Capitalism (Made in Japan)

...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...

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

...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...

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

...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...

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

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

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

...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...

...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...

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

...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...

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

...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...

...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...

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

...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...

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

...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...

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

...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...

...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...

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

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

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

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

...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...

...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...

...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...

...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...

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

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

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

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

...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...

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

...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...

...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...

...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...

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

...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...

...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...

...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...

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

...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...

...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...

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

...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...

...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...

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

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

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

...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...

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

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

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

...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...

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

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

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

...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...

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

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

...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...

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

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

...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...

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

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

...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...

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

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

...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...

...collaborators...

...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...

...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...

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

...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...

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

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

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

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

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

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

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

...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...

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

...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...

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

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

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

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

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

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

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

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

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

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

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

...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...

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

...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...

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

...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...

...This may have been coincidental...

...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...

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

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

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

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

...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...

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

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

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

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

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

...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...

...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...

...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...

...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 bureaucracy is lean...

...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...

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

...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...

...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...

...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...

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

...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...

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

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

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