Japan’s swift fall from economic glory has mystified more than a few. Looked at it from one perspective, though, it makes a lot of sense.
For a whole generation, the Japanese Economic Model epitomized the much discussed "third way" of economic development. Under it, government planners worked hand-in-hand with businesspeople to plot the path of industry. Massive corporations used superior technology and manufacturing skills to conquer and dominate strategic industries like computers and automobiles3/4assisted by "patient" money from a highly regulated banking system.
Books like Michael Crichton’s Rising Sun raised the spectre of the U.S. economy falling into the hands of cash-heavy Zaibatsu or Japanese conglomerates. The book reflected assumptions that Japan had become the world’s leading industrial nation, with paltry unemployment, superior literacy and the longest lifespans to prove it.
The third way, or the so-called "industrial policy" model, turned out to be a mirage. Japan is now the sick man of Asia, with an economy flat on its back, dragging down other economies from Asia to Canada. Tokyo’s stock market has slumped to 60% of its 1989 value. Real estate prices have collapsed by as much as 80%, burying the banks under a mountain of bad debts. The economy has grown only about 1% a year since 1992; it actually contracted last year.
Japanese companies, which traditionally prided themselves on providing "jobs for life", find themselves loaded down with redundant workers. Painful layoffs are beginning; unemployment, officially (and inaccurately) registered at about 4% in June, really sits around 9 to 10% — even higher than ours.
Finally, in another ironic twist of the "guided" economy, the government has tried desperately to spur growth through old-style, ineffectual pump-priming. This involved spending over $800 billion on public works between 1992 and 1995. As unemployment crept up, public debt climbed to over 100 percent of Gross Domestic Product. So much for infrastructure programs.
In July Prime Minister Hashimoto resigned after voters thrashed his party in national elections. Japan today seems paralyzed.
So what happened? A recent paper by the Cato Institute, a classical liberal think tank in Washington D.C., examines Japan’s doldrums. Entitled The Rise and Fall of the Japanese Model, it concedes that Japan did pose a competitive challenge after developing new and superior manufacturing techniques. The country grew rapidly, not because of policy determined by wise officials, but because it leapfrogged on technological advances from western market economies. To a great extent, it was easier to adopt and adapt technologies from elsewhere than to innovate on its own.
While Japan was catching up, it enjoyed relatively lower taxes and government spending than its western rivals. Once Japan had reached the technological frontier, its performance slowed dramatically. Since then the costs imposed by "industrial policy", including big debts and big taxes, have pushed the country into a deep, long-term recession.
In the end, the lessons from Japan provide a sharp reality check for protectionists and interventionists in our midst,who believe that a handful of smart people can outperform the marketplace.
As the Cato paper summarizes, they "… suffer from what Nobel Prize-winning economist F. A. Hayek termed the ‘fatal conceit,’ they believed that a handful of government planners could outthink millions of private decision makers-could pick ‘strategic’ industries, allocate capital in defiance of market signals, and prop up the stock market and real estate values. Like so many others before them, they prided themselves as sophisticated realists, yet in fact their faith in bureaucratic miracles was hopelessly naive. Only a few short years were needed to burst their bubble."
As it turned out, the third way led downward. No country, not even mighty Japan, can take a permanent holiday from the laws of economics.