An American comedian, a week after the 9/11 terrorist attacks, tried to ease people's anxiety a little by joking, "Boy, those terrorists sure did take the heat off of the sharks."
The world of fretting about Gary Condit and shark attacks had ended. Americans have real problems to worry about and nearly everyone agrees what those problems are. Just as there is the risk of politicians taking advantage of this new consensus to get their own pet projects through Congress, there is also a danger that policymakers around the world will turn their attention away from economic problems, such as the impending global recession.
In fact, people here in Tokyo have wondered whether a protracted war on terrorism might require Prime Minister Koizumi to use his political capital to participate in the coalition against terrorism, leaving few resources to deal with Japan's economic problems. Last month, at a seminar in Tokyo called "Asia and the US after 9/11," scholars from the Brookings Institution and RIETI considered the new roles of Russia, China, the US, and Japan. All four countries will have contributions, political and military, to make to the war on terrorism. And the level of meaningful cooperation between the countries in this "strategic quadrangle," as Johns Hopkins professor Michael Mandelbaum has called it, will increase out of necessity.
In this era of cooperation against terrorism Japan should not forget its economic responsibility: getting back on a path to growth and doing its part to avert a severe global recession. Where do the four sides sit in the quadrangle?
In the recent past, the US's job has been one of keeping tensions between the other three countries at bay. Now, the US role is one of building an actual coalition and reframing post-Cold War alliance politics. Secretary of State Powell has declared the end of the post-Cold War period and has inaugurated what has been called "the post-post-Cold War era" or, for now, "a new framework," by defining an enemy that is common to states. Terrorists seek change by embarrassing governments. So it makes sense that, as far as national governments are concerned, there is a consensus to fight terrorism.
The Gulf War made one lesson clear about fighting conventional wars against the US: don't fight conventional wars against the US. Terrorists try to carry out campaigns against states by being as unconventional as possible: in the case of 9/11, they used American technology, trained at American schools, and lived in America, to destroy American establishments. But the most difficult element for conventional armies is that the terrorists have shed physical states or national affiliation. Nevertheless they do have a "foreign policy," in that war is diplomacy by other means. So, if states harbor them, the terrorists would now be seen as quasi-state agents. This is President Bush's new paradigm.
The US economy was another target of the terrorists. The World Trade Center, in the financial district of the financial capital, was the symbol of American capitalism. As for any long-term impact on this front, though, the terrorists will have failed. Edward Lincoln, a scholar at the Brookings Institution and former economic adviser to Walter Mondale, predicted that the psychological effect of the attacks would fade quickly. It will be difficult to know exactly how much responsibility the attacks had in causing any economic downturn. In any case, the US will not follow in the footsteps of Japan after its financial bubble burst a decade ago.
Rather the US will continue to be a source of wealth--itself a terrorism antidote when governments allow their citizens to benefit from economic liberty and openness. Dr. Lincoln said the US economy will bounce back quickly because, unlike Japan, the US had no real estate bubble; there was no broad market meltdown in the US; American corporations are extremely quick at reacting to the market and restoring profitability; and US banks cannot hide their non-performing loans.
For the US, there are at least two other levels to address terrorism. First, the US government must make sure that federal agencies cooperate and share information towards increasing the security of the country. Second, the US will ratchet up pressure on the Israelis and Palestinians to reduce the level of their conflict and establish a Palestinian state to facilitate further negotiations. But the US cannot prosecute this effort against terrorism alone.
Securing support from other countries such as Russia will be vital for a successful effort to combat terrorism, given that country's intelligence expertise and its experience in Afghanistan, the apparent origin of the terrorist activity. But "the US joined Russia and China in the fight against Afghanistan, not vice versa," said Alexander Lukin, adviser to the Moscow regional governor and former Brookings visiting fellow.
To be sure, President Putin had been asking the US and Europe to join a Moscow-led anti-terror campaign months before 9/11. Nevertheless, Russia and China will require the United Nations Security Council to lead in the war effort, Dr. Lukin continued. And Russia will expect something in return for cooperation. In particular, Russia will want the US to support its accession to the WTO and it will expect the US to tone down its criticism of its campaign in Chechnya. In the past, President Putin has even linked Chechen separatists to Osama bin Laden's organization.
So far, Russia's cooperative tone has been encouraging. "After 9/11, Russia may have behaved properly for the first time since it destroyed itself ten years ago," quipped Dr. Lukin. The reason the bond is so strong between the US, China, and Russia, he said, was that now, there is a common external enemy. It is not a conflict over ethereal ideologies, but a struggle for practical matters--security and survival.
China's importance will increase too. As a member of the UN Security Council and the WTO, and with GDP growth of seven percent a year and its own expertise in dealing with terrorism, China would be a strong partner. Moreover, China's close relationship with Pakistan will help to keep that Muslim country inside the US-led coalition. Its accession to the WTO will have several beneficial impacts on China's economy. According to Nicolas Lardy, of the Brookings Institution, resources will be allocated more efficiently and move to China's labor-intensive industries. Trade will also introduce more foreign technologies to China as well as aiding in its structural transformation. China's trade expansion will have positive effects on regional, and world, economic growth.
China may actually reap benefits from the US's war on terrorism as well. The political benefits are clear. China is no longer the Bush administration's stand-in boogeyman. The US may also have less room to criticize China on its crackdown on separatists in Xinjiang. China will see economic benefits too. C.H. Kwan of RIETI said that some of China's industries would benefit from the war effort, demonstrated by the now ubiquitous Chinese-made American flags. Also, highly educated Chinese living in America may see China not only as the new land of opportunity, but as a land of relative safety (from biological warfare). If they continue to return to their homeland, it would augment China's stock of human capital.
But Japan should not view China as a threat. Dr. Lardy and Dr. Kwan agreed that, if anything, Japan stands to benefit from China's integration into the regional economy. The beneficiaries to China's rise, in fact, will include most of the world, as China may one day act as an economic locomotive, pulling smaller economies upward. The losers will be those who compete with Chinese industries, primarily those labor-intensive companies in Southeast Asia.
"Don't confuse growth of China's economy with size," warned Dr. Kwan. After all, even with ten times the population, China's economy is still only one fourth the size of Japan's. Moreover the majority of the value of products assembled in China come from Japan, the US, and elsewhere. So the trade numbers exaggerate China's industrial power. Statistics do not yet delineate the value actually added by Chinese workers to products (though they may bear the "Made in China" label).
Rather, Japan's economic enemy is within. There are several areas where Mr. Koizumi's reform package is lacking. Dr. Lincoln said that Japan's non-performing loan (NPL) problem is the economy's most pressing, yet Mr. Koizumi's plan to address it is inadequate. Dr. Lincoln also suggested elements of the package were peripheral. For example, the idea of privatizing the nation's Postal Savings Service is misguided. First of all, Japanese companies need to move to direct financing, so why add another bank to the system? Also, since the Postal Savings program's inception, the bureaucrats that run the organization have been in the business of collecting money only. They have had no experience in lending. Surely there are people more qualified for this job. Dr. Lincoln recommends shutting the whole operation down over ten years.
Masahiko Aoki, president of RIETI and professor at Stanford University, made it clear that, though the task at hand is daunting, the Japanese government has made substantial progress in creating policies that should assist in Japan's recovery. For example, the Financial Services Agency (FSA) has begun stringent inspections to determine the soundness of banks' loans, though more incentives are needed to get the banks to write off the bad loans. Also, to slow the rise in unemployment, the government is making it easier for people to change or find new jobs.
But Dr. Aoki agreed with Dr. Lincoln that more is needed in the area of corporate governance. In the past, the relationships of the businessmen and the bankers were so close that they would hide problems in the corporations to maintain an illusion of prosperity. Now, with banks pulling out of corporations, however, a management vacuum has been created. Outside and foreign directors will be crucial to the restructuring process.
Nowadays it may seem expedient to blame terrorism for poor economic performance. But governments and corporations should not use terrorism as an excuse to avoid reform. Already American corporations are launching "reverse makeovers." They are using the war on terrorism as an excuse to make overly bleak forecasts, so that the next quarter will seem that much rosier. Japan should not follow suit: reform cannot wait.
To manage the fragile economic situation and show ample support in the war on terrorism, Mr. Koizumi will need extraordinary political skill and policy aptitude. At its disposal, Japan has three general policy options for responding to the terrorist attack, said Kiyoshi Sugawa, a former visiting fellow at the Brookings Institution. The three channels include an international coalition, the US-Japan alliance, and domestic security (protecting its own citizens).
Mr. Sugawa argued that so far Japan's response has relied too heavily on the US-Japan alliance, while more attention must be given to domestic security. Indeed it has been said that in the time that it took for the US to close down its roads and airspace after the attack, had the same happened in Japan, only a report of the incident would have been made to the Japanese cabinet.
While Japanese approach must be broader, the relative quickness with which Japan moved to support the US does reinforce an important message: The war on terrorism is not a war on Islam or on any particular culture. Japan, a nation depicted as Shinto or Japanese on Samuel Huntington's map, "has a good relationship with the Muslim world, which could be an asset. It could drive a wedge between any clash of civilizations," said Yoshihide Soeya, a RIETI faculty fellow and professor at Keio University. Dr. Soeya also recommended that Japan broaden its scope. "If we could globalize Japan's politics, we could obtain a new perspective, maybe even on collective defense."
The war on terrorism will be seen as a public good and there will be questions of burden sharing. So far and to Mr. Koizumi's credit, Japan now has law that enables the country to participate in a coalition of like-minded countries against terrorism. The US has recognized his effort; and it is hopeful that China and Korea are at least acquiescent regarding Japan's new role. This is a chance for Japan to find its place in the world and to meet the expectations of its people and the global community.
On this front, Japan is performing rather well. But a healthy global economy is also a public good. As the world's second largest economy, one of the best and most substantial ways for Japan to make a contribution will be to stay vigilant in fixing its economy.
Author, Devin Stewart
Special Assistant to the Vice President
Research Institute of Economy, Trade and Industry, IAI
e-mail: devin-t-stewart@rieti.go.jp
Editor in Chief, Nobuo Tanaka
Vice President, Senior Fellow
Research Institute of Economy, Trade and Industry, IAI
e-mail: tanaka-nobuo@rieti.go.jp
tel: 03-3501-1362 fax: 03-3501-8391
The opinions expressed or implied in this paper are solely those of the author, and do not necessarily represent the views of the Ministry of Economy, Trade and Industry (METI), or of the Research Institute of Economy, Trade and Industry (RIETI).
