What Does Japan Inc. Mean?
A nickname for the corporate world of Japan that came about during the 1980s boom, when Western business people saw how closely the Japanese government worked with its nation’s business sector.
Excellent article and opinion piece in The Economist this week regarding a topic we covered extensively in class this summer – preferential treatment given by the state to a private enterprise.
These so-called “national champions” created as a result of a government’s industrial policy are not a new concept. In fact, many years ago they were more commonplace than the alternative (outside of the U.S., anyway). The articles described how government intervention, more recently viewed as taboo by Western nations (particularly during the “PPP” era that launched in Britain in the 80’s), is now regaining momentum. A few key reasons were cited:
- Weakened global economy – pressure to turn around the economy quickly via economic stimulus measures.
- Desire to rebalance the country’s economic portfolio – a distrust of banking/stock market and property investments as “safe” ways to make money is leading many countries (i.e. the U.S. and U.K.) to invest in “way ahead” technologies – i.e. green technology, which we are currently witnessing with the UK’s creation of its “Green Infrastructure Bank”. To me this is kind of like the Space Race of the 60’s – who can get the most green jobs NOW.
- Emergency fixes – which naturally lead to more (i.e. bailout of General Motors, and subsequently AIG, and subsequently Citigroup… you get the idea). A recurring theme of public policy, I am learning, is that once the precedent has been set, it is hard to break.
- Fear – the rise of China (and its mad spend on infrastructure) and others presents increasing pressure to keep up.
To speak more specifically to point #2, the article elaborates on the fact that “there is little sign of much desire to reduce protection to make industries more competitive. In food products, another area regularly touted as ripe for export growth, abundant protection for local farmers distorts the market and reduces competitiveness.” Agriculture is the certainly the most classic example, closely followed by manufacturing, that many countries fight to keep within their borders, even when production (or potential) is far above the country’s needs. I’m very interested in this topic and would like to further research the economics and financing of agriculture sometime when I am able (ha!).
In addition to these four points mentioned in the article, I would add another: the need to appear financially solvent. Did Greece fall because it spent too much – or because it spent too little compared to its peers? It is no secret that the only thing keeping many industries afloat is government support. I wonder if there is a measure of GDP per country that is calculated solely based upon private sector dollars generated? My inclination is no, since the data would have to be highly subjective. In industries such as aerospace, for example, I’m not sure how one could completely decouple the revenue streams.
Guide to Success
I don’t mean to say that government investment is always “bad” – quite the contrary in a number of proven cases. The Economist lays out three basic criteria required for success:
- Keep investment in step with the country’s competitive advantage. In other words, don’t try to bring a robust fishing business to a land-locked country… obviously seems straightforward but crazier things have been done.
- Follow the market, don’t lead it. Here is where we could stand to learn a few lessons. Unfortunately, economic crises and debt-laden balance sheets do not always bode well for following what the market would have already done in due course. The “just let it fail” mindset is not overly persuasive in our current environment.
- Investment should focus on areas of national competence/expertise. To quote the article: “The worst problems unfold when politicians intervene in purely private domains with short-term goals, bailing out old firms to save jobs or spending lavishly on white elephants.” This addresses some of what I touched upon on the previous point.
I would also add a fourth – invest in areas that are a public need, but require both significant startup capital and political buy-in to obtain feasibility. Banking, for example, will exist in any market and has relatively low barriers to entry (we will forfeit any discussion of regulation here), thus not really requiring the government to do anything except regulate what is already there. However, industries such as transportation (railroads, airlines, highways) are not going to spring up on their own due to the sheer cost involved and the need for large amounts of real estate for the cause.
This begs the question – Are we witnessing the rise of USA, Inc.?
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