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Monday, June 10, 2002

Peculiarities that give pause


More than a year after Prime Minister Junichiro Koizumi debuted under the "structural reform" slogan, its real meaning remains vague. The pivotal question is, what aspects of the Japanese structure (systems and practices) should be changed, and how?

Economists' standard answer is that the Japanese structure should be changed to the American-style structure, the model for free and competitive market economies. In other words, their prescription is that Japanese systems and practices should be rebuilt under market principles.

It will be extremely difficult to reshape the Japanese structure, which has been built over ages, to the diametrically opposite American structure. Economists know this full well, yet they believe Japan must change against all odds.

To be sure, the Japanese structure differs in many ways from the norms of the market economy. Every country has a unique structure rooted in its traditions, social mores, religion and so on. Japan stands out in that its structure is essentially incompatible with the rules of the market economy.

China, for example, is far ahead of Japan in adapting to the market economy. Chinese love competition. They think it is only natural that rewards should vary according to ability. They are now so accustomed to playing by market rules that it is almost unbelievable that China was a socialist-command economy until not so long ago.

In the mid-1980s, many Japanese were eager to teach a growing number of Chinese students here the basic rules of the market economy. Nobody here realized then that students from socialist China would grow to be much tougher players in the market economy than the average Japanese.

Around that time, with Japan's economy having its best time ever, many Chinese students tried to learn the "secret" of its success (Japanese-style management, administrative organization, etc.). But at the start of the 1990s, the economy tanked, and the deep and protracted slump that followed showed the Japanese structure to be the "flip side" of the market economy.

The Japanese structure is a Japanese creation designed for the Japanese. So it is difficult for foreign countries to copy Japanese systems and practices. It is little use copying them, given their peculiarities. By contrast, the American-style structure is a textbook model, so it is easy to understand and copy.

The globalization that progressed rapidly in the 1990s means, in its narrow sense, the globalization of market economies. For this globalization to progress smoothly, it is essential to set global rules for the market economy and to create a strict system of compliance. The World Trade Organization has been created for this purpose.

These global rules reflect the standards of the advanced market economies, namely, the United States and major European countries. Compliance with these rules is a necessary condition for participation in the global-market economy. The Japanese structure, however, has become so far removed from the global standards that its reform is now unavoidable.

Japan's prosperity in the 1980s is ascribable largely to the peculiarities of its structure, such as the protective "convoy formula," "keiretsu" business affiliations and various nontariff barriers. These unfair systems and practices reinforced the ability of Japanese companies to compete in the world market.

The irony is that the international praise of the Japanese structure in the 1980s was based largely on its peculiarities. The progress of globalization in the 1990s exposed these problems, and Japan's efforts to reform that unfair structure, it seems, cut deeply into its international competitiveness.

In my view, the "postindustrial society" dawned in the last decade of the 20th century. In that emerging period, the American-style structure worked very effectively, but the Japanese structure stood in the way of postindustrialization.

Japan's present economy, having already reached the stage of an industrial society, is taking a pause, so to speak, before going on to the next stage, the postindustrial society. The economy will likely grow only modestly, by 1 to 1.5 percent at best, for as long as it stays where it is. To achieve sustainable growth of about 3 percent it will have to get out of the "resting mode" and start building a postindustrial society.

In the 1980s, America's economy was also taking a pause. But in the 1990s it grew rapidly into a postindustrial society. High-tech industries staged a dramatic comeback by re-engineering their management and production processes with the help of information technology. In the meantime, software industries like finance, information and communications prospered as never before.

Japan's employment practices buck an IT revolution. The nation's education system is biased against the development of software ability. To make a successful takeoff toward the postindustrial society Japan has no choice but to reform its structure.

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


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