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PAIN, PAIN, GO AWAY

And don’t come back another day

by Brad Glosserman

ARTHRITIC JAPAN: The Slow Pace of Economic Reform, by Edward J. Lincoln. Washington, D.C.:Brookings Institution Press, 2001, 247 pp., $18.95 (paper)

Japan’s agonizingly slow attempts to resuscitate its ailing economy have left many observers bewildered. The policy failure is plain: the lowest growth rates in the industrialized world, skyrocketing unemployment (by Japanese standards), rising levels of bad debt and historically high levels of bankruptcies. For good reason the ’90s are referred to as “the lost decade.” Yet change has been piecemeal at best. How can a country tolerate this death by a thousand cuts?

Edward Lincoln, a long-time Japan watcher, provides the most convincing explanation for that inaction in “Arthritic Japan.” His conclusion is strikingly simple: Japan is too rich to feel the pain, its citizens either too comfortable with the rigidities of the economy or too fearful of the unknown to embrace reform. Japanese values are an obstacle to the serious structural change that is needed. They will continue to inhibit reform — and the world needs to accept that fact and its implications.

Lincoln is a reliable observer. From his vantage point at the Brookings Institution, a venerable Washington think tank, he has published several books on Japan’s economy and the country’s role in the world. In addition, he spent several years in Tokyo as the special economic adviser to U.S. Ambassador Walter Mondale. That tenure gave Lincoln real insight into the workings of the highest levels of Japanese policymaking. It must have been a frustrating experience: Several years ago, he proposed that U.S. policy makers quit returning phone calls from Japanese colleagues as a way to get their attention.

In “Arthritic Japan,” Lincoln argues that Japan has a distinctive model of capitalism. He identifies its key features as bank-led financing that yields a particular style of corporate governance, “keiretsu” (corporate) linkages, and a high degree of government intervention in the economy, among others. Lincoln does not assert that the Anglo-American model is superior or desirable; he merely claims that Japan is different — an argument that is implicit in the call for reform in Japan.

Nor does Lincoln claim that Japan is impervious to change. All economies evolve, and Japan is changing faster than it has in the past. But the forces for change are weak. As a result, “A decade from now the Japanese economic model or system will not have converged on the practices of the United States or other industrial nations. . . . Japan’s economic system will be somewhat different a decade from now, but it will remain distinctive.”

The problem is that the distinctive features of the economy have a damaging impact on productivity. They might have created the second largest economy in the world, but the world has changed and Japan has not kept pace. Today, the features that were once viewed as assets are liabilities. Lincoln claims that “Japan will not return to a sustained growth path until deregulation unleashes investment in industries that have been constrained by regulation.” Unfortunately, there are powerful forces that prevent reform. Those forces are the focus of Lincoln’s important new study.

Some of the obstacles are prosaic: vested interests, for example. According to Lincoln, such interests make up more than half the economy. “Viewed broadly, a majority of Japanese adults may well belong to one or more groups in society that stand to lose from major reform of the system. This breadth of vested interests becomes an important factor in holding back real reform.”

But that is only part of the story. Equally daunting is the perception of the need for change — or the lack thereof. “As discouraging as the 1990s were for a society that was used to rapid economic growth, the decade was hardly the disaster often portrayed in the press. For the vast majority of Japanese, life remains very comfortable, and problems are something they read about in the newspaper or view on television. . . . On average the Japanese people were better off (in income) in 1999 than in 1990. . . . Life is just too comfortable to push vigorously for reform, especially when many still believe in the value of the existing system.”

The result is the depressing litany of failures that began this review. The key for Lincoln is that last factor: the continuing belief by the Japanese in the value of the existing system. Indeed, “While the failings of the Japanese economic system may seem rather obvious from the outside, they are not so obvious or certain to the Japanese.”

Although he is careful about using emotional and value-laden words like “culture,” Lincoln argues — rightly, I believe — that Japan’s economic model is both created by and perpetuates certain beliefs and ideologies. The social values are suited to Japan’s political economy (as is true in all countries) but the important point is that the bedrock values inhibit change; in, for example, the United States, those basic values encourage change. This difference is critical to understanding the reluctance to reform in Japan.

The Japanese are proud of their economic achievements and the system that produced them; even more so of its “uniquely” Japanese features. (This is not an argument on behalf of “nihonjinron” theory, although it can come close.) The reluctance to give them up is understandable, especially when coupled with a more general aversion to change. Finally, there is cultural conditioning. (This argument could be misinterpreted, but Lincoln is careful about its implications.) Japanese culture favors the group over the individual, puts an emphasis on face-to-face encounters and facilitates the use of facades when dealing with outsiders. The economic system that has been constructed is well suited to those components. But it also makes changing the system very difficult. As Lincoln explains, “Trying to alter one piece of the puzzle without rearranging all the rest of the elements is very difficult. Either the immobility of the other pieces ultimately counteracts the effort at change, or the rest of the system must shift to accommodate the change.”

The “golden recession” and the cultural factors identified above limit the Japanese willingness to push for reform. “Ultimately, what many want is not a fundamental reshaping of the economic system, but for bureaucrats, corporations and financial institutions to behave ‘better’ — with greater morality and fewer mistakes.”

That is unlikely. The avalanche of scandals during the last decade “paints a picture of widespread routine corruption and incestuous relations among financial firms, their clients, government officials and politicians.”

Incremental reform won’t address the fundamental issues. In fact, it strengthens the forces that seek to preserve the status quo. “Over the course of the 1990s, pressure to reform the economy faded every time economic growth began to recover. Should the government muddle through in the new decade without pushing the economy back into recession, then the prognosis for accelerating reform is not good.” In other words, things will have to get considerably worse before there will be any breakthrough. This view is supported by reports of bureaucrats hoping for crises — these would force the hands of politicians and impose real reform on a reluctant political system and society.

Lincoln is not optimistic. Japan won’t crash, but the country will lurch along like a “mikoshi” (portable shrine) at a traditional festival: It will weave from side to side, avoiding disasters as policymakers improvise along the way. It is not a pretty picture, but recent developments suggest that it is accurate. If Lincoln is right, the rest of the world needs to adjust its expectations. The failure to reform will diminish Japan’s power and influence in the world. It is up to the Japanese to decide which is more important: the image of themselves that they currently hold or that of a vibrant nation that contends for international leadership. Increasingly that seems to be an either/or proposition.