JAPAN
05 June 2014
Japan -- a Venetian destiny?
In the Middle Ages, Venice was possibly the richest place on earth. But today, it is a mere museum, a shadow of its former self. Could the same Venetian destiny await Japan?
In the Middle Ages, Venice was possibly the richest place on earth. But today, it is a mere museum, a shadow of its former self. Could the same Venetian destiny await Japan?
Venice, a nation of seafarers, was able to take advantage of the recovery of the European economy and the expansion of trade from the ninth century onward. Its population rose from 45,000 people in 1050 to some 110,000 in 1330, and was then as big as Paris and probably three times the size of London.
In the post-war period, Japan enjoyed a similarly stunning rise as a global exporting giant, and at one point seemed to threaten America's leading position in the global economy.
Venice's rapid expansion was driven by the world's "most advanced set of inclusive economic institutions underpinned by nascent political inclusiveness", as Daron Acemoglu and James A. Robinson argue in their celebrated book, "Why Nations Fail".
Contractual innovations like the "commenda", a rudimentary type of joint stock company, was a key channel for social mobility. This saw the rise of new families, which forced the political system to become more open. The "Doge", who governed Venice, saw his power whittled away, and was ultimately subservient to the Great Council.
This period also saw institutional innovations in law, independent magistrates, private contract and bankruptcy laws, and new legal business forms and new types of contracts. There was rapid financial innovation and the beginnings of modern banking. Not surprisingly, we saw a rapid expansion in Venetian mercantile and naval power.
Japan's post-war rise was also driven by inclusive economic and social policies, implemented by a shallow democracy dominated by the Liberal Democratic Party. The government provided a good education to its citizens. It fostered the rise of world-beating companies like Toyota and Sony, which provided secure employment to workers, and steady business to small and medium enterprises.
The Venetian success story came unstuck as the rise of new families threatened the situation of the established elite families. These elite families managed to force through a decision to close access to the Great Council, and to ban use of the commenda. With trade now monopolised by a narrow group of elite families, Venice was on the path to its decline. Today it survives on tourism and a bit of fishing.
Despite Japan's veneer of "inclusiveness", its system was engineered by an oligarchic elite from business and government. And this is at the root of Japan's current problems which began when a financial crisis struck over two decades ago, and superimposed itself on an unfolding demographic drama.
The possible renewal of the economy through "creative destruction" was suppressed. Old companies were kept afloat, and bureaucratic barriers and a closed financial system inhibited the entry of new companies.
To revive their fortunes, Japanese companies, once the strongest element of Japanese society, have increasing made their future in overseas markets more than at home. The Japanese government provides widespread support to corporate overseas investment, and yet strangely blocks inward foreign investment, a potential great source of domestic economic dynamism and innovation. Japan's agriculture and services sectors are similarly protected from imports, and are thus saddled with low productivity.
To maximise their flexibility and competitiveness, Japanese companies now employ some 40% of workers on "irregular" contracts -- part-time, short-term, or contract workers -- with virtually no job security or social benefits. Workers thus have less access to corporate training, and suffer precarity.
This surely has a negative impact on productivity. But Japanese companies, like companies everywhere, are more concerned with short-term profits than the longer term. Inequality and poverty are on the rise, further weakening domestic demand.
Public spending, rather than new entrepreneurship, has been the government's strategy for keeping the economy afloat. As a result, Japanese citizens are now born with a millstone of government debt to the tune of more than 200% of GDP.
This growing debt is also being fed by health and pension costs of Japan's rapidly aging population. Japan's seniors are now part of the nation's extractive elite.
Thus, it is perhaps not surprising that the government has chosen to invest much less in family-friendly policies for the young. This is regrettable because they might encourage a higher birth rate, and arrest the decline in its population. Nor has the government fostered more positive attitudes towards migration.
"Abenomics" is Japan's new policy gadget which promises to revive the country's fortunes. But so far, it has been much more talk than action -- especially when it comes to emancipating women in Japan's male-dominated society. And old corporate elites will likely be the principal beneficiaries of labor market and other reforms in soon-to-be established special economic zones, one of the key initiatives of Abenomics.
The Venice and Japan analogy may not be perfect. But they are two cases where "extractive elites", elites which dominate society and politics, manage to extract benefits for themselves -- more than building an inclusive and stronger society and economy where all can contribute, and where we are all exposed to positive force of competition.
As Japanese and other tourists visit the beautiful piazzas and canals of Venice, they probably don't think of it as a monument to disastrous political management. Nor do they probably imagine that the same fate could await their own countries.
But history and the excellent analysis of Acemoglu and Robinson demonstrate that nations can and do fail, and that such failure is invariably the result of choices made by "extractive elites".
Venice, a nation of seafarers, was able to take advantage of the recovery of the European economy and the expansion of trade from the ninth century onward. Its population rose from 45,000 people in 1050 to some 110,000 in 1330, and was then as big as Paris and probably three times the size of London.
In the post-war period, Japan enjoyed a similarly stunning rise as a global exporting giant, and at one point seemed to threaten America's leading position in the global economy.
Venice's rapid expansion was driven by the world's "most advanced set of inclusive economic institutions underpinned by nascent political inclusiveness", as Daron Acemoglu and James A. Robinson argue in their celebrated book, "Why Nations Fail".
Contractual innovations like the "commenda", a rudimentary type of joint stock company, was a key channel for social mobility. This saw the rise of new families, which forced the political system to become more open. The "Doge", who governed Venice, saw his power whittled away, and was ultimately subservient to the Great Council.
This period also saw institutional innovations in law, independent magistrates, private contract and bankruptcy laws, and new legal business forms and new types of contracts. There was rapid financial innovation and the beginnings of modern banking. Not surprisingly, we saw a rapid expansion in Venetian mercantile and naval power.
Japan's post-war rise was also driven by inclusive economic and social policies, implemented by a shallow democracy dominated by the Liberal Democratic Party. The government provided a good education to its citizens. It fostered the rise of world-beating companies like Toyota and Sony, which provided secure employment to workers, and steady business to small and medium enterprises.
The Venetian success story came unstuck as the rise of new families threatened the situation of the established elite families. These elite families managed to force through a decision to close access to the Great Council, and to ban use of the commenda. With trade now monopolised by a narrow group of elite families, Venice was on the path to its decline. Today it survives on tourism and a bit of fishing.
Despite Japan's veneer of "inclusiveness", its system was engineered by an oligarchic elite from business and government. And this is at the root of Japan's current problems which began when a financial crisis struck over two decades ago, and superimposed itself on an unfolding demographic drama.
The possible renewal of the economy through "creative destruction" was suppressed. Old companies were kept afloat, and bureaucratic barriers and a closed financial system inhibited the entry of new companies.
To revive their fortunes, Japanese companies, once the strongest element of Japanese society, have increasing made their future in overseas markets more than at home. The Japanese government provides widespread support to corporate overseas investment, and yet strangely blocks inward foreign investment, a potential great source of domestic economic dynamism and innovation. Japan's agriculture and services sectors are similarly protected from imports, and are thus saddled with low productivity.
To maximise their flexibility and competitiveness, Japanese companies now employ some 40% of workers on "irregular" contracts -- part-time, short-term, or contract workers -- with virtually no job security or social benefits. Workers thus have less access to corporate training, and suffer precarity.
This surely has a negative impact on productivity. But Japanese companies, like companies everywhere, are more concerned with short-term profits than the longer term. Inequality and poverty are on the rise, further weakening domestic demand.
Public spending, rather than new entrepreneurship, has been the government's strategy for keeping the economy afloat. As a result, Japanese citizens are now born with a millstone of government debt to the tune of more than 200% of GDP.
This growing debt is also being fed by health and pension costs of Japan's rapidly aging population. Japan's seniors are now part of the nation's extractive elite.
Thus, it is perhaps not surprising that the government has chosen to invest much less in family-friendly policies for the young. This is regrettable because they might encourage a higher birth rate, and arrest the decline in its population. Nor has the government fostered more positive attitudes towards migration.
"Abenomics" is Japan's new policy gadget which promises to revive the country's fortunes. But so far, it has been much more talk than action -- especially when it comes to emancipating women in Japan's male-dominated society. And old corporate elites will likely be the principal beneficiaries of labor market and other reforms in soon-to-be established special economic zones, one of the key initiatives of Abenomics.
The Venice and Japan analogy may not be perfect. But they are two cases where "extractive elites", elites which dominate society and politics, manage to extract benefits for themselves -- more than building an inclusive and stronger society and economy where all can contribute, and where we are all exposed to positive force of competition.
As Japanese and other tourists visit the beautiful piazzas and canals of Venice, they probably don't think of it as a monument to disastrous political management. Nor do they probably imagine that the same fate could await their own countries.
But history and the excellent analysis of Acemoglu and Robinson demonstrate that nations can and do fail, and that such failure is invariably the result of choices made by "extractive elites".