Exploring the New Capitalism (Summary)

The Japanese government aims to realize a "new capitalism" based on the concepts of "Virtuous Circle of Growth and Distribution" and "Pioneering a New Post-Corona Society." In the new capitalism, the issues to be addressed include the decline in productivity and international competitiveness of the Japanese economy, as well as climate change and the intensifying international competition over technology.

In this symposium, hosted by the Research Institute of Economy, Trade and Industry (RIETI), a policy think tank of the Ministry of Economy, Trade and Industry (METI) of Japan, and the Centre for Economic Policy Research (CEPR), an independent, non-profit organization founded to enhance the quality of economic policy-making within Europe, European and Japanese experts held discussions on the current debate on the new capitalism, focusing on the two topics of "Climate Change and Economic Dynamism" and "Global Value Chains’ (GVC) Resilience in the Face of Geoeconomics Shocks," and debated on ways to solve both global and Japanese problems.

YANO Makoto (Chairman, RIETI / Project Professor, Institute of Economic Research, Kyoto University / Professor by Special Appointment, Sophia University)

Many of you may know, the new capitalism is Prime Minister Fumio Kishida’s policy philosophy, advocating the creation of a good loop between growth and distribution. Mr. Kishida’s view is very similar to what I've been studying, which is called market quality theory, which states that high-quality markets are necessary for healthy economic growth. By market quality, I mean a measure of market performance by which not only efficiency in allocation but also fairness in the trading process may be achieved.

Mr. Kishida’s proposal is to create an innovative society. Towards this goal, we need a new type of industrial policy. Industrial policy in the past was intended to create infant industry protection to catch up to the leading technologies from overseas and it allowed Japan to flourish and now China in the same way. But it has run its course. The modern industrial policy is different. It is not for the purpose of catching up, but for the creation of fundamental technologies. It is the policy that has dominated the US economy since WWII and this, along with a high-quality market, allowed them to outpace the other economies. Then the question is, what should the new industrial policy target right now? Economic theory, as well as past experiences, suggest that the targets should be large and general. What we should pursue is a general target such as green energy, zero-emission vehicle, and in the face of current geopolitical situations, the creation of a stable global value chain.

Moderator: Richard BALDWIN (Professor of International Economics, Graduate Institute, Geneva)

Rick VAN DER PLOEG (Research Fellow, CEPR / Professor of Economics and Research Director, Oxford Centre for the Analysis of Resource Rich Economies (OxCarre), University of Oxford)

The golden policy is to price carbon, and it's surprising how little it's done in the global economy. We've agreed on net-zero by 2050 but global emissions are still rising relentlessly at about 2.6% per year. The reason is that these carbon prices have very little coverage, with many of the largest polluters exempted from the price, including steel, aluminum and cement production, in addition to many regions of the world. When we look at the data, rather than pricing carbon, we see huge fossil fuel subsidies in the global economy, which is exactly the opposite and amounts to a 6-7% of global GDP subsidy on fossil fuels. What we need to do, very quickly, is we need to get rid immediately of all these fossil fuel subsidies, with a moratorium on coal and possibly on diesel and petrol cars, and start pricing carbon and let that rise at about 3.5% per year. Then we need to subsidize green energies to redirect technical change.

The pandemic had surprisingly little effect on economic activity, but it had huge effects on inequality. But we can learn something. They did a vaccine race, and within a year we had a whole lot of vaccines, and it helped to turn the pandemic. Could we not use a similar model on a global scale or on a national scale and have a green technology race for the easier technologies, with real progress within a few years? If that is successful, then perhaps some of the currently-less-likely technologies might even have a chance of becoming reality.

To address supply chains, we need to come to a resilient economy. We should think of more supply chains that are not only resilient for pandemics and for terrorism, but also resilient in a world of climate change. You need a grand coalition of visionary politicians, business leaders, and people in society to shift from a bad to a good equilibrium. There is a need for radical climate policy. We all know about climate tipping points, but let's use that same type of idea now to use non-climatic tipping points, including technological, social and political tipping points, to get to a really rapid green transition.

Mankind has always been inventive and it will rise to the challenge again. But we mustn't wait long because it becomes much costlier for every year we wait and then it might be too late, because these climatic tipping points lead to abrupt and irreversible changes, and we want to avoid those at all costs.

ONO Yuki (Representative, Hachidori Denryoku, Borderless Japan, Inc.)

Carbon dioxide concentration is measured in ppm. The time when the ppm is lowest was the ice age. According to data, the most comfortable ppm for humans is 280 ppm. But after 1950, the degree of ppm reached over 400. The carbon dioxide concentration has increased to a level that is 40% higher compared to the 800,000 years before the industrial revolution. Carbon dioxide concentration correlates with the global temperature.

So what can we do about global warming? It is said that to prevent global warming, we must reduce emissions of greenhouse gases by at least 50% from the 2010 level by 2030. By 2050, we must also realize zero emissions of greenhouse gases. If we cannot achieve any of these, there's no turning back. So how are energy and global warming related? There are many ways that we can take action for global warming. But the way which has the biggest impact is to switch from thermal power to renewable energy.

Hachidori Denryoku has three features: do not emit CO₂, only use 100% renewable energy; use 1% of the electricity costs for construction of new renewable energy power plants; use another 1% for supporting social activities. To stop global warming, we need to increase renewable energy, so we decided to use an energy mix of 100% renewable energy. We use 1% of electricity cost for the construction of new renewable energy power plants. People can support social activities by using our electricity, and they receive a report on how helpful those donations are for solving social problems.

Even if it is good for solving global warming, people do not choose high-cost topics, so we set the price lower than the local major energy companies’ standard plans. We would like customers to realize how much impact they have on global warming by switching their electricity, so we try to tell them with the monthly bill, such as by adding how much it costs and also their contribution to stopping global warming.

Richard BALDWIN:
Would you say that climate change is really a problem of too much heat and too much seawater, and too little fresh water, or is that too simplistic?

Rick VAN DER PLOEG:
That is obviously too simplistic. There are obviously connections, but of course, global warming will affect particularly developing countries. There will be costs, so there's a huge moral dilemma.

Richard BALDWIN:
Can Hachidori Denryoku provide a stable supply of energy even in such situations as big earthquakes?

ONO Yuki:
No, we cannot supply energy stably yet, but I think renewable energy has the potential to do it.

Richard BALDWIN:
Do you think the war in Ukraine is helping or hurting the fight for climate change?

Rick VAN DER PLOEG:
Unfortunately, many countries have responded by taking measures to lower gas prices, which is the incorrect response, both in the fact that it supports the Putin regime, and that it is a missed opportunity. We should use this whole crisis to speed up the green transition. But we should, of course, help those people who are hurt most by it by providing them with cash transfers instead of subsidizing the oil industry again. I see that during this period, people will rely on coal a bit. That's bad for green in the short run, but it may be good in the long run if you hasten the green transition as well.

Richard BALDWIN:
Energy is a huge equipment industry involving huge investments. Where have you gotten so far, and when do you expect to be in the black?

ONO Yuki:
It's difficult for ventures because of money, I have no exact idea, but we will continue to invest in renewable energy plants and then try to get energy which is not affected by market conditions.

Richard BALDWIN:
When you communicate with your clients and customers, do you find it effective to let people know that their money is doing well?

ONO Yuki:
Yes, they seem happy to know how their money is used to help people and also how people’s situations change for the better.

Richard BALDWIN:
Regarding climate change, who's going to pay for it? And you might also touch upon who should pay for it.

Rick VAN DER PLOEG:
Carbon pricing is not a way to raise revenue. It's just a way to change relative prices to make it more attractive to be green. We must realize that we need green industrial policy and that will cost. In terms of domestic policies for housing for example, there will be a need for a mixture of soft finance and subsidy programs to make green housing possible. This is similar for automobiles, etc. In terms of corporations, backup power is necessary, so green hydrogen will be a necessity, and in terms of paying for it, lobbying groups have popularized the idea that governments should pay corporations for their transitions, but that is not necessarily correct, and perhaps a sharing of those costs would be more just. In terms of total cost, it would be about 1-2% of total GDP to cover transitions, so I think it is just better to get it done.

From a climate justice point of view, developing countries are told that they are not allowed to develop using the same methods of developed countries, who emitted most of the carbon, and also they will suffer more from the costs. This really requires two things. One, huge transfers from rich countries to poor countries. Two, big transfers of green technology, again to developing countries to help them to make a green transition.

Richard BALDWIN:
In Japan, do you find that there's a big pattern between a generational attitude towards climate change?

ONO Yuki:
I think yes. Younger people study in school about global warming, and understand the need for action, but also older people have changed a little bit.

Rick VAN DER PLOEG:
The argument has been that if you have an intergenerational Win-Win situation, then all generations are better off, and that maybe those people still to be born need to pay money to people who are currently alive to make that green transition possible.

Moderator: WATANABE Tetsuya (Vice President, RIETI)

Richard BALDWIN (Professor of International Economics, Graduate Institute, Geneva)

First, about global supply chains, the most important thing to remember is that it is not one-size-fits-all. There's simple versus complex global supply chains. The simple supply chain is sourcing simple inputs from abroad. However, these are very different from complex global supply chains. Risk and reactions in complex global supply chains are entirely different than in the simple case. There are also three sources of shocks which are supply shocks, demand shocks and transportation shocks. It is very important to understand if the shock is coming from the supply or demand side.

If we go into types of shocks, idiosyncratic shocks are things like earthquakes or strikes. These are very well known and prepared for by global businesses. However, what's really different about what we're seeing now is that we're seeing some systemic shocks. What I mean by ‘systemic’ is that it affects many sectors and many countries at the same time.

Two recovery concepts that are important when you think about the risks are robustness and resiliency. Robustness means the ability to continue during the shock, and that's relatively easy to do when you have simple global supply chains but it's very hard to do when you have complex global supply chains because of the long-term relationship that's necessary between the buyer and the seller. For complex supplychains, businesses usually go for resilience, which means that they can recover quickly after the shock.

So, are policies needed? First of all, you should match specific policies to specific shocks. Second, there are some ‘no regrets’ policies. For example, supplier information is a public good and there should be support for that. The second issue is that stress tests should be undertaken as experiments. In other words, the government should do as the regulatory authorities in finance do; ask specific, hypothetical questions and look at potential scenarios. And we should be doing that with critical supply chains.

Lastly, there's been some talk about China backing Russia, and the US extending sanctions to China and having a big problem. Trying to shut off China from major manufacturers around the world will be extremely expensive and difficult and probably won't happen very fast. China and the US are the only nations that are major suppliers across the world. The supply chains are already so integrated, and China is already so dominant in the supply of industrial inputs.

TODO Yasuyuki (Faculty Fellow, RIETI / Professor, Faculty of Political Science and Economics, Waseda University)

Geographically diversified supply chains are more resilient. Firms are more resilient in the COVID-19 pandemic if they have supply chain partners in different countries. This is because the substitution of disruptive partners is easier when supply chains are more diversified. In other words, domestic concentration of partners is risky considering possible domestic shocks. Also geographically diversified supply chains are innovative because firms can learn more new knowledge from distant partners than domestic partners. In addition to supply chains, global knowledge networks of firms are getting more and more important. International research collaboration can raise the quality of innovation of firms substantially and the effect of international collaboration is higher than the effect of domestic collaboration.

Based on the conceptual framework and evidence, I would like to provide some policy suggestions. First, policies should not focus too much on reshoring, but should focus more on diversification, but supply chains should be diversified among countries without national security concerns. We should utilize international frameworks such as G7, QUAD, free and open Indo-Pacific (FOIP), and Japan-U.S. and Japan-EU FTAs to lower search costs of business matching and national security risks. Second, in addition to supply chains, we should expand the international knowledge networks among countries without national security concerns because innovation is key to economic growth, economic resilience and national security. But it should also be emphasized that the restrictions are needed but should be minimal. Also clear rules should be presented to the private sector beforehand so that they can actually optimize their profits. Finally, policies should not focus too much on the semiconductor industry, but should cover broad industries and firms because any product can be a choke point in supply chains and industrial policy targeting limited industries has not been necessarily successful even in China, according to many authors. Also, to be effective, industrial policies should be combined with competitive policies so that competition among firms and among industries is promoted.

WATANABE Tetsuya:
What is the implication and the relevance of the supply chain discussion in the overall theme of the new capitalism?

Richard BALDWIN:
We have to go to a more circular, sustainable, inclusive, resilient kind of society. New capitalism is, in some sense, going back to a much older world where blocks matter, geostrategic points interact with economics much more robustly and quickly. It's a matter of resilience and in the new capitalism, it’s not just about resilience and sustainability, it's also about stability and reliability of international partners and learning that we're in a different world now.

Also, the interaction between climate change and global supply chains is another dimension where the new capitalism affects the latter, and green considerations need to be taken into account. If we get carbon border taxes, the carbon content of your global supply chain will start to matter a lot. The sustainability of new capitalism and the global supply chain will matter because of carbon pricing.

WATANABE Tetsuya:
What is the balance or the role of a rules-based system to bridge the gap between the geopolitics and interdependence of the economy?

Richard BALDWIN:
There is quite substantial empirical literature that shows trade relationships and investment relationships reduce the likelihood of conflicts between countries. However, if the fighting does start, it's very, very difficult to undo it. On the whole, I think it's been useful and reduced conflicts to have interdependence. We might have to think harder about who reliable trading partners are and not come up with some idea that we need to have more decoupling or less decoupling but more intelligent interdependence, and realize that there are some countries in this world who can or may engage in very disruptive things that will have huge consequences for commercial realities, and that's the world we live in now.

TODO Yasuyuki:
I agree, but I actually think the world has changed drastically since COVID, because we have long known that diversification can lower risks. Asian countries are increasing their reliance on China too much. We should lower the heavy reliance, and Japan and the U.S. showed that it is possible to do that, so we other countries do that. We can’t go back to that old state in terms of the reliance on China. Interdependencies can avoid conflicts, but relying too much on something means we cannot avoid conflicts. Also, interdependence in terms of technologies is also an important factor in avoiding conflicts.

Richard BALDWIN:
It's been a rich painting of ideas of how geoeconomics and risk in the new capitalism intervene. We touched on many things on which there is a good deal of research in the CEPR and RIETI discussion papers. I would like to thank RIETI for the long and fruitful interdependence that CEPR and RIETI have developed, and I can assure you that we will remain at peace and harmony for many years to come. On that hopeful note of how interdependence makes good friends and better output for everybody, let me close the seminar and thank Professor Yano, Tetsuya Watanabe, and all the speakers for their wonderful interventions.