Comparative Economic Development in China and Japan

Abstract

Three hundred years ago per capita incomes in China and Japan were about equal and fairly close to the global mean. At the end of the twentieth century Japanese per capita incomes are about as high as Western incomes and about seven times as high as Chinese incomes. How could this happen? Manchu China and Tokugawa Japan did not establish equally safe property rights for merchants and producers as the West did. But political fragmentation and feudalism within Japan provided something like checks and balances against arbitrary government which China lacked. Moreover, a similar lack of respect for merchants in both countries had more favourable consequences for early commercialisation in Japan than in China.

Japan's revolution from above led to a much earlier and faster restoration of orderly government than China's protracted decay of imperial rule first and its revolution from below thereafter. Whereas the Japanese revolution from above implied the preservation of human and social capital, the Chinese revolution from below led to a massive destruction of both. Moreover, Japanese nationalism was oriented toward the conquest of foreign markets and economic supremacy earlier than Chinese nationalism. This provided another Japanese advantage over China.

Japan began its process of catch-up with the West about hundred years earlier than China. In both countries high savings and investment as well as human capital formation contributed to growth. China was held back first by political instability and later by diluted property rights and distorted incentives. In the last quarter century, however, China has re-established incentives, opened up its economy, and established some substitute for private property rights. It has done well enough to have already overtaken the Japanese economy in size. The size gap between the two economies is likely to widen quickly, whereas the still huge gap in per capita incomes will narrow only very slowly.