James E. Howell

James E. Howell, the Theodore J. Kreps professor of economics, emeritus, at Stanford Universitys Graduate School of Business, met with REVIEW staffer William MacNamara to discuss the future of Asian economies.

REVIEW: How do you see the economic rise of China and its effect on U.S. economic influence?

JH: If you look as I do at demography, as I do, around 2030 there will be really big demographic changes confronting China. By then, China will be at least 10 or 15 years into a declining population, and more importantly a declining, aging population. By 2030 it will no longer be the largest country in the world. It will still be a giant, but India will be number one, at 1.3 billion people. China then is set to become an aging giant. This will mean an enormous change for China in terms of its self-image and its economic system. The Chinese wont have the abundant labor force that they have now. Population wont go down, but labor force will. In economics this is the worst thing that can happen: They still have the same number of mouths to feed but fewer people to work. Theyre going to have the same problems relating to an aging population that Japan and Europe face, but it will play out in a completely different way.

By 2050, the death rate [in China] will go up. This will be extremely problematic for Chinas current system. China will have to cope by becoming more technology-based, not just relying on its current system of increasing production by making more heavy capital investment.

If you look at the U.S. over the last 10 or 15 years, you see that 40% of its growth in productivity has come from physical capital investment and 40% comes from intangible investment"science and technology. A further 12% comes from improvements in the quality of labor force. This is a dramatic shift compared to 20 years ago, when most productivity growth came from physical capital investment. China, too, will have to move in the direction of rich countries by relying more on people and technology. It will have to make a big transition from adolescence to maturity, which means less reliance on bricks, mortal and steel.

By 2015 to 2020, Chinas [annual] growth rate will probably drop to 5% or 4%"thats still high, but it will show that it is moving in the direction of being a developed country ... But by 2030 China should be number one in the world in terms of size of the economy. The United States should be close by.

If the U.S. keeps its head on its shoulders about its economic policy, this should present no problems for its economy, although it will present problems for people who like to look back in time and cant stand that theyre no longer number one.

REVIEW: Does Japan stand a chance of maintaining its number two position in the world economy in the next 30 years?

JH: Id say chance is close to zero. Even if they recover spending, they still have their demographic problems, which are severe. I dont think that either Japan or Europe will be able to solve their basic demographic problems. But there is another problem that I dont hear talked about. The Japanese went through a lot of emotional shocks in the 1980s and early 1990s. The U.S. went through almost exactly the same shocks from 1929-36. There were two recessions in that period, and we had what the Japanese had"five or six years of deflation. The relevant thing is, Americans who lived through that time remember it for 30 or 40 years and act accordingly, even if they were kids. They become cautious. We saw this in the U.S. when we saw in the 1980s an interest-rate spike, but a lot of people kept their money in savings banks at 1% or 2% rates of interest. People who had lived through the 1920s and 1930s said, its was because they would never trust any financial institution again. Japanese have that kind of overhang. They may face for the next 20 years the memory and the shock of deflation. It will take a long time to shake off that shadow.

REVIEW: Is there a chance of integration happening in Asia along the same lines as in Europe?

JH: ... Ultimately I dont see any big country in Asia subordinating its national ego to smaller ones. Its hard to find any basis for economic integration.

But I was struck five or six years ago when Chile applied to NAFTA. About a month after Chile said it would file an application to join, South Koreas foreign minister issued a press release saying, if Chile were admitted, South Korea would like to apply to join NAFTA too. South Korea, that great North American country. But geography doesnt mean what it used to mean. The South Koreans said, in time-distance we are as close to North America as Chile is; We are a bigger supplier to the U.S. than Chile; We buy more from the U.S. than Chile does. The State Department said, we havent thought about it, but we have no objection to South Korea. Two weeks later, the foreign minister of Singapore said, if South Korea joins, maybe we could apply to join. These countries all need trade access to the U.S., as does India and Japan, and all could work out either bilateral deals with the U.S. or multilateral deals with its trade zones. So I think NAFTA is likely to become a Pacific alliance. Saying that, I think it would be a loose alliance"it will not be like the EU but also not as loose as Asean. It would give Asian nations free trade access to the U.S. That seems much more likely to happen than getting all of East Asia to agree to something given their historical animosities.

REVIEW: Is there an aspect of Asian economics that is particularly misunderstood or overlooked by U.S. policymakers?

JH: I think I can find it in Mr. Bushs State of the Union message. He called for an increased emphasis on R&D, and mentioned $50 billion a year. He said this was designed to combat Chinese and Indian technological pressure on the U.S. I dont think Ive ever heard a bigger non sequitur except from a seven year old. China and India are not major technological threats to the U.S. They might be in the distant future, but they are not now. What is essentially going on now is low-tech trade. If Mr. Bush wanted to help the U.S."as well as China and India"he should encourage it. Because trade benefits all those who participate in it. Trade essentially increases the variety of goods, the cost of goods, and the quality of the goods in any country. Those three things combine to raise the incomes. So Sino-American trade, and Chinese exports, can raise incomes in both China and the U.S. American exports to China"which are huge"raise incomes on both sides of the Pacific. The other reason this is so ridiculous is because the biggest technological threats to the U.S. are from small European and Asian countries"not from China or India.