/ |

Fragmented or lacking institutions hinder economies from recovering

'Clear-thinking Abenomics' may help Japan, but nation faces 'difficult uphill struggle': experts

by Takashi Kitazume

Staff Writer

Japanese companies still face an uphill battle to maintain their competitiveness, given the obstacles and opportunities in the country’s political and economic environment.

“Abenomics” may represent a clear-thinking policy toward reviving the Japanese economy, but what matters is how the thinking is translated into action, and that requires the right organization and institutional structure — something that is notably lacking in Europe as it gropes its way out of the debt crisis.

These were among the views expressed by scholars at U.S. business schools who took part in a symposium, organized by the Keizai Koho Center in Tokyo on May 31, to discuss issues of competitiveness under a globalized economy from corporate and national perspectives.

Despite the repeated mantra of a globalized economy, “the world is much more fragmented and divided,” and such an “imperfectly globalized economy” creates obstacles to Japanese corporate competitiveness, said Charles Wolf Jr., a senior economic adviser and professor at Pardee RAND Graduate School.

The rhetoric of a globalized economy, he said, views the world economy as increasingly interconnected and penetrable, but the reality is quite different, he pointed out. “The reality is much more fragmented and segmented, in which there are bilateral free-trade agreements, regional groups . . . and non-tariff barriers,” he said.

In addition to this “imperfectly globalized picture,” Japan faces its own demographic woes, Wolf said. Increasing dependency of the non-working population on the working population, plus the nation’s exclusionary immigration policy, poses obstacles, he said.

The legacy of the two decades of stagnation and deflation — which Prime Minister Shinzo Abe has pledged to overcome — provides a “formidable set of obstacles,” but the reform efforts can create opportunities to revitalize Japan’s corporate competitiveness, Wolf said. There is a potential for introducing more flexibility to the nation’s labor market, higher participation of women in corporate executive positions, and selective immigration that could contribute more resilience to the economy, he said.

With these and other obstacles and opportunities, “the balance leads me to view sustaining Japan’s corporate competitiveness — let alone enhancing it — will be a difficult uphill struggle,” Wolf said.

There are other variables that could potentially be game-changers, he said, citing China as a factor that could either be a positive element or a threat to Japan’s corporate competitiveness. One of the domestic variables includes nuclear power — with Japan’s heavy dependence on nuclear power generation shattered in the wake of the 2011 meltdowns at the Fukushima No. 1 power plant, and the future course still unclear, he noted.

Wolf said the policies pursued by key Western economies in response to the recent crises — the stimulus efforts in the United States in the wake of the 2008 collapse of Lehman Brothers and the austerity policies in European countries to deal with their debt problems — “have been cost-ineffective.”

“I think both of them failed,” he said and added that the problem is that “they still adhere to their preference for stimulus or austerity regardless of the fact that they haven’t worked.” Proponents of stimulus try to explain that the stimulus “has not been big enough and/or the recession to be stimulated from was too big,” he said. “In the case of austerity, the adherents say that it has not been effective because maybe it’s been too quick, too much and too soon.”

Wolf said that neither the stimulus in the U.S. or the austerity in Europe “has been sensitive to anticipating and mitigating adverse reactions of the private sector, failing to make that in the forefront of their estimate of how stimulus or austerity would work.”

In that sense, the prospect of success for Abenomics, given its “recognition of business as a salient objective” of the quantitative easing, government spending and restructuring, are “a little bit better — I’m not sure how much better — than either the case of Europe or the U.S.,” he said.

Robert Inman, a professor at the Wharton School of the University of Pennsylvania, said, “As far as I can understand it, Abenomics is a very sophisticated, carefully crafted and clear-thinking policy. Will it work? That’s a different question.”

Inman said that while the U.S., Europe and Japan can potentially learn from each other’s experience, “the past may not be a good predictor of the future if the past is radically different from the future.” Then perhaps you cannot rely heavily on past data but more on clear thinking, he noted.

The potential for success of the Abenomics is far higher than anything on the table in Europe, Inman said. “It’s really the ability to translate clear thinking into action, and that really requires the kind of organization and institutions that can deliver on action.

“And those institutions are simply lacking at this point in Europe,” he said. The structure of the European Union — which currently lacks the right institutions to manage the spillover of the debt and other problems among governments — “is perhaps the biggest barrier” to resolving the ongoing crisis, he said.

Inman said U.S. President Barack Obama’s stimulus policy has been “half as successful as it could have been.” One of the reasons is the political environment in the U.S. in which the spending program had to be approved and implemented through state governments, resulting in only half the money allocated for the stimulus actually being used for that purpose, he said.

So the success of Obama’s fiscal policy has also been compromised by the institutional environment in the U.S., he said, without giving judgment on the institutional environment in Japan.

The eurozone has such a unique and unprecedented structure — a single currency without a fiscal or a banking union — that a comparison of its problems with those of other economies may not be appropriate, said Gur Huberman, a professor of behavioral finance at Columbia Business School.

Still, the eurozone economies have had their share of the regulatory forbearance issue — a problem that emerged when the capital of major U.S. banks was found exaggerated around the time of the 2007-2008 financial crisis despite legal provisions that mandated prompt corrective action, he said.

In agreeing on the growth and stability pact in the late 1990s, countries that formed the eurozone “were aware that it wasn’t a fiscal union or a banking union, and that there was no lender of last resort, which we would have in a country with its own currency,” Huberman said.

While the pact mandated member countries to limit their budget deficit to no more than 3 percent of gross domestic product and government debt to less than 60 percent of GDP, Germany was the first country to violate the rules, and France followed, he said. While there were sanctions for that, “who knows how to impose sanctions on a sovereign state that is a member of the European Union?” he said.

Another provision of the pact said there would be no bailing-out of any member economy, but when Greece became the first country to come into serious trouble, part of Greece’s debt was forgiven over two to three rounds, Huberman said. “So when the next domino falls, the eurozone is not in a particularly strong position to say no bailing-out — until the next domino is too big to save,” he said. “Spain — maybe they can do that, but Italy is simply too big to save.”