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Over the past two decades, sharp increases in international business competition and the pace of commercial innovation have sent a series of tremors rippling through the U.S. economy. Highly visible industries -- such as steel and automobiles -- contracted and restructured. Venerable airlines, banks, and retailers failed. Even in thriving industries like computers, some high-flying pioneers ignominiously bit the dust. When the early 1990s brought recession followed by the doldrums of sluggish economic growth, many Americans seemed to panic. Looking for ways to soup up American output, they gave the White House keys to Bill Clinton, who promised "economic change."

Candidate Clinton made it clear that the way he would pursue long-term change was through increased governmental steering of the economy. "Mr. Clinton wants to pull the American economy in the direction of the managed capitalism found in Japan and Western Europe, where governments play a larger role than Washington in shaping industries and markets," summarized the New York Times in 1992.

Clinton's Managed Capitalism

In the first months of the new administration we have begun to see exactly how President Clinton intends to use the federal apparatus to try to shape American industry. In late February, he unveiled an expansive new industrial policy with $17 billion of funding. The president proposes to remake the Commerce Department's National Institute of Standards and Technology into an aggressive, new technology-targeting agency. He says he will use U.S. national laboratories to do more research for private companies. He wants a national network of government-run "manufacturing extension" centers, a joint government-corporate program to develop "clean" cars, and a major government push to build a grid of so-called information superhighways across the country. The president says he will transfer billions of dollars from defense research into new programs that are supposed to produce civilian products instead. He has announced that the Pentagon's Defense Advanced Research Projects Agency will be renamed simply the Advanced Research Projects Agency, to reflect a wider set of responsibilities.

More efforts along these lines surely are coming. Last year Mr. Clinton campaigned on his "Rebuild America Fund," to which he proposed to allot $80 billion of fresh spending over a four-year period so that a government network of railways and roads, communications lines, and environmentalist public-works projects could be built. He endorsed a plan by Democratic senators to create a Civilian Technology Corporation that would coordinate private research and channel public funds to specific industries and companies.

Upon taking office, President Clinton set up a new National Economic Council in the White House to monitor trade patterns and protect "vital" domestic companies and sectors. Mr. Clinton originally conceived this panel as an "Economic Security Council," out of the notion that government's national security responsibilities extend directly into the realm of business and industry oversight.

He appointed as his chief economic adviser Laura D'Andrea Tyson, an unorthodox economist who argues that selective protectionism, subsidies to damaged and/or critical industries, and managed trade -- meaning government negotiations to divide up the global business pie -- will improve the well-being of American consumers. Ms. Tyson welcomes the idea of the federal government picking winners among technologies, and writes that it would be "criminal" to waste the peace dividend by failing to spend it subsidizing commercial technology.

The new administration also has hinted at a taste for trade protection and business subsidies. At his Little Rock economic summit last December, the president-elect listened sympathetically as corporate executives bemoaned foreign competition, and commiserated with them over the plight of the ailing old-line enterprises. Protectionist pressure has since been building fast, with big companies and unions from the airline, auto, steel, oil, semiconductor, agriculture, textile, apparel, and movie industries already in line by Inauguration Day. At the end of January, Commerce Secretary Ron Brown levied steep tariffs on steel imports, and the Treasury Department began a review that could increase duties on minivans and sport-utility vehicles from 2.5 percent to 25 percent. In late February, Mr. Brown testified that the administration might formally charge Japanese automakers with "dumping" -- selling their cars too cheaply in the United States.

Meddlers in Markets

Some of the president's closest advisers have been calling for measures along these lines for many years. Longtime Clinton pal Ira Magaziner, who has been appointed senior White House advisor, urges an energetic industrial policy that would use public funds to subsidize or even create companies to compete with foreign firms. He calls for "American companies to get the kind of help from the U.S. government that virtually every other nation gives its business."

Clinton confidant Derek Shearer, who is on record endorsing nationalized government investment in critical businesses, promises the president will have a special "Japan policy." Financier Felix Rohatyn, a major Clinton campaign donor and one of his informal economic advisers, has proposed in the past, in tandem with Jesse Jackson, that politicians should use the accumulated pension funds of public employees for major industrial and public works projects around the country in order to provide state stimulus to the economy. In his book Putting People First, Mr. Clinton suggests that both private and public pension funds could be tapped as a source of funding for government infrastructure projects.

Robert Reich, economic director on the transition team and now the U.S. secretary of labor, has a long history of support for government industrial planning. In March 1992, he proclaimed to the Washington Post that "industrial policy is back, far more respectable than it was before. These ideas were anathema in the 1980s. But the world has changed since then. The Japanese leviathan is that much larger, the European Community looks more menacing, the erosion of the U.S. industrial base is that much more apparent."

The Clinton economic agenda is still taking form, but we know enough about the views of the president and certain critical advisers to expect that lots of experiments in government industrial management lie ahead. Whether the talk is of "infrastructure spending" or "trade realignment" or "technology targeting," the consistent new emphasis in the White House will be on increased planning, spending, and intervention by Washington overseers.

Copying the Japanese?

Referring to other nations where government does more steering of the economy, Mr. Clinton argued during his campaign that we ought to "copy our competitors." The economic manipulations of France and some other European countries sometimes have been cited by Clintonites as examples. But today's favorite model for advocates of greater political orchestration of business activity is Japan. White House economic adviser Tyson argues that the "[Japanese] example may well provide the prescription ... for our own economic revival."

"Now that the competition between centrally planned socialism and market capitalism is over, interest in Japan's alternative way of organizing a market economy should be greater than ever before," argues Alan Blinder, President Clinton's second appointment to the Council of Economic Advisers. As part of a longer paean to Japanese industrial management written in 1992, Mr. Blinder rudely dismissed the conclusion of many economists that "government intervention is a mere detail, and probably harmful" to the Japanese economy. Actually, he asserted, in Japan "the government not only tells businesses what they ought to do, but the companies frequently listen ... the system undeniably works." Mr. Blinder concludes: "Perhaps Americans should spend less time cajoling the Japanese to be more like us and more time considering whether we might do better by being more like them."

It isn't only the Clintonites who want us to copy the Japanese. Democratic presidential candidate Paul Tsongas built his whole primary campaign around the idea that "industrial policy is what Japan has.... It is what we must have as well.... American companies need the U.S. government as a full partner if they are to have any hope of competing internationally." Indeed, every one of the Democratic candidates for president in 1992 came out in favor of a national "industrial policy" during the primaries, as did scores of congressmen in the House and Senate. "The success nations such as Japan have had by adopting industrial policies is one of the reasons laissez faire has given way to savoir faire among the Democrats," argued the Boston Globe during the presidential primary season.

If You Can't Beat 'Em ...

The most visible advocate of the Japanese model, of course, is Ross Perot. "You've got to target the industries of the future. If you study MITI [the Ministry of International Trade and Industry] in Japan, it works," he asserts loudly.

Even a few businessmen -- who traditionally have been very skeptical of government picking winners and losers in commerce -- have lately adopted an "if-you-can't-beat-'em, join-'em" attitude. "The government of Japan has acted.... The United States, too, must act.... The United States must have an industrial policy," argues Jerry Sanders, the outspoken CEO of electronic chipmaker Advanced Micro Devices. One informal survey of several hundred U.S. executives doing business in Japan recently found that two-thirds of all respondents answered "yes" to the question, "Do you feel that the United States should develop an industrial policy similar to Japan's?" A 1991 poll by the Harvard Business Review found that 74 percent of American business managers now think the government should "actively help" corporations doing business overseas. Business Week magazine carried a splashy 1992 feature story trumpeting "Industrial Policy" on its cover in huge letters. "Should the United States have an industrial policy?" asked the editors, "The answer is `Yes.'"

Unfortunately, most of today's boosters of Japanese-style industrial policy for the United States don't understand either the true strengths of the Japanese economy or its unreported weaknesses. They seem to believe, along with many other Americans, that the Japanese have triumphed in nearly all their economic endeavors, and that benevolent guidance by the Japanese government is the real source of these successes. They are wrong on both counts.

MITI's Checkered History

In popular fable, the grand intelligence behind Japan's spectacular economic rise has been the Ministry of International Trade and Industry, or MITI. Beginning after World War II, MITI bureaucrats used their broad powers to distribute Japan's limited commercial resources and assign tasks for the rebuilding of the shattered economy. In those early years, when markets were in shambles, companies were destroyed, and private economic management had nearly collapsed, the Japanese may have had little choice. But from the beginning,

MITI's attempts to manage the economy led to serious foul-ups and misdirections.

In the 1950s, for instance, MITI worked vigorously to force the Japanese automobile industry into a single company -- because planners were certain multiple competitors would only weaken each other. To their very good fortune, ministry officials were unable to strong-arm the private manufacturers into accepting their vision of one, two, or (by 1961) "at most" three Japanese auto firms. Today Japan has nine vibrantly rivalrous auto builders, and experts agree that it is the fierce competition among them that has driven the industry to its current levels of excellence.

At just about the same time MITI was trying to shrink the Japanese auto sector, it was pressuring other companies to avoid what it viewed as a dead-end in electronics. In 1953, a small company named Sony went to MITI to ask permission to buy transistor-manufacturing rights from Western Electric. MITI was not impressed with the technology, or with Sony, and didn't want to squander scarce foreign currency on either. Permission to make the purchase was refused, and a great enterprise was nearly suffocated in its crib. Fortunately, company founder Akio Morita was persistent, and he eventually badgered the bureaucrats into giving Sony the go-ahead.

Meanwhile, MITI was pushing other sectors of the Japanese economy down paths that would lead to disappointment and wasted resources. The steel industry is a good example. In this country, Japanese steel is commonly thought of as a MITI triumph, but actually it has been a drag on the nation.

After a giant, force-fed buildup during the 1960s and 1970s, many of Japan's blast furnaces fell idle through the 1980s. Over the last five years, more than 50,000 steelworkers have had to be laid off, and costly but underutilized plants have been scrapped. Massachusetts Institute of Technology economist Paul Krugman describes Japanese steel as "the success that never was," and says MITI's build-up of the industry probably "reduced Japanese national income." MITI's expensive attempts to build up the aluminum and non-ferrous metal industries in Japan were even worse debacles.

MITI's efforts to "target" the "industries of the future" have failed in many other sectors too. Indeed, the ministry has misfired far more than it has succeeded. Intensive and repeated MITI efforts to build up Japan's aircraft and aerospace industries, for instance, have produced only inferior products at absurd prices, and little or no world demand. Decades-long attempts to jump-start a biotechnology industry have been equally disappointing.

Computer Crash

Another grandly fruitless MITI venture was the Sunshine Project, initiated in 1974 with the intent of achieving quick breakthroughs in alternative sources of energy. "All that was produced for sure were jobs for superannuated bureaucrats," one observer has commented. Shades of the U.S. government's "synfuels," "shale oil," and Clinch River reactor debacles.

MITI also made an enormous mess of Japan's oil industry. The ministry set prices, allocated production quotas, forbade foreign competitors, and otherwise dabbled and interfered. The result was huge financial costs to both government and industry, consumers saddled with a serious misallocation of filling stations, wholesale gas prices nearly double the world market levels, and a very weak set of energy companies. MITI floundered in similar ways in the petroleum-based chemical manufacturing industry, another vital sector in any economy today.

MITI's aggressive efforts in oil "failed to produce true international competitors," states Harvard professor Michael Porter. In the late 1980s a deregulation plan was put together to pull government out of this sector.

Another example of MITI's pump-priming disappointments is the computer industry. Although the sector was first targeted nearly three decades ago, most Japanese computer products continue to lag behind their competitors, in little demand outside their sheltered domestic markets. Nimbler American companies set almost all industry standards, and even have used technological leapfrogging, superior manufacturing, and speedier product cycles to take back submarkets once believed to be slated for Japanese dominance. (Printers, hard drives, and notebook and palmtop computers are examples of this.) "In the mid-1980s, people like me were fearing that Japanese companies would take over the U.S. personal computer market in no time. Today, I find them a surprisingly ineffective force," states Andrew Grove, CEO of Intel Corporation, which has led U.S. manufacturers to dominance in today's microchip industry. Software has been the subject of a separate MITI push -- to even less effect. According to Japanese scholar Koji Shinjo, the "government promotion policies" that have supported the Japanese computer industry "conceal serious problems."

One of MITI's most ambitious programs of all, the so-called Fifth Generation Computer Project, inspired much fear in other countries when it commenced in 1983. The well-funded 10-year effort coordinated the work of eight companies in a newly built government laboratory. Its widely trumpeted goal was to produce the world's first thinking, "artificially intelligent" computers. The project has fallen far short of its aims, however, having produced no fundamental technical advances or marketable products, and the program now is being phased out.

White Elephants

MITI is not the only meddler. Japan's other government industries have engineered many costly failures in industrial policy. Some of the biggest follies have been portrayed in the Western press as smashing successes. Take shipbuilding: starting in the 1950s, the Ministry of Transport went on a shipbuilding binge, instituting a tariff to keep out British and West German competitors and encouraging the build-up of the world's largest yards and highest-volume industry. By the late 1970s, however, worldwide overbuilding and changing cargo patterns turned Japan's yards into white elephants.

Because they were following government incentives instead of market signals, Japanese shipbuilders monumentally miscalculated the demand for and profitability of their product. Even at its peak, the industry never netted a penny. The set-up costs had been high, and excess capacity plus competition from Korea, Northern Ireland, and other builders kept margins unhealthily slim. When the downturn came, losses were huge. The government had to step in again, this time to shrink the industry to a quarter of its former capacity. Where just a few years before they had been injecting growth hormones, the bureaucrats now were dispensing "adjustment aid."

Another boondoggle engineered by the Ministry of Transport is the Japanese national railway. The railway is known to most Americans primarily for its impressive high speed "bullet trains," the shinkansen. What is less well appreciated is the fact that until it was finally privatized in 1987 in the face of financial crisis, the agency had hundreds of thousands of featherbedded employees, continual strikes, poor service, serious overcrowding on some lines with gross overservice on others, and losses that averaged more than $20 million a day. This was despite heavy government subsidies and very high fares -- in the 13 years before privatization, ticket prices were increased 11 times.

"Everybody thinks the Japanese national railway is a success but it is the worst failure imaginable. It loses five times as much per passenger mile as any other railroad," pointed out Peter Drucker shortly before the privatization. Like many other government-dependent businesses around the globe, the railway's biggest problem was special-interest pressure to build and operate unprofitable but politically popular lines. A breathtaking $279 billion in debt accumulated by the agency ended up on the public books, a burden to be carried by Japanese taxpayers for decades. There is a warning in this for Bill Clinton, who has spoken often of his plans to have the government build "high-speed rail lines" in the United States.

Stifled Telecom

Railways are not the only sector where the Japanese government's transportation policy has gone off the tracks. Government coddling also has made the Japanese airline industry extremely inefficient. Until 1986, government-run Japan Airlines (JAL) held a monopoly on overseas flights, and All Nippon Airways (ANA) had a virtual monopoly on domestic flights. Tickets were so costly that relatively few Japanese could afford to fly.

When JAL was finally privatized, its managers found that the cozy regulatory cocoon they enjoyed for so many years left them ill-prepared for the fierce global competition that is now the norm in air transport. JAL currently is one of the highest-cost carriers in the world, and its share of travel to and from Japan recently has fallen by one-sixth. American carriers, which honed their operations after being released from government regulation a decade earlier, are far more competitive on the major trans- Pacific routes.

Telecommunications is another important economic sector that has been stifled by governmental embrace in Japan. The national telecommunications monopoly NTT is being privatized at last, but is still two-thirds state-owned and it is not lean or mean. Domestic phone calls cost 50 percent more in Japan than in the United States, and calling abroad from within Japan is far more expensive than calling in. Service is much less innovative in Japan. Cellular phones, for instance, only recently have caught on, due to clumsy regulation by the Ministry of Posts and Telecommunications.

Meanwhile, equipment makers also lag behind their competitors. "Japanese companies are at a disadvantage because they don't have enough competition in their home markets," says consultant Francis McInerney. Both consumers and companies have paid the price for Japan's industrial policy in telecommunications.

Financial Feudalism

Bureaucratic manipulation has gravely wounded Japan's financial sector, which these days often is described as "feudal." Ministry of Finance doting has kept Japan's banks, life-insurance companies, and stock-brokering firms in an inefficient backwater state, and in the past several years many institutions have careened toward serious solvency troubles. Government policies also are directly responsible for the recent collapse of Japan's stock market, and for the disastrous speculation in land and real estate markets that has made homeowning impossible for most young Japanese workers -- homes are up to 10 times more expensive than in America.

The farm policies of the Ministry of Agriculture can only be characterized as a fiasco. Their penalties are multiple: Japanese consumers must pay exaggerated prices for food -- twice as much as Americans, as a share of family income. In a time of damaging labor shortages in Japan, fully 9 percent of the workforce is tied up in farming, versus 3 percent in the United States. And large amounts of prime urban land are locked away in inefficient crop production instead of being used for desperately needed housing or commercial buildings.

Westerners have the idea that the crowding and poor physical amenities endured by the Japanese people are the unavoidable result of their island topography. Actually, there is much more land within an hour's travel of Tokyo than there is in New York, and a lot more of it is open -- Tokyo's population density within a six-mile radius of the city center is 39,000 persons per square mile, versus around 65,000 in Paris and Manhattan. Tokyo feels so overstrained because only half the land in the metropolitan area has been developed. There are still 125,000 farmers within the city, working tiny plots that average less than 6,500 square feet each. McKinsey & Company consultant Kenichi Ohmae reports that the land available for housing and offices within 30 miles of Tokyo could quadruple if the government would change its policy of protecting farming "in the national interest."

Thanks to heavy state strictures on store operations, Japan's goods distribution and retailing network is also very inefficient. It normally takes five to 10 years to get government permission to open a new store in Japan. Goods must pass through twice as many sticky fingers on their way from factory to buyer as in America or Britain. "Our distribution system is really an unofficial jobs program subsidized in full by the consumer," observes opposition politician Wakako Hironaka. These measures elevate consumer prices a punishing 60 to 100 percent.

The list of industrial policy failures in Japan goes on and on. Japanese pharmaceutical firms are second-rate internationally, in large measure due to protectionism and meddling by the Ministry of Health. Government attempts to aid and protect the Japanese mining industry have been boondoggles.

Failing the Screen Test

A major disappointment currently in the making concerns high-definition television (HDTV). Twenty-five years ago the Japanese government began to set targets for a new HDTV broadcasting standard. More than a billion dollars later (in 1991), the state-owned NHK television network pushed the world's first working system into operation. Industrial policy advocates in the United States, who had been agitating unsuccessfully for a similar $1.5-billion effort by the U.S. government, moaned that we had once again been outfoxed on a hugely valuable technology.

Actually, it was the Japanese bureaucrats who outfoxed themselves. In their office-bound wisdom, the targeters picked the wrong -- and now seriously obsolete -- technology. American companies, following consumer and market signals, have developed a far more advanced digital HDTV standard, and are now poised to dominate video transmission and reception in the coming decades. Federal Communications Commission chairman Alfred Sikes, the U.S. official in charge of broadcasting oversight, concluded from the episode that "bureaucrats determined to freeze the frame on fast- moving industries lock their companies and citizens into second- class products."

Behind in Productivity

If industrial policy in Japan has had so many failures, then how did Japan become such a juggernaut today? The answer comes in two parts.

Part one: Japan is not a juggernaut. The Japanese economy is one of the splendid successes of our lifetime, having grown about twice as fast since World War II as most of its industrial counterparts. Despite the hoopla, however, media and academic reports often ignore the fact that Japan, like every nation, continues to have plenty of weak and potholed sectors in its economy.

An inventory of the consumer goods in American houses and garages is not a good way to gauge Japan's overall productive strength. After all, manufacturing represents only about one- fifth to one-third of the economy in any industrial nation today, and Japan's manufacturing successes are further concentrated in a relatively narrow -- albeit highly visible -- band of consumer goods, such as electronics and cars.

A broader-spectrum comparison of economic output in Japan and the United States done in 1989 by professors at Harvard University and Tokyo's Keio University found that Japanese efficiency was lower than U.S. levels in 16 of 29 major industries, including communications, transport, construction, retailing and services. Japan's Labor Ministry reported in 1992 that overall, U.S. workers are 1.6 times as productive as Japanese workers. A more selective and detailed study done in 1992 by McKinsey Global Institute -- with assistance from several economists, including Nobel laureate Robert Solow -- also found that most U.S. enterprises were more productive than Japanese counterparts, particularly in the service sector -- which includes banking, airlines, and phone companies, not just fast- food restaurants. While the Japanese have many superb companies and industries, their economy also has lots of weak spots.

Two Japanese Economies

Most of the weakest areas in Japan are those that have been subsidized or otherwise shielded by the government. That's part two of the explanation of how the Japanese arrived where they are today even though targeting and so forth did not work: The fact is, they succeeded for reasons unrelated to industrial policy. Indeed, it may be most accurate to say the Japanese succeeded in spite of industrial policy. In his recent book The Competitive Advantage of Nations, Harvard professor Porter does not credit Japanese planners at all. "Government policy in a range of industries," he writes, "has had the effect of undermining competition and sheltering inefficient competitors, lowering the overall productivity of the Japanese economy."

Many of Japan's strongest businesses -- like consumer electronics, cameras, robotics, precision equipment, pianos, bicycles, watches and calculators, numerically controlled machine tools, and ceramics -- developed mostly on their own, without much help from MITI or other agencies. And where government mandarins have intervened most actively -- like shipbuilding, agriculture, petrochemicals, and aerospace -- they often have done little more than provide costly life support to fossils and failures.

There are actually two Japanese economies -- one vibrantly competitive, one bloated and inefficient and kept afloat by bureaucratic fiat. As Masaru Yoshitomi, director-general at the government's Economic Planning Agency, concedes, Japan's less efficient industries amount to "a welfare system within the private sector."

Ministry planning is not the source of Japan's economic vigor. The real credit lies elsewhere: with her strong, serious primary education system; with the extraordinarily high savings rates of her people and all the government policies that encourage that; with her low inflation and low tax policies; and with her powerfully cohesive families that allow youngsters to grow into productive citizens and workers (only 5 percent of all Japanese children currently live in broken homes, compared with 28 percent in this country). The Japanese are a fantastically disciplined people who probably would make any economic structure look good.

Maybe the most important factor driving the nation's success is the fierce market competition that reigns wherever it is allowed in Japan -- remember those nine different Japanese car companies. Japanese economist Ryutaro Komiya argues that "vigorous competition ... in spite of ... the strong inclination of the government ministry responsible for an industry to suppress competition" has been a key to the vitality of the Japanese economy. Professor Porter of Harvard describes hot competition as "perhaps the most essential underpinning" of Japanese achievement.

The Japanese Turn Away

Certainly government steering is not the secret. "The idea that central planning is responsible for Japan's success is a myth," says former White House economist David Henderson. "Japan's is an economy driven by firms, not government," says Professor Porter. While MITI and other government agencies "have preserved unproductive firms in dozens of industries," Professor Porter concludes from his massive research, "only a handful of the more than 60 industries involved have subsequently achieved significant international success." Japanese industrial policy, in other words, has failed far more often than it has succeeded.

Bailouts, more than start-ups, have been the main work of Japan's finaglers. Behind all the talk of targeting "infant industries of the future," most ministry resources have been funneled to elderly, even senile, industries of the past. Decliners rather than ascenders have absorbed the bulk of the money. Even when targeters have managed to hit the right industry, their success at hitting the right firm at the right time in the right way, without doing more harm than good, has been minimal.

For these reasons, the Japanese now are discarding industrial policy and government management of their economy -- a widely underreported fact in the West. The privatizations of the national railway, the national airline, the telephone monopoly, and the deregulation efforts affecting the oil industry have already been discussed. Deregulation and sharp reductions in ministry guidance are also underway in banking and financial services. The once tightly controlled retail and distribution sector is seeing some relaxation. Numerous government tariffs are being removed or lowered.

Meanwhile, many of MITI's formal powers have been allowed to lapse. Of course, bureaucracies never surrender authority easily, and some of Japan's agencies are still clawing to retain their powers of economic direction. But the movement away from the planned and targeted economy is unmistakable.

Japan's fling with industrial policy was closely linked with its predicament of transforming itself from a poor, war- devastated nation into a developed one, and most of the overt governmental prodding took place in the 1950s and 1960s. As their economy became richer and more elaborate, the Japanese discovered that state force-feeding interferes with growth more than it helps. "In my time, our job was simple," says Naohiro Amaya, a central MITI official during Japan's postwar rebuilding. But now, he continues, the economy has become too complicated for government ministers to manipulate effectively. His successors are "trying to solve many complex equations simultaneously." Most Japanese leaders came to this same conclusion some years ago. As the Wall Street Journal summarizes, "there is an emerging consensus among the public and the business community that an economy guided by the government ... is ill-suited to the needs of modern Japan."

The irony is that just as the Japanese are fleeing national business management, some Americans (and even more the Europeans) are edging toward it. Today's "severe danger," economics writer and Japan expert Bill Emmott warns, is that America, panicked by the reality of stiffened global competition "will learn from the wrong Japanese example, will emulate something that Japan has in fact abandoned."

On Track the American Way

Americans have high economic expectations. Sometimes this leads us to exaggerate our problems and overlook successes. From mid-1982 to mid-1990, after all, the U.S. economy grew an impressive 31 percent after inflation. That meant 18 million brand-new jobs, per-capita disposable income rising by one-fifth after inflation, and added production equivalent to the entire output of the West German economy -- all in less than a decade.

While we often hear claims these days that the United States can't compete as an exporter anymore, the truth is that American exports have more than doubled in real dollar value since the mid-1980s. The United States now sells more than $400 billion worth of goods to other countries annually. By comparison, Japanese exports total around $300 billion, and theirs recently have been rising at a much slower 3-percent annual rate.

It is true the United States has economic problems that need fixing. And it is true that some proud American companies lately have been outperformed by foreign competition. But our economy still contains a multitude of internationally unsurpassed sectors, and hundreds of American firms recently have made impressive comebacks. In 1992, for example, U.S. computer chip manufacturers stunned pundits by retaking the world market share lead from the Japanese. In most emerging branches of the business, U.S. companies -- written off just a few years ago -- once again are setting the pace. Meanwhile, European attempts to compete in semiconductors by using tariffs and huge government subsidies made their position worse.

Private restructurings are also boosting many other American industries back into world leadership. U.S. steelmakers are again the lowest-cost producers. Machine tool makers have pulled back to the front of their pack. It is becoming increasingly clear that over the next decade American firms even will regain a strong position in home electronics -- a niche filled almost exclusively by imports in recent years.

Or take even that sorest of sore spots, the auto industry. In 1992 Japanese automakers actually lost a point and a half of market share in the United States, and they will lose more this year. Detroit completely dominates today's two fastest growing sales niches: sport/utility vehicles -- like Jeeps -- and minivans. Minivans and utility vehicles now account for a fifth of the total U.S. vehicle market, and that share is rising fast. Domestic makers sell 90 percent of them.

Every one of the Japanese car companies except Honda (which is cutting production sharply this year) has recently been losing money in the United States -- to the collective tune of $4 billion a year. They are all reducing new investment, canceling products, and leaving models on the market longer between overhauls. Meanwhile, Ford and Chrysler are now on solid footing, and GM is building good cars while finally undertaking the financial restructuring it long has needed.

Improving What We Do Best

Many Japanese competitors recently have discovered that what goes up also can come down. Total Japanese industrial production was nearly 9 percent lower in 1992 than in the year previous. Corporate profits have declined for three consecutive years -- the first time that has happened since World War II. The Japanese stock market has lost half its value since 1990. Land prices are down by one-third. Several major banks are at risk of failing. Even marquee industries like consumer electronics are suffering. Sony will show a 70-percent decline in earnings in the fiscal year just now ending. The Japanese certainly will continue to have one of the world's most competitive economies for the foreseeable future, but they are not invincible. Over the next decade, weak spots in their system will become increasingly apparent.

If the United States is to prosper in the years ahead, it will do so not by aping the Japan of the 1960s, but by solving its own problems and refining what it does best. Instead of dabbling in industrial decision-making and subsidies that would amount to corporate welfare, our government should concentrate on refashioning our miserable public education system, on mending our families so children can grow up responsibly, on reducing our national expenditures and deficit, on freeing our entrepreneurs from suffocating controls, and on making our tax code friendlier to investment and savings and less protective of consumption.

The great global economic lesson of the last generation is that earnest centralized management -- even in as mild a form as existed in post-War Japan -- always will bring less prosperity than open market competition. It will be a tragedy if the new American administration, in the name of aiding American "competitiveness," ignores that vital lesson here at home.
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Title Annotation:Japan's industrial policy; Ministry of International Trade and Industry
Author:Zinsmeister, Karl
Publication:Policy Review
Date:Mar 22, 1993
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