Policy Update 013 Pre-event Report No.3
Fiscal Reform from the Perspective of Social System Design
Senior Fellow, RIETI
With tax revenue dwindling amid ongoing deflation and snowballing debts left over from massive past fiscal expenditures, Japan is now facing the potential risk of fiscal bankruptcy. Against such a backdrop, the Research Institute of Economy, Trade and Industry launched a "fiscal reform project" in December 2002. Project members have since discussed and analyzed an ideal form of fiscal system and created specific policy proposals for achieving it. In the upcoming RIETI Policy Symposium "Fiscal Reform of Japan: Redesigning the Frame of the State" to be held on March 11 and 12 at the United Nations University in Tokyo, they will present the hitherto-obtained findings of these studies while inviting commentaries from various experts in lively debate. As they prepare for the event, we asked our fellows about the focus of the symposium and the uniqueness of this project. In this the second in a series of reports in the run-up to the event, we asked RIETI Senior Fellow Yoshinori Yokoyama about his unique approach to tackling Japan's fiscal problem. Capitalizing on his experience as a management consultant, he has been proposing policy measures from the viewpoint of what solutions and strategies he would present if asked by the Japanese government to fix its fiscal problems.
RIETI Editorial Team: As a seasoned management consultant with years of experience, how do you perceive the ongoing debate on fiscal reform?
Yokoyama: Any fiscal reform debate, whatever arguments you make, boils down to increasing revenue and cutting expenditures. But if we put it that way, it would be too matter-of-fact and uninteresting. So, I think we need to discuss it in such a manner as to propose intriguing ways of increasing revenue and cutting expenditures, which would arouse people's interest and make them take action. I have been wondering whether I could put forward more action-oriented proposals with regard to three key aspects of fiscal problems - revenue increase, expenditure cuts, and the degree to which an individual's income is taken as the basis for tax calculation - although they cannot be subjected to the same level of discussion.
Let me talk on how I always feel about arguments concerning fiscal reform. To begin with, it is a matter of fact that things go well when the system changes. But the problem is that it takes too long and we cannot afford to wait until it happens. Also, even if it does happen, it may not be the perfect solution. For instance, under a taxpayer identification number system, even if realized, it would not be possible to capture 100% of people's income when calculating taxes. But, even if not perfect, there should be things that we can do. Instead of wasting our time on lengthy discussions which are basically an "excessive consumption of information," why don't we take action to realize what we can do now? That's my approach.
This is, in nature, the same as strategy. When mapping out any strategy, you cannot have the ideal solution, but you must settle for the realistic one. Should one have an ideal solution or overwhelming military power, whoever it is, they would always win the war. But strategy is the process of considering ways and schemes to win the war you cannot afford to lose, without getting the best available resources, but with a weapon in hand. A practical approach is to use, to the fullest extent, whatever limited strength one may have. So, the policy measures I propose are quite different from theoretically sound policy proposals put forward by scholars. For someone like me who has long been at the business front, when you are not doing what you know you need to do, it is same as if you didn't know. And we should say, "Stop quibbling. Let's just give it a go, as we never know." Combining this approach with the concept of "social system design," which is my research theme, is the stance I am taking in finding ways to solve fiscal problems.
RIETI Editorial Team: Could you explain your so-called "social system design" approach?
Yokoyama: I define the term "social system design" as a "system for delivering values to final beneficiaries (mostly, consumers or ordinary people)." A social system, which has cross-cutting relationships with conventional industrial classification, is tested for overall consistency, effectiveness and efficiency as a system. There are a great variety of social systems such as "transportation system," "financial system," "medical system," and "education system," ranging from those built on technology logics to those designed on social values. And each of them is being operated in such a way that the government and the private sector work hand-in-hand, interacting with each other to deliver values to ordinary people.
Any policy recommendations have their limitations, and for that matter, fiscal reform is no exception. Whatever policy recommendations that may be made, they would be of no use if those on the receiving side lack the capability to implement them, as is the case today. In a sense, however, this cannot be helped. Recommendations that can be implemented in the conventional ways would be duly accepted but those that require a new approach would not be implemented. The situation we have today is just like asking master builders and carpenters with excellent technique in wooden structures to build a reinforced concrete building. Whatever request you make to them, it is just impossible for those without the necessary skill, technology and experience to carry it out. That is, policy recommendations alone cannot help the situation.
What is needed is to go a little bit further and provide them with steps and procedures to follow, telling them, specifically, how to set the wooden frame in place, insert iron bars, and then pour concrete in. And you would also give them a list of experts they can contact in case there are things they don't understand. Social system design means to think out and present this whole set of measures. What I am trying to say is that nothing will happen unless we step in and go as far as re-designing social systems. A system is a combined mixture of different steps. Therefore, if we can get a clearer image of each step, we can pinpoint specific weaknesses or points lacking in our arguments. And once these points are determined, then we can interpret them into concrete steps and procedures that need to be taken. Unless we go this far, whatever policy recommendations we make, they will take us nowhere.
In the era described in Kanryotachi no Natsu (A Summer of Bureaucrats), a well-known Japanese novel taking the theme of elite bureaucrats' heroic devotion to the country during the postwar high-growth period, there were models to follow. Today, however, Japan is facing the unprecedented challenge of a "super-aging" society, which is a world no human being has ever set foot in. So, there are no precedents and no lessons that can be learned from America or any other countries. Sooner or later, many other countries will face the same challenge, lagging several years or decades behind Japan. But it is Japan that must, and is being counted on, to find the way to manage an aging society. Throughout the past 10 years, however, Japan has kept on saying, "No, I don't wanna do it." So, it was not so much the "lost decade" as the "decade of hesitation." Should there by any bureaucrat capable of working with confidence today, I would be delighted to meet them. There is no telling how things will turn out, unless we try out a number of measures. Now is about time that we had better to stop talking about "bureaucratic infallibility" and try to correct matters. Putting it in computer terms, what we can do is a "version upgrade", not a "cutover." To design is to reiterate such procedures and this is exactly what we need to do. But many people do not recognize this.
We often hear arguments on whether Japan is a major power. But Japan is, in fact, a "major power that dose not pursue hegemony" - something rarely seen in history. Even when it was on the summit of the world economy, there was no Pax Japonica, nor could be. Japan, however, does have a responsibility to show to the world a state management mechanism that is suitable for the coming era. But Japanese politicians, as they stand today, neither have the ability, nor the will, to do so. By adopting the idea of social system design, I believe that about half of the challenges we face could be solved.
RIETI Editorial Team: By taking an approach that focuses on social system design, what specific ideas can be derived? Could you provide us with some more details?
Yokoyama: Tax revenue can be expanded in three ways, namely, by increasing the degree to which people's income is captured in tax calculation, expanding both corporate activities and the consumer market, and increasing taxes. With regard to the third option of increasing taxes, for instance, I feel that it could be possible to raise consumption tax in a way that all three parties - the central government, companies and consumers - gain from it. And this is closely related to continuously increasing the labor productivity of domestic industries.
Japanese manufacturers used to be very enthusiastic about productivity improvement. The Japan Productivity Center (currently, the Japan Productivity Center for Socio-Economic Development) was a star organization. Visiting the United States a countless number of times, we, Japanese people, all studied American ways of doing things and were freshly surprised by what we learned. Through this, Japan developed its own quality control system that ensures a designated level of quality for each step of production process, as compared to a U.S.-style quality control to test products in the final stage of production. The Japanese quality control system, under which virtually everyone on the production line is involved with quality management, was more compatible with the mentality of the Japanese people. Also, such a step-by-step quality inspection system, though troublesome, has enabled Japanese companies to save costs by eliminating defective products at an early stage instead of having them go through the whole production process. That is, Japan discovered that thorough quality control can reduce costs.
So, I think that this time around we should be keen to improve labor productivity in the service sector which embraces two-thirds of the Japanese workforce. Japan's labor input is declining already. And even if Japan is to increase productivity by 5% every year, it would take 15 years to catch up with the U.S. So, in any case, Japan cannot afford to leave the current situation as it is. Against this situation, consumption tax should work in a way to put pressure on improvement of productivity. Looked at from this point of view, there exists an environment in Japan for implementing a win-win-win strategy under which consumption tax would be raised to 10% and yet all the three parties - consumers, product and service providers, and the government - would benefit.
What consumers desire is the increase of value for price. Competition within each industry for labor productivity improvement would reduce costs with some of the reduced costs being reflected on product prices, whereby the impact of a consumption tax hike could be absorbed. To make this happen, companies need to pursue "value assurance," taking a step beyond "quality assurance." When consumers are satisfied with a particular product or service, finding value all the while they use the product or service, they will come back to its provider with a greater probability. This would increase productivity because the cost of maintaining a repeat customer is a fraction of the cost of marketing to acquire a new customer. That way, companies would be able to earn more profits, part of which would be spent to help cover the increased consumption tax burden. Then, the government's tax revenue would increase, while consumers would get higher value for the same price. In this regard, the U.S. is not particularly advanced. Indeed, Japan cannot learn form any other country but has to pursue, earnestly and on its own, a positive cycle driven by "value assurance."
In order to quickly implement reform measures such as the aforementioned approach of increasing consumption taxes, measures designed to promote tax payment, and the removal of regulations restricting corporate activities, it is necessary to design and set in place on both the revenue and expenditure sides a "mechanism to impel people to take action" based on social system design.
My proposal - which is once again based on a very simple idea - is to stick a skewer horizontally across the vertically-segmented government agencies, because it takes us nowhere to keep on criticizing the compartmentalization of government agencies and their continuous obsession with the budget-grabbing game. As a first step toward implementing necessary policy measures regarding revenue and expenditures, we could appoint a mastermind for each of key social systems - those with high priority in view of overall strategy for Japan - on the side of expenditures, and we would call that person a "master social system designer." The master social system designers, leading a team of five to 10 people, would check whether the system under their supervision is functioning efficiently in delivering value to consumers, identify areas that need to be improved, tenaciously negotiate with government officials who might have a tendency for sub-optimization, and if necessary make bold changes to the design of the social system. Likewise, we could have master strategy designers on the expenditure side.
As I am not very well-informed about politics, I am not sure whether it is advisable to set up such an organization within the Cabinet Office. But the point is to create a matrix-style organization consisting of controllers or masterminds who would not supercede the respective authority of existing government ministries and agencies, but would be willing to undertake tasks with the strong sense of mission and responsibility. There should probably be 20 masterminds or so. Central government officials serving as division directors or those holding equivalent positions would be good candidates. People in their 40s are at the prime of their careers and should be given the chance to play a leading role, not only within the government, but also in any organization. Having been exposed to fierce criticism in recent years, the Japanese bureaucratic organizations might have reduced the glamour they used to possess. Still, bureaucrats in their 40s are kept extremely busy and work with a strong sense of mission. We should give them a chance to take an active role and stand in the public limelight, while at the same time increasing their accountability to consumers. They need to recognize that the Japanese term "min" referred to when we talk about "kan" (public) versus "min" (private) should not be interpreted as "minkan kigyo" (private-sector companies) but as "tami" (people), another way to pronounce the term "min."
Interview conducted by Toko Tanimoto, chief online editor, on March 5, 2004.
- Pre-event Report No.1
"Underlying the RIETI Fiscal Reform Project: A Unique and Coherent Viewpoint" by TSURU Kotaro, Senior Fellow, RIETI
- Pre-event Report No.2
"Local Government Fiscal Reform from the Viewpoint of 'Corporate' Governance" by YOKOYAMA Yoshinori, Consulting Fellow, RIETI
- Pre-event Report No.3
"Fiscal Reform from the Perspective of Social System Design" by YOKOYAMA Yoshinori, Senior Fellow, RIETI
March 5, 2004
Article(s) by this author
March 30, 2004［Column］
March 5, 2004［Policy Update］
April 15, 2003［Column］