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Japan's Last Chance
NOAH SMITH is an assistant professor of finance at Stony Brook University. He blogs at Noahpinion.See more by this author
Faced with economic stagnation in the late 1970s and early 1980s, most of the world’s rich countries made a fateful choice. They lowered taxes; slashed government regulation in labor, financial, and other markets; opened their economies to global trade and finance; and privatized government functions. Economic historians will probably never fully agree on the magnitude of the consequences of neoliberalism, as it became known. But most concur that the reforms at least contributed to higher inequality, increased economic insecurity, and, at least temporarily, faster economic growth.
Data crunchers will surely spend the next several decades examining all these claims. Perhaps the best way to understand the effects is to look to a country that missed the neoliberalism boat: Japan. Buoyed by the last spurt of its postwar catchup growth, Japan managed to sail through the 1980s without having to face hard choices about the structure of its economy. As a result, its labor markets are still tightly regulated, with stringent protections for full-time employees, including strict regulations on firing employees. Its corporate taxes remain high, and many of its domestic markets are still shielded from imports behind a tall thicket of non-tariff trade barriers. Its financial system remains centered on large government-backed banks instead of on capital markets, and hostile takeovers are still prevented by the courts. There are no Gordon Gekkos in Japan.
Many features of the Japanese economy that are commonly attributed to culture are, in fact, the result of Japan trying to run a modern economy without neoliberal reform: powerful but inefficient corporations, little job mobility, low unemployment, a relatively equal income distribution, and a job market that is heavily rigged against women. Taiwan, which is probably the closest country to Japan in cultural terms, has much higher inequality, greater labor mobility, more gender equality, and a higher per capita GDP than Japan. Taiwan, of course, is a low-tax, low-regulation country that is heavily exposed to trade with China.