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Monday, July 7, 2003

Little gain but lots of pain

Ever since his administration took power in April 2001, Prime Minister Junichiro Koizumi has been asking the Japanese public to endure the pain associated with structural reform. This request is justified only when all Japanese equally share the pain.

During the Pacific War, the slogan for all Japanese was "We shall give up all material needs until we win the war" -- not unlike Koizumi's appeal. The implication was that all Japanese should equally share pain until they won the war.

The problem with Koizumi's reform agenda is that the losers in market competition -- the majority of the Japanese -- are forced to suffer from his market principle-based reform while only a small number of winners enjoy the fruits of "increased efficiency."

Whatever pain results from Koizumi's structural reform, an uneven distribution of it is unacceptable in a democratic society. Such a phenomenon exists only in a society where democracy is undeveloped, the masses are ignorant or information is hidden or distorted.

In May 2001, when Koizumi appeared on the sumo ring on the final day of the summer tournament to award the prime minister's cup, he praised the winner, Yokozuna Takanohana, for persevering in spite of pain. In succeeding tournaments, though, Takanohana was sidelined by the persistent knee injury and was finally forced to retire on the eighth day of the 2003 New Year's tournament.

Putting up with pain sometimes causes irreparable damage to a sumo wrestler's body -- or to the cohesion of a society. If pain to society is unavoidable, thorough discussions should be held on how the pain should be relieved and how it should be distributed.

The Japanese economy has remained stagnant for more than 10 years. Whether Koizumi's mantra of "There will be no economic recovery without structural reform" is correct or not, there has been little progress in his reform agenda during his two-year rule. Nevertheless, no new proposals for drastic economic-recovery measures have been made by the anti-Koizumi "resistance forces" in the governing Liberal Democratic Party or the opposition. Plans proposed by the resistance forces are nothing but antiquated Keynesian measures.

Koizumi's reform agenda has so far resulted in the overhaul of government-backed corporations and postal services, plans to transform national universities into independent public organizations and to create special districts for structural reform, a 10-percentage point raise in medical bills under health insurance, and the lifting of restrictions on sales of nonprescription drugs at ordinary retail stores such as convenience stores. These measures have nothing to do with economic recovery.

Most of Koizumi's reform projects are intended to achieve fiscal reform by cutting government expenditures. Structural reform should be aimed at creating a free, transparent and fair-market economy. Thus Koizumi's reform agenda overemphasizes fiscal reform.

Koizumi is sometimes compared to former British Prime Minister Margaret Thatcher for pushing reform. Thatcher's efforts to impose market principles on the nation led to the failure of her agenda. Income gaps between the rich and the poor widened, and the quality of public medical care and education deteriorated to an abysmal level. Nevertheless, Thatcherism helped energize the British economy, which was falling to pieces in the late 1970s under the Labour government.

By overemphasizing fiscal reform, Koizumi has veered away from the essential reform goal of creating a free, transparent and fair market economy and is unnecessarily prolonging economic stagnation. The national unemployment rate has soared, stock prices have plunged and bank's bad loans have increased.

It would be more appropriate to call Koizumi Japan's Herbert Hoover (the U.S. president at the start of the Great Depression) than Japan's Thatcher. Following the 1929 Wall Street crash, Hoover resorted to fiscal belt-tightening, believing that eliminating the budget deficit was a panacea for ending the depression. However, the depression worsened until his successor, President Franklin D. Roosevelt, came to the rescue with the New Deal, which revived the economy.

I doubt if a New Deal would work in today's Japan, but Hoover-style policies will no doubt worsen the economic slowdown. What is needed to stimulate domestic demand is a neo-New Deal.

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

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