The world economy and Japan during a period of hystoric transformation

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By Carlo A. Pelanda

Tokyo Colloquium, Session 1:

It does not seem that there is some "pure economics" solution to the economic problems posed to the G7 countries by the recent changes in the world economy. A global market is emerging, but it is not ordered by any "political architecture". My belief is that we should start to design it. Let me try to explain why.

1. In Europe, Japan and the US, we are all obsessed by the problem of keeping alive the "mass capitalism" achieved during recent decades. Though the three models are very different, they are suffering from the same disease. The rich are becoming richer, the poor poorer. All three systems are losing the capacity to provide their citizens with the same access to wealth that they provided in the recent past. The three different models of mass capitalism are showing the same tendency toward deindustrialization and the return of poverty.

2. About three billions individuals are at the same time citizens of their national states and citizens of the global market. Their double citizenship is a recent phenomenon. It started when the circulation of capital technology and commercial knowledge became borderless and was no longer confined to single national systems. The second citizenship is making richer the individuals in the undercapitalized countries, but it is making poorer the individuals living in the already developed societies. "Globalization" is not only a geographical event, but also a new type of economy based on hyper-efficiency (Luttwak's "turbo-charged capitalism").

3. In my view the global market is not a problem per se, but rather a great opportunity. The problem stems from the fact that the rich countries are not changing enough to meet the requirements of exploiting the new opportunities.

4. We do not have a sound theory of "re-development starting from conditions of development". Furthermore I suspect that we do not have a good theory of development either. Yet we have a pretty good knowledge of sectoral economic phenomena. Why the latter does not lead to the former? Probably we are not fully aware of the political pre-conditions which foster economic development. We know that stability and legality are essential. But they are not enough.

5. For instance, are we sure that we know how the G7 countries became rich in the past? I am not so sure and I think that our lack of hystorical understanding might be delaying the reforms needed for re-development.

It seems to me that Europe, Japan and US became rich after the war thanks to extra-ordinary factors. Governments found a very friendly environment. Such an environment did not select the fittest. It perpetuated everything because growth was mostly spontaneous and based on a very peculiar configuration of the international system. Mass capitalism emerged as a phenomenon partially independent from direct political action. Yet their success convinced politicians, cultural elites and the public alike, that their own economic models were successfull (even though the US, Europe and Japan models were so different). When the spontaneous growth ended, governments and people had a pretty bad surprise. The models were wrong. The most evident case is Europe. The socialized economy worked relatively well until the mid 80s. When globalization hit, requiring more efficiency, the quasi-socialist model collapsed with growing debt and decreasing growth. What is interesting is that the model was unfit even before. Yet no one realized this because the economies were growing in any case. Taking into account the differences, we might say the same for the cases of both Japan and US.

My guess is that international and national inertia is delaying the re-adjustments of the G7 system to the new conditions of the world market. The G7 countries achieved mass capitalism thanks to unique conditions that they were not aware of, and which they are not able to reproduce.

6. I have been always puzzled by the observation that such different models (Europe, Japan, US) were able to achieve the same economic result: mass capitalism. A rare combination of circumstances allowed divergent models to have the same success. Yet the crisis is re-equalizing nations in reference to strict criteria of economic consistency. These selective criteria are forcing both the Japanese and continental Europe models to become more "liberalized".

7. Let us simplify such a trend by defining it as "Americanization": downsizing, tendency toward the supply side economy, compulsive efficiency, very selective conditions in the labor market, a liberalized hire and fire system, etc. First, we should notice that if Europeans and Japanese resist the trend, the crisis will be more severe and could end very badly. But, if Europe and Japan change their models along this direction - given the highly protected starting point- what will they find? For sure more efficiency and growth, but at the expenses of dividing the society into the new rich and the new poor. The latter will be an underemployed poor which is much better than to be an unemployed poor. Yet half of the people who expect to keep their current levels of welfare will be pushed down.

The paradox is that the new economy is requiring that each national model has to fit the liberalization criteria, but the gain in efficiency will not lead to reconstructing the hope and the reality of a mass capitalism. Jobless growth or a de-capitalization of the masses will be the best that a national system can achieve. But this is not enough for keeping stable and vital Europe, Japan and the US.

In fact, European countries tend to half-liberalize by trying to keep some balance between competitive efficiency and protectionist guarantees. The French-German alliance - formally known as European Union- is actually an instrument to build a dam to control external competition. Japan too is trying to find a compromise between the requirement of more competitiveness and traditional safeguards. Unfortunately there is no "free market" way to assure such a compromise.

8. For this reason there is a growing risk that national/regional solutions to the problem of re-industrialization will generate new barriers or limits in the free market system. The creation of a more structured European bloc might stimulate a counter-reaction in the US (or viceversa). Japan would be forced to strategically support and protect even more its industrial interests. If this tri-continental area splits, there will be an endemic economic war among the three blocs. And this scenario will generate more poverty for everyone by compromising the efficiency of the global market. This is not a good solution.

9. I have to add that it is not good also because, at the same time, new economic giants will emerge, e.g. China and India. And this might create two additional problems. First, each bloc, if alone, will not withstand the competition. Second, the emerging countries are going to encounter conditions of political unstability, both internal and external. If the three blocs do not cooperate, the critical mass to regulate the new unstability will not be enough. And the world market will suffer tensions which will heavily impact on the wealth of many nations. The scenario could be very negative.

First act: The G7 nations will fight against each other and everyone becomes a dwarf. Second act: The big dragons eat the smaller dwarfs. Third act: If the dragons start to fight each other or - more likely- to get internal diseases, the seven dwarfs will not be big enough to regulate the disorder.

My conclusion is that national solutions to the competitiveness problem might lead to very unpleasant consequences for all, both young tigers and old lions.

10. Let us view the same problems from another point of view, slightly more technical.

Long term interest rates are very high in Europe, Japan and US. Furthermore, it is well known (The Bundesbank launched a warning message last August) that the combination of high public debt and more investments in the emerging countries is reducing the amount of savings which is available for new investments in the G7 area.

The first datum shows that the market is more pessimistic than optimistic on the future of the developed countries and on the prospects of the global scenario.

The second datum shows that the G7 countries have a big double structural problem: the demand of capital from public authorities is jeopardizing the capitalization of the private sector. Though this is not new, it is a very bad internal short-circuit in all the national systems. At the same time capital investments tend more to go "out" than "in". The latter trend is relatively new and transforms the former one into a real emergency. Deindustrialization in the G7 is both the cause and the consequence of this phenomenon. It is becoming "structural", i.e. very difficult to reverse by using ordinary national policies.

11. Let us ask ourselves under which conditions it would be possible to reduce long-term rates, and their impact on the short-term ones. To answer this question means to be able to re-create half of the conditions for re-development.

Let us ask ourselves, also, under which conditions it would be possible to reduce the demand of capital by public authorities in order to have more for private investments and how to get back into the G7 area the money which is flowing away.

There are not pure economic answers to these economic problems. The answers must be political.

12. The first question has the following answer. If the market perceives that in the future there will be a strong cooperation among the G7 countries, then the cost of money should go down. The market will tend to import future stability into the present. All the economic cycles will shift from the current pessimism to a new optimism.

For the second question national answers are more important. Continental Europe and Japan have to strongly liberalize their economies in order to become more attractive for new investments and to stop deindustrialization.

It is crucial to note that these two moves cannot be separated. Europe and Japan cannot liberalize if they do not grow. In order to grow more, a strong agreement among the G7 is required.

13. Which kind of agreement? My guess is that a single market among the G7 countries should be built step by step. It will take decades. Yet to communicate now that this thing will be done will have immediate positive consequences. Furthermore a strong political commitment is required. Only in this case central banks will relax their current deflationary policy.

Let me be a little bit more detailed on this recommended "grand strategy". By 2005 a treaty defining both the G7 single market agenda and the consequent monetary and security agreements should be signed. The sooner such a possibility is perceived to be real by the market, the better. The agenda of integration might take many steps and 20 years - say - before full implementation. During this process the new G7 entity would have to achieve a strong degree of coordination. By becoming integrated and coordinated, the new G7 entity will have enough critical mass and communality to act as the main regulator of world economic affairs. Particularly, such a configuration can be effective for handling unstability in the emerging countries when it will start (there is no rapid industrialization without social and political upheavals). Moreover the strenght of the overall system will be so great that it will be difficult for the external countries not to look for a positive relationship with it. This new world order should be able to feed growth for decades. Moreover it will allow a new development in the rich countries which will also have a multiplying and stabilizing effect on the emerging ones.

14. The internal architecture of this possible new entity would have to be at the same time coherent and flexible. It has to be based on an agreement among sovereign nations rather than a fusion of nations (something more than an alliance, much less than an union). More important is the practical activity of cooperation. An agreement among States at the level of big projects (space, telecom, megainfrastructures) might integrate the capital resources that now are fragmented and lead to bigger volumes of industrial acitivity for each unit of the system. Security cooperation will be crucial. And so on.

15. I do not want to go further into detail. What counts is the grand strategy. Should the G7 countries find a common solution or have they separate diverging solutions? I think that cooperation at the G7 scale is the only solution in order to redevelop and to preserve the mass capitalism created in the post-1945 decades.

16. Given these premises, I have a very simple opinion about the future prospects of Japan. I have followed with growing interest some of the domestic discussions between modernist and traditionalist viewpoints and about the "abandon US and go back to Asia" scenario. I perceive that the Japanese elites are seriously discussing how to shape the destiny of the nation. I only want to put my finger into this discussion by stressing that no developed nation in the G7 group, not even Japan, can have a good destiny by trying to play the game as a single actor. The european project is not big enough any longer to provide Europeans with some independence from the requirement of a wider cooperation among economically advanced societies. US too. Moreover I think that if Japan chooses the Asia option (never clearly defined) decoupling from the western community it will be eaten by both China and the western players. That would not help Americans and Europeans, though they still have enough creativity and violence to try win any competition. My conclusion is that the history of the past fifty years is forcing the G7 nations toward more integration in order to have more wealth in the next century. What is good for Japan is good also for the Europeans and the Americans.

This is what I mean by stressing the need of providing the global market with a global political architecture.