Monday, November 24, 2014
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Dreaming of a New Edo Era

SEOUL – In mid-November, all eyes will shift to Seoul, when G-20 leaders convene for the first time in the South Korean capital. The choice is long overdue, as South Korea is a remarkable success story: in one generation, the South Koreans, formerly pummeled by civil war, under constant threat from their Northern communist brethren, long mired in poverty, and ruled by military dictators for 40 years, have built the world’s 13th largest economy and Asia’s most vibrant democracy.

Historically squeezed between its two giant neighbors, China and Japan, South Korea had long been perceived as an underdog with a fuzzy cultural identity. In Asia, however, Japan’s leaders are not waiting for the Seoul summit to take a closer look at South Korea. South Korea was formerly a Japanese colony (1910-1945), and the natives were treated like an inferior race. Today, South Korean’s economy has been growing annually by 5% on average for ten years, whereas Japan grew by 0.42% per year during the same period.

One could argue that South Korea is not yet a mature economy and is only catching up with a more advanced Japan. This was the case in the 1970’s, but no more. Whereas China’s growth is fueled by low-cost labor as millions of peasants enter the industrial economy, this is not the South Korean recipe for success, which has been driven by private entrepreneurship, innovation, and quality products: Samsung and Hyundai, not cheap wages, are South Korea’s growth engines.

Another key to South Korea’s success story is the well-balanced relationship between stable governments and the private sector. This was clearly demonstrated late last year when a South Korean consortium won a contract to build four nuclear reactors in the United Arab Emirates late last year, beating out the French.

The Japanese knew how to coordinate state and private-sector goals in the 1970’s, but then lost their way. “We should now emulate the South Koreans,” says Eisuke Sakakibara, a leading Japanese economist, who was one of the architects of the Japanese “miracle” of the 1980’s. Japanese in search of a miracle now travel to Seoul.

“In Japan, 1990 to 2000 was called the ‘lost decade,’” says the free-market economist Fumio Hayashi. Now Japan is completing its second lost decade. Hayashi and Sakakibara – indeed, most Japanese economists – more or less agree on the fundamental reason for such spectacular stagnation: the Japanese have stopped working hard. Fewer hours worked, longer vacations, and a declining population (since 2005) have, predictably, undermined Japanese growth. To turn this situation around, says Sakakibara, “the Japanese should work more, have more children, and allow immigration.” But the incentives to make any of this happen are just not there.

The Japanese still live comfortably, better by one-third than the South Koreans, thanks to their past investments. Japanese companies abroad remain profitable and Japan is still the global leader in high-tech niches like electronics or carbon fibers. For example, Apple’s iPhone and Boeing’s latest airplane rely heavily on Japanese-patented innovations. These comparative advantages may keep Japan above water for a while, but only until China or South Korea catch up.

One would thus expect Japan to be anxiety-ridden, but it is not. True, new forms of poverty and unemployment are rising, but they remain well hidden behind family solidarity or corporate customs. Companies reduce their superfluous employees’ annual bonuses, but do not get rid of them. Young Japanese tend not to work before their 30’s, and married women stay at home.

Political parties that rely on an aging constituency are not tempted to call for change.  The sort of shaky short-term political coalitions that rule Japan nowadays prefer to buy time through so-called public stimulus, or to preserve inefficient companies with subsidies. Twenty years of such shortsighted policies, whatever the party in power, have fueled government debt, hindering private investment.

More strikingly, stagnation has found its promoters in Japan itself. A leading public intellectual Naoki Inose, who is also Tokyo’s vice governor, has declared that “the era of growth is over.” When Japan was threatened by Western imperialism, he says, the country had to open up (in 1868) and modernize. This process has been completed. Japan is now ready to reconnect with its own tradition of social harmony and zero growth.

Referring to the 1600-1868 period, Inose calls this future the New Edo era: “a smaller population will enjoy the sufficient wealth that has been accumulated, and, from now on, it will invest its creativity in refining the culture.” The first Edo collapsed when the United States Navy opened up the Japanese market with the arrival of Commodore Perry’s “black ships” in 1853. Will the second Edo be able to resist Chinese ambitions? “The New Edo era needs a strong Japanese army,” admits Inose.

This second Edo era may sound like a poetic utopia, but it has some influence: Sakakibara observes that Japanese students do not study abroad anymore, and that “nobody learns English.” At a time when South Koreans are becoming more globalized, learning English, and welcoming a growing number of immigrants, Japan is entering a “de-globalization process.”

That is a worrying trend, and not only for Japan: South Korea can hardly stand alone as the lone Asian democracy. If the Japanese do not wake up from their Edo dream, Asia might very well become a Chinese empire.

Will this be debated at the G-20? Not openly, but certainly in the corridors.

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