From a purely economic point of view, pulling Japan out of its long slump would be simple. Officials would liquidate the low-return investments that form the legacy of the late-1980s asset-price bubble and then clear away the wreckage left behind in the financial system. As the examples of the recent Korean and Thai financial crises show, what is needed is political will that is equal to the task.
But the write-offs in Korea and Thailand, while large, were nowhere near as massive as what is necessary in Japan. At a dinner in 1999, Paul Volcker, the former US Federal Reserve Bank Chairman, estimated the size of this financial housecleaning to be over 100% of Japan's annual GDP. It is a brave politician who can propose that a year's economic output be lost! No surprise, then, that Japanese leaders skirt the problem as if avoiding a mud puddle.
That path of evasion is reinforced by the nature of the political system created after the 19th century Meiji restoration and that, notwithstanding the post-war constitution, has survived to our day. Unlike China, which for centuries had a unified, bureaucratic-authoritarian, imperial state, Japan evolved a unique form of dual and at times triple government. The Taika reforms of 604 AD created a constitutional monarchy in all but name, with political power wielded by shoguns, prime ministers, or chief advisors backed by military power. This led to a long, unbroken line of sacred and inviolable -- but politically neutered -- emperors that still provides the focus for Japanese nationalism.
ILLUSTATION: MOUNTAIN PEOPLE
Japan's 19th century Meiji rulers were interested in weaponry and hence enthusiastic about acquiring Western science and technology. A "national identity" was invented, justifying power in new ways and enabling new methods of control. The Imperial Rescript of Soldiers and Sailors of 1882 set out the ideology of the "family state," which framed hierarchical social relations based on authority, blood ties, and age. The family state's core values of loyalty, filial piety and duty to one's elders were spread through military conscription and indoctrination in the national educational system.
At the same time, the Meiji oligarchs created a political system with no single focus of power. They refused to write a constitution permitting power to be concentrated in the hands of a leader legitimized by the emperor. This would have threatened the position of some of them and led to the oligarchy's disintegration. Instead, they preferred an opaque power-sharing system in which no identifiable person would bear ultimate responsibility for decisions. This was in fact a colossal system of irresponsibility, as the run-up to World War II demonstrated.
The Meiji oligarchs also propagandized that politicians concerned with narrow party and personal interests were unpatriotic. So another group had to be found to manage the country: a meritocratic bureaucracy, whose members are largely recruited from the law department of Tokyo University (Todai). One oligarch, Yamagata Aritomo, made the bureaucracy immune to political meddling by obtaining a personal communication from the emperor that could never be overruled. It also made the Privy Council the guardian of Aritomo's edicts concerning examinations, appointments, discipline, dismissal, and rankings of bureaucrats.
But the outcome was not a French-style administrative state. With no political overlord to settle or adjudicate bureaucratic disputes, decisions could be made only by "consensus," which was mostly a euphemism for paralysis. The Meiji political system and the bureaucrats survived the postwar purges and the imposition of an American-drafted constitution. As a result, the lack of an effective political center to adjudicate disputes still haunts Japan.
Indeed, the continuing influence of the Meiji tradition clearly implies that Japan's post-war economic "miracle" could not have been due to the enlightened dirigisme of a developmental state, as many Western commentators believe. In fact, there was no miracle. As Maurice Scott shows in his book A New View of Growth, Japan's 9.2% annual growth rate during the peak "miracle" years, 1960-73, can be explained by the investment rate, the growth in the quality-adjusted labor force, and the push that comes from "catching up" with the most developed economies.
The much-touted Asian model of development was little more than an unholy alliance between government agencies, large industries, and the financial system. Industrialists undertook risky projects, over-invested, and eventually stuffed the banks with non-performing loans. The puncturing of Japan's asset bubble of the late 1980s merely brought these chickens home to roost.
A decade later, the chickens are still roosting. Japan must tackle its financial mess once and for all. More importantly, it must turn its back on the model that created it. Given the institutional paralysis built into Japan's political system, it is difficult to see who will undertake this task. Thus, continuing pain seems likely for ordinary Japanese, whose thrift and productivity ensured that the country rose like a phoenix from its wartime destruction. Increasingly, Japan's great postwar generation will see their hopes -- and their savings -- turn to dust.
Deepak Lal is Professor of International Development at the University of California, Los Angeles. His books include: The Poverty of 'Development Economics', The Hindu Equilibrium, and The Political Economy of Poverty, Equity and Growth. Copyright: Project Syndicate
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