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Monday, June 4, 2001

Japan needs its own third way

Temper market-oriented reform with equality

Since it debuted a little over a month ago, Prime Minister Junichiro Koizumi's administration has been trumpeting the slogan "No structural reform, no economic recovery." Whether that is true is arguable. But there is no question that "structural reform" means reshaping Japan's outdated market economy into one that is really free, transparent and fair. Market-driven reform is unavoidable.

Former Prime Minister Yasuhiro Nakasone, who took office in 1982, pushed market-oriented reform under the banner of neoconservatism. At the time, a similar campaign was going on in Britain under Prime Minister Margaret Thatcher and in the United States under President Ronald Reagan.

Nakasone privatized the Japanese National Railways and Nippon Telegraph and Telephone Public Corporation (Dendenkosha) and started liberalizing the financial and communications sectors. He also tried to introduce a flat-rate personal income tax and boost indirect-tax revenue.

Japan's economy in the 1980s did fairly well, except that in the middle of the decade it was hit by recession because of the yen's sharp rise. In my view, the industrial society entered its final stages during that decade, when industries making electronic parts and equipment formed the core of the economy.

Japanese systems and practices worked very well in that period of industrialization. Foreigners praised the way Japan was getting things done in areas like administration, management and education. By contrast, the U.S. economy in the 1980s was faltering. It would not get back on its feet, pundits used to say, unless American firms learned the Japanese way of doing business.

The irony is that Japan's economic success in the 1980s derailed Nakasone's reform drive. And in the 1990s something unexpected happened: The Japanese economy suffered a long slump while the American economy enjoyed a long boom. With the two economies trading places, the Japanese system was out and the American system was in. Those who once blamed American-style management are now applauding it. Their unspoken message: "All's well that ends well."

The American system is based on the belief that the market is the final arbiter of all economic problems -- in some cases, even social problems. America's economic prosperity in the 1990s stems from its market-driven economic system. That has led many economists here to believe that the best and only way for Japan to revive its moribund economy is to make it more like the American economy through bold market reform.

Market reform is badly needed, of course. The question is whether it is a sufficient condition for economic revival. I do not believe that the Japanese economy will be born again only if it follows the market rules.

Market-driven reform produces many side effects. In the early 1980s, however, when Britain and America launched a "follow-the-market" initiative, nobody anticipated its negative effects, such as a widening of the income gap, a deterioration in public health and education, and lapses in environmental conservation.

After the mid-1990s, however, many side effects were revealed. As a result, in Britain's general election in May 1997 a majority of voters rejected hardline Thatcherism. And four years later, Prime Minister Tony Blair chose the "third way" to combine the best in Thatcherism and the old-line Labor Party in an effort to reduce the negative effects of "market-is-almighty" reform. The British experience shows that such reform is not a panacea when dealing with economic malaise.

The progress of post-industrial development, spurred by the information-technology revolution and economic globalization, is adding to the adverse effects of market reform. Examples: unemployment is rising; the income gap is widening; and free competition is looking more like a winner-takes-all contest.

All this poses a daunting challenge for Japan. Having made a late start in market reform, the nation finds itself in the particularly difficult situation of having to make those changes at a time of escalating post-industrial development.

In these circumstances, the Japanese government should aim to achieve both market reform and third-way reform at the same time. Third-way reform means creating an equitable welfare society. To avoid any misunderstanding, however, the two key words here -- equality and welfare -- need to be redefined.

In today's Japan, equality and welfare have unfavorable overtones. Many economists attribute the nation's economic decline partly to the egalitarianism inherent in the Japanese system. Welfare is often blamed for spreading the "culture of dependence."

How, then, should equality and welfare be redefined? An equal society means a society in which all its members are "included" without discrimination. To put it the other way around, it is a society that does not "exclude" anybody.

In Britain under Thatcher, public education deteriorated, with the result that children of poor families were excluded from quality education. In America, 16 percent of Americans are excluded from medical services because they have no medical insurance. Unemployment is a form of exclusion.

The purpose of welfare must be to minimize the number of the excluded. So public and private schools, vocational training institutions and the medical-insurance system should be improved and expanded as part of welfare policy.

Japan made a late start in market reform, as I noted. That is why we must promote third-way reform in parallel with market reform. By doing so we must preclude the side effects of market-dictated reform. Otherwise the reform effort itself could collapse.

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

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