Japan left behind by tech advances

Feb 20, 2003, vol. 26, no. 4
By Diane Luckow



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Despite Japan's stellar reputation for producing the latest in new technology and for developing innovative work practices such as just-in-time inventory systems, the country is notorious for resisting advances that disrupt localized labour markets and other special interests.

SFU economist David Andolfatto (left) suggests that this reluctance to embrace technological innovation may be key to the Japanese economy's unexplained, stagnant economic growth over the past decade.

“Since the early 1990s, real per capita gross domestic product growth in Japan has averaged a paltry 0.6 per cent per annum,” he notes. “This growth record is extremely poor relative to both historical norms and the experience of other leading economies over the same period of time.”

Andolfatto, an associate professor, returned recently from a study trip to Japan, where he participated in a joint research project with the Bank of Japan that explored why the country's growth came to such an abrupt end. Finding an answer is important, he says, since many people worry that a similar fate may await North American countries.

One popular hypothesis blames the emergence and subsequent bursting of the stock market bubble in the late 1980s.

“This allegedly led to deflation and left the Japanese banking sector crippled with bad debts, making it difficult for it to extend new loans to finance business sector capital expenditure,” says Andolfatto, who refutes this theory.

He says the available evidence suggests that both large and small Japanese firms have found alternate ways of financing their desired levels of corporate investment. Capital expenditure is low, he says, because of poor investment opportunities, and not for a lack of available financing.

Instead, Andolfatto surmises that the primary cause of the slowdown in productivity growth is Japan's myriad trade barriers that prevent increasingly efficient foreign firms from implementing their superior know-how in Japan.

For example, new economy technologies and new work practices that fuelled rapid growth in the U.S. economy over the last decade (at the cost of massive restructuring) have yet to penetrate the Japanese economy in any significant way.

Andolfatto says powerful special interest groups in Japan are blocking adoption of these new technologies and work practices. One prominent example - the politically powerful yet economically vulnerable countryside regions which are resisting bank closures that would harm their local economies.

Another is the Japanese system of Amakudari where bureaucrats retire to the thousands of pseudo-government agencies that regulate all industry in Japan and then provide work for their friends, collecting huge licencing fees in the process.

“The traditional macroeconomic tools of monetary and fiscal policy are ill-equipped to deal with such structural problems,” says Andolfatto.
“The recipe for renewed productivity growth is more likely to be found in legal reforms that will enhance the willingness and ability of individuals to adopt potentially disruptive technological advancements.”

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