Is Japan Following the Steps of the Southern European Countries?

TSURU Kotaro
Program Director and Faculty Fellow, RIETI

Japan's efforts on the integrated tax and social security reform, which has been discussed since the final months of the government of Prime Minister Junichiro Koizumi, have reached the point where debate on specific reform measures including the raising of the consumption tax rate is taking central stage in the Diet. However, over the course of years since the days of Koizumi, general account expenditures—which cover the cost of policy implementation—have ballooned due to the global financial crisis and the Great East Japan Earthquake. All the while, Japan's long-term vision for fiscal consolidation remains unclear. Meanwhile, in Europe, where many countries are oriented toward big governments, some Southern European countries including Greece are in a serious fiscal crisis, but nevertheless there have been growing protests against austerity. Is Japan following the steps of the Southern European countries?

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In considering this question, we must have a uniform framework for understanding why Northern and Southern European countries differ vastly in their fiscal health despite both having big governments, and why Anglo-Saxon countries such as the United States and the United Kingdom pursue small governments. Groundbreaking research findings in this regard can be seen in a 2011 paper co-authored by Pierre Cahuc, professor at École Polytechnique, Paris; Yann Algan, professor at the Paris Institute of Political Studies (Sciences Po); and Marc Sangnier, lecturer at Sciences Po and the Paris School of Economics.

They focus on the civic-mindedness of people as a determinant for the degree of their support for welfare states and the desired size of welfare. Being highly civic-minded means no misbehaving with taxes and social security benefits. It is assumed that in a country with highly civic-minded people, civil servants are unlikely to engage in corrupt or dishonest conduct, and the government tends to be highly transparent and efficient.

People are more likely to accept tax burdens and corresponding social security benefits as well as support a welfare state when they believe that they are surrounded by highly civic-minded people, regardless of their own civic-mindedness. This is because they feel assured that they will receive what is deserved for what they have paid, expecting few people to cheat on taxes and few civil servants to misbehave. Meanwhile, it is believed that the non-civic-minded clamor for a wealth redistribution policy even more strongly than the civic-minded because they can free-ride on generous social security benefits while evading taxes.

Thus, the higher the ratio of civic-minded people in a country, the stronger is the overall support for wealth redistribution and a welfare state because the people can trust others. At the same time, however, an increase in the number of non-civic-minded people or those who free-ride on the benefit of redistribution also leads to stronger support for a welfare state. As such, effects from two opposite directions work to increase support for a welfare state.

In other words, the degree of people's civic-mindedness and that of their support for wealth distribution (or the size of a welfare state) are not in a positive correlation. There are two types of big welfare states: efficient ones where both the people and civil servants are civic-minded and inefficient ones where many of them misbehave. Meanwhile, countries with an intermediate degree of civic-mindedness tend to pursue small governments as the support for wealth redistribution is relatively weak.

Using data from international surveys such as the European Social Survey and the World Values Survey, Cahuc et al. showed that the more that individuals respect civic-mindedness and the more they trust those around them and the government institutions, the stronger is their support for a welfare state. The more that the people trust others and the government institutions, the greater is the tendency to find civil service efficient and high in quality, where the quality of the government is measured by their subjective evaluation of the living standards of pensioners and unemployed people as well as of the current status of education. Meanwhile, where the degree of civic-mindedness is measured by their perception—i.e., justifiable or not—of such acts as claiming unentitled benefits from the government, cheating on train and other transportation fares, evading taxes, accepting bribes, dumping waste illegally, and purchasing stolen items, the lower is the degree of civic-mindedness, and the stronger is their support for a welfare state.

Now, let's look at the relationship between the degree of trust in others and the size of social security expenditures in advanced countries (see Figure). Scandinavian countries and the Netherlands, where there is strong trust in others, have large social security expenditures measured as a percentage of the gross domestic product (GDP). Where the degree of trust in others is at a medium level, we see small-government countries such as Anglo-Saxon countries and Japan, where the size of social expenditures is relatively small. Found further to the left in the figure—i.e., lower trust in others—are countries with large-size social expenditures, mostly Southern European countries. The significant presence of underground economies, which serve as a hotbed for tax evasions, in some Southern European countries such as Greece, Italy, and Spain (accounting for 20% to 25% of GDP according to a survey conducted by Friedrich Schneider, professor at Johannes Kepler Universitat in Austria) is yet another piece of evidence pointing to the low civic-mindedness of these countries.

Figure: Trust in Other People and the Size of Welfare StatesFigure: Trust in Other People and the Size of Welfare States
Sources: Organisation of Economic Co-operation and Development (OECD) and the World Values Survey
Note: The size of a welfare state is measured in social security expenditures as a percentage of GDP, and the degree of trust in other people in the percentage of people who chose "Most people can be trusted" in the 2000 World Values Survey.

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Now, where does such support for a big welfare state come from? Is it a sort of culture that has been inherited across generations? If so, the degree of support for a big welfare state may not change easily even when the surrounding environments change or political forces exert influence.

The role of "culture" (see the Keywords section) has been attracting significant attention in economics. It is difficult to isolate and analyze the effects of cultural factors as culture per se is subject to the influence of economic and institutional factors. However, in their paper published in 2011, Erzo Luttmer, professor at Dartmouth College, and Monica Singhal, professor at Harvard University, demonstrated the presence of the link between the preferences for redistribution of the immigrants to Europe and the average preference for redistribution in the countries from which they or their parents came, taking the epidemiological approach (see the Keywords section), a method receiving growing attention in recent years. This suggests that individuals' support for wealth redistribution is affected by their cultural backgrounds.

In contrast, taking the same epidemiological approach, Cahuc et al. have shown that whereas first-generation immigrants' support for wealth redistribution policy is linked with the average redistribution preferences of their countries of birth, second-generation immigrants are not affected by their parents' countries of origin, but by the degree of trust they have in the people around them and in the legal system, politics, and parliament of the countries of their residence. This means that individuals' preferences for wealth redistribution are determined by their beliefs and values shaped in the process of adapting to the environments in which they live as well as by cultural preferences inherited from their parents, but that the influence of the latter factor disappears among second-generation immigrants.

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In considering the current status of Japan, what implications should we draw from these research findings? Based on the results of the World Values Survey, Japan is ranked somewhere in the middle of advanced countries in the degree of trust in others and civic-mindedness, which has been the case over the past 25 years or so. However, a closer look at the responses to the questions regarding trust in the government shows that those with an extremely high level of distrust in the parliament and civil services have been increasing steadily in Japan, with the proportion of such people being one of the highest among advanced countries.

The revelation of various cases of government failure since the 1990s has caused public trust in the government to fall. Today, politicians—whether they belong to the ruling or opposition parties—are strongly critical of the administrative branch of the government. They have a deep-rooted belief that the government budget is fraught with wasteful spending, and central government ministries and agencies hold significant amounts of "hidden funds," i.e., surplus and reserve funds in special accounts. Needless to say, eliminating wasteful spending is important, and politicians are required to monitor and supervise administrative agencies and bureaucrats on behalf of the taxpayers.

However, by going too far in bashing the central government ministries and civil servants, Japanese politicians might be excessively undermining the people's trust in the government, ending up shackling themselves. If the taxpayers believe that the civil servants are not trustworthy and the government sector is fraught with wasteful spending and redundancies, they would oppose any increase in tax burdens, and it is not surprising if some people feel tempted to cheat on taxes or receive social security benefits fraudulently if given a chance. In other words, fueling civil distrust in the government can lower their civic-mindedness, which may put Japan on the same track as the Southern European countries, leading to an inefficient large government and a fiscal bankruptcy.

However, this track following the path of the Southern European countries is not culture, and we can avoid it by changing our social and institutional environments. To begin with, we must enhance the transparency of the government to restore public trust. At the same time, it is necessary to take measures to enhance the civic-mindedness and mutual trust of the people. Efforts should be made to deepen the understanding and consensus at the political and general-public levels.

>> Original text in Japanese

* Translated by RIETI.

Keywords

[Culture]

In terms of economics, "culture" is defined, for instance, as "systematic variation in beliefs and preferences across time, space, or social groups" by Raquel Fernandez, professor at New York University, or as "social conventions and individual beliefs that (are selected as a rational choice and) sustain the Nash equilibrium as focal points in repeated social interactions" by Guido Tabellini, full professor at Bocconi University.

[Epidemiological approach]

In epidemiology, multiple samples of people are compared statistically—typically, samples of immigrants of various origins are compared against a sample of natural-born citizens—to determine whether a certain disease is attributable to genetic factors or environmental factors. Likewise, in economics, samples of immigrants and their descendants are compared against a sample of natural-born citizens in their perceptions, preferences, behavior, and so forth as found in various surveys to determine the fundamental effects of culture inherited across generations.

May 21, 2012 Nihon Keizai Shimbun

June 18, 2012