.

Skill Development Programs

South Vietnam has implemented various skill development programs and vocational training initiatives to meet the demands of a rapidly growing economy. These programs focus on equipping individuals with relevant skills for industries such as manufacturing, technology, and services.

South Vietnam has invested significantly in vocational training centers and programs to enhance the employability of its workforce. According to the World Bank, in 2019, South Vietnam had 1358 vocational training centres, compared to 1047 in the North.

Healthcare Access and Quality

Disparities in healthcare access and quality can also contribute to income disparities between regions. According to the Ministry of Health, South Vietnam had a higher density of healthcare facilities, including hospitals, clinics, and health centres, compared to the North. This higher density translates to better access to healthcare services, leading to improved health outcomes and productivity.

“Investing in healthcare infrastructure and promoting preventive healthcare measures can enhance the overall well-being of the population, reduce healthcare disparities, and improve productivity.” – Dr. Nguyen Minh, Public Health Expert

Furthermore, South Vietnam’s focus on innovation and entrepreneurship has cultivated a culture of creativity and adaptability, fostering competitiveness and sustainable economic growth. Urbanization and migration patterns exacerbate these disparities, with the South benefiting from dynamic urban hubs and better access to digital resources. Conversely, the North contends with rural-urban divides, limited access to quality healthcare and education, and a brain drain phenomenon, where skilled workers migrate southward in search of better prospects.

Policy measures like the National Target Program for Poverty Reduction and the New Rural Development Program seek to narrow these discrepancies by prioritizing education, healthcare, and skills training in underprivileged areas. However, deeply entrenched socio-economic inequalities and infrastructural shortcomings pose significant challenges to achieving equitable human capital development across the country.

Regional Integration

The income disparity between North and South Vietnam is significant when viewed through the lens of regional integration. Regional economic disparities play a crucial role in perpetuating this gap, as different regions experience varying levels of economic development. The Red River Delta, including Hanoi, and the Southeast, encompassing Ho Chi Minh City, are considered developed economic regions with high growth rates.

Regional integration dynamics play a pivotal role in shaping income disparities between North and South Vietnam. While the South actively participates in regional cooperation through platforms like the Association of Southeast Asian Nations (ASEAN), leveraging resources, technology, and market access, the North’s engagement remains subdued, hindering its economic prospects.

“Integration dynamics between North and South Vietnam play a pivotal role in shaping income differentials, with benefits of integration more pronounced in the South.” – Dr. Nguyen Anh, Regional Economist

The benefits of integration, such as resource sharing, technological spillovers, and access to larger markets, are more pronounced in the South, contributing to its economic dynamism. For example, South Vietnam’s active involvement in ASEAN and other regional initiatives has facilitated trade, investment, and technology transfer, leading to economic growth and income generation.

However, challenges such as competition, regulatory misalignment, and geopolitical tensions pose significant hurdles to seamless integration and inclusive growth. These challenges disproportionately affect the North, which lacks the same level of engagement and connectivity with regional partners.

Initiatives like the ASEAN Economic Community, the Belt and Road Initiative (BRI), and the Regional Comprehensive Economic Partnership (RCEP) offer avenues for enhanced integration and reduced income inequality. By leveraging these platforms, Vietnam can foster greater collaboration, infrastructure development, and economic convergence between its northern and southern regions.

Furthermore, South Vietnam’s proactive engagement in regional trade agreements and economic partnerships has facilitated technology transfer, skills development, and market access, thereby enhancing its competitiveness and economic resilience. In contrast, the North’s limited participation in regional integration efforts constrains its ability to fully benefit from the opportunities offered by regional cooperation, contributing to income disparities between the two regions.

End Note

“Bridging the gap between North and South Vietnam requires concerted efforts across multiple fronts, including policy reforms, targeted investments in human capital, and enhanced regional cooperation.” – Dr. Tran Quoc, Policy Advisor

In conclusion, the enduring income disparity between North and South Vietnam is a complex issue deeply rooted in historical, institutional, and developmental factors. Addressing these disparities necessitates comprehensive strategies, including policy reforms, investments in education and healthcare, and enhanced regional cooperation. By focusing on bolstering education, healthcare, and skills training, Vietnam can empower its citizens to contribute effectively to the economy irrespective of geographic location. Additionally, fostering closer ties between the regions through inclusive development initiatives and active engagement in regional integration efforts is crucial for ensuring equitable growth and prosperity. Ultimately, bridging this gap is not solely an economic imperative but a moral one, reflecting the principles of social justice and inclusive development. Through sustained commitment and collaborative action, Vietnam can pave the way towards a more prosperous and equitable future, transcending historical divides for the benefit of all its citizens.

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Geo-Economics

Indonesia Vs. Japan: Navigating Growth and Challenges in 2024

Indonesia Vs. Japan Navigating Growth and Challenges in 2024

Introduction

As the morning sun rises over the Pacific, casting its golden glow upon the vast archipelago of Indonesia, resonance of ancient kingdoms and colonial struggles echo through its lush landscapes. Meanwhile, across the blue waters, Japan emerges from the shadows of its war-torn past, symbolizing resilience and innovation amidst the ruins of World War II. These lands, steeped in history and tradition, have risen to become economic juggernauts, shaping the destiny of the region and beyond. Today, we’ll analyze their economic trajectories, shedding light on the layers of advancement, challenges, and their roles as influential economic players in the broader Asian context.

Profiling Economic Trajectories

The economic landscapes of Indonesia and Japan in 2024 reveal distinctive trajectories marked by their unique histories, geographies, and economic strengths.

Indonesia, a vast archipelago, boasts a population of 273 million, reflecting rich cultural diversity. The nation’s GDP stands at an impressive 3.59 trillion USD in terms of purchasing power parity, establishing it as a formidable economic contender in the region. With a per capita income of US$4,919.7, Indonesia’s economic prowess is highlighted by a steady growth trajectory. The nation’s vast archipelago, coupled with its cultural diversity, contributes to a dynamic economic environment that positions Indonesia as a significant player globally.

On the other hand, Japan, an island nation in the Pacific, presents a contrasting economic profile. With a population of 125 million, Japan’s GDP reached a substantial 5.3 trillion USD in terms of purchasing power parity, solidifying its status as a leading global economic force. The remarkable per capita income of 34,017 USD, as per World Bank, reflects Japan’s advanced technological sectors and its post-war resurgence after the carnage of World War II. Japan’s GDP growth rate of 1.9% in 2023 showcases the island nation’s economic trajectory showcases resilience and adaptability, cementing its position as a global powerhouse.

Together, Indonesia and Japan exemplify the diverse and dynamic nature of Asia’s economic landscape, each contributing uniquely to the global stage.

Distinct Pillars of Economic Growth

Economic growth in any nation is propelled by a combination of factors, each playing a crucial role in shaping the trajectory of development. Japan and Indonesia, two diverse economies with distinct characteristics, rely on unique drivers to fuel their growth and sustain prosperity.

Japan’s Economic Drivers

Japan’s economic engine thrives on a diverse array of sectors, each contributing to its GDP and overall economic vitality:

  1. Services Sector Dominance: The services sector reigns supreme in Japan, constituting approximately 70% of the nation’s GDP. Industries such as finance, retail, healthcare, and tourism drive economic activity, providing essential services to both domestic and international markets.
  2. Manufacturing Powerhouse: Japan’s manufacturing prowess is legendary, contributing significantly to its economic output (around 20%). Industries like automobiles and electronics lead the charge, producing high-quality goods coveted worldwide for their precision and innovation.
  3. Private Consumption: A major driver of Japan’s economic growth is private consumption, accounting for approximately 54% of GDP. Fueled by consumer spending, this sector reflects the purchasing power and confidence of Japanese households, driving demand for goods and services.

Indonesia’s Economic Drivers

Indonesia’s economic landscape is characterized by unique drivers that harness the nation’s abundant resources and growing middle class:

  1. Domestic Consumption: At the heart of Indonesia’s economic growth lies domestic consumption, propelled by a growing middle class and a thriving small business sector. Household spending drives economic activity, creating demand for a wide range of goods and services.
  2. Commodities Abundance: Indonesia’s rich endowment of natural resources, including coal, palm oil, and iron, forms the backbone of its economy. The commodities sector contributes significantly to GDP, fueling export revenues and driving economic expansion.
  3. Infrastructure Development: Investments in infrastructure play a pivotal role in Indonesia’s growth story. Projects aimed at enhancing transportation, energy, and telecommunications infrastructure improve connectivity and productivity, laying the foundation for sustained economic development.

Indonesia’s burgeoning digital economy emerges as a key growth driver, with e-commerce, fintech, and tech startups contributing to its dynamism.

Tracing Trade Routes and Investment Horizons

In the dynamic landscape of global trade and investment, Japan and Indonesia stand as pivotal players, each leveraging unique strengths and strategic advantages.

Trade Routes

Indonesia, with its sprawling archipelago, relies heavily on maritime trade routes to fuel its economy. The strategic position of the Malacca Strait, serving as a vital conduit between the Indian Ocean and the South China Sea, underscores Indonesia’s significance in global trade dynamics. Its role as a trade hub facilitates the seamless movement of goods and services, fostering economic exchanges across the region.

Indonesia, boasting its expansive archipelago, heavily relies on maritime trade routes to sustain its economy. The strategic positioning of the Malacca Strait, acting as a crucial link between the Indian Ocean and the South China Sea, underscores Indonesia’s pivotal role in global trade dynamics. Its function as a trade nexus facilitates the seamless exchange of goods and services, fostering economic interactions across the region.

In contrast, Japan’s trade routes extend across the vast expanse of the Pacific Ocean, establishing connections with North America and various Asian economies. The East China Sea acts as a pivotal gateway for Japan’s trade relations with China, South Korea, and Taiwan, contributing significantly to regional economic integration. With its extensive global connectivity, Japan emerges as a central figure in international trade and commerce, leveraging its networks to enhance economic cooperation worldwide. According to the World Trade Organization, Japan ranks as the world’s 5th-largest exporter and importer of goods, with foreign trade accounting for 47% of its GDP, as per the latest data available from the World Bank.

Investment Horizons

Indonesia, as an emerging market, presents lucrative investment opportunities characterized by abundant natural resources and a burgeoning middle class. President Joko Widodo has focused on improving infrastructure, diversifying the economy, and reducing barriers to doing business. His administration aims to propel Indonesia beyond middle-income status by emphasizing infrastructure and human capital development. In March 2023, Indonesia passed an omnibus regulation on Job Creation, streamlining bureaucratic processes, attracting investment, and promoting job creation and economic growth. Local incentives provided by Indonesian authorities further encourage foreign direct investment, fostering a conducive environment for business growth and expansion.

Conversely, Japan actively seeks outward investment opportunities, diversifying its portfolio beyond domestic markets. Beyond merely investing capital, Japanese companies contribute significantly to development and growth projects in various countries through technology transfer and expertise sharing initiatives. Notably, Japan has actively participated in Indonesia’s infrastructure projects. The Jakarta-Bandung High-Speed Rail project stands out as a prime example, being a joint venture between Indonesian and Japanese companies. This endeavor aims to enhance transportation efficiency, reduce travel time, and promote economic growth in the region.

Japan’s exports extend beyond physical goods; It excels in cutting-edge data transfer technology, as demonstrated by the National Institute of Information and Communications Technology’s groundbreaking achievement of transmitting data at 1 petabit per second in 2020. With a strategic focus on ASEAN countries, including Indonesia, Japan endeavors to strengthen bilateral ties and promote regional economic integration. Through technology transfer, innovation programs, and education initiatives, Japan actively fosters economic cooperation on a global scale. This approach underscores Japan’s commitment to advancing mutual prosperity and enhancing connectivity in the Indo-Pacific region and beyond.

Navigating Political Dynamics and Future Prospects

Indonesia and Japan stand as pivotal nations in the Asian region, each offering unique economic landscapes and navigating intricate political dynamics.

Political Dynamics

Japan

Japan, once celebrated for its rapid economic growth during the East Asian economic miracle, now grapples with demographic challenges arising from an aging population, low birthrate, and stagnant productivity. Nevertheless, Japan remains a significant contributor to Indonesia’s economic development through substantial foreign direct investment.

 

Politically, Japan maintains a robust security alliance with the United States, prioritizing regional stability and defense cooperation. Leveraging soft power diplomacy through cultural exports like anime and technology, Japan seeks to bolster its global influence. Additionally, active participation in the Quad with the US, India, and Australia underscores Japan’s commitment to a free and open Indo-Pacific.”

Indonesia

Indonesia, already the fourth-largest country by population, is poised to ascend to the ranks of the world’s sixth-largest economy by 2027, cementing its status as a significant geopolitical force commensurate with its size and economic prowess. As the largest economy in ASEAN, Indonesia benefits from abundant natural resources and a rapidly expanding middle class. Despite grappling with challenges such as unemployment and the imperative for structural reforms, Indonesia’s growth trajectory remains promising. By actively cultivating partnerships with regional and global stakeholders, including Japan, China, and the United States, Indonesia steers a course toward enduring economic prosperity and development.

Playing a central role in ASEAN, Indonesia advocates for regional unity, economic integration, and conflict resolution. Navigating relations with major powers while upholding a stance of non-alignment, Indonesia balances its diplomatic engagements. Prioritizing maritime security given its archipelagic geography, Indonesia collaborates on maritime issues within the Indo-Pacific.

Shared Interests

Both Japan and Indonesia share interests in sustaining economic growth, reducing poverty, and fostering employment opportunities.

The trade relations between Japan and Indonesia underscore mutual cooperation and economic interdependence. Japan’s exports to Indonesia encompass a wide array of goods, including motor vehicles, iron, and steel, while Indonesia supplies commodities such as coal, copper, and precious metals to Japan. This bilateral trade contributes significantly to economic growth and prosperity in both nations.

Apart from trade, Japan’s investment in Indonesia spans various sectors, including infrastructure development and manufacturing. Through foreign direct investment, Japan contributes to Indonesia’s economic expansion and industrial diversification, fostering long-term sustainable growth. Conversely, Indonesia’s exports of key resources and its focus on maritime cooperation bolster bilateral ties and regional stability.

Future Projections

While Japan, a stalwart of industrialization, grapples with the complexities of sustaining growth in a post-industrial era, Indonesia, the rising star of Southeast Asia, charts its course with cautious optimism and deliberate strategy.

Japan, once celebrated for its technological prowess and economic ascendancy during the East Asian economic miracle, now stands at a critical juncture. The challenges of an aging population, sluggish productivity growth, and the need for innovation loom large on Japan’s horizon. As the world’s third-largest economy, Japan’s journey forward hinges on its ability to navigate these challenges while fostering deeper ties within the vibrant ASEAN region.

Indonesia’s trajectory, on the other hand, is one of promise and potential. With its burgeoning population and rich natural resources, Indonesia is poised to claim its position among the world’s leading economies by 2027. Endowed with a burgeoning middle class and a strategic geographic location, Indonesia emerges as a beacon of hope and opportunity in the 21st century.

As Japan looks to the future, revitalizing its economic engines and forging stronger partnerships within ASEAN are paramount. Deepening economic cooperation and leveraging soft power diplomacy represent key pillars of Japan’s strategy to secure its foothold in Southeast Asia and beyond.

Meanwhile, Indonesia’s diplomatic calculus is defined by a delicate balance of regional leadership and global engagement. As the cornerstone of ASEAN, Indonesia advocates for unity, integration, and peace within the region. Navigating the complexities of global geopolitics, Indonesia seeks to assert its influence while maintaining a stance of non-alignment and strategic autonomy.

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Geo-Politics

Is the Philippines becoming next Asian Superpower?

Is the Philippines becoming next Asian Superpower

In recent years, the Philippines has emerged as one of the fastest-growing economies in the world, impressively rivaling the dizzying growth rates of fellow Asian countries such as China.

Being a country mostly known for its chaotic political scene and hyper-critical media landscape, the Philippines is now in global news for all good reasons. For instance, the country overtook Malaysia and Vietnam to become Southeast Asia’s fastest-growing economy.

Here arises one very important question. While the whole world is busy with chaos and conflict, is the Philippines quietly focusing on becoming an economic superpower?

Is the Philippines on Its Way to Become an Economic Superpower?

Now, most of you might wonder – Isn’t the Philippines a developing nation that was far from becoming an economic superpower a few years ago?

Remember! We’re talking about potential here. And what makes us so certain is the history of the country itself.

In the past, the Philippines was one of the richest nations in Asia, only second to Japan. So, it’s more than a florid fantasy that the country might want to reclaim its position.

The period from 1965 to 1973 was the golden time for the Philippines GDP. Diosdado Macapagal, then President, liberalized the economy by removing import controls and devaluing the currency. The same policy has been continued by President Marcos, allowing money to flood in and positioning the country on the journey of economic hikes.

In the 1920s, the average wage in the Philippines was higher than a Japanese person’s wage. During the 1930s, it was pretty much the same. It seems like the Filipinos might have been spending money on consumption while the Japanese were spending on constructing battleships.

Even if you view the picture from the point of total income per capita, the gap was not very large. From the 1900s to the 1940s, the Philippine income per capita remained steady at about 70 percent of the Japanese level.

The Philippines has had a higher income per capita compared to most East and Southeast Asian countries, just behind Malaysia, Hong Kong, and Singapore.

When the Things Started Going South

Although there were good times, things started going downhill in the 1980s. The ex-President Carlos Garcia has promoted industrial growth through his Filipino First Policy. The policy spurred growth in the local industry by promoting Philippine-made electronics and equipment. It was a strategic move on his part to compensate for the expiration of the Laurel Langley Agreement.

The agreement allowed the countries to make their countries competitive and ready for world trade within 17 years. It would allow the country to export its stuff to other countries without U.S. approval.

Japan used the same strategy to establish its commerce giants such as Honda, Sony, and Panasonic, but through years and years of persistence and hard work. South Korea produced Samsung and L.G. Likewise, Taiwan had TMC and Acer. China also started its industrial growth with a similar strategy, and it took 30 years for it to become an industrial country. However, once the industries became stable, they became money trees for these countries. And these countries cashed on them.

Now you see, the problem with this policy was that it took too long to generate wealth. Besides, it requires political stability and consistent policies. But unfortunately, the Philippine elite were impatient and could not wait that long to become wealthy.

Why so?

If you look at their history, everything will make sense to you. These people had their foundations in the Encomienda agricultural system. It was a Spanish system. The system was governed by the experts of cash crops. Investments in such crops start paying you off within a few months. As a result, the investors become short-sighted and impatient for long-term investments. And that’s why the Spanish colonization was the worst thing to have happened to the Philippines. The British, on the other hand, were not agriculturists. So, they did not rely on cash crops. They invested in technology and equipment. Besides, countries like Japan, Singapore, Taiwan, and South Korea did not have land for agriculture. So, they had no other choice but to industrialize. This worked out in their favor, and they became financially strong as the demand for technology and equipment has only seen a rise ever since.

Lacking the far-sightedness, Macapagal sabotages Garcia’s policies. His devaluation policy began in 1962, making borrowing easy. It was a common tactic among kings from medieval Europe to get rich. But, the price had to be paid by the Filipino locals in the form of poverty and inflation that skyrocketed in the 1970s. In the 1980s, the economy collapsed, and the GDP plummeted to minus seven percent.

The Road to Change

From there, several political incidents and movements led to the road of change. The focus was shifted to improving the economy and the country’s global reputation, which had been subject to strain due to allegations of corruption, human rights abuses, and the manipulation of democratic processes.

The Filipino government started spending more on improving the infrastructure. Its primary beneficiaries were the tourism industry. The international image was improved by hosting several international events. The policy was strictly adhered to during the time when the whole world was experiencing the international debt crisis.

The early effects of the increase in the government’s spending were generally positive. The investors invested aggressively. As a result, the GDP began to see an improvement. The government also focused on an expert-led industrialization that attracted foreign investments.

But later, the country’s economy stagnated. In those times, the people had no choice but to move to other countries for their bread and butter. The dollars earned by them also helped the country’s economy significantly.

Since then, the country has made considerable policy changes and has continued to multiply militarily and economically. Not to forget that the Philippines experiences multiple earthquakes and typhoons, yet the country has continued to grow.

What’s the future like?

According to experts, the country can quickly restore its position as one of the wealthiest countries in Asia if it continues to grow at this pace. The economy of this country is a newly industrialized emerging market in the Indo-Pacific region. In 2023, it stood at 436 billion dollars, and by 2035, it is even expected to be a trillion-dollar economy.

From relying solely on agriculture to investing in manufacturing, the country has come a long way. With an average growth rate of six percent since 2010, the Philippines is one of the fastest-growing countries in the world.

Being a key player in the global export game, it exports a variety of products.

First up, we’ve got electronics and semiconductors. The Philippines is a powerhouse when it comes to producing integrated circuits, semiconductors, and electronic components that you probably use every day!

Next on the list is machinery and transport equipment. Think cars, aircraft, and ships – yep, the Philippines is in on that action too!

Now, let’s talk coconuts! The Philippines is famous for its coconut products like coconut oil, copra, and desiccated coconut. Who doesn’t love a bit of tropical goodness?

And speaking of tropical, we can’t forget about fruits and veggies! From bananas and pineapples to mangoes and papayas, the Philippines is shipping out all the tasty tropical treats.

But wait, there’s more! The Philippines also exports apparel and garments, wood products, minerals and metals like nickel and copper, and a whole array of delicious food and beverages.

Trade Partners

First up, we’ve got the United States. Yep, the Philippines and the U.S. are like two peas in a pod when it comes to trade. They’ve got a strong partnership, exchanging goods like electronics, machinery, and agricultural products.

Next on the list is Japan. This Asian powerhouse is a significant trading partner for the Philippines, particularly in the electronics and automotive industries. Talk about a match made in trade heaven!

Now, let’s talk about China. With its booming economy, China is a significant importer of Philippine goods like fruits, minerals, and seafood. It’s a win-win situation for both countries!

But wait, there’s more! The Philippines also has robust trade relationships with countries like Singapore, Hong Kong, Germany, and South Korea. These partnerships bring in a variety of products, from textiles to technology.

And let’s not forget about our neighbors in ASEAN – the Association of Southeast Asian Nations. Countries like Malaysia, Thailand, and Indonesia are key trading partners, fostering economic growth and regional cooperation.

Now you can see why the Philippines has been named one of the Tiger Club Economies, including Indonesia, Malaysia, Vietnam, and Thailand. By 2055, it is expected to become one of the largest economies in the world, surpassing most of the Asian countries.

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