The Japanese Post-Industrial Economy: Perils of Planning

The Japanese Post-Industrial Economy:

The Perils of Planning

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The Japanese Post-Industrial Economy

The Perils of Planning

As we enter the 1990s, and the United States perceives itself, in many ways, falling behind the most successful country of the 1980s, Japan, it's tempting to try to implement similar economic policies to try to emulate its successes. This requires an explanation of what has made Japan as successful as it has been and if the factors that contributed to its success in the eighties will make it a "winner" in the 1990s.

Japan's policies are guided by MITI, a very tightly knit group of economists who all attended To'dai (Tokyo University) and studied together in the school of law. This very small group has the prestige and connections to their classmates in the LDP and business that enable them to effectively guide economic policy. In the economic sphere, at least, they are the state.

MITI's policy, in the post-war period, has been to concentrate on "targeted industries" abroad while controlling the home market. These targeted industries included the automobile industry, home electronics, and motorcycles.

In order to penetrate foreign markets, these companies needed to offer low prices. To do this, companies pursued a policy known as "dumping" whereby they offered goods at much lower prices abroad, subsidizing this with far higher prices in the captive home market. They could do this because in the home market otherwise competing companies adhered to agreed upon prices, and structural barriers prevented foreign access. Once Japanese firms had effectively "captured" a foreign market, they could raise prices charged for exports and ease the pressure on home consumers.

For political reasons, the LDP also continued to maintain very high price supports for Japanese rice farmers. The normal effect of this would've been for Japanese consumers to consume just about anything except over-priced Japanese rice, so a whole series of barriers were erected to raise the price of all other foods, making rice competitive.

In many, well-publicized ways, this program has been successful. The Japanese conquered many export markets while holding their own markets. The Japanese voters continued to keep the LDP in power. Gross domestic product, per capita, became the highest in the world. A large trade surplus made the yen the strongest currency in the world.

Unfortunately, however, this policy had some negative consequences. If the Japanese conquered the market in another country, such as the European motorcycle market, they could afford to lower prices in their market. Where they failed to defeat terminate competitors, however, as in the auto market, they had to continue subsidizing their target market indefinitely. The capital acquired by Japanese firms was being spent in well-publicized ways, buying American real estate, investing in Vietnam, etc, but relatively little was "trickling down" to the Japanese consumer. This, coupled with the continuing high prices in food, led to strange spectacle of the richest country in the world enjoying the 20th highest standard of living.

The 1990s, moreover, led to some serious reverses in the targeted industries of computers and communication. Americans expressed real alarm when the Japanese became the world's leading conductor of semi-computers. One economist said:

"Americans seem to think it makes no difference whether we produce computer chips or potato chips."

In fact, the American public's instincts were correct: there isn't that much difference between making computer chips and potato chips. Both are factory-produced products in which once a design and process are created, mass production is relatively simple and economies of scale important. The control of this part of the computer industry did not make the Japanese, as they hoped, owners of the computer industry. All it did was make hardware and software manufacturers come up with interesting strategies, quite quickly, to make memory relatively less important.

The Japanese had, in fact, been making a concentrated effort to "target" the computer industry since the 1960s and been having nothing but failure. Fujitsu, the Japanese electronics giant, made a much-publicizing purchase of Amadahl, an IBM mainframe clone maker. Its clones made no impact outside Japan. The Japanese electronic giants started turning out PCs in the 1980s and 1990s. Prices for a machine were triple that of comparable American models. The Japanese computer industry remained small.

In 1995, Japanese society remains, by American standards, almost totally uncomputerized. Banks use paper and adding machines. Few adults, even businessmen, own a personal computer. Most importantly, Japanese schools do not have computers. Parents purchase game machines (Nintendos and such) for their children instead of computers.

One reason for this failure is that Japanese, with its thousands of characters, is simply not keyboard friendly, but there are other reasons. Unlike a radio design, software and even hardware change in the computer industry in a matter of months. By the time a piece of hardware can be copied, it's already obsolete. With software, the language barrier (all computer languages are English-derived) is serious, but only part of the problem. Programs are creative products, and the only way to effectively "clone" them is to produce carbon copies which are outdated by the time their produced. To turn the former adage on around:

"There's a lot of difference between chips of any kind and intellectual property."

It might be reasonable to dismiss the Japanese failure in computers as an anomaly, except that it's one of many involving high technology. There were actual hearings in Congress when the leading Japanese electronics giants pooled their efforts to try to be the first to implement HDTV. Yet only a few articles noted that they abandoned this same effort, with little fanfare, three years later. When the Japanese started, they'd decided on an analogue approach. Only three years later, it was obvious that an American digital approach was far superior, and the Japanese didn't even bother to start. Again, the rate of technological change and the pace of invention left the Japanese far behind.

Yet another failure is in the area of telecommunications. There's a general acknowledgement, among all countries, that links between computers, television, and homes will transform our lives in the next ten years. The Japanese, again, are far behind, and a big reason is that their telephone company, a monopoly, has gotten as lazy and competitive as Bell Telephone was before the break-up. Service is poor and expensive. As of 1995, the only company even considering offering on-line services in the Tokyo area was American Online, and, appropriately enough, they were planning on serving expatriate Americans.

Speaking to Japanese, it's obvious that there's an awareness of the weakness of their competitive position. Unfortunately, there are few ideas about how to change the situation change. Governments in Japanese change at about the same pace as Italian parliaments, but the social cohesiveness of the MITI governing group is great. The tendency at MITI is to just try to "muddle through" and stick with the policies that have been successful in the past.

In the long run, however, Japan is approaching something of a crisis situation. For Japan finds itself at something of a crisis point. The yen is so strong that, in order to maintain its position as an industrial power it must either send most of its production to other countries in Asia, nurturing its future competitors, or raise its domestic prices ever higher to subsidize its exports. In the technology market, it finds its products hopelessly outclassed an obsolete compared to its competition. Japan, then, is caught between the industrial economy and the post-industrial economy.

The example of Japan points out several important facts about how the United States, and its European rivals, should approach economic planning-and its limitations.

First, meddling too much with the market will always, in the long run, have negative consequences. In Japan, one obvious result is high prices. While the older generation in generally well-pleased, as they remember how much worse off they are than in the past, the younger generation can only wonder why other countries live so much better. Not only this, but the higher prices in the country will, in the long-run, hurt its competitiveness. If Japanese school children are not exposed to computers, they will not be competitive.

Second, industrial planning is perfectly appropriate for an industrial economy. For items that can be mass produced, such as radios or memory chips, the proper strategy is to assemble a sufficient amount of capital and aim for cost-cutting strategies. This strategy built the Japanese auto and electronics industries.

Unfortunately, many countries, including Korea and Taiwan, are quite capable of producing anything Japan can produce at lower wage levels.

Third, industrial planning is not appropriate in the post-industrial economy. The most important firms in America today are medium-sized and even small firms that are producing creative, intellectual products. The actual "products" of the high industrial sector, the disks and tapes, are remarkably cheap. The best thing that a government can do to encourage growth in this sector is probably to give those involved as much "space" as possible and encouraging an educational system that pushes creativity.

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