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Monday, April 29, 2002

JAPANESE PERSPECTIVES

G7 needs developing nations' help as trend of globalization continues


The Group of Seven conference held April 19 to 20 in Washington highlighted negative as well as positive aspects of the world economy.

Finance ministers and central bank chiefs from the world's richest nations adopted a chairman's statement and an "action plan" following discussions that focused not only on global economic issues but antiterrorism measures and Argentina's woes.

In the chairman's statement, the participants noted that the world economy is showing brighter signs than it did in the previous meeting, but stressed that each nation must pursue healthy macroeconomic policies and implement structural reforms.

Prior to the G7 meeting, Allan Greenspan, chairman of the U.S. Federal Reserve Board, cautioned against being too optimistic about the U.S. economy, while all the participants cited the potential risk of rising crude oil prices. An International Monetary Fund report on each member's economic conditions, released at nearly the same time as the G7 meeting, drew attention to other lingering woes, such as the huge U.S. trade deficit and Japan's lagging recovery.

What became clear in the latest meeting was the fact that the industrialized nations alone are becoming unable to solve the world's wide-ranging problems as economic globalization continues to progress. Cooperation from developing nations is essential as the industrialized nations try to crack down on funding to terrorist groups.

The structural reforms of each country must be carried out within a framework of increasingly intertwining world economies. A common problem faced by the industrialized economies is the global oversupply caused by transferring money and technology to the developing countries. Consumer spending has begun to recover from the Sept. 11 attacks, but domestic capital investment remains sluggish and is dragging down corporate earnings.

Now that developing countries with cheap labor have entered the global economic system, an economic recovery will not necessarily lead to increased investment at home. But this is not because there is an excess inventory of commodities in circulation, but because there is an excess inventory of factories.

Manufacturers have expanded overseas production while failing to consolidate domestic plants fast enough. In this sense, the world economy is now flying with a single engine — consumer spending — while the other engine — corporate capital investment — sputters away.

China, a nuclear power with a population of nearly 1.3 billion, is one of the key players absorbing funds and technologies from around the world. Late last year, the nation finally realized its dream of joining the World Trade Organization. Let's look into the significance of China's entry into the WTO in two aspects.

First, the move is significant in terms of China's relations with the rest of the world. China's international trade has expanded dramatically since it decided to open up, but WTO membership also means it must participate in a global market that operates under a common set of rules established by the world trade watchdog.

China has already taken action against the steel import curbs levied by the United States, using the same methods as Japan, South Korea and Europe. This will promote China's assimilation into the international economic system and consequently contribute to expanding the world economy.

To realize this, however, China must first adhere to the WTO's rules and the promises it made negotiating its entry. Participating in the WTO brings not just rights, but obligations. China needs to quickly adjust its domestic legal system to achieve that goal.

The second aspect concerns the changes that would take place inside China.

Legal reforms to meet WTO requirements are expected to smooth over regional gaps in administrative practices within the country. Although China is supposedly governed by a centralized administrative system, its vast territory has in reality allowed each of the regional authorities to handle matters in different ways. Rumor has it that if foreign businesses complain and try to have this practice corrected, they would be blocked by vested interests trying to retain their traditionally preserved power.

Resistance is observed in any country in the process of reform, but I hope China, on the occasion of its entry into the WTO, will transform itself from a nation ruled by men to one ruled by law.

Of course, China's entry does not automatically mean that every problem should be taken to the WTO, because overloading the organization might paralyze its dispute-settling functions. The governments and private sectors of the countries concerned are advised to hold frank exchanges on potential problems at an early stage so they don't blow up into serious disputes.

The industrialized nations are competing not only with China but also with the members of ASEAN and the east European economies. The problem is particularly serious in Japan because it remains affected by the collapse of the late 1980s bubble economy, but all developed countries must consider this factor when pursuing structural reforms.

The excess of production facilities is not a problem unique to Japan, but to all in the industrialized world, and dialogue with developing nations is growing more and more important. The G7 members should of course be the ones to set the model, but we must also realize that globalization is a process which equalizes the world's economies.

Teruhiko Mano is an adviser to Tokyo Research International Ltd.


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