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Now is the time for Japan to build Shenzhen of its ownChina’s neighbour has lost sight of the policy innovation and vibrancy that once propelled itWilliam Pesek07 January 2012If you want to silence a room filled with Japanese politicians, suggest they learn from China.The conventional wisdom favours the flip side of this dynamic: China should be studying Japan’s playbook. Japan, after all, is an example of both what China needs to do (create a vibrant domestic economy and high living standards) and what it must not (slide into bad-loan crises and deflation).Yet I have one word for Japanese policy makers who dismiss the idea they should heed China’s example: Shenzhen.For two decades now, economists have been urging Tokyo to create a special-enterprise zone or two. The idea is to have a laboratory where officials can try drastic alternatives to Japan’s rigid, bureaucratic and change-resistant model - a controlled environment in which the nationwide laws and norms that thwart economic energy could be repealed.Southern China features such a place. In 1980, Deng Xiaoping started China’s first special-economic zone in a coastal village that was nothing to look at. Today, Shenzhen is a teeming collage of skyscrapers, thriving industrial parks, 10 million people, one of the world’s busiest ports, and some of the biggest manufacturing and outsourcing industries anywhere.It is the centre of Chinese experimentation. There, officials can test what works and what doesn’t: which corporate tax rates offer the best balance of attracting foreign investment while filling government coffers in Beijing, which labour standards make the most sense, which corporate-governance standards are most advantageous, which immigration procedures are optimal, which regulations stay or go.China’s experience inspired nations as disparate as Angola, Bangladesh, Brazil, Iran, Kazakhstan, the Philippines, Poland, Russia and even North Korea to erect special economic regions. India, too. You can argue that India’s software industry is such an entity - one immune enough from New Delhi’s seeming determination to stymie the growth and jobs India so badly needs.Why not Japan? Junichiro Koizumi, prime minister from 2001 to 2006, broached the issue, but his vision was never effectively implemented. Of all the growth-revitalising strategies employed by Tokyo, the ones most favoured are debt and concrete - debt to finance white-elephant public-works projects, concrete to build them. Japan is too much about saving unproductive jobs, not creating innovative new ones.What Japan never tried is a dose of supply-side economics.No, this column is not advocating a sudden Japanese embrace of the ideologies of Ayn Rand and Ronald Reagan. Yet Japan has got as far it can with financial socialism. Even after more than two decades of start-and-stop growth, its focus is on preserving its way of life, not adjusting to the demands of globalisation and Chinese competition. The big debates in Tokyo are over raising taxes and joining free-trade deals.Some fresh thinking is in order, and the country’s 2011 earthquake and tsunami provided a perfect opportunity. There are many cities Japan could designate as policy labs: Fukuoka, Kobe, Nagasaki, Sapporo, Yokohama. The devastated north-eastern Tohoku region is a better choice.“Tohoku can be to Japan what Shenzhen was to China,” says Jeff Kingston, head of the Asian studies programme at Temple University’s Tokyo campus.Kingston’s favoured regime: allow large-scale deregulation, cut red tape that frustrates businesses, offer 10-year tax holidays for new investments and incentives for employers generating full-time jobs, apply a corporate tax rate in the vicinity of 11 per cent, suspend petrol taxes, subsidise electricity, eliminate sales taxes, and structure a variety of enticements to attract capital into renewable-energy research and production.
Martin Schulz, a senior economist at the Fujitsu Research Institute in Tokyo, would take things a step further and simply make Tohoku corporate-tax free. That, he argues, would get young people and families into a region that was dying demographically even before the earth shook and the waters rose.All this would get Japan closer to passing the Malcolm Gladwell test. Days after the earthquake that triggered the worst nuclear crisis since Chernobyl, the author of The Tipping Point said: “The only time you can get things done is in moments of genuine crisis and catastrophes - there’s a small opportunity to do an extraordinary amount. Japan, a country whose politics were in deadlock and sluggish for many, many years, I hope they can seize this moment.”Gladwell’s view that a crisis is a terrible thing to waste arguably dovetails with the so-called shock doctrine advocated decades earlier by Nobel laureate Milton Friedman. I have not spoken with a single Japanese who believes the government achieved much of anything in 2011, never mind turning disaster into an opportunity. Japan must do better in 2012.China has much to learn from Japan. From the ashes of the second world war, it created a safe, prosperous, universally literate, environmentally stable and reasonably egalitarian nation. Yet Japan has long since lost the vibrancy and policy innovation that once propelled it.Prime Minister Yoshihiko Noda’s first act of 2012 should be to create a Japanese Shenzhen.It would be a much-needed recognition that if Japan cannot beat China, it can at least learn a thing or two from it.William Pesek is a Bloomberg columnist
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