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The Japanese-language version of “The Wealth and Poverty of Nations,” by David Landes, professor emeritus of history and economics at Harvard University, has been published. The translator of the book, Keio University Professor Heizo Takenaka, notes that gaps are widening between winners and losers in global economic competition. Such gaps have always existed. Civilization is often influenced by natural conditions. This explains why Western Europe has played a leading role in modern industrial civilization, starting with the Industrial Revolution, and why Japan, the last major player in that global competition, has fast grown into a major economic power.

Natural conditions, however, can have a positive or a negative influence on the formation of a civilization. Winners are successful because they take advantage of positive forces and check negative ones.

Landes is a firm believer in Western-style progress. He separates winners from losers by determining how non-Western nations have adapted to the Western concept of economic development. China’s Ching Dynasty, bound by anachronistic value systems and social structures, became a “sleeping lion” and was left behind during the period of major global change that continued into the early 20th century.

Japan, on the other hand, tried desperately to catch up with the West after the Meiji Restoration and became a major industrial power. The only way to win in the global competition was — as it still is — to adapt to rapid advances in science and technology and restructure existing systems. Meiji-Era reformers staked their lives on the goals they set, and the Japanese people put up with extreme difficulties. Landes says Japan’s success was inevitable, given the strength and determination of the Japanese people. Japan’s success in catching up with the West definitely deserves special mention. However, how should we evaluate the nation’s postbubble economic turmoil, which Landes fails to mention? These questions deserve close scrutiny:

* How has the United States emerged as the only major successful economy in the world, after experiencing serious trouble 20 years ago?

* Why is it that Japan, once touted as No.1 in the world, has stayed in the doldrums of the “lost decade”? In a recent book, Yoshimasa Nishimura, professor at Waseda University and former Finance Ministry Banking Bureau chief, details a series of policy mistakes made by government authorities in charge of banking affairs from the bubble’s peak to its collapse. The book, which contains severe self-criticism, says that if Japan appeared to surpass the U.S. and Western Europe during the bubble years, it was only an illusion. At that time, the U.S. and Britain were pushing national restructuring efforts and Japan has yet to catch up with them, Nishimura says.

Japanese banks, basically old-fashioned financial institutions that accept deposits and offer loans, play only a supporting role in the economic infrastructure. Oblivious of that role, the banks expanded their operations, contributing to the bubble, Nishimura writes.

Japanese financial institutions must do more to ensure the survival of the Tokyo financial markets and to spur the growth of the high-tech financial sector. Japanese banks have large deposits and huge total assets, but lag far behind their Western rivals in profitability, management efficiency, technical prowess and information-related capabilities. Japanese bank mergers will not lead to an increase in the banks’ competitive power, Nishimura warns.

Japan has failed to emerge from the long downturn because its economic system suffers from a systemic failure that stems from drastic changes associated with the information-technology revolution and internationalization. The world is experiencing internecine competition among different national economic systems. Various institutions in a national economic system complement one another to stabilize the system. However, once sudden changes occur, systemic inertia impedes reforms.

The only way to promote economic recovery is to develop advanced strategies that take into account the complementarities and the inertia, and to implement reforms swiftly and carefully. A combination of makeshift policies, without carefully considered strategies, will not work and will only delay true reforms.

The big problem is that economic sectors traditionally dependent on bureaucrats and politicians are trying to preserve their vested interests and retain their share of financial resources. This has impeded the expansion of sectors that are introducing new information technology designed to boost productivity and help activate the economy.

For the past 20 years, the U.S. has adopted the methods of the Japanese manufacturing industry, pushed economic deregulation and given strong government support to the telecommunications sector, a view that is espoused by Vice President Al Gore. At the same time, it has introduced a system of after-the-fact checks and established relations of moderate tension between the Congress and the administration, and between the Congress and the administration on one hand and the financial sector on the other. This arrangement has led to a remarkable growth in the competitive power of the telecommunications and the banking sectors.

Japan should also take advantage of the information-technology revolution and establish sectors in which it will have superiority over the U.S. Japan now has a window of opportunity to push the further development of electronic terminals, cell phones and digital household appliances.

Toward that end, Japan should cut Internet connection charges, work out policy measures for increasing job mobility and correcting the seniority-based wage system, and boost government support for high-tech development. Furthermore, Japan should help venture businesses raise funds through the Nasdaq-Japan stock market and other means, introduce a tax system that tolerates performance-based income gaps, and establish safety nets for the underprivileged. It should also abolish the gasoline tax, which is used only for building highways, and introduce a new tax to help improve the environment. The government should also encourage further economic deregulation and the concentration of financial resources in priority sectors.

Prime Minister Keizo Obuchi, referring to his policy of pushing economic recovery at the cost of fiscal health, says, “he who runs after two hares will catch neither.” However, the present policy of concentrating fiscal spending on public-works projects, which have little economic stimulus effects, will only worsen the fiscal crisis. Consumers will only tighten their purse strings.

If the government pushes the restructuring of the public sector and concentrates budget outlays and fiscal loans and investments in the above-mentioned programs, economic growth and fiscal health will be compatible.

Tokyo Gov. Shintaro Ishihara’s recent proposal to levy a size-based local tax on major banks is fraught with problems. However, his proposal galvanized other governors who continue to depend on the central bureaucracy. Ishihara showed that a single governor’s action could have a strong impact on the central government. No matter whether his proposal is appropriate, the leadership he has shown is needed in national politics.

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