Dear Readers,
I hope you had a relaxing holiday season. My family sure did in Chiapas, Mexico, my wife's hometown. My daughter Saki joined us as well, from Pittsburgh.
The time has come for me to depart RIETI and return to METI. It was June 2000, upon returning from Washington, D.C., that I started working for the Institute. I have sent 29 Miyakodayori newsletters and hosted about 90 Brown Bag Lunch (BBL) Seminars. I hope you found these useful. I treasured the opportunity to work with Masahiko Aoki, RIETI president and professor at Stanford University, as well as the many excellent fellows whom Dr. Aoki handpicked for the institute. This was really an intellectually stimulating experience for me.
Among the Institute's research areas, the reform of Japan's economy has been and remains central. And yet, as is the case in the banking and financial sectors, I am still very much concerned that we lack a strong driving force for change. While insiders cannot reform as they are often trapped in the web of vested interests, change often comes from outside in such forms as foreign direct investment, imports, M&As, and outside directors in corporate governance mechanism.
An excellent example of this is Carlos Ghosn of Nissan: he is Japan's national hero of corporate restructuring. Uniqlo, a casual garment store chain, is another example of innovation in Japanese retailing business. Tadashi Yanai, CEO of Fast Retailing spoke eloquently at a RIETI BBL about his new business model in retailing of importing subcontracted casual clothes from China. In this juncture, the government's role is limited to the creation of a friendly environment for corporate restructuring and welcoming inward FDI and trade. Whether it is at the national or corporate level, keeping an open system is a key for institutional reform.
Now, my new job: as of January 8, I will take the position of Director-General, Multilateral Trade System Department of Trade Policy Bureau, METI, succeeding Mr. Toyoda.
Doha successfully kicked off a new round, yet to conclude it in three years is a more challenging task. There is no question that strengthening the free trade system is crucial. But free trade should be seen as one element in establishing the freer, more open economic systems that provide countries with the best chance to survive in global, mega competition through forceful domestic restructuring.
I was pleasantly surprised with the remark of Dr. Zhao Jin-Ping from the Development Research Center of Beijing at one of our BBLs. He said of his country's WTO accession, "China faced many hardships in the process of liberalization, but we are now more confident about it. We need outside forces to reform China." It was also the case for Japan after the War. We have gradually shifted our economic system to a more open one through accession to the GATT, IMF, and OECD. Japan-US bilateral trade disputes may also have contributed to the liberalization of service sectors like finance, telecommunications, and transportation, as well as high-technology manufacturing sectors.
Though it is becoming ever more time-consuming to negotiate through multilateral forums, quick fix, case-by-case bilateral deals may invite frustration between trading partners. Regional economic arrangements and bilateral FTAs are coming to the fore, as they provide important modus operandi to further open economies of like-minded countries. Japan has recently changed its position from that of a fundamental multilateralist to one that is more receptive to regional arrangements. It completed its first bilateral arrangement with Singapore. And arrangements with Mexico, Korea and ASEAN may come next.
In hindsight, APEC has provided an excellent training ground for member countries' domestic ministries to think and behave internationally, while European countries have been practicing for over 50 years--starting with the ECSC, the EC, and then to the EU. The level of integration has reached the stage of monetary union, which requires a wide range of domestic economic policy coordination and harmonization of domestic institutional arrangements. Germany provides an interesting example of using its international framework for domestic reform. The OECD's "Growth Report" identified Japan and Germany as the big losers of 1990's, as their economic growth rates declined substantially from 1980's. The report pointed out that low investment in ICT (Information Communication Technology) and slow deregulation were partly to blame.
But the first step is to stop focusing on our past successes. These success mentalities have been burned in our minds from the miraculous economic recoveries after the War defeat. For example Japan and Germany have in common relatively low levels of inward foreign direct investment relative to GDP; this fact has often been cited as proof of economic closed-ness.
Recently Germany has taken notice of this problem and has begun strengthening its restructuring efforts--deregulation in network services, tax reform, new markets for ventures, pension reform, etc. Tax incentives to reduce cross-share-holding aims at drastic reform of "Rhineland Capitalism" by introducing more foreign capital. While Germany's political future is strongly committed to the EU, there is nowhere for Germany to move but to compete with other European countries by domestically reforming itself and harmonizing with European standards.
Germany's competitiveness measured by the IMD index shows that it bottomed out but now it is rising, while Japan is still floundering in the bottom. Japan must establish frameworks to restructure domestic institutions, as did China with the WTO and Germany with the EU. Restructuring will eventually lead Japan to an economic revival, (here, it is important to note that previous Japanese governments before Koizumi were trapped in an upside-down logic: they spent so much money on wasteful public works in the hope of stimulating the economy to get rid of non-performing loans in banks) which is most urgently desired by other nations.
Obstacles for us to move ahead will come from stronger resistance from the lagging sectors such as agriculture and some services. The unfortunate failure of the Early Voluntary Sectoral Liberalization (EVSL) in APEC shows that the small but politically sensitive issue of agricultural liberalization has prevented Japan from taking a leadership role at APEC for important economic policy issues in the region when the Asian crisis occurred. (It was a mistake of the US administration in priority setting for the APEC.)
China challenged Japan by successfully convincing ASEAN countries to initiate negotiations of the bilateral China-ASEAN FTA, which may be completed within ten years, while Japan has dragged its feet due to agricultural concerns. Agricultural experts including government officials in Japan know that this sector cannot be an exception forever. Now that the new round of negotiations including the agriculture and service sectors at WTO has started, we should no longer avoid taboos. Fortunately one of Prime Minister Koizumi's favorite phrases is, "Reform without sanctuary."
In this context, such visionary ideas as David Asher's US-Japan Common Market or Bruce Stokes's US-Japan Common Marketplace should not be considered impossible. Moreover it must be taken more seriously to provide a more stable bilateral economic relationship for two leading countries for the region. It will certainly provide a good chance for Japan to reform the hardest core sectors; certainly the faster and the deeper the reform gets, the tougher the resistance grows.
Among the missions I set for RIETI, one of the most important is that we create a "policy market" in Kasumigaseki where we, an economic policy "Team B," offer an alternative set of policies for reform. We have been trying our best in such sectors as finance, banking, communications, social safety net, and education. Yet we still have many more sectors to examine for restructuring.
I will continue to contribute to Miyakodayori as a visiting senior fellow, while the editing task will be passed on to Ichiro Araki, RIETI's director of research.
See you again soon in future BBL's or on the pages of Miyakodayori. I wish all of you a happy new year.
Editor in Chief and Author, Nobuo Tanaka
Vice President and Senior Fellow
Research Institute of Economy, Trade and Industry (RIETI)
e-mail: tanaka-nobuo@rieti.go.jp
tel: 03-3501-1362 fax: 03-3501-8391
RIETI invites you to visit its English website
[http://www.rieti.go.jp/en/index.html].
The opinions expressed or implied in this paper are solely those of the author, and do not necessarily represent the views of the Ministry of Economy, Trade and Industry (METI), or of the Research Institute of Economy, Trade and Industry (RIETI).
