RIETI Policy Symposium

Industry Related Government Policy and the Global Economic Crisis

Information

  • Time and Date: 13:30-18:00, Wednesday, December 16, 2009
  • Venue: Marunouchi Building Hall [PDF:268KB] (7th floor, 2-4-1 Marunouchi, Chiyoda-ku, Tokyo)
  • Language: Japanese / English (with simultaneous interpretation)

Summary

Panel Discussion: Significance, Issues, and Future of Industrial Policies

"There can be no future without growth"

NISHIGUCHI Naohiro (Executive Managing Director, Innovation Network Corporation of Japan)

  • Japanese corporations possess a high market share in the material and electronic component fields. While Japan is superior in terms of component technology and parts, architecting across corporations by combining these into products or services is something Japan has trouble with.
  • The Innovation Network Corporation of Japan aims to achieve high level growth and productivity in Japan by taking individual pieces of domestic technology and combining and transforming them through innovative projects. In other words, the Innovation Network Corporation of Japan forwards open innovation by joining up technology and projects from different industries in new ways. The organization acts as a hub for information/industrial capital and management development and helps businesses by providing risk money.
  • In relation to the development of human resources, people often bring up the issues of the falling birth rate and aging society, but actually personnel strength is a multiple of the number of people you have times the quality of people you have. If your personnel numbers are falling, you can still sustain or grow your personnel strength by increasing the quality of the personnel you have. Additionally, an aging society means that the number of highly proficient adults in society is increasing, and this sort of personnel especially ought to be good at management and be able to come up with new business enterprises. Accordingly, it is extremely important to raise the quality of management in Japan in light of the aging society and falling birth rate. Proficiency at global personnel management is vital for prevailing over global competitors.
  • It is said that the only resources Japan has are people and technology, but actually the coming together of people and technology is extremely important for the creation of further innovation. Innovation occurs when tacit and formalized knowledge come together. Tacit knowledge can only be spread through communication between people. The vertical innovation structure creates barriers to communication inside and outside of organizations, and blocks innovation from happening.
  • Even if you have superior products and development processes, if they are not accepted by clients, if they do not sell, it is not innovation. It is important that the start of innovation is based on an understanding of what is important to clients. It is not necessary to think only from the perspective of a Japanese person - innovation based on knowledge of the world at large will support growth in Japan in the future.
  • In order to depart from the current structure in which Japan continues to win the component technology battle but lose the overall concept and innovation war, Japan must improve its ability to come up with new business enterprises and there must be public-private cooperation on the grand design of the Japanese economy and business itself.

"Perspectives on Industrial Policy"

YANAGAWA Noriyuki (Associate Professor, Graduate School of Economics, University of Tokyo)

  • The necessity of government intervention is a major point of contention when talking about industrial policy. In Japan, opinion tends to be split between leaving things to the market and leaving things to the government, but what is really needed is an appropriate level of government intervention. If appropriate criteria for government intervention can be established we may arrive at a new perspective on industrial policy.
  • Government intervention is required when the market fails. Concretely, this is when there is: 1) a coordination failure among stakeholders; 2) a temporary breakdown of the market; 3) a need for the implementation of macro-policies; 4) a need for some sort of external strategy.
  • Private sector mechanisms, even informal ones, should be utilized to the maximum extent possible for industrial policy. Policies regarding coordination failure between the public and private sector are likely to become more and more important in the future. In relation to external strategy, support for the creation of standards and format competition is going to become an important point. Another important point for industrial policy is going to be how it handles coordination failure among government agencies.
  • The role of the government is to come out with ideas on how to prevent coordination failures - the provision of funding is only a secondary role. Private sector funding should be encouraged as much as possible. In order to do this, there must be a reduction in the amount of political risks faced by the government on this issue.
  • There are three important points we need to stick to when considering industrial policy. First, financial support should not be given out lightly. Second, the decision to give financial support should not be made by a civil servant but by someone who can be held accountable for the outcome of the support. Finally, Japanese people have become quite comfortable with government intervention. We need to examine the limits of intervention.

"The World after the Lehman Shock"

TAKITA Yoichi (Deputy Chief Editorial Writer, Nikkei Inc.)

  • The economic downturn that has occurred following the immense financial crisis will have an unexpectedly long-term effect on the world. This is the first large-scale financial crisis since the Japanese economy entered into a long-term slump in 1997. The GDP of Japan has fallen from 520 trillion yen before the Lehman Shock to 480 trillion yen afterward.
  • One reason that we have not seen a recovery in GDP is because of the strengthening of the Japanese economy's export-oriented nature during the process of economic recovery under the Koizumi reforms. It is due to these reforms that the electronics and automobile industries are such a large part of Japanese industry.
  • At the start of this week the Bank of Japan announced in the Tankan that business confidence in major manufacturing industries seemed to be improving. That said, equipment investment is down approximately 30% on what it was at this time last year. And within that figure, in the electronics and automobile industries, equipment investments are down more than 40% of what they were last year.
  • In light of all of this, what does the future hold? First, we can expect demand in Asia to grow. The IMF's World Economic Outlook predicts that the GDP of BRIC countries will be US$10 trillion in 2011. Given that the United State's GDP is US$15 trillion and the Euro area's GDP is US$13 trillion, one can see that the balance of the global economy is shifting toward emerging economies.
  • How to support business activity in the midst of this change in the world economy is going to be a topic of conversation in the coming years. How the policies of the Democratic Party of Japan are implemented will be very important for the stimulation of domestic demand. Particular attention should be paid to what sort of concrete industry image is drawn up by the government in the fields of the environment, primary education and elderly care.
  • The size of individual investments in Japan is said to be 1.4 quadrillion yen, and much of that is tied up in savings. This is because households and individual investors do not have faith that the Japanese economy will grow. With this being the case, the growth rate of Japan will not increase, and neither will we see the creation of growth industries. The importance of strategies which connect financial institutions with new growth industries is increasing.

"Financial Crisis and Policy Intervention"

KOBAYASHI Keiichiro (Senior Fellow, RIETI / Visiting Professor, Chuo University)

  • If we look at the phenomena that have occurred in the market since the Lehman Shock from the perspective of market failure, we can see that the incredible chaos caused was due to there being a market for lemons. The manifestation of a market for lemons is thought to bring about great structural changes, not only in financial markets but in other markets as well.
  • The financial crisis has led to a global mismatch between supply and demand. The acceleration of structural change in the economy means that we can expect an increase in informational asymmetry regarding the future direction of corporations.
  • If that is the case, a market for lemons will occur in many industries, and informational asymmetry will cause markets to break down and stagnation to occur. This is why we need government intervention.
  • There is public will to resolve informational asymmetry when carrying out the restructuring of corporations with uncertain futures. In light of this, the activities of organizations such as the Innovation Network Corporation of Japan are as significant as public policy. The investment of government funds into such organizations can be looked at economically as being public policy.
  • Infrastructure needs to be created for the development of new industries such as the environmental industry and new products such as electric vehicles. However, this infrastructure is difficult to realize under normal competitive market conditions given the externalities present in the market and Increasing-Returns-to-Scale. Accordingly, I believe that the government must play a certain role in creating infrastructures for new industries and products at the development stage.

Discussion

Prof. Yoshino
In the discussion so far we have heard about nine topics: 1) the creation of fair standards in each country; 2) the effective utilization of the retired; 3) supply-side development; 4) human resource development/education; 5) the strengthening of fields such as the agriculture, services, and financial industries, which are weak in Japan; 6) the creation of effective exchange policy; 7) the way government support should be; 8) initiatives for growth in Asia; 9) Support for eco-technology from the government.

Dr. Gitlin
I have three things to say. One, the new party in power is now fighting with the bureaucracy in the belief that they have to change things, and maybe that is right, but it is absolutely the wrong time for the elected government and the bureaucracy not to be cooperating on what the right policy should be. Two, the U.S. will be restored because we are entrepreneurial and accept failure. In these transition times, people must be encouraged to take risks, not the opposite. Third, financial distress is an opportunity to reform companies.

Mr. Takita
There exist industries which need government intervention. The government, the administration and businesses need to tell each other what they each need. We also need to think about how to follow-up on entrepreneurs who fail or make a mistake. I think that industrial policy will be put to good use when we start thinking of pinches like the financial crisis as opportunities for change.

Mr. Nishiguchi
The creation of new business enterprises and the mental state of entrepreneurs are two sides of the same coin. However, Japan is decidedly lacking in its ability to create new business enterprises. Rather than killing things before they begin, we need a social environment and structure and government policies which can foster new enterprises.

Prof. Yanagawa
The government should exercise greater leadership on industrial policy. The government and administration need to present a direction for the country as a whole. We need a framework through which the unemployed, those who have failed at business and those looking to change jobs can look for new work with peace of mind. We are in an era in which there is competition to become the international standard. Industrial policy should work to encourage Japanese businesses to aggressively enter into potential markets in Asia and set product standards.

Dr. Kobayashi
Wouldn't things be better if the entire government was responsible for industrial structure rather than it just being under the jurisdiction of individual agencies? Japanese financial techniques lag far behind the rest of the world, but there is still time to work to catch up. The walls between manufacturing and finance, and scientific and academic industries, create barriers to entry for superior human resources into high-added-value fields. Lenders need to create more friendly bankruptcy laws. We need to create an adequate safety net for those whose businesses fail.

Dr. Gitlin
I have two comments. When you maintain a nonviable company with government support, directly or indirectly, there are two consequences. One, it makes it more difficult for a viable company to compete because they must lower prices to survive. Two, you trap valuable assets in a company that cannot invest enough.
If you have an industrial policy that broadly allocates money on the theory that you are preserving employment, you are supporting an uneconomic situation, and you should be encouraging just the opposite, reducing it to an economic situation where, again, people can get to a point where they can invest in their future.

Mr. Henrot
If you are too debtor-friendly in your legislation, you will have problems as we have. It is a bad choice in the long run to say that banks can wait to be repaid and that companies should be bailed out. The companies who have benefited from these protections very often fall sick again. It is fine to support debtors to a certain limit, but after that you are going to have a credit crunch.

Mr. Broich
In the years to come, while economies like Japan and Germany will have to learn to adopt the culture of failure from the United States, the United States on the other hand will have to learn a different approach in which policymakers talk to industry and bankers and work in a more coordinated way to bring the economy forward.

Closing Remarks

OIKAWA Kozo (Chairman, RIETI)

Ever since the Lehman Shock in September 2008, the countries of the world have mobilized every possible policy to deal with this unprecedented crisis. Needless to say, these policies have included industrial policies. Countries like Germany and Japan continue to be in a difficult phase. Actually, Japan has fallen into recession again after just three years.

Given the situation, it can be expected that the Lehman Shock is going to have the effect of changing the nature of industrial policy. RIETI as well will build on the points and problems brought up in this symposium and continue to work as an institution to further discussion on the way more advanced industrial policy should be.