Arthritic Japan: The Slow Pace of Economic Reform

Chapter 6: Weak Outcomes

Previous chapters have laid out the argument for systemic reform and the variety of factors that work against its accomplishment. This chapter considers the outcome of such reform. Since the mid-1990s some economic reform has proceeded in both the government and the private sector. Government has been engaging ostensibly in a process of both general economic deregulation and administrative reform to reduce and reorganize government. The private sector has engaged in corporate restructuring and consolidation, prompted by the poor performance of many firms. By the end of the decade, stories of reform and change abounded, providing an image of a nation embarked on a major regime shift. That some form of real change is occurring is obvious. However, the details of what has been happening belie much of the image of vigorous reform. In many respects the process of government deregulation and administrative reform has been quite weak. Unlike the United States or some other western nations, deregulation and administrative reform have been left largely to the career bureaucracy itself. As one might suppose, the result has been a mild and slow process of change. In the private sector, necessity is driving real change in corporate behavior , irrespective of what happens in government. Banks and other financial institutions have been saddled with enormous amounts of bad debt and are unlikely to escape without considerable restructuring. Many nonfinancial corporations have faced increased global competition and poor financial results over the past decade, causing them to rethink their structure, goals,  6 Weak Outcomes and behavior. The “big bang” deregulation of financial markets appears to have pushed firms toward greater emphasis on rates of return and generally increased attention to the desires of shareholders. Nevertheless, the pressures for corporate change are weaker than they might appear and do not necessarily lead to convergence on American-style reliance on markets. Restructuring—resizing or reorganizing corporations in response to poor performance—should not be confused with reform of fundamental notions about corporate governance, labor practices, and market competition. This chapter explores both government and private-sector reform processes and outcomes. The point here is not to deny that change is occurring . Despite the obstacles considered in previous chapters, something is happening. Under scrutiny, however, the process does not appear robust, and the eventual result will be disappointing. Deregulation Deregulation had become a buzzword by 1993 when Morihiro Hosokawa became prime minister. He initiated a process of broad economic deregulation that continues today. Over the years, the government has issued regular reports touting progress on removing or modifying existing economic regulations. However, the process by which deregulation has proceeded has been centered on the bureaucracy itself rather than on the broader consumer , business, political, or intellectual communities, in great contrast to the experience of the United States. The comparison is quite instructive. Economic regulation in the United States dates to the late nineteenth century, when it began as a political response to the perceived failings of unfettered markets. By the end of the 1930s, explicit regulation governed finance, railroads, trucking, barges, airlines, electric power, natural gas, telecommunications, and some other industries. Additional health and safety regulation has been added to straight economic regulation over the years. By the 1970s, however, a strong counterreaction had begun, and it continues today. The American process of deregulation emerged from an intellectual debate among economists and among private sector groups affected negatively by economic regulation. In place of the view that regulation was a necessary protection for consumers against the excesses of the market, a new notion emerged that regulation caused more problems than it solved. Both theoretical and empirical research suggested that regulation protected industry more than consumers, essentially legalizing tight cartel behavior to the disadvan-    tage of consumers, and led to inefficiency and economic distortions. These changing views and the factual analysis behind them fed into a vigorous political process, led by both business and consumer interests, in the 1960s and 1970s. The outcome was new legislation in Congress, beginning with the Carter administration, to deregulate or restructure the regulatory framework for specific industries. Major legislative steps along the way have included the Airline Deregulation Act (1978), the Motor Carrier Reform Act (1980), the Staggers Rail Act (1980), the Cable Television Deregulation Act (1984), the Natural Gas Policy Act (1978), and the Telecommunications Act of 1996. Deregulation in the United States is not over, as the debate over the appropriate role of the government in...