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Monday, Nov. 5, 2012
Excess supply, not lack of demand, weighing on the global economy
Special to The Japan Times
The demand and supply balance is adjusted through price fluctuations under a market economy. However, price changes often go too far, occasionally leading to creation of a bubble boom and its subsequent collapse. When Japan's bubble boom went bust in the early 1990s, Japanese companies were burdened with three excesses — excess workforce, excess debt and excess production capacity — and spent the following two "lost" decades" adjusting the redundancies.
Further integration of economies around the globe through deregulation, plus accelerated speed in the turnover of money owning to advances in information technologies, created the bubble in the real economy as well as in financial products. Central banks of major countries were unable to fully grasp this new situation of excess liquidity. The recent low growth in both advanced and developed countries is proof that the global bubble is in the process of bursting. Just like in Japan in the 1990s, economies around the world are confronted with the three excesses. Here, I would like to look into more facts and background.
One thing we need to note is that whereas the excesses in Japan's bubble aftermath were mainly problems of individual companies, today the problem is weighing on the national economies.
First is the existence of excess labor. Behind the development is the greater participation of countries with huge populations, like China, India and Indonesia, in the global market. Industrialized nations boosted overseas investments in pursuit of cheap labor in developing countries. In Japan's case, the move was accelerated further as companies had to cope with the strong yen. At the same time, labor regulations made it impossible for the firms to cut jobs at home correspondingly, thereby leaving them with surplus labor.
The latest data put unemployment in advanced economies at 10.1 percent in France, 8.1 percent in Britain, 7.8 percent in the United States, 7.4 percent in Canada and 6.8 percent in Germany. These figures show the existence of excess workforces, or unused labor in each country. Japan's jobless rate stands at a relatively low 4.4 percent, but it is estimated to shoot up to around 8 percent if redundant workers retained by companies are factored in. In other words, Japan has hidden excess labor.
Second is excess capacity. Just like in the problem of excess workforce, companies tend to lag behind in reducing domestic production capacity even as they move their operations out of Japan. Prices of digital home appliances are going down at an accelerating speed, and a new model is sold at a 50 percent discount within six months of its launch. This is proof that the global economy is in excess supply.
The third problem is excess debt. Governments interpreted the excess capacity and production as a problem of demand shortage, rather than a supply-side problem, and aggressively pursued fiscal stimulus to shore up demand. This mistaken policy is behind the expansion in fiscal deficits in each country. The European Union is busy dealing with the sovereign debt crisis of its member states, while the so-called fiscal cliff has become a major issue in the U.S. presidential race. Japan, for its part, has public debt more than twice the size of its gross domestic product. The Cabinet of Prime Minister Yoshihiko Noda approved an emergency stimulus package on Oct. 26, but passage of a bill to issue deficit-covering bonds to pay for the initial 2012 budget is still nowhere in sight.
As the increasing debt puts a limit on fiscal measures, people's expectations tend to focus on monetary policy. But the ongoing ultra-low interest rates have not achieved their intended effects, as excess capacity limits cash demand by companies. The low rates ease the interest payment burden on the debt-laden public sector and provide some support for share prices. However, the elderly population who rely on interest gains on their savings complain that the low rates deprive them of even a meager income.
To survive global competition, companies do need to make new investments. But what matters is the quality, not quantity, of the investments, so that the capital input would result in beefing up the global competitive edge of their products through technological innovations.
Teruhiko Mano is an international economic analyst.