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Monday, Feb. 4, 2002


Price of pure market reform

"Kozo kaikaku"(structural reform) is the buzzword these days. But it isn't clear exactly what it means. Yet it is the "clincher" in newspaper articles, economic journals and TV comments by economists. The common belief here is that structural reform is in and by itself good. It is held as an article of faith. Those who oppose it are labeled "resistance forces."

In the context of economics, "structure" means a mechanism that does not easily change, so changing that mechanism is "structural reform." For example, the systems and practices that define the mechanisms of Japan's economy are "structures" because they do not easily change.

In the 1980s, when the Japanese economy was booming while the U.S. economy was depressed, economists here praised Japanese systems and practices. In the late 1980s, their adulation of the "Japanese model" reached a new pitch.

Referring to the seemingly endless decline of U.S. manufacturing, those economists commented in effect: To revitalize the manufacturing sector, America should learn humbly from Japanese-style management. Japanese possess a higher level of knowledge than Americans because Japan has a better education system. Japan owes its rapid postwar recovery and successful catch-up process to its bureaucrat-led industrial policy.

In the 1990s, however, the world's two largest economies traded places. America, having made a successful transition to the postindustrial age, entered a period of robust expansion. By contrast, Japan bogged down in a protracted "Heisei recession" following the collapse of the asset-inflated bubble economy.

Economists and managers who had praised Japanese systems and practices in the 1980s now praised American systems and practices. Apparently they believe in the Shakespearean maxim: "All's well that ends well." Now they believe that to revitalize the Japanese economy Japanese systems and practices should be "Americanized" -- that Japan should copy American systems and practices.

Their argument is that Japan today should do what America and Britain did in the 1980s -- namely, make the market reforms carried out under the administrations of British Prime Minister Margaret Thatcher and U.S. President Ronald Reagan. In other words, they maintain that Japan should create free and transparent markets through deregulation, privatization and other market-based reforms.

In the view of those economists, structural reform means market reform -- that is, changing Japan's unfree, nontransparent and unfair markets to free, transparent and fair ones. However, Prime Minister Junichiro Koizumi's structural reforms are essentially different from market reform.

First, the government is reportedly considering pumping more funds into banks to help them write off bad debts. An infusion of public money will raise difficult questions. For instance, how should the banks involved be held accountable for their past mistakes? Which banks should be saved a which ones should be let go? A fund infusion will be a veiled attempt to weather the bad-debt crisis under the pretext of structural reform.

Second, the government is trying to put the fiscal house in order with heavy emphasis on debt and deficit reduction. To this end, a range of measures have been proposed, such as putting a 30 trillion yen cap on annual bond issuance, streamlining and privatizing public corporations and freeing up some of the road-specific tax revenues.

There are two essential problems with these Koizumi reforms. The first is that writing off bad debts is not structural reform in the true sense of the term. Second, structural reforms such as privatization and other measures mentioned above are tilted too heavily to fiscal reform.

Privatization will be just another name for fiscal reform if it is aimed only at reducing government spending. A public corporation should be privatized in such a way that it can play its role more efficiently. Privatization, if it is to be called structural reform, must meet this basic requirement.

The government vs. market equation can create misunderstandings about the true nature of reform. Democratic society is a stool with three legs: government, market and civil society. Structural reform in a democratic society calls for the harmonization of these three components.

Therefore, privatizing a public corporation should involve not only private companies but also nongovernmental organizations. Moreover, it is desirable that privatization should aim at achieving harmony with civil society, or building a society "comfortable" to everyone, instead of just seeking harmony with the market, or economic efficiency. It must not be forgotten, either, that the ethics and logics of the market can be different from those of the civil society.

Britain under Thatcher regained economic vitality as a result of bold market reforms. But it also suffered unexpected "side effects," such as a widening of the income gap and decay in public health care and education. In the general election in May 1997, the majority of British voters said no to extreme "Thatcherism."

Koizumi makes a point of saying "there can be no economic recovery without structural reform." But if he pushes structural reform based only on market principles, Japan will suffer similar side effects, such as higher unemployment, wider income disparities and "exclusion" of the poor from equality health care and education.

As a consequence, crime will increase, spreading unease throughout the nation. Thus, economic efficiency will come at a heavy price. Which society is more "comfortable" -- an economically efficient society or a stable and harmonious one? The answer must be self-evident.

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

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