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Commentary (December 1, 2004)

Know What Reform Can't Do

Takamitsu SAWA (Professor, Kyoto University)

It looks as though Prime Minister Junichiro Koizumi is determined to push through postal privatization as the ultimate goal of his structural reform efforts.

It is generally agreed that government enterprise should not threaten private business and that privatization is desirable without qualification. Few doubt that the privatizations of Japanese National Railways and Nippon Telegraph and Telephone Public Corp. in the 1980s were successful.

When it was privatized, JNR was split into six regional passenger railway companies and a freight railway company, all of the JR group. Although residents of remote, sparsely populated areas were inconvenienced by the abolition of deficit-ridden lines, most Japanese greatly benefited from JNR's privatization, as it improved passenger service and cut train fares. High-speed Shinkansen trains, however, still charge high fares, with little competition from higher-cost airlines and inexpensive but slower buses.

As for the the telecom giant, it was privatized as NTT, but it was not divided into regional units. The privatization coincided with the launch of three telecom companies that was supposed to make the market competitive. Still, NTT monopolized intra-city telephone circuits, forcing its three new rivals to specialize in long-distance telecommunications.

The liberalization of the telecom market started in an environment of unfair competition. For example, in relaying a long-distance call from Kyoto to Tokyo, Daini Denden -- now known as KDDI -- provided wireless communications between base stations in the two cities. NTT offered the use of individual telephones in Kyoto and Tokyo and its intra-city circuits between base stations, but its rivals had to pay for the use.

Then the market was hit by the unforeseen boom in the popularity of cell phones, e-mail and and Internet-based telephone service. With the sharp decrease in international and long-distance domestic telephone calls, the use of subscriber phones declined. Use of public telephones is steadily decreasing.

There is no doubt that the privatizations of JNR and NTT successfully enhanced public convenience.

The business of networks -- be they railways, telecom-related, power grids, highways or mail services -- usually starts as a national enterprise. That's because the business requires a huge initial investment for laying a national network that offers "universal service": All regions must be covered.

It is generally agreed that it would be unfair to limit expanded mail delivery, new supplies of electricity and the construction of railways and highways to urban areas with high population densities. Similarly, it would be unreasonable to expect profit-seeking private enterprise to offer universal service.

For example, the nation's 10 electric power companies are required to supply power to any region, including remote rural areas and isolated islands.

However, network businesses sometimes develop problems peculiar to monopolistic activities, such as redundant labor, inefficiency from the practice of basing service charges on capital investment, and the tendency to maintain costs and profits at levels that do not directly correlate to demand. The result is high charges, with chronic deficits covered by tax revenues.

In Japan's high-growth years, when steady growth in tax revenues was taken for granted, few complained about using tax money to cover JNR's deficits. After the international oil crunches, though, Japan entered a slow-growth period, and the rate of tax-revenue increases slipped, causing a chronic budget deficit.

There was consensus that much of the deficit stemmed from the use of tax money to subsidize national enterprises, and this sparked efforts to reform JNR. To eliminate JNR's deficit, it was mandatory to abolish 3,000 km of unprofitable rail lines and to dismiss redundant workers.

It was impossible to implement drastic reform while JNR remained a national enterprise with the government covering operating deficits. Privatization was the only way to eliminate the chronic deficit. The rationale was that a private enterprise would go bankrupt if it continued to post deficits.

However, private enterprise is not always superior to government service. In the United States, where there are calls to privatize prisons, nobody would deny that human-rights abuses could occur in private prisons. In Iraq, some military services are manned by mercenaries from private companies. This is likely to have been a factor in the abuse cases reported in Iraqi prisons.

As the economist John Maynard Keyes said, distinction must be made between what the government should do and what it should not do.

(This article appeared in the November 29, 2004 issue of The Japan Times)

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