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Monday, Jan. 1, 2001

PRE-EMPTIVE ACTION

A possible Third Way for Japan


Special to The Japan Times

During the last decade of the 20th century, Japan's economy stagnated. The recession that followed the collapse of the asset-price bubble (1987-90) hit bottom in October 1993, but the economy remained flat through the end of 2000, with no visible signs of a lasting recovery.

Numerous prescriptions have been written to end the chronic slump, but none have proved effective. Those remedies -- generous public-works spending, the zero-interest-rate policy, mild deregulation, etc. -- have done almost nothing to boost growth. The economy seems to be suffering from a deep illness that cannot be treated with over-the-counter drugs.

Curing that illness, it is argued, requires surgery, or structural reform. Market fundamentalism -- survival of the fittest through free competition -- is the best and only way to revive the economy, say those who believe the market is almighty. These market fundamentalists hold that Japan's systems and practices, designed as they are to avoid competition, should be replaced by new systems and practices similar to those of the United States.

Market fundamentalism is not a new concept. From the 1840s to the 1870s, laissez-faire -- the classic version of market fundamentalism -- developed and prevailed in Britain. However, that "leave us alone" policy proved short-lived. In "The End of Laissez-Faire" (1926), John Maynard Keynes explains with a caveat why the belief that individual happiness and public good are harmonized by divine providence thrived in Europe from the late 18th century to the mid-19th century.

In the late 1970s, however, the laissez-faire philosophy gained a new lease of life in the name of market fundamentalism. Three reasons explain this revival.

First, the 1973 oil crisis stopped high rates of economic growth in industrialized countries, while inflated welfare spending produced chronic budget deficits. This made it urgent that countries streamline their bloated bureaucracies and create "small government."

Keynesian economics -- which says that government intervention is necessary to correct imbalances and achieve stability -- was criticized as the primary cause of big government. As a result, anti-Keynesian economics that were fixated on the market -- such as monetarism, the rational expectations school and supply-side economics -- dominated economic thinking from the late 1970s to the 1980s.

It is not true, however, that a paradigm shift in economics occurred in the late 1970s. The truth is that anti-Keynesian economics enjoyed only a brief spell of popularity because it had gained favor with conservative governments and business communities in Britain and the U.S.

Second, it was widely held that the oil crisis had been overcome through the interplay of market forces -- rational actions by businesses and consumers -- and not through the intervention of government forces. In fact, the quadrupling of oil prices triggered market mechanisms, reducing oil demand largely through alternative-energy development and energy-saving innovations while depressing energy prices through increased production from new oil finds. All this created strong confidence in market forces.

And third, a series of events in the early 1970s -- notably, the failure of China's Great Cultural Revolution, the worsening of Sino-Soviet relations, the communist-led unification of Vietnam, the Soviet invasion of Afghanistan and the setback to the new-left movement -- created deep disillusionment with socialism. At the heart of Keynesian economics is a strong ambivalence toward socialism. Consequently, the disillusionment over socialism led to disillusionment over Keynesianism, prompting a revival of market fundamentalism.

Bold market-fundamentalist reforms were carried out in Britain under the Conservative administration of Prime Minister Margaret Thatcher, who took office in 1979, and in the U.S. under the Republican administration of President Ronald Reagan, which was inaugurated in 1981. Here in Japan, the sense of justice further eroded during the economic bubble, giving way to the rampant pursuit of personal gain.

The collapse of the Berlin Wall in 1989 and the disintegration of the Soviet Union in 1991 marked an end to socialism and opened the floodgates for global economic reform. From the 1980s to the early 1990s, a revival of market fundamentalism swept Japan and the rest of the world.

It is time, however, that we cast aside the belief that the market is the final arbiter. I say this because market-oriented reforms have proved largely ineffective in dealing with various changes that occurred in the last decade of the 20th century and will likewise fail to cope with changes expected to occur in the first decade of the 21st century.

What is needed now is a new social system and a new social philosophy that transcends market fundamentalism. Of course, this does not mean a revival of Keynesian economics. The "Third Way" advocated by British Prime Minister Tony Blair -- a regime that brings out the best in market fundamentalism and anti-market fundamentalism -- probably comes close to such a new social system.

However, the exact meaning of the Third Way, proposed just three years ago, remains unclear. Broadly speaking, it aims to build an egalitarian welfare state. However, the egalitarian society that is envisaged here must be redefined as a "society that does not exclude anyone," while "welfare" must be redefined as "joint risk management."

Seismic changes will likely occur in Japan and the rest of the world in the first decade of the 21st century. Efforts to deal with such changes will help create a new socioeconomic system. But many Japanese economists continue to preach market fundamentalism rather than analyze the dynamic changes taking place. They now decry the Japanese systems and practices they once extolled.

My point is this: Remaking Japan on the lines of the American model through market reform won't help meet the challenges of the first decade of this century. Instead, we should pre-emptively create a new socioeconomic system geared to those changes.

Needless to say, Japan's market economy lacks freedom, transparency and fairness. Making it free, transparent and fair -- that is, carrying out bold market-fundamentalist reforms -- should be given top priority. But such reforms inevitably entail side effects, such as a widening of the income gap and a deterioration in public health care and education.

Moderate market fundamentalists contend that a shift to the Third Way can be made after bold reforms are carried out. Side effects or sacrifices, they say, must be accepted because such reforms are unavoidable. I oppose this approach for two reasons:

First, it will take at least 10 years before Japan, a nation that is risk-averse, achieves the market-fundamentalist reforms it needs. If we shift to the Third Way after that, we will have been left far behind the rest of the world. It is essential, therefore, to create a free, transparent and fair market while at the same time easing the side effects of reform through measures that take into account public interest and fairness.

Market-fundamentalist reform will create more serious side effects as postindustrial society makes progress. Many Japanese economists, however, seem to be embracing the Thatcherism of two decades ago. To be sure, Japan is lagging in market-based reform. But precisely for this reason we must pursue two kinds of reform simultaneously, in parallel with the development of postindustrial society in the industrialized world.

Second, the rapid progress of global market reform in the 1990s will cause side effects in the decade ahead. In order to avoid or reduce such effects, it is absolutely necessary to check and balance market forces through Third-Way reform that aim at efficiency and fairness at the global level.

At the same time, the growth of the global market economy will likely intensify rivalries between different "types" of capitalism, making it necessary to secure a way to "govern" a global capitalist system that consists of different types of capitalism. For that purpose we must rid ourselves of the illusion of global market fundamentalism -- the notion that global market economic reform will make all nations better off.

As global problems proliferate, it is no use writing simplistic market-reform prescriptions for purely domestic problems. Such recipes can be recommended only by optimists, myopic slaves, followers of the law of the jungle or market fundamentalist preachers.

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


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