The Lesson of Japan

In The Fifth Mountain, Paulo Coelho affirms that “all of life’s battles serve to teach us something, even those that we lose”. If there is a country from which the entire world could learn, it is Japan. After decades of growing in systematic fashion, developing extraordinary technologies, and demonstrating to the world new ways to produce, twenty years ago Japan confronted a crisis similar to that which recently pummeled the remainder of the orb, and the nation does not appear to be able to climb out of the ditch. During this time, the Japanese government has tried every type of stratagem without success: the Japanese live very well, but their economy continues to be depressed. Are there useful lessons here for us?

According to Robert Samuelson, the low-grade performance of the Japanese economy has two causes. One is the aging of its population, a situation that entertains social as well as economic grounds, none of which is applicable in our circumstances. The second reason cited by the scholar is the existence of a “dual economy”: a highly efficient export sector (such as Toyota and Toshiba), and a poorly competitive internal market. Until the 1980s, the Japanese economy grew thanks to the export drive of highly competitive industrial products, above all automobiles and electric and electronic devises: “20% of the economy sustained the remaining 80%”.

Revaluation of the yen in the 1980s made exports expensive and was conducive to the moving of many of its factories to other venues, among these the U.S. and Mexico. In the absence of the leverage that exports had exerted, the internal economy became paralyzed. “The domestic sector remains arthritic; Japan harbors one of the lowest rates of enterprise creation of all of the industrialized countries. In reality, the only good years that the sector experienced took place when a weaker yen stimulated exports”. The Japanese government increased public spending, invested in infrastructure, maintained very low interest rates, and developed the most impressive economy-stimulating projects with no result. The conclusion arrived at by Samuelson is that for an economy to grow and generate jobs, a vigorous private sector is required, and this has not happened in Japan.

The similarity with our own reality is obvious. In our economy, two contrasting worlds survive: that of the hyper successful and competitive sectors that export, compete with imports, and whose development ranks among the best in the world, and a creaky old economy that barely clings to life. The former generate wealth, the latter live on the leftover morsels. To a great degree, the existence of these two worlds explains our economic reality: when exports grow, as they have this year, the remainder of the economy begins to function; when exports decline, as happened in 2009, internal demand collapses. As in Japan, 20% provides buoyancy for the remaining 80%. But that 20% produces much more, at a lower price, and of better quality than all of the rest.

The similarities with Japan do not stop there. The reason for two worlds in counterpoint has to do with the protection, explicit or implicit, de facto or de jure, that characterizes the internal market. Some of the protection mechanisms are obvious: customs duties and levies, norms, or subsidies that do not permit determined products to being imported or that render the cost of their importation prohibitive. The beneficiaries of these mechanisms are delighted, but what is interesting is that there is no recognition, not even among the entrepreneurs themselves, that protection for some implies lack of protection for others: if a footwear producer enjoys protection in the manufacturing of soles for shoes, his products will be more expensive than the alternative, thus shutting the rest of the shoemakers out of the market. The protection that so many business people covet has the effect of reducing the competitiveness of the entire economy. Businesses and sectors that are successful have no protection: that is why they’re successful.

There are other protection mechanisms that are perhaps more cultural. When I was a child, I had a responsibility in my house: due to the heat generated by their use, some light bulbs would become stuck to their aluminum recipients that were embedded in the ceiling, because the spot was poorly designed. After a certain number of months, it was my task to break the burned-out spot, remove its screwed-in base with pliers, and insert a new spot. Forty years later, I moved to a house that had the same spots and I continue to carry out the same task: the absence of competition continues to make the product deficient. When I asked the electrician why he had installed these spots, his response was that these were the ones that he had always installed. The manufacturer of these spots has seen his sales diminish little by little but, thanks to electricians like mine, has not yet encountered a death-dealing competition. The problem is that the manufacturer’s sales diminish day to day: in a few years he won’t sell anything. Instead of investing in novel productive processes, he was left behind. That is how a good part of the national productive plant is.

Of course, the great difference between Japan and Mexico is that the Japanese have an extraordinary quality of life; its population does not grow, and it has all of the satisfiers that it can wish for. In contrast, we have a young population, a high unemployment rate, and an economy that frequently produces goods that are inferior to the imports available. What is amazing about the Mexican economy is that there is no lack of individuals with outstanding entrepreneurial spirit: the informal economy is overwhelming proof that the Mexican is exceedingly “Johnny-on-the-spot”, available, creative, and “a mover and a shaker”. The sad part is that the informal economy cannot resolve the country’s development problems despite the fact that it employs two thirds of the economically active population.

In a recent study*, Gordon Hanson concludes that despite that the country has advanced on many reform fronts, some factors continue to impede the economy from growing. For Hanson, the key to Mexico’s being stuck in the mire resides in the following: the persistence of informality and of the incentives that strengthen it; the dysfunctionality of the credit market; the distortion in the supply of non-tradable goods (such as electricity or communications); the lack of effectiveness in education, and the vulnerability of the external sector (i.e., currency exchange crises). The relevant fact is that we have two economies, and the successful one produces 80% but only employs 20%. There is no way that there will be progress if the internal economy is not resolutely worked out.


*Why Isn’t Mexico Rich? NBER Working paper 16470