Have Xi, Modi and Abe lost their way with ‘shock therapy’ for the economy?
William Pesek says investors may have rejoiced too soon at the promise of an Asian ‘axis of reform’ that could remake the global economy, as the strongman trio from China, India and Japan has proved less than bold
To discern how India is doing, focus on the numbers three and two. Three for the years since Narendra Modi was elected prime minister on a promise to revolutionise the economy, and two for India’s reduced standing – now second to China – among the fastest-growing major economies.
Since Modi took office in May 2014, his team has never missed an opportunity to trumpet India as “the world’s fastest-growing large economy” and a “bright spot” amid globally slowing demand and market turbulence. Latest GDP data put the lie to those talking points. What’s more, changes in how inflation is calculated may mask the depth of the slowdown.
Modi deserves much of the blame. Three years on, his pledge to unleash creative destruction of the Joseph Schumpeter variety is more talk than action – and he’s not alone. Modi’s arrival on the scene was noteworthy because he joined self-described shock therapists Shinzo Abe of Japan and Xi Jinping (習近平 ) of China. Investors rejoiced at the prospect of Asia’s biggest economies suddenly experiencing bursts of change that could remake the global economy – an “axis of reform”, if you will. The only shock is how this strongman triumvirate has been more timid than bold.
Watch: Challenges facing Xi at the start of 2017
Prime Minister Abe took office in December 2012 trumpeting an audacious plan to deregulate Japan’s ageing and unproductive economy. Abenomics was to be a three-pronged assault on deflation: monetary easing, fiscal pump-priming and structural reform. Markets rejoiced as aggressive Bank of Japan policies weakened the yen and supported exporters.
Then came the buyer’s remorse. Flooding the system with yen and fiscal stimulus was meant to loosen labour markets, slash trade barriers, catalyse a start-up boom, cut red tape and empower women. Nearly five years on, the upgrades have been few and far between. Structural reform took a back seat to Abe’s desire to rewrite Japan’s post-war pacifist constitution and upgrade its military capabilities. All stimulus and no reform has Japan facing a demographic time bomb – too much debt, too few babies. The little growth today will come at a high price as competitiveness wanes.
President Xi is also battling a slowdown, as highlighted by the first downgrade of China’s rating by Moody’s since 1989, belying his pledges to rein in debt bubbles. While Xi acted quickly in 2013 to gain control of the military, domestic security, and foreign and economic policy, a shadow-banking sector churning out tens of trillions of dollars of fresh credit proved hard to tame. Xi’s lack of toughness on financial matters has China getting more addicted to new borrowing for growth.
State companies that would struggle to survive in a free economy generate at least a third of GDP and receive the lion’s share of bank financing. Xi has yet to confront a zombie factor that’s spilling over into the global marketplace in ways Japan’s debt and overcapacity excesses never did. His anti-corruption push, meanwhile, seems aimed more at slapping political rivals than cleansing China Inc. By not acting boldly to contain excesses, Xi is ensuring that when, not if, China’s speculative bubble bursts, it will be larger and more devastating than it ever needed to be.
Modi has something important in common with Abe and Xi: he is arguably his country’s most powerful and popular leader in generations. He harnessed it early on to open the insurance and defence industries, and get a national goods-and-services tax through Parliament. Modi’s move to take large-currency bills out of circulation to fight graft was bold, but so badly executed that it dented his managerial bona fides.
But Modi has tended to target low-hanging fruit, instead of challenges such as attacking bad loans in banks, getting the state out of the private sector, modernising the judiciary, and pursuing land and labour reforms. Nor has he reassured investors burned in the past that rupee assets are safe.
The excitement that linked Abe, Xi and Modi three years ago is giving way to a sobering reality: Asia’s strongmen aren’t strong enough to remake the region’s biggest economies. There is still time to turn things around, but the clock is ticking as fast as the challenges are piling up.
William Pesek is a Tokyo-based journalist and the author of Japanization: What the World Can Learn from Japan’s Lost Decades. Twitter: @williampesek