Priorities for the Japanese Economy in 2014 (December 2013)

Economic Growth as a Policy Goal and the Importance of Considering the Roles of Corporations

Fellow, RIETI

In 2014, Japan is expected to continue to pursue policies geared toward economic growth under the government led by Prime Minister Shinzo Abe and his Liberal Democratic Party (LDP). However, sustaining sound economic growth is no easy task. I would like to point out some potential issues that should be kept in mind in considering economic growth from the viewpoint of economic history. In my earlier article for this column, I discussed the historical trajectory in the nature or meaning of "economic growth," pointing out that an increase in productivity does not necessarily result in a recovery in employment and a rise in household income, and that we should focus not only on the enhancement of market functions but also on the role of corporations (Note 1). This time around, I would like to focus on economic growth as a policy goal. I will first look back on how deregulation has been emphasized over the years as a tool to achieve that end, and then point out the limitations of such an approach and re-emphasize the importance of considering the role of corporations.

Economic growth as a policy goal and rising calls for deregulation

The belief in the competitive pressures of the market as a catalyst for economic growth seems to remain firm and well-rooted. To begin with, arguments concerning market functions were made and highlighted in the course of the government's effort to reduce administrative costs and solve trade friction. From around 1980, fiscal reconstruction emerged as a key policy issue in Japan, gradually fostering the perception that allocating resources through the markets is both an effective and easy-to-understand way to reduce administrative costs and obtain understanding from taxpayers. The logic that underlines the importance of market functions was also embraced as a way to address trade friction, in which the Japanese market was being viewed as unusual and heavily regulated. Furthermore, the business community expected that a reduced government role in the overall economic activity would bring them greater business opportunities (Note 2). Entwined with all of those expectations and speculations, the perception of endorsing the efficacy of the market mechanism evolved into a government policy to promote deregulation. In this context, we can say that Japan's deregulation policy was meant to address issues raised from a perspective that is somewhat different from that of economic growth.

Needless to say, people were beginning to see sustainable economic growth as a policy issue in the 1970s when Japan's high growth period was coming to an end. Indeed, economic stimulus measures implemented in the 1970s were the cause of subsequent fiscal deterioration, and the government's policy vision announced in 1980 called for achieving "adequate growth" amid the increasingly severe and complicated constraints as a key policy issue (Note 3). Seen in this light, we could assume that this logic of deregulation as a catalyst for economic growth—that is, so long as "new combinations of resources" can be expected as a result of unleashed business opportunities—has been in existence or embedded since as early as the 1980s. However, it was only after the burst of Japan's economic bubble and the subsequent doldrums forced us to realize the need to pursue sustainable growth that the logic gained wide acceptance. Although it is not easy to determine the factors behind this development, many people found it persuasive to attribute the slowdown in growth to the peculiarities of Japan, and this sentiment has had a significant impact in setting the direction toward the let-the-market-decide approach, which is to reconstruct the Japanese economy by allowing the market mechanism to run its natural course. That is how deregulation, a policy tool initially adopted in the course of addressing fiscal problems and trade friction, has come to be considered and focused on as a silver bullet for economic growth from the 1990s onward.

The logic that market maturation driven by deregulation should have a positive impact on economic growth can be summarized as follows. It assumes that through exchanges of goods in which prices serve as signals, demand becomes concentrated in producers capable of supplying goods with higher productivity. Given the existence of such a path, the logic says that the continuous selection of producers with higher productivity will result in a continuous rise in the gross domestic product (GDP).

The role of corporations must be focused on as well

I find this reasoning to be somewhat problematic. For one thing, the scope of information reflected in prices is limited. And if prices only partially reflect the value of the goods and the social role of their producers, they may not be an effective indicator by which to assess organizations engaged in production activities. This problem has surfaced particularly in the stock market. The easing of the capital market regulations has surely led to the development of various financial products. However, if reaping profits by taking advantage of price fluctuations is one of the purposes of money games, value hidden by stock prices—such as production facilities, work carried out day by day by utilizing such facilities, and the social role of goods and services produced there—may mean little to stock market participants. It is necessary to rethink the operation of the markets as to whether they are properly assessing the social value of corporations (Note 4).

More importantly, focusing solely on the role of the markets is not enough to understand the mechanism of economic growth. Limitations of such approach can be observed in the fact that the following question is unable to be answered: While the Netherlands in the 1600s had mature markets where various goods were traded, why was the United Kingdom, another country with comparably developed markets, the first to move into the Industrial Revolution (Note 5)? If I attempt to explain this by applying the present-day way of thinking, I would say that even if markets become mature as a result of deregulation, we would never know whether it would induce production activities leading to economic growth.

If such is the case, then what is important is to focus on the collaborative human work that has achieved higher productivity and generated economic growth. It is important to have a perspective that the history of economic activities is not confined to the expansion of markets but is also the history of the organizing of labor processes. In a capitalist society, corporations are the key target for observation (Note 6). While market environments are important and have a significant influence on corporate behavior, it is for the people within each corporation to decide how such environments should be perceived and reflected in the production activities. Thus, the role of corporations is an important factor for consideration (Note 7). We may have to delve into what constitutes a desirable society from a broader perspective.

December 27, 2013
  1. ^ Kawamura, S., "The Historicity of Economic Growth: Considerations to be given to growth policies," RIETI Column, August 6, 2013.
  2. ^ Takeda, Haruhito, "Zaisei Saiken to Mineika [Fiscal Restoration and Privatization]," Chapter 15 in Takeda, Nihon Keizai no Jikenbo [A Case File on the Japanese Economy], Nihon Keizai Hyoronsha Ltd., 2009; Abe, Takeshi and H. Takeda, "Nihon no Taigai Keizai Kankei to Tsusho Boeki Seisaku no Kicho [Japan's external economic relations and the baseline of international trade policy]," Introduction in Abe, T. (ed.), Tsusho Seisakushi 2: Tsusho Boeki Seisaku [History of Japan's Trade and Industry Policy (2): International Trade Policy], Keizai Sangyo Chosakai, 2013.
  3. ^ Ministry of International Trade and Industry (MITI), Industrial Structural Council (ed.), "80-nendai no Tsusho Sangyo Seisaku [Trade and Industrial Policies for the 1980s]," Tsusho Sangyo Chosakai, 1980, p10.
  4. ^ In this sense, it is necessary to rethink the meaning of focusing on stock prices as an indicator of economic recovery. In other words, this is an inquiry into the definition of economic recovery or how we can determine that economic growth has delivered its fruits.
  5. ^ John Richard Hicks' theory that considers the history of economic activities as the deepening of markets has its limitations. See Hicks, J. R., A Theory of Economic History in Japanese translation, Kodansha 1995. In contrast, Hisao Otsuka attempted to capture the background that prompted the Industrial Revolution by assuming the birth of modern people who make a continuous quest for industrial revolution. See, for instance, Otsuka, H., Kokumin Keizai [National Economy], Kodansha 1994. My viewpoint here is slightly different from that of Otsuka. Considering not only the economic development in the early stage of modernization but also high economic growth, I would like to point out briefly where to focus our attention in order to find out the factors behind such development.
  6. ^ The process of labor as a platform for collaboration generates various goods and services, thereby enabling the reproduction of human society. In this sense, ever since their existence, human beings have always been engaged in labor to support the reproduction of society. However, the ways to organize the process of labor have varied across different times. For instance, unlike in the Edo Period (1603-1868) where collaboration was based on the production relations determined by individuals' status within the society, the process of labor in today's society is organized by employer-employee relationships that are established by contracts and primarily driven by profit motivation. This is why it is important to consider the historical significance of corporations. Needless to say, the process of labor not only at profit-seeking corporations but also at government agencies can be included as targets for consideration.
  7. ^ To be more precise, simply considering the organizational process of labor, such as the one at corporations, is not enough. It is important to remember that considering the historical nature of the markets is to consider the history of organizational adjustments that have taken place in the allocation of resources. For this, refer to Takeda, Haruhito, Preface for Niho Keizaishi Vol. 3: Ryo-Taisenkanki [History of the Japanese Economy Vol. 3: Era between the Two World Wars], Ishii, Kanji, Akira Hara, and Haruhito Takeda (ed.), University of Tokyo Press, 2002.

January 16, 2014

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