China's leaders have devalued its currency. South Korea's President is letting convicted business executives out of jail. And Japan's Prime Minister is talking more about dismantling the pacifist constitution than about his faltering "Abenomics" revival plan. Taken together, it amounts to a troubling phenomenon: the waning of the export-led growth model, and the lack of domestic consumption, across East Asia's most powerful and influential economies.
These countries are in a bind, and it is not a simple one to solve. The situations of China, South Korea and Japan are obviously all unique, and admittedly, many other less-developed countries in Asia would gladly pay to have these types of problems. But the three countries are export powerhouses facing a precarious balancing act as they try to tilt away from exports to more sustainable, broad-based economic growth centred on prosperous consumers.
Last week, China's central bank jolted world markets by devaluing its highly controlled yuan, letting it drop the furthest against the dollar in two decades – and revealing the level of anxiety among Chinese policy-makers.
In Japan's mature democracy, the situation is in some ways the least concerning. Starting in 1990, Japan began coasting through a so-called "lost decade" of deflation and stagnation that has simply never ended. As part of Prime Minister Shinzo Abe's attempt to boost growth, the central bank presided over a monumental stimulus package that has driven down the yen – benefiting the country's powerful exporters. But these moves, of course, make imports more expensive – hurting not just consumers, but the small- and medium-size businesses across Japan that bring supplies into the country, and also happen to employ the majority of Japanese workers.
As profits at big firms pile up and the stock market in Tokyo soars, household consumption in Japan has flagged – and many people feel (and are) worse off than before. Just this week, awful new data out of Japan revealed consumers cut back spending by 0.8 per cent even as exports tumbled a remarkable 4.4 per cent – resulting in an annualized contraction in gross domestic product of 1.6 per cent in the April-to-June quarter.
South Korea is coming up fast behind Japan, having consciously mimicked the same export-led industrial growth strategy. Thanks to preferential policies that benefited family-run chaebol conglomerates (such as Samsung, Hyundai and SK Group), leaders in Seoul nurtured the growth of massive firms that wield enormous influence in South Korea. The chaebol bully suppliers and frequently muscle small- and medium-sized enterprises (SMEs) – again, where most people work – out of business.
But faced with a situation in which the country's sputtering growth is choking on the chaebol's dominance, President Park Geun-hye recently pardoned more than 6,500 people – including jailed SK Group chairman Chey Tae-won and other executives. This, the government said, would "give them a chance to develop the country's economy." Develop it toward what, exactly? South Korean leaders have too much of a sweet deal with their export-oriented manufacturing sector to risk any tinkering – such as actually maintaining a firm line on chaebol malfeasance, helping SMEs and enacting meaningful policies to alter South Korea's growth trajectory.
The situation is grimmest in China: Of all three economies, China is the one that can least afford to change its economy's course. For Beijing, economic growth equals political stability – and the economy is obviously slowing.
Few believe that China's official gross domestic product growth of 7 per cent reflects reality, with some suggesting 3-per-cent or 4-per-cent growth is more likely. Factories have emptied, extra shifts to churn out goods have become rare and higher wages in China have sent labour to cheaper locales. But even before the tide rolled out on China's unstoppable growth, fissures were emerging. Devaluing the yuan, of course, slams the pedal down and moves the country in the opposite direction: It benefits exporters at the expense of consumption, and puts the economy back on a track that well-known China watcher Patrick Chovanec recently called a "dead end." Although some think China's move on the yuan is more about liberalization and reform, it still doesn't speak to a healthy economy.
Policy-makers in these countries have different reasons for continuing down their own respective, export-oriented policies. In Japan, heightened domestic consumption will only come after tough structural reforms that Mr. Abe seems unable to make. In South Korea, it will only arise if Ms. Park, who is already deeply unpopular, takes on the mighty chaebol – and that is unlikely. The slowdown in China, of course, is a big reason why South Korea and Japan – both huge trade partners of China – are doing so poorly. With exports now struggling across the board, it will be crucial for Asia to move to the next phase of growth.