1. INTRODUCTION
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As a strong contrast to the multi-decade long Japanese stagnation, there has been considerable academic (and media) interest in China’s rapid economic growth and also in its growing imbalances. For example, Michael Pettis has examined the sources of China’s rapid growth and analyzed its growing imbalances in great detail. Michael’s demand-side research provides clear insight into the origins of China’s growing imbalances, and suggests that China must correct these imbalances (i.e. rebalance) soon in order to avoid a debt-crisis. Michael’s research also shows that slower future GDP growth in China will be a necessary consequence of this rebalancing.
Source: http://mpettis.com
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For the convenience of the reader, here is a quick summary of Michael's forecast for China from his insightful demand-side analysis:
(1) Landing: Unlike the case of the Japanese imbalance-bubble that burst in 1991, there will be no crash (i.e. Hard Landing) in China, as it is a semi-command economy. Instead, China will see a slow descent of growth-rates over a long period (i.e. Long Landing)
(1) Landing: Unlike the case of the Japanese imbalance-bubble that burst in 1991, there will be no crash (i.e. Hard Landing) in China, as it is a semi-command economy. Instead, China will see a slow descent of growth-rates over a long period (i.e. Long Landing)
(2) Growth: GDP growth rates will come down as they did during Japan's rebalancing, but in China's case they will be 'front loaded', with each passing year showing slower growth, instead of a sudden collapse and subsequent stagnation as happened in Japan during the 1990s.
(3) Consumption: As we saw during Japan's rebalancing in the 1990s, consumption as share of GDP will rise, as China shifts to a consumption-led growth pattern in order to rebalance. As consumption-share of GDP rises, the savings-rate must necessarily fall, as they are merely the inverse of each other.
(4) Investment: As we also saw during Japan's rebalancing in the 1990s, investment share of GDP in China will fall, as it sharply reduces investment-growth to prevent the credit-driven investment bubble from getting out of control. In other words, slowing GDP growth will be accompanied by even slower investment growth, which will tend to 'drag it down' as it did in Japan.
(5) Surplus: The world cannot handle a country the size of China (i.e. world's second largest economy) running large (> 2-3% of GDP) current-account surpluses, so China's surplus as a share of GDP will not be able to grow much.
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Not only is Michael’s forecast for China logically-sound, but it is also backed up by the data from the historical precedent set by Japan during its own rebalancing in the 1990s. However, we will not dwell any further on China here. Readers should visit Michael's blog for additional information on his insights into China's economy.
Source: http://mpettis.com
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The point of great interest here is that when we consider East-Asia as a whole, everything that Michael has forecast for China from his demand-side analysis is exactly the same as the forecast for Korea that comes up when analyzed from the supply-side. Everything Michael describes in his forecast for China is exactly what is going to happen in Korea soon. In fact, the uncanny parallels are so exact that we need not even do much thinking on this issue; we could as well gather all of Michael's predictions for China and then almost blindly apply them to Korea-- and they would all be just as true.
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To see why, we must move beyond Michael's original demand-side research and also perform a supply-side analysis of the situation in Korea.
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2. SUPPLY SIDE ANALYSIS
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In order to understand the past-trajectory and future-direction of Korea’s economy, we should compare it to an economically-similar country that follows similar supply-side trends. By carefully observing the differences between their supply-side sources of growth, we can then elucidate the key-sources that have made Korea grow for the last 20-years and then extend them to analyze Korea’s growth prospects for the next 20-years. The natural comparison for Korea would be with its economic guru in the East-Asian Co-prosperity Sphere-- Japan. After all, in the famous “Flying Geese” paradigm, where the head goose leads, there the flock must follow.
We will use a standard supply-side analysis as follows:
We will use a standard supply-side analysis as follows:
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(a) Comparative trends in total GDP
(b) Comparative trends in per capita GDP**
http://alturl.com/esund
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**Cautionary note: Nominal USD exchange rates for Korea's currency are still slightly suppressed, as seen here:
http://alturl.com/23da8
http://alturl.com/ovcup
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The supply-side sources of this ‘growth’ are:
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**Cautionary note: Nominal USD exchange rates for Korea's currency are still slightly suppressed, as seen here:
http://alturl.com/23da8
http://alturl.com/ovcup
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The supply-side sources of this ‘growth’ are:
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(i) Comparative trends in the Productivity
(ii) Comparative trends in the Participation-rates
(iii) Comparative trends in the Demographic Profiles
(iv) Comparative trends in the growth of Population
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Similarly, here are the tabulated end-point data for Japan extracted from the World Bank data linked above:
Finally, here is the tabulated comparison between the supply-side sources of growth (expressed as Cumulative Annualized Growth Rates or CAGR) over the last 20-years between Korea and Japan:
Brief summary: Compared to Japan, Korea’s growth received a disproportionately larger contribution from productivity (3.5% > 1.0%), because Korea was still in the rapid ‘catch-up’ phase over the last 20 years. In addition, unlike Japan, which faced a ‘headwind’ from deteriorating demographics (negative 0.3% contribution), Korea had a good ‘tailwind’ from its still improving demographics (0.8% contribution) over the last two decades. Still further, whereas Japan’s population was mostly steady (0.1% contribution), Korea’s population actually grew quite well (0.7% contribution) over the last 20 years. This was because Korea’s population was rising as its society was still in its maturation phase over the last two decades.
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The supply-side analysis above clearly shows that Korea has done very well in the previous two decades. But what lies ahead? What can we expect from Korea over the next twenty years?
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3. LOOKING AHEAD
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3.1 Productivity Projections
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It is clear from the data that Korea has matured in terms of productivity ‘catch-up’ and its productivity (capital and TFP) today has already reached the productivity levels of Germany, Netherlands, Denmark & Japan.
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3.2 Demographic Projections
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The data indicate that Korea is almost exactly 20 years behind Japan in terms of its demographics (i.e. demographics are merely time-shifted by 20 years). As shown in the graphs below, this implies that Korea right now is demographically almost identical to the Japan of 1992.
In addition, as seen the graphs below, the five-year interval period (1992-1997) between the two demographic inflexion points for Japan is exactly equal to the five-year period (2012-2017) between the same two inflexion points for Korea. This implies that Korea’s tip-over into a demographic cross-over condition in which its old-age dependency ratio is higher than its young-age dependency ratio will occur very soon.
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In addition to the demographic profile effects, we further note that Korea already has a very low unemployment-rate compared to its equivalent advanced-economies.
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When this high-employment rate and Korea’s labor-peak (see figure below) are combined with its already-matured high-productivity, it follows that Korea’s total economic output is already at its maximum potential for the given demographic-profile.
From all the above, we can conclude that Korea’s days of fast-growth driven by the demographic ‘tailwind’ are also now over. The demographic tipping-point has now arrived in Korea, exactly as it did in Japan in 1992. From here on, Korea will be facing a demographic ‘headwind’ that will act as a brake on future growth.
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3.3 Population Projections
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Korea’s population growth-rate today, as seen in the graph below, is the same Japan’s was about 20-years ago. This implies that Korea’s population-growth profile over the next 20-years will likely imitate that of Japan’s over the last 20-years.
Looking at the measly contribution made by population-growth to Japan’s economic-growth over the previous 20 years, we can project that Korea will also experience see the same over the next 20 years. This implies that the boost that Korea’s GDP-growth received from a fast rising population over the last two decades is also now over. As we saw in Japan’s case over the previous two decades, very slow population growth now lies ahead for Korea.
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4. CONCLUSIONS
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Even though Japan's wave arrived earlier than Korea’s, Korea’s approaching negative-demographic wave will be a lot steeper. This is because the speed of the demographic ascent in the younger days of a society is generally proportional to the speed of its demographic descent in its older days. In other words, the stronger the demographic ‘tailwind’ (lifting growth-rate up) an economy experiences when its demographic profile in improving, the stronger will be the demographic ‘headwind’ (pushing growth-rate down) it will experience when its demographic profile changes direction and begins to deteriorate. Given that Korea’s demographic ascent has been much faster than Japan’s, we can project that its demographic descent over the next 20-years will also be faster than what Japan experienced over the last 20 years. This leads us to the conclusion that Korea’s demographic headwind over the next two decades will be worse than the -0.3% CAGR contribution we saw in Japan’s case over the last 20 years.
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Combining all the listed factors, here are the projections that follow from the supply-side analysis for Korea’s growth statistics over the next 20 years. Compare the numbers projected for Korea over the next 20 years with the actual numbers for Japan from the past 20 years (i.e. the 'stagnant' decades) in the following table:
In final conclusion, then, here is the forecast for Korea that arises from the supply-side analysis, and should be juxtaposed with Michael’s demand-side forecast for China (listed at the top) to see the uncanny similarities:
In final conclusion, then, here is the forecast for Korea that arises from the supply-side analysis, and should be juxtaposed with Michael’s demand-side forecast for China (listed at the top) to see the uncanny similarities:
(1) Landing: Unlike Japan in 1991, Korea will not see a sudden and violent crash. Instead, Korea will see a slow descent in GDP growth-rates over the next 20 years.
(2) Growth: GDP growth-rates will be 'front-loaded', implying growth-rates will show a secular downward-trend for the next 20 years, as the demographic 'headwinds' grow stronger and stronger. Average GDP growth rates (or CAGR) over the next 20-years are unlikely to be much higher than a meager 1% or so.
(3) Consumption: As we saw in Japan over the last 20-years, consumption share of GDP will rise (typical of demographic headwinds) as more and more people retire to consume without producing. In other words, like Japan over the last 20 years, Korea will become a consumption-driven economy over the next 20-years. Savings rate will naturally decline, as an aging Korea begins to consume a larger share of what it produces. We note that the savings-rate is merely the inverse of the consumption-share of GDP, and so the savings-rate must decline for consumption-share of GDP to rise.
(4) Investment: As is also typical of demographic-deterioration, investment share of GDP will also fall, exactly as seen in Japan during the last 20 years. In other words, slowing GDP growth over the next 20-years will be accompanied by even slower investment growth.
(5) Surplus: In order to maintain its growing elderly-share of the population, Japan will convert from its historical structural current account surplus to a structural current account deficit in the next 5-7 years. Korea will naturally follow this same pattern 15-20 years thereafter, as its own elderly-demographic follows Japan's with a 20-year time-lag. Therefore, on average, there will be no growth in Korea's surplus over the next two decades.
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The only wild-card in this analysis is immigration. Immigration is the only thing that can pull Korea out of its upcoming demographic-decline triggered stagnation. However, given that Korea, as an ethnically-pure country, has never accepted immigrants and does not view itself as a society that can ever accept immigrants, immigration is not an option for Korea. Once we accept this as an iron-clad fact, we arrive at the inevitable conclusion that Korea is going to enter into a state of slowing growth (initially) and then finally end-up in an indefinite secular-stagnation pattern. Korea will then slowly, but inexorably, enter into a high-income trap, and will never be able to escape it.
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The Korean ‘Miracle’ is over. Its ‘Long Stagnation’ has now begun.
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