Why Nobody Invests in Japan
Tokyo’s Failure to Welcome Foreign Capital Is Hobbling Its Economy
The global recovery from the Great Recession of 2009 has just entered its eighth year and shows few signs of fading. That should be cause for celebration. But this recovery has been an underwhelming one. Throughout this period, the global economy has grown at an average annual pace of just 2.5 percent—a record low when compared with economic rebounds that took place in the decades after World War II. Rather than rejoicing, then, many experts are now anxiously searching for a way to push the world economy out of its low-growth trap. Some economists and investors have placed their hopes on populists such as U.S. President Donald Trump, figuring that if they can make their countries’ economies grow quickly again, the rest of the world might follow along.
Given how long the global economy has been in the doldrums, however, it’s worth asking whether the forces slowing growth are merely temporary. Although economists and business leaders complain that a 2.5 percent global growth rate is painfully slow, prior to the 1800s, the world’s economy never grew that fast for long; in fact, it never topped one percent for a sustained period. Even after the Industrial Revolution began in the late eighteenth century, the average global growth rate rarely exceeded 2.5 percent. It was only with the massive baby boom following World War II that the global economy grew at an average pace close to four percent for several decades. That period was an anomaly, however—and should be recognized as such.
The causes of the current slowdown can be summed up as the Three Ds: depopulation, deleveraging, and deglobalization. Between the end of World War II and the financial crisis of 2008, the global economy was supercharged by explosive population growth, a debt boom that fueled investment and boosted productivity, and an astonishing increase in cross-border flows of goods, money, and people. Today, all three trends have begun to sharply decelerate: families are having fewer children than they did in the early postwar years, banks are not expanding their lending as they did before the global financial crisis, and countries are engaging in less cross-border trade.
In an ideal world, political leaders would recognize this new reality and dial back their ambitions accordingly. Instead, many governments are still trying to push their economies to reach unrealistic growth targets. Their desperation is understandable, for few voters have accepted the new reality either. Indeed, many recent elections have punished establishment politicians for failing to do more, and some have brought to the fore populists who promise to bring back the good times.
This growing disconnect between the political mood and the economic reality could prove dangerous. Anxious to please angry publics, a number of governments have launched radical policy experiments designed to revive economic growth and increase wages, or to at least spread the wealth more equitably—even though such plans are likely to fail, since they often rely on heavy spending that is liable to drive up deficits and spark inflation, leading to boom-and-bust swings. Even worse, some leaders are trying to use nationalism—by scapegoating foreigners or launching military adventures—to divert the public’s attention from the economy altogether.
Depopulation, deleveraging, and deglobalization need not hurt everyone; in fact, they will benefit certain classes of countries, companies, and people. To respond properly to these trends, governments need to plan for them and to manage public expectations. So far, however, few leaders have shown the ability—or even the inclination—to recognize the new economic reality.
MORE OR LESS
The emergence of the Three Ds represents an epochal reversal in the story of global development, which for decades prior to the Great Recession was a tale of more: more people, more borrowing, and more goods crossing borders. To understand why the plot took such an unexpected turn, it’s helpful to consider the roots of each trend.
Depopulation was already under way prior to the economic meltdown. During the postwar baby boom, the annual rate of growth in the global population of working-age people nearly doubled, from one percent in the mid-1950s to over two percent by 1980. This directly boosted economic growth, which is a simple function of how many people are joining the work force and how rapidly their productivity is increasing. By the 1980s, however, signs that the boom would fade had begun to appear, as women in many countries began to bear fewer children, in part because of the spread of contraception. As a result, the annual growth rate of the global working-age population started to fall in stages, with a sharp drop after 2005. By 2016, it had dropped all the way back to just one percent. In the United States, growth in the working-age population declined from 1.2 percent in the early years of this century to just 0.3 percent in 2016—the lowest rate since the UN began recording this statistic in 1951.
The UN now predicts that worldwide, population growth rates will continue to decline through 2025 and beyond. Such long-term forecasts, which are based on a relatively simple combination of birth and death rates, have an excellent track record. And the economic implications of that trend are clear: every percentage point decline in working-age population growth shaves an equally large chunk off the GDP growth rate.
Few leaders have shown the ability—or even the inclination—to recognize the new economic reality.
In the 1950s and 1960s, the baby boom provided a massive boost to the global economy, as did increases in productivity rooted in large measure in technological advances. As productivity growth slowed in the subsequent decades, however, easy money started to take its place as an economic spur. Beginning in the early 1980s, central banks began to win the war on inflation, which allowed them to lower interest rates dramatically. Until that point, borrowing and economic growth had moved in tandem, as is the norm in a capitalist system; for decades, global debt had grown in line with global GDP. But as falling interest rates lowered the cost of borrowing to near zero, debt surged from 100 percent of global GDP in the late 1980s to 300 percent by 2008. Although some of this borrowed money was wasted on speculation, much of it went to fuel business activity and economic growth.
Then came the global financial crisis. Regulations issued in its wake limited the risks that U.S. and European banks could take both in their domestic markets and overseas. In 2008, global capital flows—which are dominated by bank loans—stood at 16 percent of global GDP. Today, those flows hover at around two percent of global GDP—back to where they were in the early 1980s. Meanwhile, many private borrowers and lenders have been paralyzed by “debt phobia,” which has prevented new lending despite the fact that interest rates are at record lows. The only country where borrowing has continued to grow rapidly is China, which did not develop a fear of debt because it remained insulated from the financial crisis in 2008. But globally, since interest rates can hardly drop any further, a new debt boom is extremely unlikely.
Globalization is not likely to revive quickly, either. The last time that cross-border flows of money and people slowed down was in 1914, at the onset of World War I. It took three decades for that decline to hit bottom, and then another three decades for flows to recover their prewar peaks. Then, in the early 1980s, many countries began to open their borders, and for the next three decades, the volume of cross-border trade doubled, from the equivalent of 30 percent of global GDP in 1980 to 60 percent in 2008. For many countries, export industries were by far the fastest-growing sector, lifting the overall growth rate of the economy.
In the wake of the recession, however, consumers have cut back on spending, and governments have started erecting barriers to goods and services from overseas. Since 2008, according to the Centre for Economic Policy Research’s Global Trade Alert, the world’s major economies have imposed more than 6,000 barriers to protect themselves from foreign competition, including “stealth” measures designed to dodge trade agreements. Partly as a result of such policies, international trade has fallen back to the equivalent of 55 percent of global GDP. This trend is likely to continue as populists opposed to globalization move to further restrict the movement of goods and people. Witness, for example, one of Trump’s first moves in office: killing the Trans-Pacific Partnership (TPP), a 12-nation deal that was designed by Trump’s predecessor to assure that American-style free-market rules would govern trade in Asia.
WELCOME TO THE DESERT OF THE REAL
Depopulation, deleveraging, and deglobalization have become potent obstacles to growth and should prompt policymakers in countries at all levels of development to redefine economic success, lowering the threshold for what counts as strong annual GDP growth by a full percentage point or two. Poorer countries tend to grow faster, because they start from a lower base. In countries with average annual incomes of less than $5,000, such as Indonesia, a GDP growth rate of more than seven percent has historically been considered strong, but that number should come down to five percent. For countries with average annual incomes of between $5,000 and $15,000, such as China, four percent GDP growth should be considered relatively robust. For developed nations such as the United States, with average annual incomes above $25,000, anything over 1.5 percent should be seen as healthy.
This is the new reality of economic success. Yet few, if any, leaders understand or accept it. Given the constraints imposed by the Three Ds, the economies of China, India, Peru, the Philippines, Poland, and the United States are all growing at what should be considered healthy rates. Yet few citizens or policymakers in those countries seem satisfied with the status quo. In India, where the economy is now growing at a pace between five and six percent, according to independent estimates, elites still fantasize about hitting eight or nine percent and becoming the next China. The actual China, meanwhile, is still taking on ever more debt in an effort to keep its growth rate above six percent. And in the United States, Trump has talked of somehow getting the already fully developed U.S. economy to grow at four, five, or even six percent a year.
Such rhetoric is creating an expectations gap. No region of the world is growing as fast as it was before 2008, and none should expect to. In 2007, at the peak of the pre-crisis boom, the economies of 65 countries—including a number of large ones, such as Argentina, China, India, Nigeria, Russia, and Vietnam—grew at annual rates of seven percent or more. Today, just six economies are growing at that rate, and most of those are in small countries such as Côte d’Ivoire and Laos. Yet the leaders of many emerging-market countries still see seven percent annual GDP growth as the benchmark for success.
THE POPULIST MOMENT
“What’s wrong with ambition?” some might object. The answer is that pushing an economy to sustain speeds beyond its potential is like persistently gunning a car’s engine: it may sound cool, but eventually the motor will burn out. And if buyers are promised a muscle car but find themselves stuck in a broken-down family sedan, they will turn on the dealer.
In the last year, numerous leaders once considered rising stars, such as Mexico’s Enrique Peña Nieto and Italy’s Matteo Renzi, have seen their approval ratings tumble and, in Renzi’s case, have been forced out of office after their reform plans failed to deliver as promised. Normally, incumbent politicians enjoy an advantage on election day, but not during antiestablishment revolts, such as the one occurring now. In 2009, in the 50 most populous democracies, the governing party won 90 percent of elections at the national level. Since then, the success rate of ruling parties has fallen steadily, to just 40 percent last year.
The beneficiaries of this shift have often been populist and nationalist leaders who have cast doubt on the central tenets of the liberal postwar order. Figures such as Trump, Prime Minister Theresa May in the United Kingdom, and the right-wing leader Marine Le Pen in France have encouraged people to question the so-called Washington consensus—that is, the belief that there is an intrinsic link between global free markets and rising prosperity—which was an article of faith in the United States and other Western countries for decades.
Many of these same politicians promise more muscular leadership in the name of promoting their countries’ interests, and publics have shown themselves to be increasingly open to such appeals. The World Values Survey polled citizens of 30 large countries in the late 1990s and then again in the first five years of the current decade, asking, among other things, whether “having a strong leader who does not have to bother with parliament and elections” would be good for their country. In 25 of the surveyed countries, the share of people who said they would prefer authoritarian rule to democracy rose. The figure increased by 11 percentage points in the United States, 24 percentage points in Russia, and 26 points in India, where the number now stands at a stunning 70 percent. Even more striking, the decline in support for democracy was sharper among young people than among the old.
Many leaders are responding to this shift by embracing protectionist policies and by intervening more aggressively in markets. One of the main reasons for British voters’ surprising 2016 decision to leave the EU was a popular desire, whipped up by populists, to “retake control” of national borders and trade policy. Now the Washington consensus is under attack even in Washington. In the name of his “America first” agenda, Trump has begun publicly demanding that private companies build with U.S.-sourced materials and threatening to change the tax code to explicitly favor exports over imports. This willingness to scrap postwar economic orthodoxy has extended into emerging markets as well. Although Indian Prime Minister Narendra Modi was once a darling of the free-market crowd, he has recently begun to defy its preferences, most recently by deciding to withdraw 86 percent of the paper currency in circulation in India, virtually overnight, as a way to punish wealthy tax dodgers.
Such policies stand little chance of accomplishing the larger goal: bringing back a period of broad prosperity. Indeed, populist experiments will likely do more harm than good, in part by threatening the victory in the war on inflation that governments won in the 1980s and have sustained ever since, as tighter central bank policies have combined with intensifying international competition to put a lid on prices. If countries pursue insular, protectionist policies, decreased foreign competition will likely remove that lid. Populist proposals to boost growth by increasing government spending could also push prices up, especially if the economy is already running close to full capacity, as it is in the United States right now. That is why expectations for U.S. inflation have risen markedly since Trump took office.
Diverting attention from economic troubles by blaming foreign cabals and enemies within is a trick as old as politics.
Populist spending might indeed drive up growth for a year or so, but it would come at the expense of higher deficits and rising inflation. That would force central banks to raise interest rates faster than expected, triggering a downturn. Trump’s call for significant new spending on roads and bridges has proved broadly popular, but the timing is all wrong.
The U.S. economy is already in the eighth year of a recovery, which means the need for stimulus spending has passed. And the Trump plan would push the U.S. budget deficit, which is already at unprecedented levels, even higher. At this stage, Washington should be building a surplus—money it will need when the next recession inevitably hits. But the idea of saving for a rainy day seems quaint at a time when disgruntled voters are demanding an economic revival. The U.S. economy is already growing in line with its potential rate of 1.5 to two percent, yet most politicians seem to share the public’s disappointment and eagerness for more.
WINNERS AND LOSERS
The slowdown in global flows of goods, money, and people has affected more than just national politics and policymaking: it has also rearranged the international balance of economic power. Before 2008, emerging economies sought to export their way to prosperity. But that model has become less effective as the competitive edge once enjoyed by major exporters, such as South Korea and Taiwan, has begun to shift to countries that can grow by selling to their own large domestic markets, such as Indonesia or Poland.
At the same time, countries that got ahead by specializing in outsourced labor will probably see their advantage dwindle. India has seen cities such as Bangalore emerge as incubators of the country’s rising middle class, spurred by opportunities at global outsourcing firms. The same goes for the Philippines, where call centers did not exist at the turn of the millennium but have exploded into a $22 billion industry employing more than one million people. As globalization retreats, however, outsourcing is likely to decline, and Trump’s tax plans, designed to bring companies and jobs back to the United States, will accelerate this shift.
Economic advantages are also moving away from big multinationals and toward smaller, domestically focused companies that rely less on exporting goods and importing or outsourcing labor. As borders tighten and it becomes harder to fill positions with foreign employees, workers in developed economies such as the United States will gain more bargaining power. For much of the postwar era, the share of U.S. national income that went to workers declined, in large part because many companies cut labor costs by shifting jobs abroad. Meanwhile, the share of national income going to corporate profits rose steadily, to a peak of ten percent in 2012. Since then, however, the corporate share has started to drop and the workers’ share has begun inching up.
Border restrictions and aggressive government intervention in markets are nonetheless likely to slow the global economy. Reduced competition tends to undermine productivity, one of the key drivers of growth. As leaders attempt to grab a greater share of the global pie for their countries, their combined efforts will wind up shrinking the pie itself.
I'M A SURVIVOR
So what will happen when populists and nationalists fail to deliver faster growth? One might expect everything to come crashing down around them. In fact, history shows that canny populists can survive such outcomes. But the tactics they tend to use often stoke international instability, as the cases of Russia and Turkey demonstrate.
When Russian President Vladimir Putin came to power in 2000, his basic promise was that he would make Russia great again by reviving its economy. Thanks largely to rising prices for Russia’s top exports, oil and gas, average annual income increased tenfold over the next decade, to the equivalent of $15,000. Putin reaped the benefits, basking in unprecedented levels of public support. But in 2014, energy prices collapsed, setting off a recession, and average annual income fell to just $9,000. Putin suddenly seemed politically vulnerable.
To deflect attention from the downturn, Putin embarked on a series of foreign adventures: invading and annexing Crimea, fomenting a pro-Russian insurrection in eastern Ukraine, and launching a military intervention to support the embattled Assad regime in Syria. By playing the nationalism card and casting himself as the hero of a campaign to restore Russian prestige and power, Putin has avoided suffering the fate of so many other establishment politicians. Despite Russia’s continued economic struggles, his approval rating remains above 80 percent.
Pushing an economy too hard is like persistently gunning a car’s engine: it sounds cool, but eventually the motor burns out.
Like Putin, Turkish President Recep Tayyip Erdogan is also well into his second decade in power despite the fact that he presides over a sputtering economy. Erdogan’s ideas about economics are distinctly unconventional: he has claimed, for example, that raising interest rates—a standard antidote to inflation—is in fact a cause of inflation. Turkey faces a crippling mix of rising deficits, accelerating inflation, and slow growth. Yet the latest polls put Erdogan’s approval rating at close to 70 percent, in part because Erdogan has managed to convince many Turks that the United States and the EU are the masterminds of a conspiracy to weaken Turkey. When military officers launched a coup attempt against him last year, Erdogan claimed that the plot was “written abroad,” and members of his government accused the CIA and the FBI of involvement—an accusation that Washington denies but that most Turks believe, according to polls.
This trick—diverting attention from economic troubles by launching foreign adventures or by scapegoating foreign cabals and enemies within—is as old as politics. But Putin’s and Erdogan’s success with such tactics will only make other leaders more willing to take similar measures when they find themselves unable to deliver on promises of renewed prosperity. The resulting wave of nationalist antagonism and aggression will stoke geopolitical tensions, especially at a time when Washington’s commitment to upholding the liberal international order seems to be wavering.
THE NEW NORMAL
Not all the effects of the Three Ds will be negative; the trends will produce some winners, such as countries whose economies are less reliant on international trade and firms that deal primarily with domestic markets. A slower-growing, less globalized economy might also raise middle-class wages in developed economies, which might in turn halt or even reverse the increase in income inequality that many nations have experienced in recent decades. Such gains will prove fleeting, however, if leaders and policymakers refuse to accept the new normal.
There are some steps that governments can take to dampen the impact of the Three Ds. Although attempts to reverse the long-term decline in birthrates, such as offering women “baby bonuses,” have proved largely futile, governments can offer more women and elderly people incentives to enter or reenter the work force. They can also open doors to immigrants. But doing so will be at best politically impractical at a time of rising nativism. And working-age populations are falling so sharply that women, senior citizens, and immigrants can make up for only a small portion of the looming labor shortage.
The same basic math applies to deglobalization: at a time when global trade talks have stalled and regional trade deals are dying on the vine, countries can try to boost trade by cutting bilateral deals—but this will only partly counteract the global anti-trade trend. And the rise of populists will continue pushing mainstream politicians to be wary of any trade deals: before beginning her 2016 presidential campaign, former U.S. Secretary of State Hillary Clinton had called the TPP “the gold standard” for trade deals; once primary season started, she withdrew her support for the agreement in response to anti-trade populism in the Democratic Party’s base.
The obstacles to reviving the postwar debt boom are even more daunting. The financial crisis of 2008 led to new regulations and new restrictions on lending and made big banks an easy target for populists of all stripes, limiting the room to maneuver for policymakers and financial firms alike. And global debt, although stable, is already quite high, at around 300 percent of GDP. That means that, even if policymakers wanted to do so, it would be politically difficult and perhaps economically destabilizing to trigger a new period of debt expansion.
If political leaders can’t summon the words or the courage to explain this slow-growth world to a demanding public, they can at least avoid overpromising on growth and eschew unorthodox policy experiments to achieve it. Some traditional economic policies, such as well-designed tax cuts and deregulation, could help increase productivity and lift growth rates at the margin. But the gains from such policies are unlikely to add up to much. No country will be able to avoid the constraints on growth posed by the Three Ds; the time has come to prepare for life in a post-miracle world.