The world economy has experienced a significant shift in recent years. Previously, Japan was facing deflation while China was prosperous. However, the situation has reversed, with Japan championing open trade rules and the United States adopting protectionist policies. This turnaround challenges the neoliberal narrative that dominated after the Cold War, when the collapse of Soviet communism discredited government-directed economic growth. Additionally, Japan’s recent economic activity, including annualized growth and price and wage increases, indicates a potential turning point in its battle with deflation. Moreover, Japan boasts social stability and a relatively low income inequality problem compared to the United States.
Japan may not be a perfect model, particularly in regards to recognizing women’s rights. Nevertheless, its Human Development Index is rising, and it ranks among the most affluent and successful societies globally. Other economists acknowledge the success of Japan and other East Asian nations in using market-sensitive government industrial support and progressive tax systems to promote export competitiveness and create good jobs for the middle class. Meanwhile, China’s economic slowdown may be attributed to its leader’s crackdown on the market economy, disrupting the delicate balance of government and market control.
The dominance of the neoliberal Washington Consensus in the policy debate was gradually eroded as global capitalism and the excesses of neoliberalism became apparent. The 2008 financial crisis revealed that unregulated capital flows and financial markets, along with regressive tax policies, were problematic. Additionally, China’s systematic violations of trade rules and disregard for intellectual property rights became more evident. The confidence placed in high-tech advantages and startups did not translate into sustained manufacturing growth for the middle class. Consequently, neoliberalism has been declining, and recent politicians like Donald Trump and Joe Biden have delivered the final blows.
This shift in economic ideologies has had social and political implications. Deepening inequality resulting from neoliberal policies has caused social instability and populism in major Western economies like the United States and Great Britain. Trump and Johnson transformed the once-globalist democracies into anti-globalist, inward-looking nations. Trump initiated trade wars and undermined international trade organizations, while Johnson exited the European Union. Ultimately, this topsy-turvy state of affairs represents a historic test of alternative economic approaches and social stability.
The transformation began around three decades ago when President Bill Clinton embraced markets and globalization following the collapse of the USSR. At that time, command economies and big government were discredited, while import substitution policies had failed in Africa and Latin America. However, East Asia, including Japan, had successfully implemented managed economies, inspiring other nations to follow suit. This period represents a critical test of different approaches to economic development and social stability.