Capitalism (Made in Japan)

...For one thing, Japanese bureaucrats are able and intelligent, and know what they are doing...

...What is astonishing about this rescue is that the central bank was then engaged in a vigorous intragovernmental debate, in which it was arguing that automobile manufacturing was not an appropriate industry for Japanese companies to invest in...

...The Japanese system, which, by contrast, gives enormous discretion to government authorities, is tailor-made abuses of power and special treatment...

...few Japanese protest, for example, against the systematic employment discrimination faced by women and Koreans...

...The Ministry of International Trade and Industry (MITT) has a bureau for each of the key industries singled out for special attention, and these bureaus have often been deeply involved in their industries' major business decisions...

...The Japanese system of administrative guidance, based more on the selective use of incentives and punishments than on clear statutory authority, violates one of the fundamental principles of Anglo-American jurisprudence-the rule of law...

...Americans are also entitled to some misgivings about a system that, if carelessly imported, could seriously threaten many of our liberties...

...Two years later, permission was granted, and Sony and other Japanese firms went on to revolutionize the consumer electronics industry...

...Two brief examples can illustrate how industries cooperate with MITI officials...

...MITI's involvement has been based in part on statutory authority...

...Videotape recorders, for example, will be one of the most important new consumer products of the next ten years, and almost every one bought in America will be made in Japan...

...Consider the automobile industry, today the scourge of American and European manufacturers...

...See also Eugene J. Kaplan's Japan: The Government-Business Relationship, published by the U.S...

...A fuller understanding requires an appreciation of national character...

...In the "oil shock" of 1973-74, Japan suffered the pangs of higher energy prices all at once...

...collaborators...

...Probably most important, what regulation there is tends to be administered by officials who are sensitive to company problems...

...Import protection and the possibility of ultimate financial relief have been available to most enterprises in Japan...

...That has nothing to do with business-government relations...

...Japan's system of political economy has served its country well...

...In 1952, in a colossal misjudgment, MITI refused permission for a small company called Sony to import transistor technology for radios...

...And when Japanese bureaucrats make mistakes, they rectify them...

...Japanese industries are not harassed by a welter of unsympathetic regulatory agencies, suspicious of the profit motive and burdening decision-makers with reams of foolish paperwork...

...In the 1950s, MITI tried unsuccessfully to streamline the fragmented automotive parts industry down to 45 firms...

...Japanese take great pride in their work, as individuals and as a nation...

...That Japanese firms subsequently met these standards is a testament to the ingenuity of Japanese engineering rather than to the virtues of business-government cooperation...

...Toyo Kogyo, one of the companies that led the fight to defeat MITI's proposals, applied for permission to import radiator technology from France's Renault...

...In controlling all transactions with the outside world, the-Japanese government has often been able to exert monopoly power on behalf of Japanese enterprise and at the expense of foreigners...

...The Keidanren, or Federation of Economic Organizations, is more powerful politically than its nearest American counterpart, the National Association of Manufacturers...

...Contrary to the mythology of "Japan Incorporated," Japan is a contentious pluralistic democracy, with well-organized interest groups jealously clamoring for their prerogatives and different government ministries forever disagreeing with each other in the service of conflicting constituencies...

...One has been a general willingness to come to the financial aid of enterprises in trouble...

...Japan, as I have mentioned, is the most protectionist of all industrial countries...

...Support for private enterprises, as a matter of economy-wide policy, takes a number of forms...

...it has refused to go along with MITI's restrictions on capacity and allocations of market share...

...It is difficult to summarize just how the Japanese system works...

...Yet government policies can only account for some of Japan's economic achievements...

...In America we distrust our elected and appointed officials, and so we carefully circumscribe their powers, not only by subjecting them to institutional checks and balances, but also by limiting their discretion to single out particular interests for special favor or punishment...

...Eugene J. Kaplan writes that " the essential characteristic of the Japanese government-business relationship is that the business community and the various government departments have been in close communication with each other from the days of the Meiji Restoration...

...A second form of support has been tight protection against foreign compe on- often at the expense, at least in the short run, of Japanese consumers...

...Today it is arguable that Japan, which depends almost entirely on imports for its energy needs, is in a more comfortable fuel position than the United States with all its abundance of resources...

...At the sectoral level, government officials have often worked closely with company managements in determining the investment, technological, and environmental strategies of specific industries...

...Since Japanese enterprises have been remarkably successful whether or not they have cooperated with public officials, we should be careful not to exaggerate the importance of business-government rela-tioi . in explaining Japanese growth...

...Then in the 1970s, the automobile industry emphatically protested the harshness of Japanese emissions standards, by far the most stringent in the world...

...Under certain circumstances, e.g., in such depressed sectors as textiles and coal, MITI has had the legal right, under exemptions in anti-monopoly law, to form industry cartels that restrict capacity and production...

...It is therefore commendable that Americans, especially businessmen, are increasingly turning to Japan for instruction and inspiration...

...Although Japanese authorities no longer come automatically to the aid of firms facing bankruptcy, their general policy of being "lender of last resort" has allowed Japanese firms to take risks they otherwise might have shied away from, and to finance their investments more by lower-cost debt than by higher-cost equity...

...But it is worth observing that the two countries with the closest cooperation between business and government-namely France and Japan- are the two Western countries that have been most uncooperative in the international community...

...The Japanese have the most ingenious, the hardest-working, and the best-educated labor force in the world...

...But we should not jump to the conclusion that Japan's economic successes are attributable to what is often called its partnership between business and government...

...Even this sense of community inspires some misgivings, for its strength is in good measure related to a feeling of national isolation in a hostile world...

...Department of Commerce in 1972, with some superb case studies prepared by the Boston Consulting Group...

...The relationship,, first of all, includes little state ownership...

...Televisions, radios, cameras, motorcycles-these are the work of bold, risk-taking entrepreneurs such as Sony and Matsushita who saw market opportunities in industries that did not figure in government plans and that received little official encouragement...

...the ministry failed to see any value in this technology...

...We can learn enormous amounts from a flourishing democracy where workers seldom strike, little time is wasted in costly litigation, and engineers have taken the world's lead in addressing such technical challenges as the efficient use of energy and the control* of pollution...

...After lawsuits, outraged public protests, and the enactment of legislation prohibiting the dumping of mercury, MITI worked quickly to change the offending technology...

...Thus environmental laws are enforced not by environmentalists but by MITI industrial bureaus that are charged with the welfare of their industries...

...To grasp more precisely what is involved, let us begin with what the Japanese business-government relationship clearly is not...

...Presumably MITI felt that competition from Dow, whose costs were thought to be lower than Japanese producers', would unfairly cut into the revenues of firms that were assuming higher costs in response to government pressures...

...Second, it is improper to think of business and government as being tightly linked...

...At the level of general economic policy, Japanese officials have been prepared to support ailing private enterprises more actively than in the United States...

...Edwin 0. Rei-schauer writes that "the relationship in Japan Between government and business is not that of mutually suspicious adversaries, as in the United States, but of close Adam Meyerson, formerly managing editor of The American Spectator, is on the editorial page staff of the Wall Street Journal...

...It has also, by its strict controls on international capital movements, severely restricted the opportunities of foreign firms to surmount import barriers by making direct investments in Japan...

...as of 1972, there were still 300...

...Japanese officials were not about to impose price controls that would ease short-term hardships but obstruct long-term movement away from energy-intensive industries and technologies...

...As the result of government protection policies, this market has been virtually locked up by Japanese enterprises, whether they be in labor-intensive industries such as textiles, where Japanese producers can no longer compete internationally with the Taiwanese and Koreans, or in industries such as...

...Indeed, the whole public sector, which still consumes less than a quarter of national income, is by far the smallest, proportionally, of any industrial country (one reason being that the Japanese spend almost nothing on defense...

...It is sometimes secured by the generous provision of incentives for firms that cooperate-low-interest loans, accelerated depreciation allowances, tax rebates...

...American businessmen tend to envy such patterns of cooperation, and to ascribe to a business-government partnership many of their difficulties in competing with the Japanese...

...But on the sectoral level, their relationship is anything but cooperative...

...And before we seek to emulate the Japanese model, we should consider that aspects of this partnership violate some of our most cherished political principles...

...Apart from the national railway, the post office, the Japan Telephone and Telegraph Company, and the cigarette monopoly, the Japanese government owns few enterprises...

...steel and consumer electronics, where Japanese producers were initially uncom-petitive but now dominate the world market...

...and its effort to enforce environmental regulations without severely disrupting affected industries...

...I do not mean to suggest that business-government cooperation is necessarily associated with un-neighborly nationalism...

...Many enterprises simply share MITI's goals-for example, its enthusiasm for large-scale plants and firms, mergers and restrictions on new firms and capacity...

...With no welfare state, they enjoy the world's longest life-spans...

...But key industrial sectors have received much more extensive support-among them steel, oil refining, shipbuilding, industrial machinery, petrochemicals, and computers...

...This may have been coincidental...

...Sometimes it is the result of corporate behavior that forestalls the need for regulation...

...Japanese businessmen and government officials often do cooperate, but it is a very nationalistic and xenophobic cooperation...

...Even so, it saved an enterprise it disapproved of...

...To avoid multiple purchases and bidding wars for licensing rights, the ministry asked the industry to select one firm as purchaser, on the condition that this firm share the technology with the rest of the national industry...

...MITI also rejected the application of the Dow Chemical Company to produce caustic soda in Japan-in direct contravention of its promise to other Western nations to liberalize capital investment in the chemical industry...

...Japanese bureaucrats, unlike Americans, have generally taken the longer view...

...And their manufactured goods-laughed at only a generation ago for their shoddiness-are now the terror of sophisticated international markets...

...Given this qualification, we can distinguish two levels of cooperation between business and government...

...In the 1950s, when the liquid oxygen process was successfully developed in the Austrian steel industry, several Japanese steel companies almost immediately began exploring the new technology...

...They are selected by rigorous examination from the top universities (where often they were classmates of the businessmen they work with), and they undergo systematic training programs that give them a detailed knowledge of the industries they are supposed to administer...

...They have by far the world's highest savings rate-a fact which may be more significant than accelerated depreciation allowances or subsidized loans in providing Japanese enterprises with access to plentiful and inexpensive capital...

...The result is that government action is painfully slow, but what is red tape for one man is often the protection of another's liberties...

...However, relations between business and government in Japan are more harmonious in some industries than others, and Japanese industries that engage in heated conflict with government are often as successful as those which cooperate...

...Collaboration" and "communication" could mean virtually anything...

...as a matter of fact, abuses of power are rare in Japan, where government officials tend to act circumspectly and on the basis of national consensus...

...But in a country without Japan's sense of community, government officials need not be similarly constrained...

...In fact, a close examination of the Japanese economy* reveals that many of Japan's most dramatic industrial success stories have had little to do with government...

...Just as in defense, where they have contributed virtually nothing to the Western alliance, the Japanese in international economic matters have taken a selfish stance which has depended ultimately on the willingness of their trading partners not to retaliate...

...It has, accordingly, received fewer of the subsidies and rewards that accompany cooperation, but its steel is still cheaper and of better quality than most of America's...

...Cooperating companies were offered generous subsidies and financing opportunities, and by 1961 all Japanese steelmakers had at least two liquid oxygen furnaces-a major step on Japan's road to becoming the world's low-cost producer and technical leader in steel...

...In the early and mid-1970s, MITI worked closely with the caustic soda industry to replace prevailing mercury technology by a diaphragm process...

...Japan's environmental laws are the world's toughest...

...More quickly than any other enterprises in the world today, Japanese companies have seen their opportunities and taken them...

...MITI decided, correctly, that this process would revolutionize productivity and wanted to ensure its rapid and widespread diffusion in the Japanese industry...

...Indeed, the overriding purpose of Japanese planning has been to direct resources into those industries considered to be in the country's long-run comparative advantage...

...MITI refused, but granted permission the next year when Nissan, which had supported MITI, applied for the same technology and was given approval...

...In a few industries such as oil refining and shipbuilding, MITI by law has the right to accept or reject any proposed additions to capacity...

...Not only has Japan had the highest tariff and nontariff barriers of any industrial country since the war...

...I fear, however, that in our mixed envy and apprehension of Japanese achievements we are drawing some of the wrong lessons-particularly in business-government relations...

...And quite frankly, Japanese management in recent years has often been bolder and more imaginative than its American counterpart...

...Big business is only one of many interest groups in Japan, it is itself often divided over vital issues such as trade policy, and it is arguable that the Liberal Democratic Party (which has ruled since 1955) is more beholden to its agricultural and small-town supporters than to the bankers and industrialists...

...Apart from these reservations, many features of Japanese business-government relations are attractive...

...Japanese firms have bene-fitted from the economy-wide policies that nurture all enterprises-i.e., import protection and relief against bankruptcy...

...Unlike many Japanese companies, Sumitomo does not hire MITI functionaries when they retire from office, and '* The best work available in English is Asia's New Giant: How the Japanese Economy Works, edited by Hugh Patrick and Henry Rosovsky, and published by the Brookings Institution in 1976...

...Though this authority is being gradually removed, it has had to approve any flows of capital into or out of the country, and until 1968 it had to grant permission before any foreign technology could be imported into Japan...

...Their edu-cationak-est scores are the world's highest, their crime rates the lowest...

...Sometimes the absence of regulation in Japan reflects the poorly developed state of certain pressure groups...

...A possible example of such abuse occurred after MITI's failure to consolidate the auto industry...

...It deserves our careful attention as an example of how to give government a powerful guiding role in the economy, without constricting the independence or initiative of private enterprises...

...But realizing that new investments would place" financial burdens on many of the caustic soda manufacturers, especially the smaller ones, the ministry arranged for low-interest loans and accelerated depreciation allowances to be granted to firms that replaced their tech- nology...

...there are few industrial accidents in Japan's paternalistic companies...

...The standards, it argued, were unreasonable, could not be met, and did not sufficiently weigh costs against benefits...

...It has nevertheless lost some major recent battles, among them efforts to reduce Japan's protection against agricultural imports and to relax the country's new pollution laws, the world's toughest...

...MITI has exercised absolute control over many international trans- -actions...

...In the early 1960s, MITI tried to consolidate the engine and assembly industry around Toyota and Nissan...

...But there are no equivalents in Japan to the Securities & Exchange Commission, the Equal Employment Opportunities Commission, the Occupational Safety and Health Administration, the Employee Retirement Income Security Act, or a host of other regulatory agencies and legislative enactments that, whatever their virtues, make life miserable for any organization trying to produce goods and services in the United States...

...Thirty years ago, for example, when the Toyota Motor Company was on the verge of bankruptcy, the central bank came to its rescue, announcing that it would back up commercial banks that lent the company additional funds...

...More commonly, however, MITI derives its administrative authority from the voluntary cooperation of its constituententerprises...

...its desire to promote the importation and rapid dissemination of foreign technology...

...With its 115 million increasingly prosperous citizens, Japan is one of the most attractive consumer markets in the world...

...The bureaucracy is lean...

...All Japaji had been shocked when, in 1969, strange and fatal illnesses afflicting the villagers of Minamata were attributed to mercury wastes dumped by a local chemical company...

...Brash new entrants such as Honda, Mitsubishi, and Toyo Kogyo refused to go along, and lobbied vigorously and successfully against legislation in the Diet (parliament) that would have enabled MITI to force them to participate...

...Even in steel, the industry best known for cooperation with government, one of the most aggressive and prosperous companies, Sumitomo, has kept a guarded distance from MITI officials...

...This cooperation is sometimes secured by the threat to withhold access to vital foreign technology...