Developments in International Economic Policy Co-operation and Japan's Tasks

After reviewing the OECD's role in coordinating macroeconomic policy over the last 30 years, Mr. Shigehara addressed Japan's involvement in multilateral approaches to structural reform. That section of his remarks and the question and answer period that followed is in truncated form below:

Until the 1970s, the main focus had been on trade and current payments liberalization. In this context, Japan's participation in successive GATT rounds had brought the average level of its tariffs below US and EC levels, but a high level of protection has remained for a number of agricultural products in Japan.

In the second half of the 1980s when I was Director of Policy Studies Branch in the OECD Economics Department, my Branch prepared papers to make quantitative assessment of the economy-wide effects of agricultural protection using a general equilibrium model it developed as a pioneer. Realizing that there was little dialogue between the economic and agricultural ministries in the capitals of OECD Member countries, I asked member countries to send delegates from the two wings of the governments for discussion of the Secretariat papers at the Working Party. My letter was received with hostility in some member countries including Japan. In the end, this objective and rigorous analytical work of the OECD was said to have made a positive contribution to the GATT work for the liberalization of agriculture at its Uruguay round.

Increased international inter-linkages, notably through trade and investment, have widened the scope for direct international spillovers of domestic structural policies. In many structural areas, such as legal and regulatory systems, education systems and much social legislation, there would not appear to be any crucial direct international dimension. Nevertheless, policies in these areas shape macroeconomic developments, and especially the strength of macroeconomic equilibrating forces. Also, structural policies may affect other areas that do have international spillover effects; this explains the interest in applying multilateral surveillance to apparently domestic issues. For example, when inappropriate domestic structural policies lead to high unemployment, confidence in macroeconomic policies may be undermined. There may, as a result, be turbulence in foreign exchange markets, and fertile ground may be provided for protectionist sentiments.

Over the past decade, multilateral surveillance based on benchmarks and best-practice standards has become increasingly important at the OECD. The Jobs Study, endorsed by OECD Ministers in 1994, laid an analysis of labor markets and other policies and proposed a number of specific recommendations to reduce unemployment and boost employment. These recommendations have been further refined and developed through follow up analysis of specific policy issues, such as the disincentive effects of certain aspects of the tax-transfer system and the appropriate design of active labor market policies.

A similar example, in a different field, is the work undertaken in a joint effort by a number of OECD Committees to identify best practices in the areas of innovation and technology, and environmental policies as well as regulatory practices. Japan has been involved in these exercises.

The coverage of the IMF surveillance has also expanded during the 1990s and several areas now have a prominent part in the Fund's review process of member countries: labor market policies; product market reform; privatization; and financial sector regulation and supervision. Unlike the surveillance process at the OECD Committees, where member countries are represented by delegates coming from capitals, IMF reviews of member countries at the Executive Board are conducted by Executive Directors in Washington.

Multilateral surveillance on structural policies is inherently difficult. First, the effects of structural policy changes are uncertain. This is particularly because structural policies in different areas are prone to interact with each other, implying that the same structural policy change may have different effects across countries. Also, very little is known about the time profile with which structural policies take effect. Finally, because real economies usually deviate in important respects from textbook models, policymakers find themselves in the world of the second- or third-best, suggesting the need for caution in applying policy prescriptions based on the theory of the first-best.

Perhaps more important are the distributional conflicts often involved in structural policy making. Implicitly or explicitly, structural policy measures balance efficiency concerns against concerns of equity and social stability. The pain associated with structural reform usually occurs before the gains. Also, the pain is usually concentrated on specific, often homogeneous and well-organized groups, whereas the gains tend to be widely dispersed and accrue to groups that are heterogeneous and not well organized. Indeed, where reforms benefit firms and jobs not yet in existence, the pro-reform constituency may be difficult to identify. As a result, the constituency against reform is often stronger than the constituency in favor.

Given these problems, it is natural to ask if multilateral surveillance on structural reform in Japan can be effective. Some observers argue that there exists a direct negative correlation between the size of the country examined at multilateral surveillance and the impact of the surveillance. A question has also been raised about the credibility of the exercise particularly on structural policies as international institutions such as the OECD and the IMF as well as delegates from other member countries may not have sufficient knowledge of domestic political and social problems involved in structural reform.

Japan does not belong to regional institutions like the European Union where peer pressure from the Commission and representatives from other member countries can be more effective. This is so partly because they are more aware of local problems and partly because there are national commitments to peer review. As such commitments do not exist in the OECD and IMF processes, the effectiveness of these processes depends crucially on the willingness of the examined country, in our case Japan, to listen to the advice of these institutions and delegates from other member countries. Somewhat similar observations could be made about the effectiveness of G-7/G-8 in structural surveillance, if the body were to embark on such activity more systematically.

The process of publishing the basis for multilateral peer reviews, e.g. economic surveys, etc. can contribute to public debate and discussion. Indeed, we should remember that public debate and the world of ideas are ultimately where most battles have to be won. More generally, information sharing is an important element of structural as well as macroeconomic surveillance. Access to international public goods such as data produced by the OECD on an internationally comparable basis, detailed information it collects about structural policy measures in member countries, its analysis of them and so on is helpful in designing and implementing economic policies in Japan. Japan, as the second financial contributor to the OECD (its contribution is just under the US share of 25 per cent), is expected to play a key role in helping the OECD to continue to secure resources needed for making such products in sufficient quantity and with good quality.

Q: Isn't it true that the only way for Japan to solve its demand problem is for it to export?

We should not think that export-led growth is bad for the international community. There are always tradeoffs. You should look at this in relative terms. It is important to note that when the yen depreciates, it may hurt Japan's competitors but it helps importers of Japanese goods such as New Zealand. Also rising exports over a period of time can lead to rising demand, when in combination with structural reform.

Q: Is the G7 still relevant as a forum to discuss policies?

Even in the "glorious" years of the G5, it was not glorious. You can only talk seriously when you are outside of the limelight. In terms of macroeconomic issues, the G7 is not very useful. With the introduction of the euro, what is the point of having European countries individually represented? We may want to change the membership of the G7; certainly China and Korea will become more important.

Q: Free trade is fine, but countries need time to adjust to change. I believe it is more important to maintain the economic welfare of workers.

This whole globalization debate started in France. I am concerned about erratic currency fluctuations. In Europe, you see the tradeoffs between efficiency and equity. If you put too much emphasis on equity, you hurt consumers. We should encourage the exit of inefficient companies. We have to globalize by our own will. This will require statesmen, not politicians.