Disclaimer: my takeout on “reinventing japan’s economy” and recent essay submitted for a writing competition.
The recent calamity of Tohoku earthquake and Fukushima nuclear-plant incident have made Japan re-grasp the importance to constantly innovate and to reclaim its power as major economic hub in Asia. Japan, once a country with continuous double-digit growth rate and rapid technological innovation during the 1970-80, has faced bubble economy phenomenon following the zero economic growth after the 1990s. The ever-changing policies (altogether with numerous inconsistencies inside) have been done to tackle the issues of economy stagnancy, but only a little worked out. The inability of the government to engage in a real-plan to reconstruct the whole country’s economy, let alone the Tohoku area, has more or less reflected by its slow crisis management preparedness post Tohoku disaster.
The concentration of political and economic power in mega polis Tokyo has partly contributed to the stagnancy of technological innovation and economic growth. Tokyo has turned into a super-city -with a population of around 34,300,000- that has expanded enough to consume other neighborhoods in terms human capital, industry and resources. As a result to this, the government policies are too centralized in Tokyo area, resulting in the sluggish policy adoption and policy respond in outside Tokyo area. Simply said, the current obstacle in Japan economy is that economic power is way too concentrated in Tokyo -hence caused over-agglomeration that neglecting the construction and industry of other important settlements in the country; and that there is little to none institutional changes that respond to the problems.
Indeed, the Tohoku disaster and the nuclear crisis could become a hallmark of a brand new “human capital” of Japan. Skidmore and Toya (2002), demonstrates that higher frequencies of climatic disasters are correlated with higher rates of human capital accumulation, increases in total factor productivity, and economic growth. Though disaster risk reduces the return to physical capital, risk also serves to increase the relative return to human capital. Thus, physical capital investment may fall, but there is also a substitution toward human capital investment. Disasters also provide the impetus to update the capital stock and adopt new technologies, leading to improvements in total factor productivity. In the case of a land with frequent disasters like Japan, disaster risks affect the development of human capital accumulation. Certainly, the world has witnessed the strong willpower and determination of the Japanese people after the disaster. Tohoku earthquake obviously serves as a main turning point of Japan, to –the first and foremost- change the human capital, in this case, the institutions.
Change the institutions may affect growth in the long run. Douglass North (1991) defines institutions as “humanly devised constraints that structure political, economic and social interactions.” According to North, past historical institutions, which create the current institutions, determine the destiny of the nation; in short, history tends to be repeating from the past institutions to the latter one. Changing institutions are difficult, but they are not impossible. In the case of Japan, after the crisis of World War II, Japan has shown a tremendous improvement in terms of economic development, and achieved growth beyond reconstruction by drastically changing its institutions. From a poor country defeated after the war, Japan has managed to swiftly adopt the western technology, translate it to build the domestic industry, and then make technological innovation that almost (or have) surpassed the west. This fact has become a repeating occurrence when Japan opened up in the late Edo period around 1880, when growth was rapidly accelerated. Drawing a scarlet thread between these facts, Japan can actually grow beyond reconstruction again, as it has proven itself surviving through the hard crises in the past. Obviously, drastic institutional changes are deemed necessary in order to propel the rapid growth again after a series of reconstruction. These institutional changes have to take into account the issue of globalization -a relatively nouvelle issue that Japan hasn’t faced during its reconstruction in the past-, and the development of regional industrial cluster –that will further de-escalate Tokyo’s role as the economic and political powerhouse of Japan.
In addressing the issue of globalization, many economists argue that the source of economic growth is the technological progress, and that knowledge diffusion from abroad shall be adopted domestically. The idea is simple: by connecting with advance minds over the world, one is able to generate more ideas, adopt them and tailor them to the domestic needs, and consequently, achieve faster growth. In the present time, Japan has yet to turn the globalization into power and yet to maximize the benefit of globalization to drive domestic innovation. Compare to the United States which ratio of domestic innovation versus foreign innovation is 60%-40%, Japan’s ratio is currently around 30%-70% (Eaton & Kortum, 1999). This shows that Japan is still lacking of domestic innovation to sustain domestic productivity growth. Although there is a fear toward the globalization by Japan’s domestic companies, globalization does not necessarily deteriorate domestic employment. In fact, globalization can help change the ways the business is being done. In the short run, the domestic employment may suffer due to the relocation of business in other low cost settlements, however, as productivity is increasing overtime, the human capital could be benefited from the higher productivity, thus increasing more employment in the long run.
Currently, Japanese corporation is not globalized much. With regards to the FDI inflows per GDP, and the FDI outflows per GDP, Japan’s ratio are far below the other developed economies like France, Germany, Switzerland, and UK. Policies are needed to reinforce the globalization-spillover effect across Japanese corporation –and Japan’s policy makers have to race against the time to offset the lag of Japan to other countries more advance (i.e. Singapore, Switzerland, etc) in order to capture the right momentum. From this point onwards, policy has to promote openness and focus to invest in human capital. Economic policies particularly, have to be decentralized and involving the whole area of Japan with each economic and industry specialization.
The first step toward gaining momentum of globalization is to embrace trade openness and prevent further agglomeration in Tokyo and Kanto area by developing the existing clusters industry in other part of Japan. With the commitment in trade openness particularly the participation in the Free Trade Area (FTA) and Trans-Pacific Partnership in particular (TPP), Japan is gradually embracing the openness and tendency to spread the wings to the international trade community. The next crucial step is implementing the decentralized industrial agglomeration outside Tokyo. The regional government shall be able to reinforce domestic industry by strengthening the networks amongst local industry, with the help of tax incentives and reward from the central government. The plan shall be executed by making use of the existing geographical cluster industry in the major cities. Gradually, the cluster will attract related firms working on the similar industry, thus reinforce knowledge diffusion and positive competition amongst the firm to both the old players and the late entrants, and will attain pool of skilled labor. In the current situation, even though public investment is increasing in the rural area, total population is declining in the rural region as people are clustering in Tokyo. Furthermore, the lacking of entrepreneurship initiatives and the sheer presence of network between science, technology and entrepreneurship aggravate the situation. Government shall highlight the declining population as a crucial factor determining the future of human capital, by trying to attract foreign pool of skilled labor, and also by giving incentives to the return-migrants –or people returning to the rural areas to start up their own business.
In the effort to build a robust network between science, technology and entrepreneurship to create new industrial clusters, Japan shall learn from the case of Singapore’s Biopolis or the High Tech Cluster Zhongguancun Science Park in Beijing China. Both high-tech clusters have emphasized the innovation in frontier technology, and promoted research collaboration in regional clusters. Both impose almost zero tax to foreign firms with regional centers. Both even foster university-industry relations, in other words, provide finances for recent university graduates to build start-ups. With Japan’s advance higher education spreading from Okinawa to Hokkaido, the rudimentary infrastructure to build research collaboration already exists. The next thing the government shall do is to strengthen the network between Japan’s high-tech industries to the pool of talents in the University, by initiating various research collaborations in frontier technologies.
Concerning the new start-ups and newborn companies in this new industrial cluster, low corporate tax should be imposed, with incentives and subsidy dedicated to research and development. With the strong network ties and the collaboration between higher education institutions and industries, technological progress will be promoted through networks, thus makes effective geographical knowledge diffusion. Government too shall not forget that high-tech clusters will attract foreign research and industry alliance, which will benefit domestic innovation in the long run. In an instance, Hokkaido is geographically situated near Russia, while Fukuoka is geographically situated near Korea peninsula, and Okinawa’s located relatively near to the Philippines. Obviously, Japan has to consider building up a high-cluster area within those proximities, considering the alliance and foreign cooperation opportunities that are of abundant.
Toward the end, Japan has actually mastered the formula to attain rapid growth beyond the reconstruction of Tohoku area, by preventing further agglomeration in Tokyo (and building the high-tech clusters outside Tokyo), and making use of this brand-new regional clusters to build research collaboration network that will further, promote growth. Quoting historian Arnold Toynbee, history is repeating. The past glory of Japan in tackling the crisis has proven that Japan is actually resilient to crisis if radical institutional changes are being implemented. With the technological innovation spreading through the network from the regional clusters across the country, we shall see the second awakening of Japan’s economy.
 “Noda to declare Japan will join TPP at APEC” – the Japan Times, Sunday, Oct. 30, 2011
Eaton, Jonathan and Samuel Kortum (1999), “International Technology Diffusion: Theory and Measurement.” International Economic Review, 40 (3), pp. 537-570.
Skidmore, M. and H. Toya (2002), “Do Natural Disasters Promote Long-Run Growth?” Economic Inquiry, 40 (4), pp. 664-687.
Todo, Yasuyuki (2011), “Quantitative Evaluation of the Determinants of Export and FDI: Firm-level Evidence from Japan,” The World Economy.
Todo, Yasuyuki and Satoshi Shimizutani (2008), “Overseas R&D Activities and Home Productivity Growth: Evidence from Japanese Firm-level Data.” Journal of Industrial Economics, 56(4), pp. 752-777.
Todo, Y., W. Zhang, and L. A. Zhou (2009), “Knowledge Spillovers from FDI in China: The Role of Educated Labor in Multinational Enterprises.” Journal of Asian Economics, 20 (6), pp. 626-639.
Todo, Y., W. Zhang, and L. A. Zhou (2011), “Intra-Industry Knowledge Spillovers from Foreign Direct Investment in R&D: Evidence from a Chinese Science Park.” Forthcoming in Review of Development Economics.