New Catchwords Symbolizing Concrete Reform Measures Need to Replace "Structural Reform"

Faculty Fellow, RIETI

With economic uncertainty deepened by war with Iraq, some people have begun to insist that the government, at a time of crisis, should not let the nation's economy further weaken by forcibly carrying out structural reform. "Structural reform" as referred to by politicians, however, is not clearly defined. A substantial gap exists between how researchers use the phrase and how it is used in the political arena. Unless terms are clearly defined beforehand, proposed policy intentions may be totally distorted in the process of debate and realization, producing unintended results. It is about time to focus on the specifics of structural reform, subdividing reforms into several policy measures and to think out a well-defined catchword for each of them.

Are the Specifics of Structural Reform Clear?

"Structural reform" is a convenient term. For some, it may conjure up an image that Japan will finally change for the better by undergoing drastic reform. For others, however, it may imply a conspiracy by foreign countries to remake Japan. At the layman's level, where many politicians operate, there is a good deal of confusion about the meaning of this term.

Experts on the economy may have come to a general consensus that structural reform is to correct problems such as the national economy's overdependence on public sector demand, or to facilitate the transfer of financial and human resources from low-productivity sectors to high-productivity ones by terminating support to the former.

But how can we interpret the Japanese government's policy to curb new bond issuance under the banner of fiscal reconstruction? Can we call it a structural reform as has been stressed by Prime Minister Junichiro Koizumi? If the government spends public funds to accelerate the disposal of nonperforming loans (NPLs), will it run counter to the spirit of structural reform because such a measure might deteriorate the nation's fiscal position? Not necessarily. Issues that need to be addressed by structural reform are very complex and cannot be explained by a simple, one-dimensional theory. And this is exactly why structural reform is so named, i.e. the reform of "structure."

A Policy Mechanism Underpinned by Consistent Logic is Needed

As to ways to tackle the ongoing NPL problem, for instance, some people call for the injection of public funds and a shakeout of the banking sector, while others insist that the problem can and should be solved by boosting land and stock prices. No solution can be derived from discussing whether or not these arguments are correct because each has its own supporters.

In the world of politics, it is important to take an initial step somehow by trying out one proposed policy option, and then correcting or trying out another option if the first does not work. In doing so, however, we need to be clear about which policy option is being implemented. In reality, it is rare that policy proposals are correctly translated into actual policy measures. Indeed, in the aforementioned example of the NPL problem, it is hard to evaluate which of the proposed policies have been adopted by the government. Advocates from each side of the debate would say that the government has been unable to solve the problem because it has adopted policies proposed by the other side.

As such, although policy packaging obviously needs to be logically consistent, the reality is that proposed policies are prone to distortion, tainted by a political power game and/or driven by the internal logic of an administrative organization. The results of policy implementation often run counter to what was intended by those advocating the policy.

"Tendency to Use Simple Models for Analysis" and "Friend-or-Foe Logic in Politics"

It is thus all too obvious that policy principles must be presented in a clear and explicit way. The question is to what extent things should be simplified. In designing policies, policymakers try to analyze the areas to which the policy will be applied. And in the process, they inevitably need to simplify matters and frame them into simple models. Such simplification, in itself, should not be criticized. If analytical models are to hold true, we need to be conscious of the conditions under which those models relate to reality. But it is both long-winded and unappealing to say "this is how things will turn out under these circumstances" and "that will be the result under another set of circumstances." Thus, usually, only the conclusions of analysis are presented.

The fact that policy proposals inevitably take on a political nature the moment they are proposed further complicates matters. In the world of politics, it is impossible to stop relationships from being interpreted as "friend or foe". In fact, it is fair to say that such relationships are the very foundation upon which the world of politics stands. Once in the political arena, policy proposals - simplified conclusions from analysis - begin to develop on their own irrespective of the conditions under which the policies were formulated and the specifics of the model used for formulation. By this stage, proposed policies, regardless of the intentions of their authors, become subject to arbitrary interpretation by each of those advocating them, for whatever reason.

Arguments calling for inflation targeting have been used to criticize the Koizumi administration which, some politicians say, is "exacerbating national economic problems by forcibly promoting structural reform." On the other hand, the same arguments have been labeled as support for structural reform by others based on the logic that the Bank of Japan's refusal to introduce inflation targeting is raising inflationary expectations on fiscal expenditure, and thus, hampering structural reform. These contradictory interpretations are the product of the political dynamic.

"Policy Conflicts due to Clashing Interests" and "Policy Conflicts due to Differing Views on the Correct Policy"

One effective way to distinguish between "policy conflicts due to clashing interests" and "policy conflicts due to differing views on the correct policy" is to prevent proposed policy measures from getting blurred as a result of simplification. By explicitly specifying the cause of policy conflict, a common understanding can be reached. Policy implementation costs money. Therefore, by specifying the costs associated with each policy, the structure of policy conflicts can be pictured to some extent.

Of course, even if there is a shared recognition about the desirability of inflation, opinions differ over the validity of inflation targeting. The focus of debate, however, should be shifted onto whether or not to take a risk to try out the policy and evaluate its validity, rather than on whether the policy is valid or not. Policy conclusions derived from these debates should be weighed against other arguments that the ongoing deflation should be endured because there is no workable solution. And if the current policy is judged to be ineffective, the government will need to devise measures to cope with the continuing deflation. This way, we can avoid a situation in which policy options are presented as a dilemma over whether certain policies are correct or not.

Creating a Sub-track in Political Debate

The comparison between "trust" based on rules and "assurance" based on personal relationships by Professor Toshio Yamagishi provides a good picture of the conflicting interests facing the modern social system in Japan. In interpreting such conflicts politically, however, it is more appropriate to focus on the competition between trust and assurance as a means through which government policy changes society, rather than assuming that the social system inevitably changes from an assurance-oriented one to a trust-oriented one.

The same competition mechanism applies to political conflicts. Political parties should compete with each other based on different value systems, to make democracy work. In order to better understand a particular policy proposal, it is necessary to first specify the realm of "correctness" with respect to the policy, and then expand the realm of "clashing interests".

In order to do this, we need to create a "sub-track in the political debate" by clearly defining the terms used. I have been interviewing a number of specialists in various fields to try to find out what "approaches" and "senses of value" lie underneath the policy debate. Such interviews form necessary preparatory work to create a sub-track. I intend to publish these interviews on the Internet and create a symbolic term for reform by clarifying the relationship between the "correctness" of a policy and the "clashing interests" surrounding it in the debate on economic policy.

April 1, 2003

April 1, 2003