Some mandatory & optional readings for next week

I) Mandatory reading for next week

For next week, November 17, 18,
Please read Mankiw, chapter 10.

Homework #4:
1. How do monetary and fiscal policy shift the IS and LM curves?
2. Bring to class a recent newspaper article indicating a shift of the=
IS
or LM curve.
3. Given the decline in aggregate demand in Southeast Asia during the=
=20
last
2 years, what shifts in IS or LM would you recommend? What shifts did the =
IMF
recommend?
4. Mankiw p. 292 problems 1 and 2 for class.

In short, we will discuss recent shifts in IS & LM curves in EC, US, Japan,=
=20
and
Indonesia during the 1997-98 crisis. Please have something to say about on=
e=20
or
more of these.

II) Optional readings: Your classmates sent for your perusal:
1. =0F"A French Paradox at Work=0F" on the 35- hour week
2. =0F"Latin American markets rally"
3. "Getting to the Bottom of Japan's Economic Blues"

1. =0F"A French Paradox at Work=0F" New York Times November 11, 1999 By=
SUZANNE
DALEY

FASTATT, France Last year, the Beyer family, which owns a small =
jam
and fruit preserves plant here near the Swiss border, made a proposal to th=
eir
18 employees: Would they like a 35hour workweek and continue to be paid for
working 39 hours?
To no one's great surprise, the employees said yes. "An hour more=
=20
for
yourself is an hour more," said Christiane Grimm, whose job includes slapp=
ing
labels on jars, sorting through crates of fruit and watching over bubbling
vats of jam. "There's lots you can do with it."
Surprisingly, the Beyers ended up happy, too. The company, one of
thousands of French enterprises that have reorganized their businesses=20
because
of a 16monthold law creating one of the shortest workweeks in the world,
believes that it is far better off than before.
In the reshuffle, Philippe Beyer split his 18 employees into two team=
s
and staggered their shifts. His factory here in the Alsace region now=20
operates
12 hours a day, up from 8. And it produces 30 percent more than it did last
year with only two extra employees.
The promise of 39 hours of pay for 35 hours of work was a campaign pl=
ank
that helped catapult Lionel Jospin's leftist coalition to power in the 199=
7
Parliament elections. And it remains the glue that keeps Socialists,
Communists and Greens together. It was aimed at creating as many as a mill=
ion
jobs in a country that has struggled with a doubledigit rate of unemployme=
nt
for years.
But many experts think that this bold experiment which business lead=
ers
had warned would cripple France's economy is not going to be a cureall fo=
r
the nearly three million unemployed.
Instead, it could accomplish something the leftist governing coalitio=
n
never aimed for: a kind of housecleaning in the French workplace that will
tear the cobwebs from French industry and lead to a more productive and
flexible work force, as it did at Beyer.
"The primary goal of this policy is very unlikely," said Emanuel Ferr=
y,
an economist at Banque National de Paris, who is studying the policy. "But=
it
seems to be having a backdoor effect. It is providing a very good opportun=
ity
to renovate the workplace. And it is introducing these elements
productivity, flexibility quietly without triggering social unrest. So ev=
en
if the direct goal of job creation is not achieved, it may still not
necessarily be a bad thing for the economy."
That may be, but there is hardly a policy that has caused as much
argument in France as the 35hour week. While labor was an early advocate o=
f
the idea, many unions have recently demonstrated against it, fearing that =
the
way it is being carried out will freeze salary levels and reverse hardfoug=
ht
gains in employee rights. Businesses have protested, too. Last month, some
30,000 industrialists and executives gathered in an empty Paris conference
center to wave placards and chant slogans deploring the policy. They say i=
t
will cost too much and destroy France's competitiveness. Average citizen=
s
also seem to be losing their appetite for it. Surveys show that the idea w=
as
very popular when first proposed, but resistance grew the more the French
considered it. A recent poll found that less than 10 percent of France's
citizens now believe that they are going to benefit from shorter workweeks.
Most people suspect that one way or another, they will be inconvenienced.
Either way, it is a subject almost sure to start a fight.
"People feel very strongly about it," Beyer said. "In this country we=
=20
are
a little retrograde, we live the way we lived 30 years ago, and this is=20
forcing
change and so people are uneasy with it."
So far, there is little proof that the 35hour week has created many=
=20
jobs.
Labor Ministry officials said in Parliament recently that the plan had=20
created
or saved 120,000 new jobs. But one legislator called the figures "thin air=
,"
and most economists say a more realistic number would probably be half tha=
t.
Opponents also point out that the government has been subsidizing the
transition with business tax cuts and other incentives.
France's economy grew at a healthy rate of 3.2 percent in 1998, and i=
s
expected to do nearly as well this year. The unemployment rate has dropped =
to
11.1 in August from a high of 12.6 percent in June 1997. But few see much
connection between the new jobs and the 35hour policy.
"The 35 hours was a political decision," a Finance Ministry official
said, "but it may become a really positive thing. Nothing was moving befor=
e.
Now suddenly everyone has to go back and look at the way we have been doin=
g
business. People are talking and thinking and being creative."
The process of carrying out this complicated law, passed in June 1998=
,=20
is
still in its early stages. This month, Parliament passed a tangle of more t=
han
100 amendments spelling out exactly how and when the policy should be
instituted. One rule: All companies with 20 employees or more must operate
with a 35hour workweek by the year 2002. So far, only about 16,000=20
businesses,
or little more than 1 percent of eligible French employers, have formally=
=20
made
plans for the conversion.
Economists say the brunt of the law will be felt unevenly. Some
businesses like the Beyer factory will benefit. Others, including service
industries, are likely to have a much harder time.
George Jallerat, who owns Le Grand Monarque Hotel and Restaurant in
Chartres, says he cannot figure out how to reduce his employees' hours, pa=
y
them the same wages and not lose money. "In the end, we will have to raise
prices," he said. "There is no other way."
Some entrepreneurs are already taking steps to protect themselves. Dr=
.
Thierry Sandr, employs 19 people in his medical lab on the outskirts of=20
Paris.
He says he will do all that he can to avoid hiring a 20th person and bring=
=20
the
35hour workweek into his business.
But he does not trust the government to leave him alone. So he has no=
t
raised the pay of any of his employees in two years, as a way of saving mo=
ney
for the day he has to give them a 35hour workweek for 39 hours of pay. He=
=20
says
he is not alone.
While the 35hour workweek was being debated, government officials beg=
an
trying to enforce the 39hour limit that now exists, even among managers.
Agents prowled garages to see what time people were actually leaving.
Thousands of fines were issued, and in one case, the director of a=20
electronics
factory owned by ThomsonRCM was hauled into court for working too hard and
allowing his engineers and other managers to put in an average of 46 hours=
a
week. In June, he received an $18,000 fine. The action prompted some
businesses to install time clocks even for managers and made the governmen=
t
the butt of jokes.
Those who have jumped at the shortened workweek are often those who w=
ere
already planning to expand their businesses. For instance, the Packard Bell
factory in the western town of Angers, which makes computers, went to the
35hour week this year precisely because it wanted to increase production b=
y=20
30
percent. To do that, it needed to reorganize its 1,200 employees into more
teams and more shifts. Offering a 35hour week was a way of opening
negotiations with its unions.
JeanLuc Bayel, the director of human resources, said the plan had wor=
ked
out even better than anyone expected. "We have far less absenteeism," Baye=
l
said. "And we are seeing a better product. People have to stand to do the=
=20
job,
and standing for eight hours is hard. Now they stand for only seven and we=
=20
are
seeing a 5 percent reduction in problem computers. We are very happy with =
the
changes."
Packard Bell did not take advantage of government subsidies because i=
t
did not want to follow government rules. But others like Beyer also saw in=
=20
the
new law a way of getting government aid to pay for expansion plans.
At Beyer, for instance, the government aid package will pay nearly 90
percent of the salary for the two employees he added this year. Next year,=
it
will pay about 70 percent and 50 percent the year after that. But Beyer, w=
ho
took over the business from his father two years ago, wanted to expand=20
anyway.
He says he might have gone ahead with his plans anyhow, but the law gave h=
im=20
a
push.
Not far from Beyer's factory, Didier Thuet, who owns a small heating
installation business adopted the 35hour week for just the same reason. "I=
t
was an opportunity to try something," he said.
Thuet's business is seasonal. There is little work at all from March =
to
May. So he offered his employees a shorter workweek during those months in
exchange for a longer one during peak business periods. They also got an
additional six to eight days off. All six of the employees agreed to a sal=
ary
freeze until the year was over and the company could see how much money it
made.
But both Thuet and Beyer have their doubts about whether the law will
work everywhere.
And there are complaints from the supposed beneficiaries of the new=
=20
jobs.
At Beyer, Sarah Charro, who at 26 had a series of temporary jobs, was hire=
d
because of the reorganization, but she has little good to say about it. Sh=
e
says the atmosphere in the factory is tense.
"I feel in some ways like we went backward," Ms. Charro said. "We are
working only 35 hours, but they are trying to push a lot into those hours
push, push, push. We are all stressed out."
Thuet's new employee, Christoffe Foulon, says the 35hour week is grea=
t=20
if
he does not lose any money. But in truth, he would rather work more and ea=
rn
more. He says few of his friends seem to envy him. Instead, he says, most=
=20
give
him a hard time. "They treat me like I'm lazy," he said.

*******************
2. Published Monday, November 8, 1999, in the San Jose Mercury News
=0F"Latin American markets rally,=0F" Simon Romero, New York Times

SAO PAULO, Brazil Buoyed by fresh inflows of overseas investment money, st=
ock
markets in Latin America are staging a rally that could presage a return t=
o
economic growth in many of the region's countries next year.

Over the last few weeks, indexes like the Bovespa on the Sao Paulo stock
exchange, Latin America's largest stock market, have soared to a sixmonth
high. In Mexico, Latin America's second-largest country, the bolsa index
reached a threemonth high. On the coattails of these markets, stocks in
Argentina, Chile and Colombia registered healthy gains.

Much of the rally has been fueled by relief over potential interest rate
increases in the United States, as recent economic reports have led some
investors to believe that only one increase in rates, instead of several, =
is
likely in coming months. Lower interest rates in the United States, Latin
America's biggest source of investment, translates into more money availab=
le
for purchases of stocks in the region.

However, a growing consensus that Latin America is positioned for a revi=
val
of economic growth next year is also encouraging investors to increase the=
ir
stock holdings.

The recovery of some commodities prices, healthy demand for Latin Americ=
an
exports in rich industrialized nations and political and economic=20
developments
in countries like Mexico have led analysts such as Geoffrey Dennis of Salo=
mon
Smith Barney to predict 3.2 percent growth for the region as a whole next
year, compared with fourtenths of a 1 percent contraction in 1999.

``Investors are lifting the veil from a period in which Latin America was
oversold,'' said Edmar Bacha, the New Yorkbased strategist for Banco BBA
Creditanstalt. ``What they're seeing, minus the threat of higher Fed rates=
,=20
is
a region looking a lot better next year than this year.''

One of the best examples of this newfound optimism is Chile, a nation th=
at
was hit hard by the economic crisis suffered by some of its Pacific Rim
trading partners.

Helped by lower domestic interest rates and a recovery in the price of
copper, Chile's economy is expected to grow 5.5 percent in 2000, compared=
=20
with
a shrinkage of half a percent this year. And coming presidential elections=
=20
are
not viewed as risky, since the two leading candidates are pledging a simil=
ar
blend of centrist economic policies, said Neil Dougall, an economist with
Dresdner Kleinwort Benson.

In Mexico, politics is also generating optimism over the economy with
concern easing over the possibility of disruption resulting from primary
presidential elections. And strong growth in the United States, Mexico's m=
ain
export market, contributes to positive sentiment over the country's econom=
y,
which is increasingly viewed by economists as more linked to its northern
neighbors than to the rest of Latin America.
Yet while prospects look better in countries like Chile and Mexico, it is=
=20
in
Brazil, Latin America's biggest economy, where most attention is focused. =
So
perhaps it is no small wonder that the rally lifting most Latin markets is
nowhere as dramatic as it is here.

Two weeks ago, Brazil's currency, the real, was getting hammered as
speculators who had been betting on weakness pushed the real beyond two to=
=20
the
dollar for the first time in eight months. As alarm grew over the real's
decline, Brazil successfully sought greater flexibility to defend the=20
currency
by using money from the International Monetary Fund, which has oversight o=
ver
such matters because it is financing an economic aid package to the countr=
y.
The real began to strengthen.

``All of a sudden there was much less pressure on the bank to raise rate=
s=20
to
attract foreign capital,'' said Carlos Novis Guimaraes, head of Latin=20
American
investment banking at Lehman
Brothers.

With the likelihood larger that Brazil might lower rates rather than raise
them, a fresh assessment emerged. Corporate profits, like those from
eucalyptus producers benefitting from higher pulp prices and banks prosper=
ing
from prescient investment strategies, suggested an economic recovery stron=
ger
than once thought. Most analysts are predicting Brazil's economy will grow=
3
percent in 2000, compared with 0 percent expected this year.

Still, investors remain cautious about the potential for rebound. While
shocks like Ecuador's moratorium on foreign bonds seem to have been absorb=
ed
without causing much damage to investor sentiment, other factors lead some
investors to remain wary.

For instance, interest rate increases abroad, like those announced Thurs=
day
by the European Central Bank and the Bank of England, could undermine Lati=
n
America's stock rally. Reticence by Brazil's Congress to approve governmen=
t
proposals to simplify the tax system and trim pension spending may also ra=
ise
a red flag.

Nevertheless, an important shift in sentiment seems to be taking place. =
=20
``It
appears that global risk aversion is lowering after the collapses predicte=
d=20
by
some people never materialized,'' said Ernest Brown, senior Latin America
economist at Morgan Stanley Dean Witter.

*************3. JAPAN ECHO Vol. 26, No. 1, February 1999
Getting to the Bottom of Japan's Economic Blues
KOJIMA Akira
The Japanese economy found itself pushed to the edge of a precipice=
in
1998 by a rapid surge of deflationary pressure. Obuchi Keizo, who succeeded
Hashimoto Ryutaro as prime minister at the end of July, proclaimed his new
administration an "economic revitalization cabinet," and policy at least
shifted in the right direction, however belatedly. The government secured
passage for legislation setting aside a huge volume of public funds to deal
with the stricken financial sector, and it approved fiscal outlays on an
unprecedented scale to stimulate demand. Thanks to these measures, the econ=
omy
managed to stop just short of the precipice.
During 1999 the economy should enjoy a bit of a breather as the=20
effects
of the heavy dose of government stimulus take hold. But it will be no more=
=20
than
a breather, and it will be essential for financial institutions to take
advantage of this temporary respite to restructure their operations and for
business corporations to undertake serious efforts to strengthen themselves=
.=20
If
they fail to do so, the economy is liable to slip back into critical condit=
ion
as soon as the effects of the stimulus have worn off. This year will be a
decisive one, representing as it does the last chance of the twentieth cent=
ury
for the Japanese economy to be revitalized.
After achieving a recovery labeled miraculous in the years after Wo=
rld
War II, our country's economy suddenly lost its momentum in the final decad=
e=20
of
the century. The downturn started in 1991, and from 1992 through 1994 the
growth rate was close to zero. In 1995 and 1996 the economy managed to expa=
nd
by 2%-3%, but then in fiscal 1997 (April 1997 to March 1998) it contracted =
by
0.7%. And the growth rate for fiscal 1998 is being estimated at around -2%.
This will be the first time in the postwar period that the economy has=20
recorded
negative growth for two years in a row. It will also mean that the average
growth rate from 1992 through 1998 will fall to 0.7%, dipping below the 1%
mark.
Why did the economy suddenly lose its steam? The main causes are th=
e
speculative bubbles of the late 1980s and the policy blunders following the=
ir
bursting starting in 1990. Over the course of history, countries around the
world have experienced economic bubbles. Where they differ is in the skill =
of
their policies to deal with the aftermath. Japan's record on this score has
clearly been a string of failures. Until 1998 the authorities did virtually
nothing to promote the clearing up of the large volume of loans that went b=
ad
after the collapse of the bubble economy. This huge overhang of nonperformi=
ng
assets in the financial sector acted as a drag on the economy as a whole,
preventing it from regaining its forward momentum. And as the recession=20
dragged
on, the bad-debt problem grew even greater in scale. The situation=20
deteriorated
to the point where a series of major financial institutions went bankrupt i=
n
November 1997, setting off an overall contraction of credit.
Earlier in the year the government had implemented a set of
belt-tightening measures, including a hike of the consumption tax from 3% t=
o
5%, that produced a negative fiscal impulse on the order of \9 trillion. In
other words, 1997 was a year of powerful deflationary pushes from both the
monetary and fiscal sides of the macroeconomic picture. No economy could
withstand this sort of double punch without buckling.
Particularly from November 1997 on, the economy was obviously heade=
d
down, but even so the government dallied in shifting its fiscal stance and =
in
dealing with the bad debts that were at the root of the financial deflation=
.
What set off the powerful deflationary contraction of credit was the first
occurrence of default in the interbank market in the postwar period in earl=
y
November. Despite the smallness of the amount defaulted, the market panicke=
d
because all its transactions were premised on the absolute impossibility of
default. Financial institutions became leery of extending credit to each=20
other,
and the interbank market ceased to function smoothly. Every institution tri=
ed
to build up its own liquidity. And financial institutions whose capital was
meager by comparison with the scale of their nonperforming loans found
themselves coming under a fierce attack in the stock market. As a result, t=
hey
moved to raise their capital adequacy ratios by cutting back on their=20
lending.!

This set off a classic credit crunch.
LENDER OF FIRST RESORT
When matters reach this sort of pass, the relaxation of monetary=20
policy
by the central bank fails to affect the real economy. Though the Bank of Ja=
pan
has adopted an extremely loose policy stance, actual financial conditions h=
ave
become severely tightened. This can be seen most clearly in the relationshi=
p
between the money supply and bank credit. Normally when the money supply (c=
ash
and bank deposits) expands, the volume of lending by banks grows accordingl=
y,
and financial conditions relax. But in the credit contraction that became
pronounced from the end of 1997 on, bank lending has shrunk in volume despi=
te
growth of the money supply.
For example, if we look at the figures for the so-called city banks
(Japan's major money-center banks) in the 12-month period ending September
1998, we find that their deposits were up 5.3%, but their outstanding loans
decreased by 2.5%, or \4.5 trillion. And the ratio of loans to deposits fel=
l=20
by
a remarkable 8.7 percentage points over the same period. Banks were under
pressure to write off their bad loans, which they had been putting off doin=
g;
the capital crunch in the financial sector was accompanied by a credit crun=
ch
in the general economy.
So what have the banks been doing with their increased deposits? Th=
ey
have been avoiding risk by investing them in government bonds, and as a res=
ult
the yield on the government's 10-year issues has fallen below 1%. This is a
first for Japan, of course, and in fact it is unprecedented in capital mark=
ets
around the world. The problem is that, even as government bond yields have=
=20
been
falling, the yield on the corporate bond issues of big businesses has been
rising. In other words, not only has it become harder for businesses to bor=
row
from banks, but it has also become harder for them to raise funds from the
capital market. Even so, major corporations have been raising some funds
through bond issues. But smaller firms that are not in a position to issue
their own bonds have felt the full brunt of banks' cutbacks in lending.
If this situation were left untreated, the Japanese economy would h=
ave
no prospect of recovering. During the course of 1998, therefore, the Bank o=
f
Japan implemented large-scale purchases (via banks) of commercial paper, wh=
ich
are notes issued by corporations to cover their operating expenses. In effe=
ct
the central bank was stepping in to lend where regular banks would not. One
might even say that it became the lender not of last resort but of first
resort. In addition, other government-affiliated financial institutions hav=
e
been actively extending loans to companies and other firms.
The root cause of the contraction in bank lending is the remaining=
=20
pile
of bad loans, which has still not been adequately dealt with. In order to
alleviate this problem, the government has come up with a massive \60 trill=
ion
package of public funding for the financial sector. But bank executives are
reluctant to make use of these public funds, fearing that if they do, they=
=20
will
be expected to take responsibility for the failure of their earlier lending
decisions. And under these circumstances the credit crunch appears certain =
to
continue, even if it becomes somewhat less serious in degree.
The gravity of the bad-debt problem is apparent from the volume of =
the
asset value lost as a result of the collapse of the bubble economy. In the
period from 1991 through 1994 land prices fell \556 trillion, and from 1989
through 1992 stock prices dropped \490 trillion. In other words, the value =
of
assets in these two major categories plunged by over \1 quadrillion in the
post-bubble period, an amount equivalent to more than two years' gross=20
national
product. Since a large portion of the purchases of both land and stocks had
been financed by bank lending, the deflation in these asset values led=20
directly
to the emergence of huge amounts of bad loans.
STRUCTURAL FACTORS ADDING TO THE DRAG
The principal causes of the Japanese economy's sudden loss of momen=
tum
in the 1990s thus appear to have been the policy failures in dealing with t=
he
aftermath of the bubble years, in connection both with the bad-debt problem=
=20
and
the handling of fiscal affairs. These were not the only causes, however. Ot=
her
factors, systemic and structural, account for probably 20% to 30% of the to=
tal
negative change.
A number of problems may be cited in this connection: (1) Japan
completed the decades-long process of catching up with the West. (2) The
country was tardy in coping systematically with the forces of globalization=
=20
and
megacompetition that picked up strength following the end of the cold war. =
(3)
The Japanese population has been aging at a pace never experienced by any
country in the world, and this has heightened people's concerns about the
future. (4) The focus of technology has been shifting from manufacturing=20
toward
information, software, and services.
The end of the catch-up process meant less scope for growth through=
=20
the
introduction of technologies and products from overseas, forcing Japan to r=
ely
on innovations of its own to achieve further economic expansion. Furthermor=
e,
it had to do so within the context of the world's highest average wage leve=
ls.
Next, the advent of megacompetition meant the emergence of rivalry=
=20
from
the newly industrialized economies, many with wages only a tenth or a=20
fifteenth
of Japan's, placing Japanese businesses in a highly disadvantageous positio=
n.
Population aging, meanwhile, is a process that has been going on in=
=20
all
the industrial nations, but in Japan's case it has been progressing at an
especially rapid clip. This has forced the country to scramble in order to=
=20
make
the required systemic adjustments in areas like pensions and employment. In
addition to the rise in longevity, there has been a sharp decline in the
birthrate, which has further accelerated the rise in the elderly share of t=
he
population. Early in the twenty-first century, the total number of Japanese=
is
expected to start declining. In the 50 years following the end of World War=
=20
II,
the population grew by an average of about 1 million people a year, but in =
the
50 years to come it is estimated that it will decline on average by half a
million a year. This will mean a shrinking labor force, which will face an
increased burden in supporting the growing numbers of elderly, and it will=
=20
also
mean shrinking markets. Various systems, including pensions, taxes,=20
employment,
and wages, will have to be reformed fundamentally in order to keep them fro=
m
collapsing. Meanwhile, of course, the vitality of the economy will wane, an=
d
with it the capacity for economic growth. The outlook is bleak.
Finally, the paradigm shift in technology will pose a major challen=
ge
for Japan in the period to come. During the twentieth century Japan has bee=
n
extraordinarily successful with its technology for standardized mass
production, which was the dominant paradigm of the century. Automobiles and
electric appliances are representative of the fields in which Japanese
manufacturers have won strong positions. But since the early 1980s, when
Japanese industry was seen by many people to be victorious, the focus in
high-value technology has been shifting away from standardized mass product=
ion
in the direction of knowledge-intensive and information-intensive areas, fr=
om
hardware to software, and from manufacturing to services.
As globalization has progressed, capital, technology, and managemen=
t
know-how have been moved actively across national borders, and standardized
production was easily shifted to the newly industrialized economies. The=20
medium
for these transfers has been cross-border direct investment, which has grow=
n=20
by
leaps and bounds since the end of the cold war. We have entered an age in=
=20
which
comparative advantage in standard mass production can be imported. This
produces a tendency toward price leveling. In most cases the trend is a
downward one, with prices being drawn to the level of the low-wage countrie=
s.
And it makes it difficult for a high wage country like Japan to sustain hig=
h
value-added production.
THE PARADOX OF SUCCESS
There are two ways out of this difficulty. One is to shift
manufacturing
operations overseas to take advantage of lower wage levels. The other is fo=
r
businesses to compete in nonprice areas by coming up with their own
technologies and products. Corporations that shift their operations offshor=
e
can continue to enjoy growth in their consolidated results on a global basi=
s,
but meanwhile they are promoting the hollowing out of the domestic
manufacturing sector. For Japan as a whole the second alternative, nonprice
competition, is more desirable, especially now that the goal of catching up
with the West has been accomplished. But in order to succeed at this endeav=
or,
it will be necessary to recast the whole set of systems that were designed =
for
the catch-up period. The new systems will have to shift their focus from th=
e
achievement of equality of results to support of those who take risks and
display creativity. The system of automatic wage hikes in line with increas=
ing
seniority will have to be overhauled, and the egalitarianism of the school
system will also have to be modified.
Making such reforms will mean fundamentally changing the social val=
ues
to which we have become accustomed. Resistance is likely to be great. Peopl=
e
will be quick to agree with the need for reform in principle but will resis=
t
the particulars that affect their own areas of activity. Already over the p=
ast
decade we have witnessed many loud calls for reform, leading to numerous
reports and recommendations, but there has been little by way of
implementation.
One reason for this lack of follow-through is the fantastic success
that
Japan enjoyed in the economic sphere for the previous several decades. Sinc=
e
the existing systems and practices were so successful for so long, they hav=
e
become quite hard to change. This is the "paradox of success" or "reward of
success" to which Peter Drucker refers.
It may be possible for the Japanese economy to get out of its curre=
nt
hole by overcoming the credit crunch arising out of the bad-debt problem an=
d
correcting the earlier mistakes in fiscal policy. This, however, will amoun=
t=20
to
no more than the righting of earlier wrongs. In order for our economy and
society to demonstrate vigor and creatively produce new value and new
technologies in the century to come, we must overcome the "paradox of succe=
ss"
and remake our long-standing systems and practices. The lack of progress=20
toward
this goal is the source of our current sense of being at an impasse.
The massive dose of financial and fiscal stimulus that the
government is
now administering should halt the severe downturn that started in November
1997, and in 1999 we can hope to see at least faint signs of a recovery. Bu=
t=20
it
is essential that this respite be used to achieve progress toward systemic
reform. Unless this is accomplished, the 1990s will be a "lost decade" for
Japan, and our economic outlook for the twenty-first century will be a gloo=
my
one.

David I. Levine Associate professor
Haas School of Business ph: 510/642-1697
University of California fax: 510/643-1420
Berkeley CA 94720-1900 email:
levine@haas.berkeley.edu
http://web.haas.berkeley.edu/www/levine/