Japan's Ranking in the Global Economy: Reform and Competitiveness

Takahiro MIYAO (Professor, GLOCOM)

(Summary of the presentation in the Roundtable Session on Reform and Competitiveness at the 13th Biennial Conference of the Japanese Studies Association of Australia, held at the Queensland University of Technology in Brisbane, Australia, July 2 – 4, 2003)

First, let me start with a widely accepted criterion for national competitiveness by referring to the annual rankings provided by the IMD (International Institute for Management Development) in Switzerland (see: http://www.glocom.org/debates/20020502_miyao_com/). According to the IMD rankings, Japan used to be number one at least until the early 1990s, but since then it has been free-falling. As of 2002, Japan was ranked in the 30th place, and this year the situation seems to be essentially the same as last year. Surprisingly, Japan is ranked lower than such Asian countries as Thailand, Taiwan and Malaysia. That is partly because the IMD rankings are based not only on economic performance but also on such factors as business efficiency, government efficiency and infrastructure.

But still Japan's low ranking seems unreasonable. Just take up per capita income or real wage levels. Japan's per capita real income is comparable to that in major European countries such as the UK, France and Germany, and much higher than that in other Asian countries. Hong Kong and Singapore are among the Asian economies with the highest income level, but still they are behind Japan. So, by just looking at typical figures closely related to the usual definition of competitiveness, I just do not understand the generally accepted view or the general perception that Japan's competitiveness has been dropping so sharply for the last decade and now ranked below some of the Asian countries.

In addition, there are some serious studies done by such economists as Robert Solow and Martin Bailey ("International Productivity Comparisons," Journal of Economic Perspectives, Summer 2001) indicating that Japan is still ahead of the US and Germany in terms of productivity in automobile, consumer electronics, steel, etc.

However, one might quickly point out that there are so many inefficient domestically oriented industries in Japan such as construction, retailing, food, etc., and that is why we need reform to stop the erosion of Japanese competitiveness. For such an argument, I would say that the existence of inefficient industries has been the case in Japan throughout the post-war period and, therefore, that fact alone cannot explain the sudden free-fall in the Japan's competitiveness ranking, although reforms are needed to improve the performance of the Japanese economy as a whole.

It seems to me that there is some mix-up in measuring competitiveness in terms of its level and change. Certainly in Japan the growth rate has been dropping, deflation has been developing, and productivity increases have been decelerating, say, from three to four percent in the late 80s to only one percent now. So it is clear that there is something to be done to reverse the trend of productivity declines in Japan, but that does not necessarily mean that Japan's productivity and competitiveness are less than those for Thailand or Malaysia.

It is often point out that China has been growing so rapidly that Japan's competitiveness ranking should be declining compared to China and possibly to other Asian countries as well. That may be true, but we have to be careful about the evaluation of China's rapid rise in competitive rankings. In fact, that is a result of investments from multi-national corporations including Japanese companies. And there are off-shore production strategies adopted by multi-national corporations to take advantage of low production costs in China. That is not the same thing as the development process that advanced countries have been following. Therefore, there is a long way to go before China acquires the self-developed capability of R&D, design and other high-value added activities to increase the standard of living substantially.

So by using the traditional commonsense approach in economics, one can say that China is often overrated and Japan is definitely underrated in competitive rankings. It is needless to say that Japan has to do something about its decline in terms of change, and reforms are needed to reverse such a trend, as I already pointed out.

Finally, I would like to take up a broader definition of productivity and competitiveness. In Japan one of the most popular terms these days is "soft" economic power, which might include culturally oriented products and services such as books, music, movies, animation, games, etc. In these terms, Japan's recent advance is quite noteworthy. Japan's exports of culturally oriented products and services have tripled for the last ten years, while their imports have not been increasing much in the same period. So, their trade gap has been narrowing rapidly in recent years. The worldwide acceptance of Japanese animation, "Spirited Away," is one of such examples. That is a welcome change for Japan.

So, if you broaden the definition of productivity and competitiveness beyond the "hard power" of the Japanese economy, Japan could be regarded as a rising star, rather than the setting sun as the image of the Japanese economy described by the IMD rankings.