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Tuesday, March 13, 2001

Postindustrial economy calls


In the 1980s, most Japanese economists were under the illusion that the American economy would continue to decline and that Japan would surpass America as the world's largest economy. In fact, the Japanese economy was reaching the apex of its prosperity while the U.S. economy, with its different systems and customs, was languishing.

Japanese systems and customs, such as those governing business management, public administration and education, were considered models for other nations. Japan's ascent and America's decline were thought to reflect the differences between Japanese and American systems. Japanese economists, managers and bureaucrats were saying proudly that American businesses should learn from Japanese-style management in order to get the American economy back on its feet.

During the 1989 bilateral Strategic Impediments Initiative economic talks, American representatives criticized the unfairness of Japanese-style management, referring to the keiretsu business relationship between assembly-line makers and parts suppliers. Japanese delegates emphasized that this vertical integration of business ties was best suited to the manufacture of low-cost, high-quality products, calling it the foundation of Japanese-style management. They even advised the Americans to adapt their education system to the Japanese model. The irony is that in the 1990s the scholastic and intellectual ability of Japanese youths declined because of defects in Japan's education system.

The U.S. economy began its ascent in the 1990s and it continued for nearly 10 years. By contrast, the Japanese economy has been stuck in an unprecedented slump since March 1991. Now, almost every economist here says that Japan should adopt the American model in order to bring about an economic revival indeed, that adopting "the American way" is the only way out of the protracted slump. To those economists the rule of thumb seems to be "all's well that ends well." Absent is an objective analysis of why the Japanese system worked so well in the 1980s and why it lost ground to the American system in the 1990s.

In the '80s, assembly-line industries that build electronic systems from various electronic parts played a pivotal role in the economy. I call this period the "final stage of the industrial society." The Japanese system worked best at this stage. Japanese-style management typified by lifetime employment, seniority wages, keiretsu ties and so on helped greatly to manufacture low-cost, high-quality products.

The American system was ill-suited to the final stage of the industrial society. That is why the U.S. economy stagnated in the 1980s. In the 1990s, however, when society entered a "postindustrial age," it was the Japanese system that was ill-suited; the American system demonstrated its strength and achieved unprecedented prosperity.

As I see it, the U.S. economy of the 1980s, having reached the final stage of industrial society, was about to enter a new stage. In other words, it was suffering "birth pains" as it prepared to become the first postindustrial society. During such a transition the rate of economic growth inevitably slows down, perhaps to the 1 percent level or 2-2.5 percent at most. Beyond that, however, lies the new world of the postindustrial society.

The present stage of the American economy the postindustrial society can be summed up in two ways. First, manufacturing reinvents itself as management and production processes are restructured using information technology. Second, software industries, such as finance, information and communications, play a pivotal role in the economy.

America traditionally holds a pre-eminent position in all levels of the software industry. American manufacturing declined continuously from the 1970s through the 1980s, but it regained vitality in the 1990s thanks to the IT revolution. Supported by a born-again manufacturing sector and its traditionally strong software sector, America is rapidly climbing the ladder of the postindustrial society.

In the 1990s, Japan has been marking time, so to speak, on a platform leading to the postindustrial society, as America was in the 1980s. That is why the Japanese economy stagnated throughout the 1990s. At the beginning of the 21st century, it is still marking time.

When will Japan be able to begin climbing the ladder of the postindustrial society? Japan is good at making hardware, but not at making software. To boost the international competitiveness of software industries like financial services, communications and information, the government needs to take promotional measures. More urgent, however, are the development of human resources and the employment of talented foreigners. The existence of quality staff, not just well-developed infrastructure, is key to the success of software-related businesses.

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


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