GISPRI No. 10, 1994

GISPRI Activities

Report on GISPRI Symposium '93

On July 15 and 16 of last year, "GISPRI Symposium '93," the international symposium sponsored by Global Industrial and Social Progress Research Institute, was held in Yokohama under the joint sponsorship of Nihon Keizai Shimbun Inc. and the City of Yokohama. This year's symposium, the theme of which was "Thinking About Capitalism: Seeking to Achieve the Harmony and Development of the World Economy," and at which lectures were given and panel discussions held, was attended by a total of thirteen speakers representing the academic community, the public sector and private industry, including, from Japan, Dr. Ken'ichi Imai (Professor at Stanford University and Director of the Stanford Japan Center & Research); Dr. Iwao Nakatani (Professor at Hitotsubashi University); Dr. Seiichiro Yonekura (Associate Professor at Hitotsubashi University); Mr. Saichi Nakazawa (Director of the Industrial Structure Division, Industrial Policy Bureau, Ministry of International Trade and Industry); and Mr. Jiro Ushio (Chairman of Ushio Inc.). Also attending were eight speakers from overseas, including Dr. Lester C. Thurow (Professor at the Massachusetts Institute of Technology and Dean of MIT's Sloan School of Management); Dr. Alexis Jacquemin (Economic Advisor to the Forward Studies Unit of the Commission of EC and Professor at the University Catholique be Louvain, Belgium); and Dr. Noordin Sopiee (Director-General of the Institute of Strategic and International Studies (ISIS), Malaysia).

On the first day of the symposium, attended by roughly 700 persons (including invited guests and general applicants) assembled at the Pacifico Yokohama, Mr. Shinji Fukukawa (Senior Advisor to the Global Industrial and Social Progress Research Institute), and Mr. Hidenobu Takahide (Mayor of Yokohama), both delivered sponsor's opening remarks, after which lectures and discussions were held at the first session, titled "Various Forms of Capitalism and Competition Among Them." The second session, which began in the afternoon of that day, was titled "The Role of Government and the Corporate System." The following day, the symposium shifted to the ballroom of the Yokohama Grand Intercontinental Hotel. Additional lectures and discussions were heard during the third and fourth sessions, titled "Industrialization and the Market Economy" and "The Market Economy System in the 21st Century" and held in the morning and afternoon, respectively. This lively two-day, four-session symposium was a huge success, judging from the thought-provoking presentations of the distinguished lecturers, the comments and discussions that followed, the intentness with which the participants listened while jotting down notes, and particularly the many questions and comments during each session.

An outline of each speaker's lecture and panelists' comments during each session are summarized below.

First Session:
Various Forms of Capitalism and Competition Among Them

With Mr. Akira Kojima (Senior Editor, Nihon Keizai Shimbun, Inc., Japan) as moderator, lectures were given.

by Dr. Ken'ichi Imai, Dr. Lester C. Thurow and Dr. Alexis Jacquemin.

The thesis of Dr. Imai's lecture, titled "Competition Among Different Capitalism Systems," was that, as advanced by the economist Schumpeter, competition between different forms of capitalism leads to evolution. This argument can be summarized in the following six parts. (1) Innovation is the engine that drives capitalism, but its pattern differs from country to country, and such differences must be recognized in order to assure mutual evolution. (2) The issue of how to create human resources and capital in preparation for the 21st century is of greater fundamental importance than methods of distributing resources and lowering costs, for instance. (3) Innovation in Japan, the U.S. and Europe is mutually supplementary, and competition among these regions will lead to evolution in capitalistic economies. (4) A new mechanism should be created to avoid the monopolization that results from the strategy in the Japanese system of increasing returns. (5) The high rate of savings in Japan is a cause of the trade surplus, while the expansion of domestic demand is a countermeasure thereto, and so we must examine policies in this area. (6) There is an optimum mixture of disparate systems, and capitalism will survive through policies for actively incorporating the advantages and modes of other systems.

Dr. Imai also discussed the new trend of promoting evolution through cooperative relationships within the framework of capitalism that are nongovernmental and voluntary.

Dr. Thurow, regarding the attempt to solve the problems facing capitalism today, first stated that current conditions are similar to those of the 19th century, then used actual cases to show that (1) communism and socialism, (2) the social welfare state, (3) Keynesian macroeconomics, and (4) guaranteed jobs all failed to achieve a satisfactory solution.

Dr. Thurow then continued with an extremely pessimistic outlook on capitalism:

Inequality is expected to increase during the extended worldwide economic recession, the reasons being the globalization of the labor market and the existence of workers unable to adapt to technological progress. The development of transportation and communications, in particular, has made possible the procurement and remote management of developing nations' labor, thus lowering the wage structure of advanced nations, which will result in lower rates of growth, first in the United States, then Europe and even Japan. When the demand for property and services fails to keep up with the rate of increase of productivity and constant shrinkage in scale progresses, joblessness rises and it becomes necessary to take into consideration the income of the unemployed. The disadvantage of an American-style consumer-driven economy is that as social welfare systems increase and the costs of health care and annuities increase, budgetary allocations for R&D, education and other style of long-range investment, which is the responsibility of the government, are held down. On the other hand, the problem with a Japanese-style producer-driven economy is that decreased demand in the consumer-driven economies leads to excessive production (in relative terms), resulting in a glut of products on the market. Unable to prosper even with a trade surplus, the country must implement drastic systematic changes. However, with a threat like communism no longer present, it is unlikely that capitalism will effect the necessary changes on its own.

Dr. Jacquemin gave a lecture titled "Which European Capitalism?" His lecture can be summarized as follows.

Although Europe has begun to recognize the positive social effects of market competition, in order to compensate for the incompleteness and failures of the market itself, public policies for controlling or supplementing the market are necessary; European-style competition and the purpose of industrial policy agree with this philosophy. A greater emphasis on fairness and collective responsibility over economic efficiency is the essence of the European approach to capitalism; even in the business world there is support for various social models & like investments in social stability & that are unique to European capitalism. In short, although European capitalism is a central model, it is not the basic unit of the EC. In addition to the market mechanism, factors such as the extent of democratization and the protection of human rights also characterize patterns of capitalism; in developing nations, authoritarian systems can be used to promote rapid economic development. It should be remembered that, at any rate, the formation of the EC has lead to further democratization. Finally, as Japan, the U.S. and Europe currently face common problems as their patterns of capitalism are tending to converge, we are now at a turning point at which we shall head either towards a plus-sum game through healthy competition between systems, or towards a zero-sum game.

The panel discussion was then begun, with Dr. Iwao Nakatani (Professor at Hitotsubashi University) stating that Japan is developing increased resistance to foreign pressure as its economic power grows, while the EC has failed to find a solution to the problem of structural unemployment, reflecting a general loss by the various styles of capitalism of the ability to effect changes themselves. He then stated that the momentum for change is likely to come either from significant innovation in the democratic process or from the economic stimulation of rapid growth in Southeast Asia. Dr. Thurow stated that worldwide cooperation will not be possible unless the nations of the world are visited by a crisis simultaneously, and that it will also be difficult to achieve unless Japan, the U.S. and Germany, as well, are prepared to have their citizens shoulder an increased burden and undergo a certain amount of hardship in order for these countries to serve as the "locomotive of the world economy." Hence, he concluded, tripolar cooperation will be impossible, at least politically. Dr. Jacquemin then stated that because of the strains in Eastern and Central Europe caused by insufficient regulation of activities in macroeconomic policies, these regions must strive to effect structural changes without depending on the market economy. Dr. Imai, touching on the differences between capitalism and the market economy, proposed that the definition of a market economy be widened to include volunteer activity. Dr. Nakatani commented that government activity and other supplementary measures could conceivably compensate for failures of the market, and that morals, public spirit and other aspects of mentality must be taken into consideration when promoting innovation in democracy. Participants then commented on and discussed problems concerning R&D and technological development, dynamism in Asia's economy, regional economies, and the appearance of fundamentalism, after which Mr. Kojima concluded the session with this summarization of the discussion: (1) Revisionism is histori-cally necessary now that the East-West conflict has ended, and the Japanese-style of capitalism is unique. (2) Although this uniqueness has been the foundation of success so far, (3) the necessity of voluntary change has not been recognized Japan, and so (4) other nations have begun to believe that their approach to Japan must be changed.

Second Session:
The Role of Government and the Corporate System

After the lecture by Dr. Michele Schmiegelow (Professor at University of Lourain) and Dr. Nakatani, a discussion moderated by Mr. Youichiro Ichioka (Director and Chief Editorial Writer, Nihon Keizai Shimbun, Inc., Japan) was held.

A researcher on industrial policy, Dr. Schmiegelow stated that industrial policy, which began 300 years ago in France and has been practiced by countries around the world, involves the negative aspect of protecting weak industries and the positive aspect of helping to nurture new ones. She then went on to discuss the systems and actions for making industrial policy successful.

In terms of systems, Dr. Schmiegelow continued, a system for ensuring cooperation between industry, the public sector and academic world is necessary, as is the exchange of information between the public and private sectors and banks. The fiscal, monetary and currency policies adopted by governments to hold down inflation and stabilize exchange rates & i.e., indirect government intervention & are important for encouraging banks to invest in corporations that require development capital. As governments must also provide vision and indicate courses to take in research and development, the cooperation of universities engaged in innovative research for the private and public sectors will also be needed. Investment in basic research in the private sector and other long-term research involving risks will continue to be important.

However, she added, whether such policies can actually be implemented is another matter. In terms of action, a crucial point is whether or not the private sector is prepared to assume these risks itself in performing research and development.

Dr. Nakatani, praising industrial policy as having served an important role during the stage of capitalism's development, and stating that Japan's corporate system is currently at a crossroads, discussed the style of industrial policy that is needed now.

In the past the Japanese corporate system was concerned with catching up with other nations by borrowing original concepts from advanced nations and, through repeated improvements, creating products better than those made by the originator, and consequently there was a very effective incentive mechanism in place. Corporations acted as a community, emphasis was on growth, and strategies involved low risk and low return.

Dr. Nakatani went on, however, to add that four styles of limitations have appeared: quantitative growth, globalization, capital costs, and personnel shortages. To overcome these limitations it is necessary to effect a transformation from a catch-up system to a pioneering system, and therefore the government must become actively involved in reforming the capital market, the tax system and, to produce personnel possessing originality, the labor market.

Comments made by panelists in response to these lectures include the following.

Mr. Nakazawa remarked that although the industrial policy of.

the Ministry of International Trade and Industry has been consistent with its basic objective of bringing out the strengths of the private sector within the framework of the market mechanism, some areas of industry have changed along with the times, and a system for supporting reform in Japan's corporate system, which is now in a transition phase, is now needed.

Mr. Ushio, after stating that the many catch-up industrial policies of Japan's private sector were one reason for the country's success, stressed the universality of Japanese-style management and the importance of the role and decision- making of top management in introducing original technology.

Dr. Thurow commented that the slowdown in worldwide economic growth is due to factors unrelated to the technological revolution, and that measures to prevent the exclusion of nations' state-of-the-art technology are now necessary.

Central topics in the panel discussion were policies for changing the corporate system from a catch-up one to a pioneering one, and how to coordinate different nations' industrial policies on a global scale. Dr. Schmiegelow remarked that although policy cooperation involving the exchange of information on technology, for instance, is necessary, the coordination of industrial policies on a global scale is an issue that affects the protection of each nation's workers' interests and would therefore be very difficult politically.

Dr. Nakatani stated that an aspect of Japanese-style capitalism that must be rectified is the tendency to bind the individual to an organization beyond what is necessary, and added that the coordination of industrial policies would be extremely difficult. Mr. Nakazawa commented that governments must play an active role in areas such as environmental issues, technology transfers, the breakup of monopolies, research and development on elemental technology, and systems involving corporate activity that transcends national boundaries. Mr. Naohiro Amaya (Director, Dentsu Institute for Human Studies) pointed out the difficulty in knowing when to implement industrial policy and when to terminate it, and stated that advanced nations should concentrate on public finances in their industrial policy.

Lastly, Mr. Ichioka summarized the session by saying that with so many problems today that cannot be dealt with on a level of individual nations, coordination, in the broad sense, of industrial policy on a global scale is needed, no matter how difficult it may be.

Third Session:
Industrialization and the Market Economy

Below is a summary of the lectures given by Dr. Ivan D. Ivanov (Deputy Director of the Institute of Foreign Economic Studies, Russia), Dr. Wu Jinglian (Senior Researcher, Development Research Center, State Council of P.R.C.) and Dr. Sopiee, and the subsequent discussion moderated by Dr. Hiroyuki Itami (Professor at Hitotsubashi University).

Dr. Ivanov, citing the privatization of government-run assets, the breakup of monopolistic corporations and the stabilization of finances as the three primary objectives of Russia's economic reform that rank in importance with political democratization, stated that a problem Russia must face in privatization is management's lack of know-how. Regarding reform, he remarked that a difference of opinion exists between the radicals and specialists regarding issues such as the political system, fiscal stability, government intervention in the market system, gradual reform, and internationalization.

Dr. Wu stated that because of the extremely decentralized nature of China's economic system in the past, reform was begun in rural villages and succeeded in strengthening nonstate enterprises (such as township and village enterprises), and that this sector, having developed rapidly, has served as an example for reform in the state sector and stimulated the economic growth that is seen in China today. However, he added, the reform of state enterprises has failed to progress very far, with a double economy comprised of state enterprises and the dynamic private sector resulting, while the country is also faced with an overheating economy at the same time.

Dr. Sopiee, stating that in order to achieve harmony between the various styles of capitalism, this variety must be recognized, cited the following as key factors behind Malaysia's economic development: political stability, a strong and efficient government, emphasis on the market system, democracy, an "economy-first" policy, and strategic pragmatism. As a result, Malaysia's economy has developed through four stages: the period, up to 1957, of laissez-faire and the production of substitutes for imported goods under English administration; the period of growing disparity in incomes (up to 1969); the period of extensive government intervention (up to 1985); and the current period of market emphasis.

As current policies, he stated an emphasis on the private sector, shrinkage of the public sector, assistance for new operations, liberalizing imports while promoting an export-led economy, infrastructure investment, developing human resources, holding down inflation, and striving for balanced economic development, then stated that these strategies have been effective and added that his country hopes to become "Malaysia Incorporated.

In the discussion, Dr. Hal R. Varian (Professor at Michigan University) pointed out that Eastern Europe and other regions that are switching to a market economy must supplement their free markets and free economies with social, political and legal systems. Dr. Yonekura, after stating that frontiers can be found in countries like Russia, China and Malaysia, and that these countries differ from the advanced nations, which now suffer from low growth, added that today's problems include combining a market economy with industrial policy in Russia, now that its shock therapy has failed; economic stability in post-Deng Xiaoping China; and the.

limits of an export-led economy in Malaysia, where domestic demand is small. Dr. Schmiegelow, pointing out that what is important in switching to a market economy is management, stated that in order to train effective managers, a gradual transition to a market economy as in Germany and Japan is preferable to merely entrusting everything to the market. She then expressed her doubts as to how China can assure the solidarity of its people in the midst of regional differences in income and social security.

In response to this, Dr. Ivanov recognized the necessity of government intervention in the distribution of income, then stated that in Russia, where, because of its relationship with the IMF, there is now great interest in the Latin American style of reform, the problem is that the transition to a market economy is generally taking place without a sufficient legal framework. He then added that the IMF's "big bang" approach has had disastrous effects on Russia, and that reform should begin domestically.

Dr. Wu said that with reform in China now irreversible, problems like inflationary pressures and increased disparity between regions are more important to the transition to a market economy than the individual's loss of influence, and so the government intends to proceed with reform in order to solve these problems.

Dr. Sopiee stated that Malaysia, because it is unquestionable dependent on exports, intends to seek out new markets in ASEAN member nations and developing countries, as well as in the advanced nations, and that in terms of making Malaysian firms more efficient, operating firms as free-market firms that increase their profits is more important than the transfer of ownership.

Lastly, Dr. Itami concluded the session by pointing out the common philosophy that the actual ability to act independently is more important than ideals in economic reform in Asia.

Fourth Session:
The Market Economy System in the 21st Centure

The fourth session consisted of presentations by Dr. Varian and Dr. Ryuzo Satoh (Professor at New York University), and a panel discussion led by Dr. Schmiegelow, Dr. Sopiee and Dr. Yonekura and moderated by Mr. Fukukawa.

First, Dr. Varian gave a presentation, titled "The Market Economy in the Information Age," about the various effects of the information revolution on industrial society and the corporate system. He opened by citing a 1986 prediction he made that the extent of the freedom and ease of exchanging information would become a factor behind the growing disparity between democratic and totalitarian countries, then stated that societies and corporations capable of properly managing this flow of information will someday rule those than cannot. Then, comparing this with the standardization of software, decentralized information management and other aspects of the computer industry, he predicted future developments in the market economy at a corporate level. He also stated that the new concept of "hard budget constraints," as opposed to the government's "soft budget constraints," are effective in preventing the bureaucratization of an organization.

Next, Dr. Satoh, lecturing on "Industrial Policy in the 21st Century" from the standpoint of policy stance and capitalism's historical cycle, stated that in the 21st century Japan will be forced to shift to import industrial policy and should therefore adopt an industrial policy for switching from process skill innovation to product innovation. He then added that there are countries (like some in South Asia) which, because of cultural similarities, could adopt traditional Japanese industrial policy, and that styles of capitalism such as American-style capitalism, British-style capitalism, German-style capitalism, and Japanese-style capitalism, are, overall, tending to converge.

In the panel discussion, first.

Dr. Sopiee stated his prediction that capitalism and the market system will continue to exist in the future, and that although the power of governments will decline, a mixed system of governments and the market will prevail. Dr. Yonekura pointed out the importance of the method of implementation of the soft budgetary constraints discussed by Dr. Varian, citing as an example the fact that keiretsu (groups of affiliated firms) that had functioned with "soft networks" formed through a deft combination of competition and cooperation are now being severely criticized. He then asked whether societies with organizations of a wide range of sizes should be capable of creating information, an ability more important than the selection and management of information.

Dr. Varian responded that if limited to the organization of information, small organization are superior in this respect.

Winding up the session, the moderator asked for comments from each person in attendance on the following two points (which had been major points throughout the symposium) to be kept in mind when considering capitalism and the market economy in the 21st century: (1) how to combine the harmonization and diversity of systems, and (2) whether self-reform is possible to maintain a system's dynamism. First, Dr. Itami predicted that China and Russia will drive the market economy system in the 21st century and together will create a new style of capitalism. Dr. Schmiegelow stated three strategies that should be considered: (1) Rules concerning the protection of weak corporations through government intervention should be drafted. (2) With the world currently in the midst of a third industrial revolution, we should consider the social costs of this transition period. (3) Skill innovation, which assures dynamism, is the most important issue.

Dr. Sopiee commented that although capitalism is superior in terms of productivity and efficiency, we must strive, without being misled by physical progress, to transform it into a system for perfecting human civilization. Dr. Yonekura commented that the problems currently faced by the world's economic system cannot be overcome by a single nation acting alone; instead, the seven advanced nations must create a large framework, which, in the case of Japan, would involve doing what it can in such areas as supplying personnel and opening its markets in order to create a model of a capitalistic world rich in variety. Dr. Varian cited the creation, during the current period of low economic growth, of a system for distributing costs and profits not just domestically but also between nations; considering the process of lifelong education; and revitalizing the market structure by preventing the enlargement and bureaucratization of organizations. Dr. Satoh stated that capitalism inspires challenge because it enables relative inferiority to be overcome with hard work, and that it is a superior system that offers hope for the 21st century. Lastly, moderator Mr. Fukukawa concluded the symposium by saying that the concept of capitalism is a general one, and that with human wisdom we should be able to combine infrastructures and public finances along with market functions to turn capitalism into a system for the 21st century.

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