Two Observations on East Asia Challenges

Two Observations on East Asia Challenges

Photo credit: Wikimedia Commons

Last month, my Global Conversations Tour took me from the U.S. to Seoul and Tokyo before heading to the Penn Wharton China Center in Beijing for a week full of exciting events. There is so much going on in East Asia, and it is so great to listen to and learn from prominent Wharton alumni who are business and political leaders.

Clearly, these are challenging times in East Asia. Korea and Japan have a long list of domestic to-dos: increasing female labor force participation, helping people remain economically active when they retire from full-time careers, stimulating innovation in big conglomerates, and fostering entrepreneurship and startups. For Japan, these are ongoing issues—a hard slog with no real prospect of radical change. Things could be different in Korea.

The prospect of Korean reunification is beguiling. For older South Koreans, it is a deeply emotional issue, reuniting families after 60+ years. For politicians it’s more strategic, relying on and making possible better relations with China.

But for economists, the issues are broader. The costs of Korean reunification would be massive—probably requiring financial support from China, Japan and the U.S. But the long-term economic benefits could be even larger. Immigration is close to a cultural taboo in Japan and Korea. Korean re-unification offers the prospect of a 50 percent increase in the country’s population, and the North is much younger than the South.

There’s no timeline for reunification because the trigger, inevitably, will be a major political implosion in hermetically-sealed North Korea. But people in the South are preparing—politically, economically and emotionally.

Despite these major domestic concerns, the biggest issues in both Korea and Japan today are external—with major questions about China and the U.S. dominating my conversations (I spent some time thinking and writing about this subject on LinkedIn in July and August as well).

On the one hand, will China be able to execute a soft landing to higher quality but lower growth rates based on domestic consumption and private investment? Or will China plummet into Japan-like stagnation—dragging down Asia and global commodity exporters with it?

On the other hand, if and when the Federal Reserve raises U.S. interest rates, will this help other economies by increasing the competitiveness of their exports (via a higher dollar)? Or will higher U.S. rates hurt other economies by triggering large-scale capital outflows to the safe haven of American investments?

Two simple observations:

1. While China does look like Japan in some troubling ways—too much government investment today with a declining population tomorrow—Japanese-style stagnation does not seem in the cards. The main reason is that China’s domestic market is immense and still growing, with hundreds of millions of middle-class consumers. Beneath the headlines of stock market volatility and frantic government reactions, a real Chinese private-sector economy is emerging to serve these consumers.

Chinese private sector companies are now competing with Western firms for market share in China. Think about the rise of Xiaomi as it takes on Samsung in smartphones. This is a big problem for Samsung, sandwiched between low-cost Xiaomi and premium-priced Apple. But it’s great for consumers in China and elsewhere. And it’s very good news for those hoping for the growth of a vibrant consumption-based Chinese economy and a vibrant Chinese private sector.

2. When it comes to higher U.S. interest rates, economies with strong fundamentals will benefit from a higher dollar because it will promote their exports; whereas, economies with weaker fundamentals will be challenged by the specter of large and rapid capital outflows.

This is certainly good news for Korea and Japan, probably China too. But there are challenges for countries where booming commodity exports in recent years have concealed other economic problems, problems that have now been exposed as lower Chinese demand and a stronger dollar have pushed oil, gas and iron ore prices way down. Globally, the focus has been on Brazil and Russia; however, one must also look at Indonesia and Malaysia.

Slower Chinese growth and higher U.S. interest rates are new realities that will reshape not only Asia but also the global economy for years to come. Everyone will have to respond to these realities. Now would be a good time for China and the U.S. to send a positive signal to the world that the two biggest economies are working together.

Editor’s note: The original version of this article appeared on LinkedIn on Sept. 9, 2015.

For photo highlights of the dean’s Global Conversations Tour stops in Seoul and Tokyo, enjoy the slideshow below.

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