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Home > Debates Last Updated: 14:31 03/09/2007
Debate: Comment

Response to Book Review on Ronald Dore's "Stock Market Capitalism: Welfare Capitalism"

Ronald Dore (Professor, University of London)

Dear Reviewer,

Thank you for an accurate summary of the main thesis of my book, and of the underlying value premises which animated my writing of it, and thank you for offering me the chance to respond. The key sentence of your review is clearly the following:

"We are yet to learn whether those preconditions (recovery of self-confidence, stabilization of asset prices, etc.) can be met without fundamentally altering Japanese ways of doing business and whether Japan can be returned to a respectable economic growth path even if all the preconditions are actually met. One should be reminded that too strong a belief often clouds one's objective vision for the future".

Just to remind the reader, the "etc." of my preconditions, were "stabilization of expectations of asset prices", (which presumably would follow a longish period of fairly steady trends in asset prices), and - more problematic - bringing savings down in line with investment needs.

Now you ask (a) can those preconditions be met without "fundamentally altering Japanese ways of doing business". And (b) if they were met, would Japan return to a respectable growth path- Let me answer the second question first. What would a "respectable" growth rate be- Obviously something closer to 2% than to the growth rates of the 1960s or even the 1980s. I say obviously for a number of reasons: the slower growth of domestic demand with the changing demographic balance and slower rate of household formation, the inability to grab market share from higher-wage countries through cost advantages such as Japan still enjoyed in the 1980s, the continuing loss of markets in more labour-intensive products to China, the declining weight of manufacturing (where the big productivity gains occur) in GNP. Japan's "trend growth rate" will depend on innovation and on the ability to compete with higher quality products - and on the ability of macroeconomic managers to maintain demand.

So, my answer to the second question is: yes: the capacity for innovation and high quality of Japanese industry is unimpaired (the Nikaimura incident was not symptomatic of a general trend) and if the current BIG BIG macroeconomic problem of demand deficiency can be cured, that "respectable" growth rate can be maintained.

But now for your first question. Do the Japanese have fundamentally to change their way of business in order to meet those preconditions of revival of confidence, adjustment of savings levels, stabilization of asset prices, etc.

By "fundamentally change" I take it you have in mind the sort of changes that are usually assumed to be on the Koizumi "structural reform" agenda. It is hard to know what that agenda really is, but five things seem clear. (i) Clearing up the tokushu hojin. (ii) restricting banks' holdings of equity, (iii) in the short term, accelerating the clean-out of bad debts, thereby promoting creative destruction -- through deepening the recession, achieving the "painful" destruction of low-profit business activities in order to free resources for the "creative" flourishing of the most "gainful" activities, (iv) revising the pension system, shifting further from pay-as-you-go to funded, (defined contribution) systems and thereby channelling more savings into the stock market, (v) in the longer term promoting cost-reducing, ROE-raising restructuring of major corporations, and thereby revitalising the stock market A few words on each.

(i) Revising the structure of the tokushu hojin. There are three parts to this: first, the normal adjustment of institutions to social and economic change which has always taken place in Japan if usually slowly. That is excellent. Second, ideological attachment to privatisation. Thoroughly bad (as Britain is learning as the consequences of railway and utility privatisation become more apparent). Third, bureaucrat-bashing. Also bad: an intelligent and public-spirited bureaucracy is one of Japan's greatest strengths, and the new rule that bureaucrats may not speak in Parliamentary committees will damage Japanese democracy, not improve it.

(ii) Limiting banks exposure to the stock market by curbs on their equity ownership. Probably sensible since the Tokyo stock market is now effectively under the control of American pension funds and mutual funds who do most of the buying and selling.

(iii) Provoking bankruptcies, creative destruction and getting gain through pain. Note that this is not structural reform in the sense of "changing the ways Japanese do business". It is a matter of changing the structure - the composition -- of business activity, a process which has been proceeding quite rapidly for half a century: the shift out of agriculture, the running down of the coal industry, for instance. To be sure, there is often a great deal of confusion between this kind of structural reform and changing the way business is done. Perhaps I can quote from an article I wrote for the December Chuo Koron. (It will be published in translation in the Japan Echo in February).

"Which kind of structural reform do people have in mind when they call for the debt-laden construction companies to be allowed to go under- Is their position that, since it is clear that there is overcapacity in the construction industry, the weaklings must be weeded out- Or are they saying that the loans provided by banks on the basis of cosy (nareai) relationships are an abuse and represent a structural shortcoming of the economic system- Or are they aiming at structural reform in both senses-

If it is industrial structure, it may be that relative to the projected demand (even after a recovery takes place) the construction sector has unnecessary capacity. But is a speedy rationalization of the sector by forcing some companies into bankruptcy the wisest policy- In the first place, the timing is problematic. When the economy is in good form, those who lose their jobs as the result of bankruptcy can probably find other jobs. But in the midst of a slump all that will happen is that long-term unemployment will rise and deflation will be accelerated. And apart from the issue of timing, it is questionable whether bankruptcies are the most suitable method of rationalizing the sector.

The Organisation for Economic Cooperation and Development published a report in the 1970s, when there were constant calls for "positive adjustment," which praised the method of industrial structural reform applied in Japan up to that time. The argument was roughly as follows. Japan avoids as far as possible the normal British and U.S. route of making adjustments via the external market-that is, bankruptcy followed by unemployment followed by reemployment. In the retail sector and other family-run local businesses, the principal adjustment mechanism was the changeover of generations. In the case of large corporations, such as coal-mining companies, another method was employed, based on the Law on Temporary Measures to Stabilize Specific Depressed Industries-- gradually liquidating companies while providing government aid for retraining or for switching to different businesses. Often, however, industrial restructuring was achieved by companies' own efforts to diversify or create new companies. One example of this was in the steel industry, where over 20 years ago all the major steel companies set themselves the target inter alia of sourcing 30% of their sales from non-steel-industry products within five years. The OECD's positive view of the Japanese method, rooted in the practice of lifetime employment, is still valid today. And I believe also that there are many companies today trying to follow this same diversification policy as a means of survival, in spite of the fact that the economic climate is so unpromising."

And why is it so unpromising- Because the economy is facing a deflationary, demand-deficiency depression. And the emphasis on cleaning up bad debts and making the banks balance sheets stronger, even at the cost of more bankruptcies and unemployment, can only make it much worse. "No recovery without structural reform" is absolute nonsense. "No structural reform without recovery" is much nearer the truth. It amazes me that even a lot of the unemployed are apparently Koizumi fans. Incredible!

(iv) As for pensions, the reform of the kosei nenkin system last year and the decision to finance more of the kiso nenkin from taxation seemed to me a very sensible way of making the system viable throughout the period when the population is ageing. The necessary reforms - trimming - of the system have already been done. When Koizumi talks of further more fundamental reforms he seems to have in mind cutting back further on the pay-as-you-go system in favour of expanding what is known in Japan as the 401k system. For all kinds of reasons (which I have spelt out in a paper I could make available to anyone interested) this "in the way Japanese do their pension business" seems to me very undesirable, both from the point of view of economic efficiency and from the point of view of social solidarity. At any rate, the major relevance of this to the present discussion is that all the TALK about the need to "reform" the pension system is a major contributor to popular anxiety - particularly among the 40-60 age group. And anxious people save. Anxious people don't spend.That is a major contribution to the lack of effective demand which is at the root of the present deflationary impasse.

(v) As for the more long-term project of changing the orientation of management: abandoning the life-time employment principle and the notion of the firm as some kind of community in favour of management for the maximization of shareholder value, again a lot of fuzzy thinking. The push in this direction has, in my opinion, much less to do with economic efficiency than with values and class interest - what one thinks about the importance of keeping income distribution not too unequal, and whether one has personally more to gain from one's salary or from one's financial assets.

I take it that this is primarily the "fundamental way of doing business" that you have in mind. So my answer to your question is clear. Yes, I do believe that this sort of fundamental change is not necessary for fulfilling those preconditions for the resumption of growth. And I don't think that is just wishful thinking. Nothing that I read about what has happened in the United States in the last 18 months - the recent collapse of Enron being a case in point - has convinced me that firms are best run by managers whose single-minded concern is to keep up the price of their shares on the stock market, in order to avoid the danger of a hostile takeover if they let it fall. I still believe that they can be run better by managers who want to maximise their value- added rather than their profits and want to do so, not only to pay decent dividends but also in order to be able to pay decent wages and not have to ask for "voluntary retirements" and in order to make their firm grow and to treat their suppliers decently.

And I have become even more convinced of this since I wrote the book. Japan's current problem, I think, is cyclical not structural. The policy problem now is how to cure demand-deficiency deflation.

Apologies for answering a short review with such a lengthy tirade!

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