Dear SSJ-Forum members:

I would like to offer my own summary of the recent two-day workshop on Japanese
industrial policy, sponsored by the Japan Policy research Institute and the New
Mexico US-Japan Center. Please note that this is mostly in my own language
(including some things that are in quotes) so any arguments might be with my
interpretation rather than with the speaker. I have added a comment at the end
of the final summary, but this is bracketed.

[Moderator's Note: The workshop was held on September 15-16.]

"Japanese Capitalism: The Intellectual and Ideological Controversy" Chalmers
Johnson, president, JPRI

There has been a shift in the balance of power in the east Asia region. Some
"conventional wisdom" explanations are: Nye's security-based thesis (but if the
DoD takes the Weinberger Doctrine about having an endgame before any conflict,
then there can be no role for the US military in E. Asia); the Fukuyama "end of
history" claim that only western liberlaism remains as a force in the world; or
the Huntington "clash of cultures" argument that we are facing a world of the
"West" (with its supposedly universal set of values) and "the Rest".
Neoclassical theory and the proponents of convergence and technoglobalism see
the end of the tunnel; maybe they have some valid points -- one of which is that
they seem to have (inadvertantly?) brought culture back in as a variable.

There are three arguments for how we have arrived at the present situation: the
Amsden (she will speak in Albuquerque) argument regarding late industrializers,
but perhaps she doesn't take into account how her argument applies to other, SE
Asian, countries with different state structures than the ones she describes as
pivotal to E Asian development; the new/revived argument that japan just carried
over and legitimized its wartime production processes, with a boost from the US
Occupation when the US shifted from defending democracy to rebuilding the
economy -- in other words, Japan stayed on a "war footing" straight through to
the present; culture -- the state instituted industrial policy measures that
stressed the society, moral rather than technocratic rationale, and
responsibilities rather than a social contract -- but perhaps it was the culture
that allowed these measures to be acceptable to the population and perhaps it is
this cultural basis that provides a foundation for a new Greater East Asian
Co-Prosperity Sphere without the guns.

"The Regulatory Environment of Japanese Industrial Policy" Marie Anchordoguy,
Associate Professor, Jackson School, Univ. Washington

Industrial policy has a number of features: it is tailor-made, has broad
economy-wide influence, overlaps with trade policy, is centered in MITI (tho'
other bureaucracies also have policies), and is an integral part of the broader
managed economy of which things like keiretsu are a part. If japan really has
been successful and did it by being different, there are some conclusions to
draw from this -- conclusions that explain in part the emotionality of the
debate: Japan might be a threat to West/US ideological hegemony; West/US might
need to deal with Japan outside the established int'l mechanisms (GATT, WTO,
etc.), the US might need to institute real I.P. itself. In addition, it is
extremely difficult to measure the impact of IP (only counterfactula arguments
and evidence will do) and this makes the arguments intractable as well. Japanese
IP is not as necessary now in some ways (Japan has caught up and the US monitors
Japan's efforts to acquire technology and restrain trade better now), but on the
other hand, with a strong yen Japan can't rely just on economies of scale and
cannot compete as well in innovation and R&D. Now that Japan is dealing more
with the "frontier" of S&T, with fewer defined targets, maybe this also creates
need for IP (though an adjusted IP). Reform in Japan is illusory. Deregulation
is done for internal reasons and the actual japanese term is "loosening"
regulations; gaiatsu generally results in Japan admitting some foreign firms in
to increase domestic competition and put the foreign firms in competition with
themselves -- Japan just incorporates some foreign firms into the system of
managed trade. The sense of crisis (like the "software crisis") is in part
kabuki in order to provoke change in Japan -- they are aware that they need to
innovate more. They are re-directing (rather than changing) the system through
changes in education, the national innovation system, the permanent
employment/seniority/enterprise unions system, and the financial sytem
(keiretsu, etc.). These areas all represent bnottlenecks in the overall system,
but the Japanese know this and are responding. She speculated that maybe what is
happening will result in a stronger bureaucracy and cited "The 1940s System" --
the collapse of the LDP/'55 system opens the way to return to the
pre-war/wartime system with stronger government intervention.

"Japan's Strategic Use of Foreign Aid"
David Arase, Pomona College; author of Buying Power

Japan doesn't need a yen block in Asia as long as the US absorbs exports and
provides a basic framework for the econ functioning of the region. However,
Japan does want to penetrate markets, upgrade its industrial structure, and gain
access to resources. Arase focused on the "New AID Plan" -- the Asian Industrial
Development plan -- started in the mid-1980s after the Plaza Accord made some
sectors of the economy uncompetitive due to yen appreciation. With the
cooperation of MITI, MOF, MoFA, EPA the plan helped transplant Japanese firms to
low-cost Asian sites. AID promised Asian countries three things: export
orientation of their economies, tech transfer, and jobs. While this may have
happened (their is some argument about the degree to which various countries
have benefitted) Japan had an ulterior motive throughout, which they were candid
about at home, if not overseas -- Japan wanted to create an Asian-wide division
of labor in order to restructure its own economy away from being an
export-oriented producer and towards a demand economy. The implications for the
US are: the US needs better access to SE Asian markets because Japan is ahead of
the game; Japans ODA means that alot of japanese personnel cycle through the
region and gathjer information and build networks; the system creates a lot of
"transparency between the Japanese planning and the planning going on in SE
Asian countries; ODA offers a different economic model stressing the role of the
state and cooperation rather than liberalization; ODA mitigates structural
adjustment costs for Japan. Arase noted that there is no law mandating or
supporting ODA and no Diet guidelines -- this is something that was created by
and is completely run by the bureaucracy, in particular a cadre of fairly
invisible people (retired bureaucrats and businessmen for instance) who have ODA
as an "avocation".

"The Ministry of Finance's Role in Industrial Policy" Eamonn Fingleton, author
of Blindside

"It's a story of components -- of enabling components." Japan's export success
has been driven by jobs and investment (labor supply and investment in training
and equipment). Investment is running at 2-3 times the US level even during this
slump and is driven by the simple fact that Japan has 52% of total world
savings. Firewalls built into the system contain the damage that might be
expected from the serious problems in the financial system. Advanced
manufacturing places extreme pressure on cost structures by requiring heavy
front-loading of R&D investment and in plant/equipment. In addition, the system
in the West leads to lots of R&D duplication, pressure on suppliers to cut
prices to the bone and threaten their own existence, creates unstable prices,
and makes antitrust too much of a focus. This last point is crucial because the
tendency under advanced manufcturing transition is towards monopoly and japan
makes a practice of targetting monopolistic industries in order to control or
influence the enabling technologies that are at the heart of the modern economy.
In the lens industry, Japan started with 35mm cameras and now cotrols the
stepper industry (crucial to advances in semiconductors), copiers, etc. Japan is
central to any miniaturization efforts. Japan doesn't have a monopoly in
shipbuilding (the Koreans do), but Japan has an "upstream" monopoly in ship
engines. Japan controls the market in critical materials (special steels, carbon
fibers) and in other critical components (LCDs and CD-ROMs e.g.). Through the
use of cartels, Japan regulates entry into the market, paces the development of
the techn ology, maintains stability, adjusts domestic prices, and gets R&D
cooperation (more bang for the buck). Japan DOES NOT spend much effort in the
service sector because it is mostly a low-wage and minimal export sector;
manufacturing is and will be the heart of a thriving economy and quality jobs.
The MOF is central to this whole effort because it controls the the budget, the
tax agency, the defense agency, and the financial sector of the government
(esentially the Fed, Treasury, SEC, FDIC, and the Controller). MOF's control in
turn filters through MITI and down the chaion to the banks and the Cabinet, and
to business and the political parties. People point to the laws that are on the
books -- very restrictive laws -- but these laws are "selectivey enforced" which
gives MOF tremendous influence because nobody and no organization wants to get
on their bad side and have a judgment placed against them. There are
"recession-like" pressures in japan but no real recession. Said that the current
situation should be seen in conjunction with the bubble economu -- that also was
induced, but it went to far; now we are seeing the adjustment.

Leslie Helms of the Los Angeles Times pointed to some contradictory evidence:
the US has 22% of G-7 exports (highest share since 1981), investment is up since
1991, and the world Competitiveness report has reaffirmed the leadership of the
US. On the other hand, there are long-term negative trends in productivity,
corporate R&D and wages. We may be seeing the beginning of a dual economy with
lots of low-wage jobs surrounding a small high-wage high-tech sector. In
high-tech, the US has a dominant world position but runs a chronic deficit with
japan (chips, computers, telecom, etc.). Look at the decisions that US companies
make: Apple found that there was no difference in manufacturing costs whether it
produced one of its low-end laptops in SE Asia or in the US, but it STILL had
Acer manufacture them -- they showed no sense of what the long-term threat will
be and acted purely on spurious risk-aversion criteria. So, in the short-term
the US is strong and Japan is in trouble; in the L/T the US is not aware of what
is happening and Japan is doing what it needs to do to get back in shape. The US
should know what it can do -- look at the semiconductor industry. Here there was
a combination of government forcing (and enforcing) an agreement with Japan,
backed up by US government and industry cooperation to organize and support the
rebuilding of the industry through SEMATECH. However, in the current Congress,
any similar attempts, like ATP and TRP, have been shut down; "dual use" is now
called "corporate welfare". what should the US do? Cretae disincentives to move
production and technology off-shore (through mechanisms that our competitors use
like 60-day warnings, severance packages for workers, etc.); eliminate
incentives to import (such as duty-free zones); increase the use of and increase
public awareness of local-content laws.

Steve Clemons, in Senator Jeff Bingaman's office and also Director of JPRI,
spoke on the relationship between security and trade (his comments were his own;
he was not speaking for the Senator). It is not possible to separate the
security question from trade and technology policy, as is the case now with the
Nye initiative and similar moves in Congress and DoD for example. In order to
get real change in the US-japan relationship, the US MUST look at the entire
region; the "system" accepts the "special relationship" and only a wholistic,
region-wide approach that perceives the trade/tech/security nexus will succeed
in displacing the "special relationship" with a more workable framework. One
piece in this new view will hopefully come out of the new Presidential
Commission on US-Asia Trade. The relationship has to change because it has
resulted in a "50-year adolescence" for Japan; coming into adulthood makes Japan
both dangerous and vulnerable to cooptation; japan has a history of swinging to
extremes with each new crisis (militarism, pacifism, capitalism). The
relationship has survived because of US public ignorance about the true nature
of that relationship. On the other hand, the "asianization of japan" is an
outcome of the economic fact that Asia-japan is now more important than
US-Japan. There is a "psychological wasteland" in Japan right now -- the result
of Aum, Kobe, the LDP collapse. Japan is morally adrift, but the system is on
autopilot -- there is a strong economy but it is not able to change direction or
policies; there is no leadership and no structure for leadership. "What is to be
done?" The US has to deal with the securities environment and how that drives
corporate decision-making; has to deal with the regulatory framework; the tax
code; coporate logistics; labor and education; private sector R&D (non-military)
needs a big increase. One big issue: US companies trade technology for market
access (this is actually actionable under US law, but nobody acts on it); we
need to enforce existing law in this regard and also enforce existing labor and
environmental laws dealing with US companies and internationalization of
business (such as NAFTA) because it is avaoidance of these laws that are a major
driver of US corporate relocation.

"Japanese Industrial Policy as seen from Southeast Asia" Andrew MacIntyre, UCSD
IR/PS

[Perhaps the most important talk because the speaker is at odds with many of the
major points of the preceding presentations]

The SE Asian economies (Malaysia, Thailand, Indonesia, Vietnam, and the
Phillipines -- though the last is not always in the calculation) have had strong
economic growth over several decades. This is the result of good macro economic
policies, high savings rates, good primary resources, and a recent shift toward
export-oriented manufacturing. However, these countries have achieved this
result without having the kind of strong state that is associated with the
"developmental state" model applied to Japan, Korea, Taiwan, and Singapore. The
SE Asian states are much less capable and the nature of state intervention is
quite different. Rather than having insulated bureaucracies that avoid capture
by rent-seeking interests and rather than having strong state intervention (in
the form of sophisticated, elaborate IP), the SE Asian states are clients [in
somewhat the way the states in E Asia were clients before WW2?]. These states
are authoritarian, but not coherent or capable. The state-industry relationship
is personalistic rather than bureaucratic, as can be seen in the levels of
patronage and allocated monopolies. Sure, there is IP in SE Asia, and there is
clientalism is E Asia, but it is the relative scale of the situation in the two
regions that is striking. It is clientalism rather than L/T planning based on
technocratic interests at the national level. The pattern in SE Asia is either
less use of IP or use but without notable success (as in the cases of Indonesia
especially, or Malaysia). So, why are they doing so well? Maybe there is more
than one route to economic development and growth; or maybe the role of the
strong state has been overstated; or maybe the weak state will catch up with
these countries and they will collapse (like Latin America or African states).
Japan does not have nearly the influence on policies in these countries that
some people see. Also, these countries are starting to have problems with Japan
-- their exports are either raw materials or the result of Japanese companies
selling to companies in Japan (reverse exports). They are also suffering because
so much of their debt is yen based and unpayable. The US, far from being behind
Japan in the "race" for SE Asia, actually has a lot of influence in the region
-- IF the US would make the effort to deal with these countries on their own
terms and not go out of its way to make enemies.

[A question -- picking up on the comment that these countries may resemble the
rest of the developing economies, I wonder to what extent the state is not
strong, or what defines strong and weak. A country that is able, as Macintyre
says, to implement and maintain "good" macroeconomic policies over a long period
of time cannot be a weak state. There are, simply, no examples that I am aware
of where this has happened. I would assume that the leading economic interests
in these countries and the state cooperated to implement these policies and
maintain them -- but cooperation means that the state has some "strength" to act
as a partner rather than a client.] [Another comment. This line of argument
would seem to reinforce the role of culture as a key variable in the development
equation. If so, then what can the US, e.g., learn from Japan? Maybe, as one
observer said a while back, we should become more like ourselves...?]

Michael Jensen
New Mexico US-Japan Center
http://www.jimt.unm.edu/