Blinded by the Sun

Oren Grad from the November 1994 issue

(Page 2 of 3)

Despite that telling admission, Fallows remains committed to the notion that we have something fundamental to learn from the Asian model. So what lesson does he draw? That America needs more dirigisme. Have faith, and all will be well.

The second part of the "failures" argument has to do with economics and its role in explaining the world. Astonishingly, Fallows betrays not the faintest awareness of recent work on the economics of growth and neoclassical updates of comparative advantage models, some of which he might have used to bolster his case. So while it's certainly true that the explanatory power of economists' models is rather less than they fancy, Fallows, because he seems so ignorant of contemporary research, is hardly in a position to make the charge stick.

But let us grant Fallows his point, while recognizing that he has set fire to a straw man. Neoclassical economics cannot explain every aspect of economic growth, but we shouldn't expect it to. Free markets are not the same thing as neoclassical economics at all, nor are they logically reducible to it. A predilection for free markets is not in any way incompatible with a recognition that exogenous factors of culture, individual idiosyncrasy, and historical accident can have a major impact on development.

Indeed, the staying power of free-market ideals in America has less to do with an irrational attachment to abstract economic principles than with a rough-and-ready, pragmatic judgment of what seems to work. That judgment itself is informed by a more fundamental, exogenous moral/ethical belief that, to the extent possible, people ought to be free to live their lives as they see fit. Fallows is not entirely off base when he charges that for Americans political economics is "an essentially religious question," though he seems to have forgotten the proverbial advice to people who live in glass houses.

The urgency of Fallows's efforts to buy respectability for interventionist policy by placing it on a philosophical foundation--indeed, the entire appeal of the revisionist approach to anyone beyond the community of Japan scholars--rests on a vague but profound fear that America has lost the secret of perpetual economic growth, and Japan has found it. Yet the fantasy of a Japanese philosopher's stone vanishes upon a closer look.

Fallows, for instance, offers a capsule history of the rise of the Japanese semiconductor industry. He portrays it as the crowning glory of a coordinated strategy of massive capital investment that with military precision captured the business of memory-chip production, dominated collateral industries, and trapped the United States in a position of dependence for both commercial products and military components.

In choosing the semiconductor industry as his example, Fallows plays to the current fashion of seeing chips as the source of economic salvation. Yet the commodity-chip markets dominated by Japan make for a profitless business and the market share Japan purchased by brute force can be--and is being--bought in turn by South Korea and Taiwan. The United States itself could always buy it back if there were a compelling need. But there isn't one now.

Despite the industrial-policy gurus' neat theories of planned technological development, "success" in memory chips has failed to bring with it the expected collateral impacts. Japanese companies haven't made much of a dent overseas in the microprocessor, computer, or software markets despite massive investment and government R&D subsidies. Within the past two years, an invasion by American producers has thrown even Japan's domestic PC market into turmoil, wrecking a cozy oligopoly in which Japanese vendors used fat profits from overpriced PCs based on backward, proprietary technology to subsidize other domestic and overseas operations.

There's a more serious problem with Fallows's selective vision, as well. He sees the semiconductor industry as a model for the general success of a Japanese mercantilist development strategy which aims at domination. But the international record of Japanese industry more broadly--even in areas considered "high technology"--is extremely uneven. In fields such as chemicals, pharmaceuticals, and biotechnology, Japanese industry has remained weak despite years of protected markets, R&D effort, and procurement subsidy.

If we throw in the domestic sector and examine the trend in Japan's GDP over the past 30 years, the claim that Japan has found some sort of economic magic wand becomes still less plausible. Viewed as a five-year moving average, which smooths out year-to-year variations and brings out longer-term trends more clearly, Japan's annual GDP growth fluctuated around the 10 percent level through the 1960s, dropped to a 4 percent trend line around the time of the first oil shock in 1973, and remained there through the end of the 1980s. With the collapse of the late '80s "bubble economy" and the onset of the current recession, GDP growth has crashed to near zero. While it is anybody's guess when and how strongly Japanese growth will rebound, the trend of the past 30 years begs explanation. Whether because he mistrusts neoclassical theory or because he feels he is on to something bigger, however, Fallows pays hardly any attention to economic statistics.

The same cannot be said of Bill Emmott. As Japan bureau chief, business-affairs editor, and now editor-in-chief of The Economist, he has been arguing for years that however "different" the Japanese may appear or believe themselves to be, in the end they are subject to the same market forces as anyone else. In his 1989 book The Sun Also Sets, Emmott analyzed the Japanese economy, concluding that Japan's trade surpluses, capital exports, and savings rate are destined to subside as demographic, cultural, and economic forces follow their natural course. Japanophobia briefly updates that argument in light of the past four years, while focusing more narrowly on a particular phenomenon: the global expansion of Japanese multinational companies.

Japanophobia sketches out six reasons why Japanese firms have rushed to invest overseas: perceived opportunities to arbitrage superior management against lower wage rates; the need to evade trade barriers; the cheapness of foreign assets paid for in inflated yen borrowed at low interest rates; the need to be represented locally to be successful in certain highly competitive markets; the opportunity to take advantage of local technology; and the pursuit of Japanese customers overseas.

Emmott reviews the experience of Japanese multinationals overseas in four industries-- cars, entertainment, tires, and finance--and makes a plausible case that their successes and failures can be accounted for in decidedly mundane terms. And failures there have been indeed. The takeover of Firestone by the Japanese firm Bridgestone has been as pathetic a comedy of errors as any all-American corporate foul-up. The major Japanese securities firms and banks prospered only so long as their Japanese customers overseas had pots of money, while their efforts to build genuinely domestic businesses were non-starters. Sony and Matsushita paid grossly inflated prices for Hollywood studios in a quest for a supposed synergy between entertainment software and hardware. The investments are now finally showing some signs of life, but the long-term success of those ventures is still an open question.

By contrast, the Japanese automakers have, on the whole, been much more successful, and Emmott describes some of the ways in which skilled management has overcome the problems of overseas investment. He dissects the fuss over "local content," and argues that the logic of "lean production" dictates that manufacturers locate more and more aspects of the business near their target markets if "transplant factories" are to be successful over the long haul.

Emmott's case studies are useful in puncturing the illusion of Japanese invincibility. His broader macroeconomic arguments, which are presented in greater detail in The Sun Also Sets and which I have not laid out here, are clear and convincing as far as they go. His skepticism toward revisionist industrial-policy nostrums is on the mark. But in the end he really doesn't meet the challenge raised by Looking at the Sun, however flawed its conclusions may be.