Declining rural economies
In its report released on May 8, 2014, the Japan Policy Council (JPC) warned that a number of rural municipalities will disappear if nothing is done to change the ongoing demographic trends, delivering a grim prediction based on population projections for the period until 2040. Given the migration of people from rural areas with relatively high fertility to low-fertility urban areas, an accelerated pace of decline in the number of children is an issue in which we, as a country, should be concerned with a strong sense of crisis. However, so long as a lack of good job opportunities in rural areas continues to provide a clear motive for individuals to leave for urban areas, there is no changing the flows of migration.
Generally, rural economies are heavily dependent on activities that utilize region-specific immovable resources (including the natural environment and, more broadly, social relationships) and operate in accordance with the law of constant returns to scale. In contrast, economic activities in large cities such as Tokyo operate in accordance with the law of increasing returns to scale, whereby the greater that the scale of operation is, the greater will be the productivity and income of individuals. As such, the continuation of the rural-urban migration works to strengthen the advantage of urban areas, making it extremely difficult to put the brakes on the population shift.
However, for those having established their livelihoods in rural areas, moving to urban cities involves huge risks and costs. Thus, young people who are about to make their career choices would be the ones having the least difficulty in doing so. In order to confirm this, I compared changes in the composition of urban and rural populations, producing population pyramids for Tokyo and three rural regions in eastern Japan based on the Ministry of Internal Affairs and Communications (MIAC)'s population estimates by five-year age group for 1998 and 2013. It should be noted that the rural population data used here are the aggregate total for the Hokkaido, Tohoku, and Koshinetsu regions.
In the figure, those in the age group 25 to 29 in 1998 fall into the age group 40 to 44 in 2013. A comparison of the 1998 and 2013 pyramids show no significant changes in the size of their populations, which are slightly down in the rural regions and slightly up in Tokyo. The same can be said of all of the age groups from 30 to 34 in 1998 and above. Thus, the upper half of the 1998 pyramid is simply moved upward in 2013 without changing much in shape both for the rural regions and Tokyo. The size of the population in the age group 80 and above in 2013, which includes those who were in their later 60s to later 70s in 1998, is roughly twice the size of the population in the same age group in 1998, which is a reflection of the increased longevity and is commonly observable in Tokyo and the rural regions.
However, when we focus on those who were in the age group 15 to 19 in 1998 and who then became members of the age group 35 to 39 in 2013, we can see that the population of this cohort in the rural regions decreased by about 300,000 while that in Tokyo increased by about 350,000. This indicates that many in this cohort population moved to Tokyo for university or work. It should be also noted that the problem of declining child population is more serious in the rural regions, from which young people are moving out, whereas in Tokyo, the primary destination of those young migrants, the size of the population in each age group below age 15 remained generally unchanged from 1998 to 2013.
This is exactly what the JPC report points out by saying that the rural-urban migration over the past decades has "not only caused rural regions to suffer a decrease in population but also deprived them of the power to reproduce population." If this trend continues, Tokyo will become unable to absorb a sufficient number of young people in the near future, resulting in a rapid aging of its population. Meanwhile, in rural regions, the problem of the declining child population will become increasingly serious with the continuing outflow of an already small number of young people.
Revisiting the issue of monocentric concentration in Tokyo
One possible idea to change this situation is to reinforce—instead of resisting—the ongoing move toward monocentric concentration, increasing the agglomeration of population while at the same time implementing measures to address low fertility intensively in Tokyo. Perhaps, this idea would easily find public support, because the economies of agglomeration in Tokyo have been playing an important role by contributing to productivity growth and innovation—both of which are indispensable to Japan's economic growth—and giving incentives to promote migration to rural, low-income regions would distort the distribution of resources. As a way to address low fertility, the government could implement measures to improve the childrearing environment and change the work-life balance, and consider accepting foreign immigrants to make up for a decrease in the inflow of people from rural regions.
However, this idea leaves room for more consideration. First, while our earlier studies under the RIETI research program on regional economies have found the correlation between agglomeration and innovation, research into the causal relationship is still insufficient both theoretically and empirically. Is it the case that companies active in research and development (R&D) tend to cluster geographically, or that geographical agglomeration makes it easier for companies to achieve innovation? Or, are both the case? We have not yet identified how these factors relate to each other.
Excellent people nurtured in rural regions will continue to demonstrate their abilities in Tokyo and are encouraged to do so because it is good for Japan and the entire world that such brilliant talents interact with one another to generate innovations. Indeed, Tokyo should gather talents not only from rural regions in Japan but also from all over the world to enhance its functions as a cluster center for intellectual interactions and serve as a platform for innovations and startup businesses. However, as often pointed out by RIETI President Masahisa Fujita who has stated "three people together have the wisdom of Monju but three years together makes an idea mediocre," clusters may lose their innovation power when they become locked in. And, if so, it is important to maintain the metabolism of Tokyo, and it is necessary to ensure the diversity of rural regions as providers of fresh knowledge.
Meanwhile, further intensifying the monocentric concentration may be contradictory to the improvement of work-life balance, a key component of government measures to address low fertility. Low transportation costs that enable salaried workers to commute from remote suburbs to the city center are one of the major reasons why the Tokyo metropolitan area continues to sprawl by merging with neighboring municipalities. However, this means that long-distance commuters are being forced to spend unproductive and uncomfortable hours in crowded trains day after day, which deprives them of time with their families. The reason why they cannot live nearer to their office is that they cannot earn enough to do so. But then, that is probably because their work is given low value, having little to do with the economy of agglomeration, which is the reason for locating in Tokyo. Thanks to the emergence of new technologies such as intra-company social networking, videoconferencing, and cloud data hosting services, we are now living in an era where most of the office work can be carried out anywhere. Despite this, many companies continue to locate their offices in Tokyo, where land prices are very high, at the cost of forcing employees and their families to bear the burden. Isn't this inefficient? Many young people, who would have been otherwise able to enjoy a good work-life balance, are leading unsatisfactory lives in Tokyo, but they will no longer have to do so if office work operations are relocated to rural regions.
In the area of production, the division of labor has developed in an accelerated manner since 2000. A production process that used to be completed within a single factory are now divided into multiple processes and carried out in their respective optimum locations, which are dispersed geographically and together forming an advanced supply chain. As is the case of production activities, the efficiency of office work can be improved by dispersing separable processes to rural regions in a proactive manner. The decentralization of organizational structure is also considered as part of business continuity planning because it is expected to increase resilience to natural disasters and other emergencies. One day in the not so distant future, having headquarters in a grandiose, high-rise office building in Tokyo's Marunouchi district may become a cause of downgrading because such companies are seen as lacking awareness of the need for cost control and risk management.
As a means to provide incentives for the spatial decentralization of office functions, it would be effective to offer appropriately designed tax incentives for corporations operating in rural regions and implement policy programs to support the development of communications technologies. Those policy measures are justifiable in the light of their intention to improve efficiency for both companies and individuals with an expectation of striking a fairly good population balance between urban and rural areas as a consequence, instead of seeking to achieve population decentralization as a predetermined outcome at any cost. Various policy options, including a combination of measures to address unipolar centralization and low fertility, should be compared in terms of costs and benefits.
Vitalizing local resources
I have focused thus far on the monocentric concentration in Tokyo, because the vitalization of rural economies in Japan and the issue of what should become of Tokyo are inseparable and should be considered together. Now I would like to move onto the issue of rural regions.
What do we mean when we say "rural economy vitalization?" It may seem clear, but it is actually difficult to define what constitutes successful rural economy vitalization. For instance, population growth in a certain rural region resulting from the improved regional economy would be meaningless if such growth simply reflects population losses in other rural regions. Also, while it is important to make cities and towns more livable for the elderly, whose number is on the rise, such efforts would not lead to vitalization unless young workers and families with small children settle there. Furthermore, constructing infrastructure and other building structures or drawing crowds of people temporarily by holding events is not enough in its own right. Such a measure can be effective only when it leads to a permanent increase in people's income.
In order for local communities to be sustained, it is necessary to vitalize local resources. As discussed above, a population shift driven by the economy of agglomeration leads to ineffectiveness, abandoning otherwise useful and economically valuable local resources. In the presence of a properly functioning market, such a situation should cause a decline in prices of such local resources, which in turn would induce new demand for them. However, third parties are often blocked from acquiring such resources due to certain institutional factors, with fishing rights and farmland being typical examples. In this regard, I would like to continue to monitor some pioneering efforts to lower such institutional barriers. For instance, the Momoura district of the city of Ishinomaki, Miyagi prefecture has been designated as a special fisheries reconstruction zone to allow private-sector corporations to enter the fisheries business as part of post-quake reconstruction efforts. Meanwhile, in the city of Yabu, Hyogo prefecture, designated as a national strategic special zone, the authority for permitting the consolidation of abandoned farmland will be transferred from the local agricultural commission to the city.
Some rural municipalities have succeeded to increase people's income by utilizing the existing local resources but in a totally unconventional way. In a famous case of successful rural economy vitalization, the town of Kamikatsu in Tokushima prefecture has turned local mountain forests—which were increasingly abandoned due to an aging local population—literally into forests of money trees by shifting from the labor-intensive forestry and orange farming to leaf picking, a light work business that even elderly people find manageable. In the neighboring town of Kamiyama, a number of information technology (IT) companies have established their satellite offices in old abandoned houses, as they seek for a quiet environment to enable their employees to better concentrate on their work. The remote island town of Ama in Shimane prefecture has been successful in branding its local products, while at the same time seeking to bring in young people by promoting the entire town as a place of learning for future community planning leaders. As a result, it is witnessing an increase in the incoming population. The village of Nishiawakura in Okayama prefecture, where forestry is the predominant industry, has been promoting the sustainable use of local resources under the One Hundred Year Forest vision, a village-wide shared philosophy that calls for using wood from trees planted 50 years ago by earlier generations in a well-planned manner and managing forests for future generations.
Those municipalities, which have now become high-profile cases of successful rural economy vitalization through media reports, seem to be receiving a steady stream of observation teams from other municipalities. However, there is no mastering the universal key to success from model cases. It is often said that "outsiders," "youngsters," and "fools" are the three critical ingredients for successful rural vitalization. Of those, "fools" refer to the kind of people who can act for the public interest of the community to an extent that would be irrational from the perspective of their personal interest. Those are the ones who serve as key persons. In the aforementioned case of the town of Kamikatsu, Tomoji Yokoishi, president and chief executive officer of Irodori K.K. that operates the leaf business, is the one. Before turning his vague business idea into an actual business, he kept on visiting ryotei—luxurious, traditional Japanese restaurants—to learn how decorative leaves are used in authentic Japanese dishes, spending his own fortune and even compromising his health. The emergence of a maverick man of action such as Yokoishi is a mutational event that occurred in a specific region, and there is no rational explanation to such a phenomenon. If I dare to decipher somehow, I would say that tolerance on the part of local residents is indispensable. That is, they must be able to listen to what outsiders, youngsters, and fools—i.e., those symbolizing changes—say, and then, as the owner of local resources, they must be able to accept such changes that involve risk. Still, those are just necessary conditions, not sufficient conditions.
A sense of crisis about the possible disappearance of their cities or towns may provoke local residents' desire to sustain their communities and provide motivation for changes. At the same time, however, some people may think that they should just follow the trend of the time. In the end, the future of each community is left to the choice of its people. Thus, there is no need for government intervention that will distort people's decisions, but there should be greater deregulation and fiscal support to help those municipalities willing to change.
The original text in Japanese was posted on September 1, 2014.
September 25, 2014
