Monday, June 4, 2012

Some Asian Economics reading!

This past month I promised myself that I would try to learn more about East Asia's economic history.  And so, I turned to a few trusty books to get the job done.  To be sure, they were complex, and having had only a few basic econ courses under my belt, I am almost sure that much of their content was lost on me.  Even so, I found them to be pretty interesting.  In my reading, I chose to focus on two principal economic issues: the causes behind Japan's 1991 asset bubble (and resulting collapse), and ongoing problems with China's export-oriented economy.

For the question concerning Japan, I relied on Bai Gao's Japan's Economic Dilemma: The Institutional Origins of Prosperity and Stagnation, as well as a shorter publication from the Woodrow Wilson Center and Sasakawa Peace Foundation, titled, "Looking Forward: U.S.-Japan Economic Partnership in the Post-Lehman World."  American journalist David Wessel and former Vice Minister of Finance Eisuke Sakakibara were the two contributors to this piece.


I'll start with Gao's book.  According to Gao, the Japanese economic collapse was essentially caused by a glut of money, a lack of regulation, new means of profit-making, the decline of Japanese banks' influence, and bullish sentiments in Japanese companies.  From what I was able to glean, here's essentially what happened:

1.  In 1985, in the Plaza Accords, the Japanese committed to a roughly 40% increase in the value of the Yen, making the currency much stronger.  Although self-defeating, this decision was made in response to U.S. pressure, as the U.S. had finally begun to lose tolerance for Japanese manipulation of the Yen, which boosted Japanese exports at the expense of American imports.
     Predictably, the rise in the Yen hurt Japanese companies, which had been export-focused for the entire post-war era.  In an attempt to avert recession, the Bank of Japan (BoJ) lowered interest rates and traded dollars for Yen (before the 40% increase took place), drastically expanding the money supply.  Companies engaged in currency conversion as well, so despite the downturn caused by the currency revaluation, they were still sitting on big piles of cash and savings.  In effect, there was a ton of cash just waiting to be invested and drive up prices.

2.  Even with the currency reevaluation, the Japanese were still running trade surpluses with the U.S. and Europe into 1986 and 1987.  In response to a government report on the topic (the "Maekawa Report"), which strongly recommended a boost in domestic consumption to solve the problem, the Nakasone administration issued a large fiscal stimulus package, which was pretty big (about 1.8% of GDP, or 6 trillion yen).  As these funds were funneled into local government projects, they boosted land prices, beginning the run-up in real estate prices that occurred during this period.

3.  The brunt of the problem had yet to come.  With the increase in the value of the Yen, large Japanese companies abandoned their traditional emphasis on exports and quality improvement in exchange for short-term profit.  This was done through quick investments in the stock market, on a huge scale.  Between 1983 and 1989, Japanese stock prices increased three-fold.  Companies also invested in other assets - most notably, real estate.  Lots of it.  It was during this time that Japanese companies became famous for investing in resorts, foreign property (i.e, the Rockefeller Center or Hawaiian cottages), and golf courses, sparking stock-market speculation and a land boom.  This is just an aside, but I should note that at the height of this land boom, the grounds of the Japanese Imperial Palace were valued higher than all of the land of California.
      To be sure, Japanese companies also invested heavily in capital and export capacity during this period.  But they didn't innovate or improve efficiency - they merely expanded the capacity to produce existing exports.  The author uses the term 'bubble technology' to describe the sorts of superficial, ineffectual improvements that were made to products during this period instead, in place of genuine innovation.

4.  Deregulation in the 1980's only exacerbated short-term speculation.  A new rule unveiled by the government increased the profitability of stock-market activity.  Originally, before the rule, if a company bought shares of another corporation in two waves, and the price of the shares had gone up by the time of the second wave of purchases, for accounting purposes, taxes would be paid on an average that included the adjusted price.  So, beforehand, taxes were paid on the old price + the new price, divided by 2.  After the new rule, however, taxes only needed to be paid on the price of the share in the first wave of buying.  As such, it made sense to not only buy more stocks, but to bid up the price of the stock rapidly in order to offset the cost of taxes, even in their reduced form.

5.  Meanwhile, banks lost influence, leading to a whole other mess of other problems.  Traditionally, in the 60's and 70's, Japanese corporations received most of their funding through large bank loans.  These loans gave banks enormous regulatory control over the behavior of companies, and kept aggressive CEO's in line.  As soon as it became more profitable to seek self-capital through the stock market, however, this trend ended.  Beginning in the early 1980's, huge corporations (Mitsubishi, Sumitomo, etc. etc.)  paid off their loans en masse, leaving banks in a lurch.  In turn, they had to compete for customers from smaller, middle-sized firms with riskier prospects.  Many loans were made to default-prone customers, and led to the unique breed of unprofitable corporations later kept alive by the government in the 1990's known as "zombie corporations."
   New bank loans also helped drive the land boom.  A unique aspect of Japanese banks is that they tend to use land as collateral when granting a loan.  Corporate strategy, product spread, and other aspects of a company are less important than the real estate it owns.  As such, by 1987, land served as the principal collateral for more than 20% of bank loans for these small and middle-sized companies, further egging on the massive increase in land prices.

6.  Bullish sentiment served as the bedrock of the whole phenomenon.  As in all bubble economies, consumers thought Japan had reached a permanent peak, and that low interest rates would go on forever.  But this was not so.  The BoJ soon began to raise interest rates to reign in the economy, and returns on stocks began to fall by 1990-1991.  On the whole, the Japanese economy began to collapse gradually between 1990 and 1992, and would remain sluggish until 1995, when it resumed course briefly but then fell back into recession.  Japan's economic outlook picked up somewhat in the 2000's, and seemed to be getting much better in 2007, but then the global economic crisis of 2008 reversed many gains.

Why did the Japanese economy underperform throughout the 1990's, during a time that is famously called Japan's "lost decade?"  I myself still need to research this question more, but let's turn to the next book to get more insight on this...

            The Woodrow Wilson Center publication, by way of comparing Japan's economic collapse with that of the U.S. 2008 recession, helped to address this sort of question.  The publication labelled this sort of economic collapse - as experienced by Japan, and now, by the U.S. - as a "balance-sheet recession."  In such a situation,  companies and banks are burdened by toxic investments that are hard to clean up.  Even with interest rates near 0%, meaning that a bank can borrow money for free and throw it into profitable investments, these bad loans still clog up the system and take time to be washed out.  It's a long, grueling process.  In Japan's case, according to one of the experts in the publication, too little action was taken too sporadically.  7 major stimulus projects were pushed between 1990-1992, but this focus was lost thereafter, and after 1995, when the economy began to improve somewhat, helpful stimulus measures were abandoned.  In short, there was no massive stimulus project to boost the economy in a meaningful way, pushing the country past its glut of toxic investments.
            Moreover, going back to a point made in Bai Gao's book, the structure of the Japanese economy during this period was all wrong.  Japanese companies had over-invested in export capacity in the late 80's, and it took a long time for Japan to reach a point where it could make use of it all.  Moreover, their technology was outdated.  Japan missed the internet revolution, and as American companies sped ahead in investments in computers and the like, Japanese companies did not catch up until much later.

Anyway, let's talk about China now.  For this subject, I turned to Chi Lo's, China after the Subprime Crisis: Opportunities in the New Economic Landscape.  Lo's book was highly technical, and at times, I struggled to get through it.  Basically, though, Lo also began his study of the Chinese economy by way of comparison with the U.S. economy after the subprime crisis.  Lo, agreeing that the U.S. was in the midst of a balance-sheet recession, felt that it is necessary to remove needless regulation and allow the economy to wash out bad loans, without huge government stimulus packages.  As an alternative, he recommended more emphasis on foreclosures, as a way of 'clearing the board' and freeing up funds for new investment.

When it came to China, Lo's points, if I were to boil them down into a basic form, are interesting.  In Lo's view, China's economy is inherently bubble-prone because of the large amount of cash that is sloshing around the system.  He also feels that its export-oriented economic structure is going to start experiencing problems.  Lo argues that China must soon make efforts to boost domestic consumption, as it can not always count on exporting to European and North American (*cough* the U.S. *cough*) countries that will increasingly be unable to afford Chinese products on the same scale.  In this effort, one principal initiative that the Chinese government must spearhead is the creation of a social safety net.  The Chinese government offers even fewer services to its citizens than Mexico, which puts a huge financial burden on its citizens.  They must pay for things like health-care almost completely out of pocket.  Hence, in a big way, the 40% savings rate you see in China right now.  As of 2009, the amount of government spending on health care is indeed rising (from about 2% to 4% of GDP), but it has yet to make a large dent.

So, in sum, an interesting round of reading.  More to come later!


Friday, June 1, 2012

"Policy Entrepreneurship and Elections in Japan: A Political Biography of Ozawa Ichiro" (Takashi Oka)

I was excited to read this book, as it was one of the few English-language biographies available at Lauinger Library on the infamous DPJ politician Ozawa Ichiro.  Before I delve into the details, I should note one thing for other interested readers.  This biography was originally written as a graduate thesis, and certainly reads as such.  Many chapters are spent proving a specific hypothesis, namely, that politician Ozawa Ichiro fit the model of a so-called “policy entrepreneur,” apparently a theoretical term for politicians who are motivated by divergent policy beliefs.  As such, unless one is immediately concerned with the ramifications of the author’s hypothesis, expect to delve through some technical details to get into the meat of the story. 

Oka starts with Ozawa's childhood.  Ozawa's father was an independent, reformist war-era Diet member, and several of Ozawa’s own beliefs trace back to him, especially his support for the U.S. security alliance and single-member constituencies, which will be discussed later.  Ozawa inherited his old man's koenkai (the highly personalized support organization used by Japanese politicians) after the late politician's death, though he chose not to use it to full effect, instead relying on the youth vote in a tough election.  Having emerged victorious, Ozawa entered the Diet in 1969, and joined the infamous Tanaka faction, a politician whom he would dutifully serve up until the mid-to-late 1980's.

Ozawa served as a Parliamentary Vice-Minister of several ministries in the Diet, but did not get his first big break until 1982, when he was made the head of the LDP party's electioneering bureau ("General Affairs Bureau," or "somukyokucho").  Here, he proved himself to be a master election strategist, ensuring that the LDP retained a majority after the grueling 1982 general election.  In 1989, Ozawa was appointed Secretary General of the LDP, and would later conduct a number of trade agreements with the U.S. under the Premiership of PM Takeshita Noboru, a distant successor of the Tanaka faction, even if not necessarily well-liked by Tanaka himself.  

Here's where we get into the most important part.  Beginning in the early 1990's, Ozawa began to push for electoral and political reform, an issue that he had first mentioned in 1969, when he promoted the idea of single-member electoral districts in Japan (keep in mind, since 1947, Japan had been using the Single-Non-Transferable-Vote system, which was heavily rigged through various means to keep the LDP in power.)  According to the author, who worked with and interviewed Ozawa extensively, Ozawa was convinced of the benefits of a single-member district system because of its first-past-the-post plurality voting method.  In such a system, one candidate is elected from one district, and whoever gets 51% of the vote wins.  This naturally incentivizes voters to coalesce into two main parties with a viable chance of breaking the 51% mark, a phenomenon known as Duverger's law.

This is not so in SNTV systems, where multiple positions exist for each district and the top three or four vote-getters are elected.  As such, SNTV elections make it easier for a politician with low levels of grassroots support (i.e, a politician from a small party or an unpopular one from a larger party) to win a seat, should they be able to rally enough voters to make it over the threshold.  If there are four possible positions in a district, for example, a candidate might need to only get 21% of the vote to secure one of the seats, rather than 51%.  Moreover, an SNTV system can be manipulated through strategic voting.  For example, an LDP lawmaker who is assured of victory could have some of his 'overflow' supporters vote for a fellow LDP candidate, pushing his comrade over the, say, 21% threshold, and allowing the LDP to garner more of the district’s seats.  It should be noted that the LDP's dominance of the SNTV system was aided by malapportionment, in which pro-LDP rural districts were given more MP's than their more liberal, urban counterparts.

Ozawa disdained the effects of the SNTV system, seeing it as a manipulable, corruption-prone device.  On the other hand, he saw the politics of those countries which used single-member districts - Britain was his chief model - as far superior.  He admired the concept of alternation in power, feeling that it offered fresh policy options and kept corruption in check.  In Japan, he felt that a plurality system would provide the public with meaningful electoral choices, and bring an end to the LDP's nearly 38-year lock-hold on power.

In 1990, Ozawa convinced P.M. Kaifu Toshiki to take the issue of electoral reform seriously (Author's note:   This probably only worked because Kaifu was one of the few LDP leaders to not be completely smeared by corruption at the time - he was selected as P.M. for this exact reason, after the disastrous "Recruit Scandal" broke in the late 80's.)  In response, Kaifu adopted a plan entailing a mixed PR/Single-member-district system, which had been suggested a number of times since the 1960's by government-created committees on electoral reform.  Such committees were typically organized by the LDP as 'cover' after a scandal, and after they issued their recommendations, were promptly ignored.  

Unfortunately, however, the First Gulf War occurred around the same time, and threw Japan into a crisis.  As the U.S. pressured it to join the anti-Saddam coalition, momentum was lost and the Kaifu administration failed to pass the reforms.  Ozawa would later break away from the LDP in 1993 with a large number of MP's from the Takeshita factionAlong with a number of other reform parties created during this period, Ozawa and his "Shinseito" ("Renewal") party brought the LDP to a crushing defeat in the 1993 elections.  This was a historic moment, as it marked the first time since 1947 that the LDP had actually lost its governing majority.

Although the new coalition would only last 10 months, under the charismatic leadership of Hosokawa Morihiro, who was chosen by Ozawa, it nonetheless succeeded in bargaining with the minority LDP to produce an electoral reform bill.  This legislation brought about the long-awaited PR/Single-district system.  Success at last!  But not quite.  Hosokawa unexpectedly resigned in 1994 after an intra-party snafu over a potential consumption tax increase, and the LDP united with the Socialists to win the next elections.  The LDP would, in the coming years, actually enjoy a resurgence under the charismatic leadership of Hashimoto Ryutaro, and perhaps most importantly, Junichiro Koizumi.  During a brief period of time,  however, from 1998-2000, Ozawa did manage to join the LDP in a coalition government and force the P.M., Obuchi Keizo, to carry out some pretty serious reforms (perhaps most importantly, bureaucrats were banned from the floor of the Diet chambers.)  

In 2009, however, the single-member district system began to mature, and a convincing opposition party, the Democratic Party of Japan – formed by Ozawa and future PM Kan Naoto – took power.  Currently, Japan is still ruled by the DPJ, which has experienced a questionable record of success.  Regardless, however, the author feels that the DPJ is bound to stay, because of Duverger’s law.  According to Oka, the DPJ and its predecessors’ gradual gains ever since 1993 are a sign that the effects of the single-district system are, in fact, taking hold in Japan.  Given how many argue that Japan’s cultural traditions make it impossible for a genuine two-party system to take root, this is a controversial point. 

Oka also spent a considerable portion of the book detailing Ozawa’s foreign policy stances.  Once regarded as a member of Japan’s “new right,” Ozawa believes that Japanese Self-Defense Force members ought to be able to enter combat, as long as they fight under the aegis of the United Nations.  In Ozawa’s thinking, U.N. missions are a form of ‘collective defense,’ and by participating in such operations – no matter the role – Japanese soldiers are not necessarily fighting an offensive war on Japan’s behalf, which is outlawed by Article 9 of the Constitution.  Instead, they are merely fighting on the world’s behalf.  Ozawa sees such a step as absolutely necessary, should Japan ever wish to become a ‘normal’ nation and face its international duty squarely.  However, his opinions on this matter are controversial, and disavowed by many.

Alongside foreign policy and electoral reform, Ozawa's stances on other issues are also explained in great detail.  Like many members of the DPJ, Ozawa believes in a more liberal, non-interventionist economic policy, and at least in the book, feels that Japan ought to open its domestic market to more competition with foreign companies.  In a way that is uncommon among Japanese politicians, he also feels that the country ought to place more emphasis on the individual, rather than the group, should it hope to become a 'normal' nation with 'normal' politics.

Throughout the book, I often sensed that the author may have ‘played up’ Ozawa’s virtue or foresight at times, and obscured some of his true policy positions.  Given the author’s relatively close connection to Ozawa - Oka himself was an adviser to the politician - this is not necessarily surprising.  For example, Oka does not consider opposing points of view when it came to a real estate scandal concerning Ozawa.  He simply argues that Ozawa is innocent.  Moreover, I was also skeptical of several explanations offered by Oka about Ozawa's policies.  For example, while Oka argues that Ozawa believes firmly in Japan’s alliance with the U.S., I am aware of several other sources that suggest the opposite, almost painting Ozawa as an advocate of a Japan-China alliance.  Moreover, while Oka suggests that Ozawa is pro-trade and pro-liberalization, Ozawa is an opponent of the Trans-Pacific Partnership Free Trade Agreement, suggesting another area where Ozawa's stance in the book has either changed or is presented incorrectly.  Only more research and reading will be able to sort these dilemmas out, and I look forward to reporting back to you on them.  

Ultimately, I learned a lot from the book, though I still feel that there is much more to examine about Ozawa's stances on various issues.  I recommend this book, then, not necessarily for its content on Ozawa, but more because of its portrayal of various efforts at electoral reform after the 1980’s.  I have found that it is difficult to find accounts of these events with similar levels of quality, and as such, this book is a valuable source.