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Friday, March 12, 2004

Diagnosing what really ails Japan, Germany

Experts dig deep into the roots of problems and find reforms wanting

Staff writer

BERLIN -- Japan and Germany, once the powerful engines of the global economy together with the United States, have had stagnant years since the 1990s.

News photo
Symposium panelists at the Japanese-German Center Berlin -- (from left) Tetsuro Kikuchi, Klaus von Dohnanyi and Noriko Hama -- discuss the prospects of reform in the two countries. The symposium was held Feb. 27.  PHOTOS COURTESY OF JAPANESE-GERMAN CENTER BERLIN

The two countries face common problems, such as the rapid aging of their population and subsequent rise in social security costs, but on the other hand, they are confronted with different challenges that are unique to their respective social and political structures.

To revive their economies, both nations need structural reforms, but first they need to have a clear understanding of the realities of today's problems and their root causes, said Japanese and German experts who gathered at a recent symposium held in Berlin.

The symposium, under the theme "Economic and structural reforms in Japan and Germany," was jointly organized by the Japanese-German Center Berlin and Japan's Keizai Koho Center on Feb. 27.

"Japan and Germany are alike in a number of respects. Both were once called economic miracles, but today they face a protracted period of stagnation," Angelika Viets, secretary general of the Japanese-German Center Berlin, said in her opening remark.

But they also have different problems, she said. For example, Japan's economic woes partly stem from the weakening of the banking sector due to the collapse of the real estate market bubble of the late 1980s, but no such phenomenon has taken place in Germany and its financial sector remains in a relatively healthy condition, she noted.

The German government of Chancellor Gerhard Schroeder has launched a package of social security and labor reforms called Agenda 2010, while Prime Minister Junichiro Koizumi has advocated structural reforms of Japan's economy, said Masami Tashiro, secretary general of Keizai Koho Center.

In Japan, piles of policy reports prescribing necessary reform steps have been released by government and private sectors, but very few have been implemented so far, Tashiro said. "The question is whether Japan can demonstrate the political will and muscle to carry them out," he told the audience.

Contrast in growth

While Japan's economy is on an apparent uptrend with the nation's gross domestic product having expanded by an annualized rate of 7 percent in the last quarter, Germany remains mired in low growth and high unemployment. Last year, Germany's GDP suffered a contraction of 0.1 percent -- the first negative growth since 1993, and 4.4 million people -- or 10.5 percent of the labor force -- were without jobs.

News photo
Other participants in the symposium listen to a debate: (from left) Werner Spinner, chairman of the Japan Initiative at the Federation of German Industries; Bernd Ziesemer, editor in chief of the Handelsblatt newspaper; Wolfgang Wiegard; and Masami Tashiro. Spinner and Ziesemer served as moderators at the symposium.

Klaus von Dohnanyi, former minister of state in the Foreign Office, said Germany must first come to grips with the fact that East-West reunification in 1990 has left a huge structural burden on its economy.

While the former East German part of the country accounts for one-third of the nation's land and 20 percent of the population, it contributes to only 10 percent of the gross domestic product and 20 percent of exports, he pointed out.

Of the 17 million people in the former East German states, 9 million still do not hold jobs of the levels of those available in former West Germany, Dohnanyi said.

Each year, about 90 billion euros -- equivalent to 4 percent of the nation's GDP -- is transferred on a net basis from the former West German states to the east to cover social security and infrastructure costs, he pointed out.

"As long as such a situation continues, Germany will not be able to regain the growth performance of the 1970s and 1980s," Dohnanyi said, adding that forecasts show this problem will not disappear for decades to come.

What Germany needs, he noted, is to have a correct diagnosis of its economic illnesses -- to recognize that the East-West reunification is at the root of the problems.

Similarly, Japan needs to have a correct understanding of the implications of its economic woes, said Noriko Hama, a professor of international economics at Doshisha University Business School. "Otherwise, we will not know what is needed to rebuild Japan's economy," she told the audience.

While deflation, for example, is often considered a monetary problem, it is eroding Japan's economic strength in more fundamental aspects, Hama warned.

One of the effects of deflation, she said, is the damage to rural economies. "When you step outside of Tokyo and walk down the main streets of major rural towns, you will see a pathetic scene described by the media as a 'shuttered street,' where all local businesses have closed and shops have been shuttered up," Hama said.

Another offshoot of deflation that is particularly worrying, she said, has manifested itself in a series of major accidents that have hit the plants of Japan's industrial giants in recent years.

The examples cited by Hama included the fire that destroyed a tire factory of Bridgestone Corp. in Kuroiso, Tochigi Prefecture and a fire and explosion at Nippon Steel Corp.'s Nagoya ironworks, both of which happened last September.

In their bid to make profit under deflationary pressures, those companies have been restructuring their operations and trying to cut costs, and are compelled to continue using facilities and equipment that normally would have been replaced or renewed years ago, thereby raising the risk of accidents, Hama said.

Also because of job cuts, the firms do not have sufficient numbers of workers who can repair and keep the old equipment in proper condition, she said.

The operation of Japan's manufacturing industries was once looked upon as a global standard, but the fact that major companies that are supposed to symbolize that standard have been hit by serious accidents shows deflation has damaged the nation's industrial base, Hama observed.

One of the fundamental solutions to the deflation woes, according to Hama, is to "localize" Japan's economy -- giving greater autonomy to local communities and enabling them to compete with each other and take center stage in the nation's economic activities.

Hama noted that Japan, in rebuilding its economy from the devastation of World War II, managed its human, financial and material resources under a strongly centralized power structure.

But the nation's economic strength gradually weakened as concentration of power in the central government went too far, she said. What is needed in today's Japan, she added, is decentralization of power, which will spur local communities to take initiatives in developing their own economies.

According to Dohnanyi, Germany is confronted with an exactly opposite problem.

After the fall of the Nazi empire, Germany's reconstruction began with a determination that the central government authority should never again have too much power on its hands, he said.

Therefore, postwar Germany adopted a federal government system, and the nation's economy became fairly decentralized, with its industrial bases intentionally scattered over various parts of the country.

Dohnanyi said this decentralized power structure had its advantages and disadvantages. But one of the major problems is that it either takes too much time or is extremely difficult for the central government to implement new policies.

Currently, the Bundesrat -- the upper house of Germany's Parliament comprising representatives from states -- has the power to block the government's legislation approved by the Bundestag, the lower house.

This system enables both the central government and the Bundesrat to blame each other for policy delays or inaction. It must be reformed, Dohnanyi said.

Overhauling the systems

How are reforms progressing in Germany and Japan?

Wolfgang Wiegard, professor at the University of Regensburg and chairman of the German Council of Economic Experts, said Agenda 2010 was created with a realization that Germany's social security system is no longer sustainable under the nation's current demographic trends.

The program, launched by Schroeder last year, features measures including cuts in health care and unemployment benefits, overhaul of the pension system and loosening of rigid labor regulations.

Just like in Japan, Germany is confronted with declining birthrate and rapidly graying population, he said.

The birthrate -- or the average number of babies born to a woman in her lifetime -- stands at 1.5 in Germany, well below the 2.1 needed for maintain population at current levels, while the life expectancy of a German woman increased by 12 years over the half century since 1950, Wiegard noted.

"It is difficult to sustain pension and health-care programs under these demographic changes," he said.

Dohnanyi said Agenda 2010 must of course be implemented, but added that the program alone would not be sufficient. It does not yet provide fundamental solutions to Germany's problems, and further reforms will be necessary, he said.

Tetsuro Kikuchi, chief editorial writer for the Mainichi Shimbun, said the same problems targeted by Agenda 2010 also confront Japan.

However, he noted, German leaders seem to take the problems more seriously than their Japanese counterparts.

"Japan's reform initiatives have produced little result. But it almost seems that nobody cares," Kikuchi said.

In his roughly three years in office, Prime Minister Koizumi has achieved nothing -- except to provide a background music effect of repeatedly calling for "reform," Kikuchi charged.

The veteran journalist added that Koizumi's reform package is merely a rehash of what everybody has known all along is needed to revive Japan, and the only difference is that he put it in words that are easy for the public to understand.

The prime minister spent more than a year compiling a proposed legislation for privatizing expressway corporations as part of his promise to reform inefficient, government-linked special corporations.

"But the privatized expressway firms will continue to build roads just like before, so nothing changes," Kikuchi said. Still, Koizumi boasts that privatization is now on its way because of his efforts, Kikuchi said. "This is the reality of reform in Japan," he added.

Japan may in fact be a "paradise" even though the nation appears to be in trouble, Kikuchi noted.

"The national and local governments combined collect 75 trillion yen in tax and spend 150 trillion yen, which means that people receive public services worth 150 trillion yen even though they pay only half the amount," he said, adding that one problem is that too much of public spending goes to wages for government workers.

The result is that the central and local governments combined have accumulated debts that could reach 1 quadrillion yen, including hidden debts -- an amount that is probably not repayable, he said.

"It is amazing that few people in the Japanese government seem to take the situation seriously. Maybe it's OK as long as somebody continues to buy Japanese government bonds," Kikuchi said.

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