In 1966 the De Beers Corporation kicked off a large-scale advertising campaign to promote diamond jewelry in Japan. The Japanese market was spinned up literally "from zero" - in the early 1960s Japan's diamond consumption was less than one percent of the world level. In the 1970s Japan was already an assertive member of the “prize-winning trio”. In 1988, Japan turned to be a leader for the first time: the country’s retail sales of diamond jewelry hit $14.4 billion, whereas the United States managed to score $14.1 billion. Creating a diamond market equal by its capacity to its American counterpart within a relatively short period of time in the country not accustomed to diamond consumption and noted for a highly original jewelry culture may up to now be viewed as a paragon of marketing.
Is it possible to repeat this fantastic success nowadays in the country which is currently attracting the hopes of diamantaires - in China? Can the growing consumption of diamond jewelry in the People’s Republic of China offset the falling demand in the United States caused by the current crisis? And how soon will it occur, if ever?
The successful diamond marketing in Japan rested on the fundamental foundation which was the so-called “Japanese economic miracle” of the 1950s-1980s and which had patterns and purposes very similar to the “Chinese economic miracle” emerged in 1979. Probably, parallels drawn between these two "miracles" will not be superfluous for searching answers to the posed questions.
After the end of the Second World War Japan was an economic corpse: its infrastructure and industry were destroyed both organizationally and to a large extent physically being cut off from their sources of raw materials and markets, while the country’s financial system practically ceased to exist. It seemed that to restore the economy to at least its pre-war level even one hundred years will not be enough. But as soon as Japan’s political system acquired acceptable outlines and stabilized from the winner’s point of view, the country was flooded with a gold rain of credits and technologies. Since 1950, U.S. EXIMBANK opened multibillion credit lines while the American government and corporations provided for transfer of patents, state-of-the-art equipment and technologies to new Japanese industries whose production was first of all aimed at export which was to become a major budget-earner in the country. The most powerful starting impulse to this process was given by the Korean War in 1950 - 1953 during which Japan received a huge order from the Pentagon literally for everything that was necessary for the South Korean Army and American Task Force - everything, except weapons.
In the 1950s – 1970s the United States boosted the Japanese economy with surprising altruism: credits were granted on concessionary terms, the retooling cycle in export industries did not exceed 5 years (while in the USA it was 9 years); and still, according to the Japanese legislation, foreigners could not be stakeholders in Japanese enterprises. The technologies for which the United States spent billions of dollars and dozens of years were given to Japan almost for nothing. The U.S. and European markets were generously opened to Japanese goods. Japan’s GNP during these years was growing hand over hand at the rate of 11%–15%, the highest in the world, while its share in global export soared to 6% virtually from zero. The export-oriented industry generated an enormous amount of jobs and rural population migrated to cities in large numbers. The country’s national budget was in surplus and the population’s spending power was growing at a fast pace. The process of manufacturing “economy № 2” out of Japan obviously became irreversible in the second half of the 1960s (from then on diamond marketing there took a successful turn).
According to the Constitution of 1947, Japan cannot have an army and participate in military blocks - it does not exist as a “power” ally for the United States. After the Nuremberg and Tokyo processes Japan’s weight in international organizations, at least in the 1950s and 1960s, to put it mildly, was not great, and the country also did not look strong diplomatically. So what was the reason for boosting the economy which was fast becoming a direct competitor, mostly in the "American" (then) segments of the world market - motor industry, radio electronics, machine-tool manufacturing, etc.?
From 1940 to 1950 the U.S. national debt increased 6 times, from $43 billion to $257 billion, which made 94.1% of the country’s GNP. The forecast that the economy of a country emitting the world reserve currency could exist exclusively under condition of continuous (and rather fast) national debt growth was implicitly formulated in Bretton Woods in 1944, and as it is known, was perfectly proved to be true. By 1980, the U.S. national debt swelled almost 4 times from the level of 1950. But the debt could exist only if there were solvent creditors. So, the “Japanese economic miracle” honesty executed its main task – “economy № 2” became the main foreign buyer of the American national debt - approximately at the time when Japan’s share in global export reached a historical maximum.
From 1980 to 2000, the U.S. national debt went up from $909 billion to $5,629 billion. To make such an impressing result possible, the pack of creditors was to welcome a new powerful player. In 1979, a high-running economic reform was launched in the People’s Republic of China. Again there were soft loans from the United States and international financial institutions, all this followed by free transfer of newest technologies and development of export bound industries virtually from zero, opening markets (China turned to be a member of the WTO in 2001), unseen growth of GNP and a likewise fantastically increased share in global export - 5 times in the course of 20 years. Of course, the “Chinese economic miracle” turning into yet another “economy № 2” in the world took the honored first place on the list of foreign buyers of the U.S. national debt, having squeezed the “Japanese miracle” out to the second place.
An identical matrix was applied with regard to South Korea, Singapore, Hong Kong, Taiwan, and Malaysia. These countries due to their wonderful transformation into “Asian tigers” turned into joint holders of approximately 10% of the U.S. national debt placed among foreign creditors.
In all the instances of such economic "miracles" the following phases come out sharp and clear:
- The share of a country in global export is increased exponentially. In the course of this growth the "miracle" nation turns into a buyer of the U.S. national debt, while the maximum size of its purchase corresponds to a peak value of its share in global export.
- There occurs a “planned” halt of export growth caused by external factors - an antidumping policy and (or) slumped spending power of the population (due to the crisis) in importing countries.
- Export goes down followed by attempts to offset the loss by boosting internal demand using the accumulated budgetary reserves and (or) by increasing one’s own national debt.
The peak of consumption of diamond jewelry in Japan was registered in 1995 ($16.9 billion), two years after the country gained the maximum share in global export, i.e. during the last of the above mentioned stages. Indeed, attempts to balance the losses from declining export by way of stimulating internal demand inevitably suggest increasing the population’s spending power due to increased salaries, easier credits, etc. However, the problem is that increased incomes of the population in their turn bring export costs higher, thereby reducing export activity. So, the encouraging peak in the mid-1990s was followed by a long plateau passing into a downward slope. It is highly probable that China will follow the same way.
It seems that the export-focused model of economy laid down through similar techniques into the basis of both Japanese and Chinese "miracles" is calculated not for an infinite and boundless development of the thus made happy counterpart, but for making this counterpart achieve and maintain a certain level permitting to credit the budget of the model’s founder to the level of a set quota. The size of this quota can hardly be more than 25% - otherwise it will be extremely difficult for the emitting party to hedge risks, and the currently strained situation around the CNY/USD exchange rate proves it. Today China’s share among the foreign creditors of the United States is slightly over 23%, while that of Japan is 21% and most likely it is close to the limit. And if we take into account that the peak of Chinese export was ex-growth two years ago and right now China has already a balance of trade deficit, it is possible to assume that the level of its population’s spending power if has not reached its maximum then is close to it. Therefore, China’s share in diamond consumption can hardly be changed in any essential way.
Fortunately, the tireless generating of export-bound "miracle" economies does not suggest any fixed levels of own debt. Only in 2011 this indicator is predicted to surpass its current value by almost a quarter. Certainly, such plans may involve attracting a worthy creditor to the already existing team - with a quota comparable to those assigned to the present champions of the list. The candidate is obvious. India possesses today a piteous 1.13% of the U.S. national debt, while its share in global export is about 1%. That’s the scratch from which Japan and China started their "miracles". If India’s share in global export will increase to 7%-8% generating a corresponding 18%-20% share among the U.S. foreign creditors this will give a chance not only to balance the entire slump in demand for polished diamonds occurred during the current crisis, but also to expand essentially the capacity of the diamond market as a whole. There are many signs saying that this process has already been started and the above indicators may be reached within the next five years.
Sergey Goryainov, Rough&Polished
