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Why Japan is Failing Economically?

Why Japanese economy is failing

Introduction

Japan is grappling with an unexpected economic downturn as it enters a recession, marked by two consecutive quarters of contraction. The final quarter of 2023 saw Japan’s gross domestic product (GDP) shrink by a more severe-than-anticipated 0.4%, following a 3.3% contraction in the previous quarter. This decline has resulted in Japan relinquishing its status as the world’s third-largest economy to Germany. Despite economists’ expectations of over 1% GDP growth for the fourth quarter, the actual figures indicate a different reality, presenting a challenging economic scenario. The International Monetary Fund (IMF) had foreseen Germany surpassing Japan in economic rankings, a change awaiting final economic growth figures from both nations. The weakening Japanese yen against the US dollar has played a role in this shift, impacting stock prices positively but contributing to economic challenges. The Nikkei 225 index recently reached its highest point since 1990. The data also suggests that the Bank of Japan may postpone plans to raise borrowing costs amid ongoing economic struggles. In the backdrop of this economic uncertainty, understanding the historical context becomes crucial. Japan’s post-World War II recovery was a remarkable tale of resilience and growth, fueled by strategic reforms, Western influences, and technological advancements. The nation transformed into an economic powerhouse, but the current downturn raises questions about the sustainability of Japan’s economic prowess. Examining the historical trajectory provides insights into the factors contributing to Japan’s economic challenges and prompts a closer look at the intricate web of issues affecting its present economic landscape.

Phases of the Postwar Japanese Development

Phase I: Postwar Reconstruction and Catch-up

The postwar development of Japan unfolded in three distinct phases, each marked by its own set of challenges and achievements. Phase I, spanning from 1945 through the 1960s, was characterized by the collective endeavor of businesses, households, and the government to catch up with the industrial economies of North America and Europe. Coordinated efforts, often orchestrated by the government, aimed at overcoming obstacles such as the shortage of savings. The establishment of the ‘Japanese style market system’ fostered stable relationships among economic agents, underpinned by long-term employment practices, corporate governance structures built on cross-shareholdings, and the main-bank system. These initiatives, coupled with active public policies, played a pivotal role in Japan’s successful catch-up with industrialized nations.

Phase II: Era of Transition and the ‘Bubble Economy’

Phase II, from the early 1970s to the late 1980s, witnessed Japan’s emergence as a major player in the global economy. Having achieved its catch-up goal, the Japanese economy entered an era of transition characterized by increased autonomy for businesses and households in coping with risks amid a more competitive environment. However, the era also saw the emergence of speculative bubbles fueled by expansive macroeconomic policies to counter the yen’s rapid appreciation. The bursting of these bubbles in the late 1980s and early 1990s, precipitated by restrictive monetary measures, marked the onset of significant economic challenges.

Phase III: Lost Decade and Beyond

In Phase III, spanning the 1990s and beyond, Japan grappled with the aftermath of the burst bubbles, facing issues such as excess capacity, mounting non-performing loans, and persistent deflation. Delayed stock adjustments to address these imbalances, driven by concerns over job security, contributed to prolonged stagnation and financial crises. To address these challenges, Japan embarked on an effort focused on halting deflation, reforming the public sector, stabilizing the financial system, and stimulating business confidence through regulatory and tax reforms, alongside fostering an environment conducive to technology development. This phase reflects Japan’s ongoing struggle to navigate the complexities of post-bubble economic realities and enact reforms necessary for sustainable growth and stability.

Reasons Behind Japan’s Prolonged Economic Stagnation:

Lost Decades:

The term “Lost Decade” often describes Japan’s economic woes during the 1990s, marked by prolonged stagnation, which extended into subsequent decades, including up to 2011. During this period, Japan experienced minimal GDP growth, averaging only 0.5% annually until the onset of the global financial crisis. The slow growth persisted, earning the timeframe the monikers “Lost Score” or “Lost 20 Years” from 1991 to 2010. Subsequent years saw slightly improved growth, with GDP averaging just under 1.0% from 2011 to 2019. However, the onset of the COVID-19 pandemic in 2020 triggered a new global recession, exacerbating Japan’s economic challenges. Recent research indicates that Japan’s GDP growth rates suggest it will take 80 years to double, a striking contrast to the previous 14-years doubling rate.

Declining Population and Aging Workforce:

Japan faces significant demographic challenges due to declining birth rates and an aging population. This is leading to a shrinking workforce, declining productivity, and dwindling social welfare systems. Over the next 40 years, Japan’s population of 127 million is expected to decrease by over a quarter, equivalent to the entire population of Malaysia or Peru. This rapid aging and population decline position Japan at the forefront of global demographic shifts, presenting economic hurdles. Despite a resilient 2020 economic growth projected at 0.7 percent by the IMF, the increasing proportion of older workers and fewer younger ones will likely dampen growth and productivity. Estimates suggest Japan’s economic growth may decline by 0.8 percentage points annually over the next four decades due to demographics alone. The decline in population has also resulted in an oversupply of homes, particularly in rural areas, leading to weakened house prices and posing risks to the financial health of households and banks. Also, Japan’s financial sector faces growing vulnerabilities due to its ongoing demographic transition.

Banking Crisis:

The burst of the asset bubble triggered a banking crisis, as financial institutions faced significant losses. This led to a credit crunch, hindering investments and economic growth.

Labor Shortages:

Auguste Comte is often quoted as having said, “Demography is destiny.” Japan may face a shortage of more than 11 million workers by 2040. Due to Japan’s aging population, almost half of enterprises lack full-time workers. The labor shortage is especially apparent in the hotel industry. The number of visitors to Japan has recovered to over 60% of pre-pandemic levels.

As Japan prepares for a workforce shortage, generative artificial intelligence, and economic threats, the labor market may be at a critical point. There is rising concern about the sustainability of wage growth, which has accelerated at the fastest rate in 30 years. Prime Minister Fumio Kishida wants wage increases in excess of inflation. Japan’s long-term salary stagnation is due to its seniority-based employment structure, low labor productivity, and worker reluctance to move occupations.

Seniority – Nenko Joretsu, the Japanese system where individuals are promoted by length of service, is a hallmark of the Japanese system of lifetime employment. When wages are generally not connected to performance evaluations, productivity generally suffers.

Labor Productivity

Japan’s labor productivity is the lowest among the G7 countries and is about two-thirds of the United States’ productivity. In 2022, Japan’s labor productivity was $53.2 per hour worked, compared to the world average of $71.1 per hour worked. Remarkably, the nation that brought us kaizen, kanban, and Ishikawa “fishbone” diagrams, methodologies that have immensely improved labor productivity, is itself highly non-productive now as measured by the value of labor output.

Labor Mobility

Japan’s job mobility is less than half of the OECD average. What this means is that rather than switching to jobs where they would be more productive, employees stay at a firm after they have passed peak productivity. In addition to being less productive, they block newer employees from having upward mobility to help attract and retain talented workers.

Structural Rigidities

Japan’s labor markets have faced criticism for their inflexibility, often characterized by lifetime employment practices prevalent in many industries. While providing job security, these practices have hindered companies’ ability to adapt to changing economic conditions and restricted labor mobility. The prevailing labor market norms, rooted in Japan’s rapid growth era, emphasize long-term job security, seniority-based wages, and company-based labor unions, seen as vital for skill formation and industrial harmony. However, rigid practices have led to a dual labor force, creating inequality between regular and non-regular workers, with non-regular workers serving as shock absorbers during recessions. College graduates encounter challenges in finding jobs, as large companies reduce job openings, leading to a competitive job search process. Additionally, married women face a trade-off between full-time employment and raising children due to long working hours and job rotations. Despite criticism, there is a reluctance to embrace labor law deregulation.

Moreover, Japan has been criticized for its reluctance to adopt technological innovations, particularly in software development, compared to other advanced economies. This hesitancy has affected competitiveness, especially in industries like information technology, as the world shifts focus from hardware to software. Historically, Japan’s economic success relied heavily on hardware manufacturing, shaping a mindset that undervalues software development. Software engineers are often considered less prestigious compared to hardware engineers. Japanese firms prioritized operational effectiveness over innovation, evident in their limited investments in software development compared to the United States. The disparity in software investments reflects Japan’s broader cultural and economic emphasis on hardware manufacturing rather than embracing software innovations to drive technological advancement.

Persistent Deflation

Japan has grappled with deflationary pressures, experiencing a prolonged period of mild deflation since the latter half of 2010. This situation, where prices decline over time, has led consumers to delay purchases, dampening economic activity. Traditional monetary policies struggle to stimulate growth in such an environment. Annual average Consumer Price Index (CPI) inflation rates, which reached 11.6 percent in the first half of 1990, declined to around zero or slightly negative from the middle of 2010. The weakness in prices becomes more apparent when accounting for the hike in oil prices and the yen’s depreciation against the US dollar.

Simultaneously, Japan’s heavy reliance on exports has faced challenges due to changes in global trade dynamics. Trade imbalances have impacted the economy, with Japan’s terms of trade worsening with time. Import prices rose significantly (60.7 percent) compared to export prices (27.7 percent) during this period. This was influenced by rising commodity prices and the supply shock from Russia’s invasion of Ukraine. Additionally, the Japanese yen depreciated due to divergent monetary policies, with the US and Europe tightening policies while Japan maintained a loose one.

The deteriorating terms of trade have affected Japan’s national income, equivalent to a 4.6 percent loss of real gross national income. Despite some offset by increased net income from abroad, the trading loss has weighed on Japan’s economic recovery, particularly impacting private consumption. The rise in inflation, peaking at 4.3 percent in January 2023, significantly discouraged private consumption.

Addressing these challenges necessitates a comprehensive approach, encompassing structural reforms, innovation promotion, labor market flexibility, and strategies to mitigate the impact of demographic shifts.

Impacts of Economic Stagnation

Declining Real Wages

Despite being an advanced economy, Japan has experienced prolonged periods of stagnant wage growth. Real wages, adjusted for inflation, have not seen substantial increases for decades. The lack of significant wage growth has led to a decline in real purchasing power for many Japanese workers. This, in turn, affects living standards as households face challenges in keeping up with the rising costs of goods and services.

According to Japan’s Ministry of Health, Labor and Welfare, real wages in Japan saw little growth from the early 1990s to the mid-2010s. For instance, between 1990 and 2015, real wages increased by only around 3%, contributing to a prolonged period of income stagnation.

Lack of Capital Spending

Economic stagnation has led to low levels of business investment in new technologies, research and development, and infrastructure projects. Companies may be hesitant to invest in the face of economic uncertainty and low demand.

Data from the World Bank shows that Japan’s gross fixed capital formation as a percentage of GDP has been relatively low compared to some other developed countries. In the 2010s, Japan’s gross fixed capital formation ranged between 20-25% of GDP, indicating a cautious approach to capital spending.

Growing Inequality

Economic stagnation has contributed to growing income inequality in Japan. Those with assets and investments may fare better than those dependent on traditional employment, exacerbating social and economic disparities. According to the Organization for Economic Cooperation and Development (OECD), Japan has seen an increase in income inequality over the past few decades. The Gini coefficient, a measure of income inequality, rose from 0.26 in the 1980s to around 0.33 in the 2010s, indicating a significant shift. The trajectory of this income inequality is still in the upward direction.

Demographic Pressures

The global economy is undergoing a significant shift due to demographic change, contrary to past predictions. Instead of the feared scenario of overpopulation leading to resource depletion and economic collapse, the world’s population is expected to nearly stop growing by the end of the century, mainly due to declining fertility rates. Japan serves as a prominent example of this trend, with its unique history of population, fertility, and immigration patterns. The effects of an aging and shrinking population are evident across various aspects, including economic performance, financial stability, urban landscapes, and public policy priorities such as ensuring the long-term sustainability of pension, healthcare, and long-term care systems. As demographics increasingly impact societies, Japan’s experience serves as a model for understanding and addressing the challenges of “shrinkonomics,” influencing other countries to draw valuable lessons from its experiences.

The IMF’s work on the Japanese economy has focused heavily on demographics in recent years—mirroring the intense debate within Japan on how best to respond to the pressures from a rapidly aging and shrinking population. While each country’s experience will be different, and prompt different solutions, some of the key macroeconomic and financial effects can be identified from Japan’s recent experience.

 Low Fertility Rate:

Japan has one of the lowest fertility rates globally, with the number of births consistently below the replacement level needed to maintain the population size. Societal factors such as high living costs, career demands, and changing gender roles contribute to this trend. According to the World Bank, Japan’s total fertility rate (the average number of children born to a woman over her lifetime) was around 1.4 in recent years, significantly below the replacement level of 2.1

Declining Working-Age Population

Japan’s working-age population (15-64 years old) is decreasing, leading to concerns about the sustainability of the social safety net. This demographic shift is a consequence of both a declining birth rate and an aging population.

The National Institute of Population and Social Security Research in Japan projects a significant decline in the working-age population from around 76 million in 2020 to about 45 million by 2065.

Labor Shortages

Labor shortages are becoming more prevalent, particularly in industries that require physical labor, such as construction, healthcare, and agriculture. According to the Ministry of Health, Labor and Welfare in Japan, there has been a noticeable increase in job openings exceeding the number of job seekers in recent years, indicating labor shortages in various sectors.

Potential Consequences of Demographic Pressures

A shrinking workforce poses concerns for productivity and economic growth as fewer individuals contribute to various sectors. The International Monetary Fund (IMF) identifies demographic challenges as a key factor contributing to Japan’s low potential growth, predicting a decline in potential output in the coming decades. Additionally, the aging population increases the demand for social security services, including pensions and healthcare, leading to higher social security costs. The rising dependency ratio, reflecting more dependents, mainly the elderly, compared to the working-age population, puts strain on government budgets, as noted by Japan’s Ministry of Health, Labor, and Welfare. Beyond economic implications, changing demographics disrupt Japan’s traditional social fabric, impacting family structures, societal norms, and community dynamics. These shifts may necessitate adjustments in policies and social systems to address the evolving landscape.

Persistent Deflationary Tendencies

Japan’s long-standing deflationary trend stems from economic stagnation since the 1990s, where falling prices dampened demand and growth. Policymakers have sought to combat this trend since 2016 by maintaining ultralow interest rates to stimulate economic activity, aiming for a sustained inflation target of 2%. However, the recent rise in U.S. interest rates has led to a yen sell-off, causing imported consumer goods prices to surge and pushing food inflation to 9%. The inconsistency between official inflation measures and perceived inflation, as indicated by the Bank of Japan, has sparked concern among voters and policymakers. Despite inflationary pressures driven by factors like the cheaper yen and higher energy costs due to the Ukraine war, the BOJ remains committed to its loose monetary policy until inflation is supported by rising incomes and sustained economic growth. Japan’s deflationary spiral, witnessed during the “Lost Decades,” has led to consumer price index (CPI) inflation frequently below zero. The country’s high debt-to-GDP ratio, exceeding 200%, limits the effectiveness of fiscal policy in stimulating economic activity. Persistent deflation also contributes to weak consumer confidence and job insecurity, impacting consumer spending habits and worsening deflationary pressures.

Negative Impacts of Persistent Deflation:

Businesses hesitate to invest in new ventures when they anticipate declining future profits. This in turn hinders long-term economic growth. In Japan, investment as a percentage of GDP has experienced periods of stagnation, reflecting businesses’ reluctance to expand. Fluctuations in gross fixed capital formation, highlighted by World Bank data, illustrate this cautious approach. Deflation discourages consumer spending as people delay purchases in anticipation of lower prices, which in turn leads to economic stagnation. Household consumption expenditure data, published by Japan’s Ministry of Internal Affairs and Communications, reflects periods of stagnation or decline during deflationary periods. Persistent deflation can instill expectations of further price declines among consumers and businesses, contributing to an entrenched deflationary mindset. This mindset reduces inflation expectations, making individuals less inclined to borrow, spend, or invest, thereby perpetuating the deflationary cycle.

Conclusion

In short, Japan is facing big economic problems that need careful planning for long-lasting growth. These issues include a stagnant economy, changes in its population, constant low prices, and the need for big changes in how things are done. Japan’s economy has been slow for more than 20 years, with periods where it hasn’t grown and prices have stayed low. Experts from the International Monetary Fund (IMF) say Japan’s low birth rate and people getting older are affecting how much the country can grow. Data from Japan’s National Institute of Population and Social Security Research shows there are fewer people of working age. Japan has also had a problem with prices staying low, which affects how people and businesses spend money and how well the government’s plans work. Information from the World Bank shows that Japan has been dealing with low prices for many years. Fixing these problems means making lots of changes. Japan needs to make it easier for businesses to hire and adapt, while also making sure jobs are secure. Rules need to be simpler to encourage new ideas and businesses to start up. Investing more in new ideas and technology is important too. This can help Japan come up with new ways of doing things and create more jobs. Japan also needs to sell more goods overseas to make up for fewer people buying things at home. By working together and sticking to these plans, Japan can turn things around and have a strong economy again. It will take time and effort, but with the right changes, Japan can have a bright future ahead.

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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