Japanese economics and competition policy

The attached extract from a 1989 book, Politics and Productivity, edited by Chalmers Johnson, Laura Tyson and John Zysman is significant because:

· it argues that Japan's (and thus the East Asian) economic style represents a fundamental challenge to the USA, a challenge which is partly intellectual

· one of the key authors, Laura Tyson, has chaired the US Council of Economic Advisers to President Clinton

For competition policy, the significance of this argument (if correct) is that competition may not be sufficient to ensure competitiveness. Competition encourages efficiency (in production, resource allocation and response to change), but the resulting resource allocation to suit current economic conditions is argued to be less important than strategic positioning for long term growth, and for capturing gains from technological change.

This argument could be drawn to the attention of those dealing with Queensland's SEDS (noting also that the situation in both Japan and the USA has changed since 1989).

Key Points in Politics and Productivity: The Real Story of Why Japan Works (1989)

Japan made significant policy errors from the viewpoint of traditional economics, which implies that traditional US economic concepts are flawed.

In reality, Japan has made significant industrial gains relative to the USA

· US trade deficits have accumulated into large foreign debt, which can not be explained in terms of exchange rates

· Japanese rates of growth and productivity have outstripped the US and other developed economies. This can not be explained by 'catch up'

· basic innovation in manufacturing practice, now means that US factories are using imported equipment

· while Japan still imports technology, it is establishing its own technological trajectory

It will not be easy for the US to adapt to the new challenge as its economic and political institutions have evolved to suit its previously dominant position. The challenge is intellectual as well as economic, and involves stretching traditional economic theory (which often provokes experts to deny the problem).

Japan has built capitalist institutions which are quite different to those in USA, in that markets are emphasized as the source of long term growth rather than short term efficiency. Government's role is to ensure that markets achieve this. This approach is explicitly dynamic and developmental. Competitive advantage is created rather than deriving from given resource and technological endowments. Temporary efforts to create competitiveness have long term benefits.

To understand this it is necessary to abandon static concepts of comparative advantage (and new growth theory) and adopt a dynamic model, which distinguishes resource allocation for current economic conditions, from that required to achieve long term growth and that required to benefit from technological change. Japan is at the forefront of a new technological trajectory which is based on government's economic involvement.

This trajectory requires not only that US firms catch up, but that they substantially change direction. Erosion of manufacturing capacity has contributed to US trade problems, and US firms have been unable to adopt or adapt to innovations elsewhere. The techno-economic paradigm is based on flexibility rather than volume production.

Despite changes, the basic style of protection of targeted activities remains in Japan, though the activities to which this applies constantly changes. The Japanese market is very difficult to penetrate because of a dense web of relational contracting. Economic relations are embedded in social relations which make penetration by outsiders very hard. Crucial elements of these networks are the keiretsu (around trading companies and banks). These arrangements are impervious to efforts to liberalize the Japanese economy.

21/8/96