Thursday, January 21, 2010

Is Productivity and Superior Technology the Panacea for Economic Ills?

Dr.Mohd Nazari Ismail

The current economic problems faced by Malaysia have resulted in many suggestions on how best the country could overcome those challenges in the coming years. Some of the most common revolve around the need to ensure that the country’s productivity or competitiveness be enhanced. They include revamping the nation’s educational system at all levels, primary, secondary and tertiary. Public and private sector organizations are also exhorted to upgrade their technology and their workers’ skills. In other words, as far as Malaysia’s economic problems is concerned, the ultimate panacea is productivity and competitiveness of the country.
Truth be told, such a belief is fallacious and based more on hope rather than solid evidence. The most obvious evidence of this fallacy is the Japanese economy. Without any doubt, Japan is the model country when it comes to competitiveness, skills, technology and productivity. Out of the ashes of World War Two, the Japanese built a country that was and still is superior to almost all nations in the world in terms of technology and productivity. Japan’s industrial and manufacturing sectors are so advanced that it arguably was responsible for the closing down of many manufacturing concerns in Britain and America. In the automotive sector, for example, Japan’s Toyota overtook General Motors (GM) of the US as the largest car manufacturer in the world. GM even underwent the ignominy of having to be rescued from bankruptcy by the US government in 2009. Many British car manufacturers also closed down in the face of onslaughts by Japanese car manufacturers. Japanese companies also dominate the electrical and electronic sectors. Japanese brands such as Sony, Sharp and Toshiba are household names around the world. Japan’s export successes in the ‘70s and ‘80s caused serious trade deficits in other countries especially in the West. In the 1980s, Japan’s trade surplus with the US was so high that it led to a period of Japan-bashing by American politicians. Japan had to practice a `voluntary export restraint’ policy in order to placate American anger.
In 1990, the IMD World Competitiveness Report ranked Japan as the top country in terms of domestic economic performance, external economic performance and science and technology. It also placed Japan at number two in terms of labour market and third in terms of finance. Clearly Japan was at the top of the world compared to any other nation on earth and its future economic performance should also be the most stable and secure, right?
Beginning 1990 and in the ensuing twenty years, Japan went through a terrible depression. In the period 1991-2000, the average growth rate of per capita GDP was only 0.5 %. The Japanese government’s fiscal health also deteriorated badly. From 1991 onwards, it has been incurring a string of budgetary deficits, which got larger and larger. By 2000, it was 7.4 percent of GDP. In 2009, it was close to 10% of GDP. Public sector debt to GDP ratio in 2008 was a whopping 180% and as result a quarter of the total government’s expenditure were used for debt-servicing alone. The IMF predicts Japan’s gross public debt to reach 227% of GDP this year.
There have been hundreds of thousands of bankruptcies in Japan since 1990. And till today the picture is not improving. The most recent high profile case is the 59-year old flagship airline JAL. On 19 January, the company, with unpaid debt of USD25.6 billion filed for bankruptcy. A state-backed restructuring plan to prevent it from going belly-up will result in 15,000 of its employees being laid off to join millions other Japanese who have lost their jobs. The only reason why unemployment rate in Japan does not appear horrifying is because of the rise of the phenomenon of `temporary employment’. Temporary employees have gone from being a rarity in Japan to accounting for one-third of the workforce of 67 million. Life-time employment, a uniquely Japanese feature of corporate culture and once touted to be an factor behind its previous success, is now disappearing. Now, Japanese workers are more vulnerable. In March of this year, it is predicted that 85,000 part-timers will be victims of haken-giri, or temporary worker cutbacks.
According to a recent article on Japan by The Economist, the coming decade is going to be worse for the Japanese younger generations compared to the previous two decades. What a bleak prospect indeed.
Question is: how could such a technologically advanced and productive nation end up in such a miserable situation?
The answer is deceptively simple. It is the system. To be more precise, it is the finance industry, which encourages massive amount of loans be made to Japanese firms and individuals. The lenders i.e. Japanese banks had lots of money due to Japan’s export successes during the previous two decades. The huge amount of loans resulted in a massive bubble in property and stock markets. The speculative activities were at gargantuan levels such that at one point it was reported that a square kilometer of land around the Imperial Palace in Tokyo was worth more than the whole of California. It all came crashing down in 1989. The size of the speculative bubble was so big that after two decades of recession the Japanese economy is still extremely sick. In fact it now appears that it is going to get sicker still.
The most important lesson to be learnt from Japan is that having a highly productive, skilled, and disciplined workforce or a technologically advanced manufacturing sector is not a guarantee that a country’s economy will continue to be prosperous and stable. So long as there exists a lending-for-profit industry in the country, there is no avoidance of a catastrophe. It may be difficult to accept but the Japanese experience of the last twenty years is evidence of this reality. Unfortunately many policy makers seem blissfully unaware of this reality and continue to encourage us to look at Japan as a perfect example to emulate.


Dr. Mohd Nazari Ismail is a professor at the Faculty of Business and Accountancy, University Malaya.