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Tuesday, Sept. 12, 2000

Japan needs a Third Way


Through the last decade of the 20th century, the Japanese economy has been in a state of confusion. After the bubble peaked in 1987-90, the economy went into a tailspin. The economy hit bottom in October 1993, according to official statistics, but since then it has shown few tangible signs of robust recovery. As of last October, it was moving slowly at that low level.

Policymakers have come up with a variety of measures to reflate the sluggish economy, but none has worked. These include stepped-up public-works spending, a de facto zero-interest-rate policy and limited deregulation. It looks as though Japan is troubled by a disease that is incurable with conventional medication.

Seeing that medication does not work, some experts have proposed drastic surgery, or economic structural reforms, to treat the malaise. These advocates of market fundamentalism say competition -- in which survival of the fittest is the rule -- is the only way to revive the moribund Japanese economy.

To be sure, Japanese systems and customs are all designed to avoid competition. Free-market reforms would Americanize Japanese systems and customs.

Market fundamentalism is nothing new. Laissez-faire, classic market fundamentalism thrived in England from the 1840s to the 1870s, but it did not last long. British and other European governments were forced to modify their policies and establish welfare states. Keynesian economics, which advocated government intervention to avoid economic imbalances and instability, dominated economic theory.

From the 1960s to the 1970s, many economists called environmental disruption, income gaps between rich and poor, and the North-South problems "market failures." They argued that market forces had their limitations. Laissez-faire was revived under the name of "market fundamentalism" in the United States and Britain from the late 1970s to the early 1980s.

Active free-market reforms were implemented by the government of British Prime Minister Margaret Thatcher when it came to power in 1979. Similar policies were pursued by the administration of President Ronald Reagan in the U.S. from 1981. Advocates of market fundamentalism, who said Keynesian economics was dead, dominated Western economics. Japanese economists were no exception to that trend.

In 1987-90, when the economic bubble peaked, the Japanese people lost much of their sense of justice. Japan was full of people hungry for money. The collapse of the Berlin Wall in 1989 and the disintegration of the Soviet Union two years later marked the end of people's illusions about socialism and touched off giant waves of global market-economy reforms. From the late 1980s to the early 1990s, market fundamentalism dominated Japan and the rest of the world.

But I believe the demise of market fundamentalism is imminent. Market-economy reforms have failed to deal with changes that have occurred in the last decade of the 20th century, and will be unable to adapt to the changes that are likely to take place in the first decade of the 21st century.

We need a revolutionary socioeconomic system that transcends a market-economy society -- or a revolutionary philosophy that transcends market fundamentalism. Keynesian economics is unlikely to make a comeback, however. Perhaps the "Third Way" espoused by British Prime Minister Tony Blair, which combines the benefits of market fundamentalism and its antithesis, is similar to the revolutionary system. But the Third Way, proposed only three years ago, remains vague and is not backed by definitive theories.

In the first decade of the 21st century, drastic changes are likely to occur in Japan and throughout the world. Efforts to adapt to these changes are expected to help create a new socioeconomic system. Nevertheless, many Japanese economists have failed to forecast dynamic changes in the coming years. They once extolled the excellence of the Japanese system; now they decry the system and call for market-economy reforms.

Let me emphasize that even if the Japanese system is Americanized through a series of reforms, it will not be compatible with the first decade of the 21st century. We should try to accurately predict changes in the years ahead, adapt to the changes, and create a socioeconomic system that will be compatible with the needs of the coming decade.

The Japanese market economy lacks freedom and transparency and is unfair. Japan must make it free, transparent and fair; market-economy reforms should be a priority. However, reforms will inevitably lead to wider income gaps and problems in public medical care and education. Advocates of mild market reform say that since reforms are inevitable, drastic measures should be implemented, first without regard to their side effects, then a new Third Way should be considered to restore fairness to the public.

I have two arguments against this proposed two-stage approach.

First, Japan will need at least 10 years to successfully implement market reforms. If it only then pursued Third Way, Japan would be left far behind other countries. Instead, it should try to create a free, transparent and fair market economy as well as implement measures to alleviate the side effects of those reforms. Free-market reform and Third Way reforms should be promoted in parallel, not successive stages.

As Japan becomes a postindustrial society, it will suffer from even more serious side effects of market reform. I believe opinions expressed by many economists today represent "Thatcherism 20 years too late." Japan has lagged behind other nations in market reform, and is required to implement these two reforms simultaneously.

Second, the drastic global market reforms implemented in the last decade of the 20th century will cause side effects in the first decade of the 21st century. To avoid or alleviate them, checks and balances of market forces through Third Way reforms are essential to guarantee global-level efficiency and fairness. As global reforms are implemented, there will be even more heated competition than before among different types of capitalism. To govern a global economy in which different types of capitalism coexist, we have to rid ourselves of the illusion that global market reforms will make every country better off.

Some experts focus on Japan and continue to propose naive reforms while many global problems remain unsettled. They must be extreme optimists, victims of myopia, spokesmen for the privileged or gurus of market fundamentalism.

Takamitsu Sawa, professor of economics at Kyoto University, is also the director of the university's Economics Research Institute.


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