Abenomics: More politics than economics

In Tokyo, newly-installed Prime Minister Shinzo Abe has unveiled a massive, multi-billion dollar stimulus package, ostensibly to get the static Japanese economy moving. The announcement came after the Prime Minister, in an obvious PR blitz, formed an “economic revitalization council” composed not only of Cabinet members but experts from the academe and the private sector, and called for greater monetary intervention to devalue the Yen.

If these are all designed to shed the Prime Minister’s image as a security hawk out of touch with important domestic concerns– an image that helped ruin his first administration from 2006 to 2007– to a premier who prioritizes the economy, then they’re probably working. Many in Tokyo are now saying that the new administration is a lot better than the one it replaced, simply because it is seen to be doing something. The media has even come up with a nickname for the Prime Minister’s economic policy: Abenomics.

The claim, of course, is that Abenomics could potentially resuscitate Japan’s economy the way Reaganomics did in America in the late 1980s, Thaksinomics in Thailand in the early 2000s, and, more recently, Aquinomics in the steadily-rising Philippines. Experts appear to be divided on whether this claim is valid or not.

Prime Minister Abe’s stimulus package adheres to the classic Keynesian principle of pump-priming the economy through aggressive government spending in order to encourage greater consumption and investments. In theory, this is an effective way to reverse economic contractions. The flip side, of course, is that massive state expenditures would result in the accumulation of more debt to cover the resulting budget deficit. For it to be successful, therefore, the spending spree must stimulate the economy enough for it to yield returns that would offset the ballooning debt.

What many in Japan don’t realize is that this same principle also served as a premise of the economic policies outlined by the Democratic Party of Japan (DPJ) when it first came to power in 2009– the DPJ was of course ousted, I believe unfairly, late last year for failing to solve the economic malaise that for the most part was a result of decades of mismanagement by the Liberal Democratic Party (LDP) regime. However, the difference between the two major parties’ policies is that the LDP prefers pump-priming the economy by spending on infrastructure and aiding big businesses, hoping that these would create jobs and generate economic velocity; while the DPJ prefers giving dole-outs directly to the people, like monthly allowances for children, free high school tuition, and free expressway tolls, in order to encourage spending and stimulate the economy from the grassroots up, and perhaps even encourage families to produce more children.

While the Democrats’ policies were generally dismissed in Japan as populist and irresponsible, they actually resembled Thaksinomics, which boosted Thailand’s economy for the first time after the 1997 Asian financial crisis. Prime Minister Thaksin Shinawatra’s economic policy of giving dole-outs to the rural poor in Thailand’s Issan areas resulted in an improved social safety net, which encouraged rural households to save less and spend more, which in turn stimulated the country’s manufacturing, services, and export sectors. Thaksinomics, in its various forms, was later on emulated by countries like India, China, the Philippines, and Indonesia. As for Japan, the DPJ wasn’t able to fully implement its populist policies since its governments were torpedoed by the elite bureaucracy, which appears to work in tandem with big businesses and its traditional partner, the LDP. Eventually, internal strife in the party resulted in the abandonment of its populist policies, leading to the defection of erstwhile party boss Ichiro Ozawa, the architect of DPJ populism, and his minions.

The focus of Abenomics’ stimulus package, meanwhile, seems to combine classic LDP strategy with Prime Minister Abe’s political ideology. On one hand, it calls for more construction of roads, tunnels, and bridges; and has more allocations for state subsidy for corporate innovation than for the speedy reconstruction of the earthquake- and tsunami-stricken areas in Tohoku. On the other hand, it allocates ¥3 billion for improving nuclear reactor technology, which betrays the Prime Minister’s indifference to widespread public clamor for the country to re-examine the viability of nuclear energy in light of the Fukushima nuclear disaster; and ¥180.5 billion for purchases of various military hardware like PAC-3 surface-to-air missiles, which has nothing to do with stimulating a stagnant economy.

Perhaps the most disquieting feature of Abenomics is the dramatic increase in government spending on infrastructure, which is to be funded through state-issued construction bonds. In other words, the Abe government wants Japan, whose debt is already double the size of its gross domestic product (GDP), to borrow more so it can build more roads and bridges. Considering that Japan is already unmatched in terms of the amount of concrete it’s covered with, this approach is bewildering.

To be sure, there are urgent areas of development. Japan’s ageing infrastructure, which mostly dates back to the 1960s, needs maintenance and repair. That’s the lesson of the unfortunate collapse of the Sasago Tunnel in Yamanashi that killed nine people late last year. Similarly, the reconstruction of Tohoku requires billions of dollars. Yet, as the Japan Times said in its editorial, “because the Abe administration decided on the total amount of the package first without initially selecting necessary projects, chances are high that money will be squandered on nonessential projects.”

Indeed, such “nonessential projects” have for many years characterized the LDP’s spending track. Through much of the party’s almost uninterrupted fifty-year reign, politicians have scrambled for pork barrel funds to construct huge white elephants throughout the country. These public works projects were at the heart of the feudalistic socio-political set-up in the countryside during the post-war years: They created the impression that LDP politicians were doing something for their districts, which in turn strengthened their Koenkai machineries and their respective dynasties, while keeping the construction firms, which fund the LDP, happy.

The highly inefficient Japanese construction industry, together with the agriculture industry and the rural post makers, served as the electoral backbone of the LDP in the post-war era, and was pampered by the party rather well indeed. In his 2009 paper entitled Insights From Japan’s Lost Decade, Prof. Michael Heng Siam-Heng of the East Asian Institute (EAI) in the National University of Singapore (NUS) identified this cronyism as one of the causes of current Japanese economic woes.

In fact, after the Japanese bubble, which caused the country’s Lost Decades, burst in the early 1990s, the LDP governments unveiled a series of similar stimulus packages that spent trillions of yen to further cover the entire country in concrete. These projects succeeded only in lifting the GDP by at most 0.5% and causing the ballooning of Japan’s debt to more than 200% of its GDP, which is way bigger than those of Greece and other troubled economies in the Eurozone. These dimal– some would say disastrous– results were not really surprising, considering that the jobs created by such a multi-billion dollar spending spree were limited to a single sector and were temporary in nature, and that the spending itself was never rationalized effectively.

Taking these into consideration, one can easily see that increased spending on mindless construction projects could once again worsen Japan’s fiscal position in the medium- and long-term. But for Prime Minister Abe and his party, it probably doesn’t matter; the priority is to lift the GDP and the employment rate in the short-term, which would be enough for the LDP to claim that Abenomics is yielding returns. Indeed, achieving temporary bullish economic figures, at all cost, is the motivating factor behind Abenomics.

At the end of the day, Abenomics is probably more of a political kabuki; a matter of form over substance. Short-term economic growth rates, however minimal, coupled with the projection of an image of an economy-centric Cabinet, however shallow, would help the LDP-led coalition win the Upper House election in July, allowing the party to consolidate its return to power.

That, in turn, would give Prime Minister Abe the leeway to pursue his fetish: Further revising World War II history and changing Japan’s pacifist constitution.

The emerging Philippine tiger: Asian or Celtic?

READER’S POST

During his recent visit to Manila, Canadian Prime Minister Stephen Harper echoed many economists in hailing the Philippines as the next Asian tiger. This is something Filipinos had also heard some fifteen years ago, when the world hailed the Philippines as the next Asian tiger in the mid-1990s. The problem, however, is that the anticipated rise of this new Asian tiger never took place, and it’s highly likely that it will also not take place this time around.

An Asian economic tiger is characterized by massive influx of foreign direct investment (FDI), an export-driven economy, and a phenomenal expansion of its manufacturing base. Export-driven economic policies and a solid manufacturing base were the hallmarks of prominent Asian tigers like South Korea and Taiwan; while next-wave tigers Thailand and Malaysia were boosted by massive FDI, followed by the expansion of their manufacturing bases and the re-orientation of their policies towards an export-driven economy.

During the term of President Fidel V. Ramos from 1992 to 1998, the Philippines tried to follow the Asian tiger model by making a powerful pitch to attract a bulk of FDIs that were then going into the Association of Southeast Asian Nations (ASEAN) region. The Ramos era was a time of political stability, economic liberalization, and a vibrant economic vision with a catchy name– Philippines 2000. Key industries were deregulated and de-monopolized, public enterprises were privatized, and economic zones and free ports, coupled with financial incentives like tax breaks, were set up to attract foreign investors. These brought about significant positive results. Electronics and semiconductors manufacturing sites mushroomed in Subic Bay Free Port and various economic zones in Laguna and Cavite, for instance. Yet all of these achievements failed to compare with what the rest of the major ASEAN economies achieved.

According to data from the United Nations Conference on Trade and Development (UNCTAD), from 1990 to 1994, the Philippines took merely $4.7 billion in FDIs, while Thailand and Indonesia got $9.9 billion and $8.6 billion, respectively. It was even worse in the 1995-1999 period, when the Philippines got a measly $7.2 billion, while formerly lackluster Vietnam cornered $9.3 billion and Thailand received more than double its previous at $22.9 billion. The same story reflects the data for 2011: The Philippines got a meager $1.73 billion, while Vietnam took in $10 billion and Indonesia raked in $19.3 billion.

This failure to attract a substantial amount of FDIs resulted in an insignificant manufacturing base and a dismal performance in terms of manufacturing-based exports. Ateneo de Manila University’s Dr. Edsel Beja, in an opinion piece that appeared on the Philippine Daily Inquirer, even pointed out that the Philippines has been experiencing de-industrialization. One can simply go around Subic Free Port to know how much Philippine manufacturing has reversed.

Instead, the narrative of economic growth of the Philippines during the past decade has been characterized by the increase in foreign exchange remittances from overseas Filipino workers (OFW) and the phenomenal boom of business process outsourcing (BPO) industry. Manufacturing and export-oriented industry played very little role in comparison. This paradigm of Philippine economic growth is contrary to the Asian tiger model.

Many observers, like the Asian Development Bank (ADB), continue to argue that the Philippines needs to develop its manufacturing industry in order to attain inclusive growth. Some even assert that the Philippines should not yet aspire to be a services-based economy, since its manufacturing sector has never fully matured in the first place. However, the continued reluctance of foreign investors to set up a manufacturing base in the Philippines tells us that growth through the Asian tiger model is no longer viable, unless an indigenous Filipino company courageously decides to set up one.

There is, however, an alternative path to economic “tigerhood” that emerged alongside the Asian tiger paradigm: Ireland’s Celtic tiger model. From 1990s to 2000s, Ireland achieved phenomenal economic growth that raised its profile from being among the weaker economies of Europe to being one of its richest.

Ireland’s growth was different the path taken by the Asian tigers. Aside from the usual financial incentives to entice foreign investors, Ireland used its comparative advantage as an English-speaking nation and as a relatively cheaper location in Europe to build a strong services-based economy. The Emerald Isle became the destination of knowledge-intensive businesses like information technology (IT), financial services and BPO. This turned the country into a knowledge-based economy.

Of course, one key difference is that, unlike the Philippines, Ireland did not have to deal with poverty on a massive scale. But Ireland’s growth path through the development of its knowledge-based services industries is similar to the current path that the Philippine economy is currently taking. The Philippine BPO industry is already transforming from a voice-based services sector to a knowledge-intensive service industry.

The Philippine BPO industry is still in its infancy, and it must pursue the development of more sophisticated knowledge-based services sector like those involving IT, financial services, and similar other industries. The Philippines has the best chance of cornering investments of these nature. The competition in this field is smaller, with only India as the sole viable competitor.

Manila’s economic growth policy should therefore make a significant shift towards building a knowledge-based economy. The Philippines produces hundreds of thousands of highly skilled graduates that can meet the demands of a Celtic tiger economy. Jobs in a knowledge-intensive service sector are significantly better-paying than those in the manufacturing sector, which means that a knowledge-based economy would create a sizable middle class with a high disposable income.

In the Celtic model, inclusive growth can be achieved when the knowledge-intensive service sector produces a multiplier effect that boosts allied sectors. The demand for office spaces, for example, would boost the real estate industry, while the proliferation of offices would result in an increase in demand for fast foods, convenience stores, retail outlets like malls and supermarkets, and building maintenance and security services, among others.

In so far as the traditional Asian tiger economic growth model is concerned, the Philippines has arguably lost its comparative advantage to the other major ASEAN economies. The country should therefore explore growth paths where it enjoys overwhelming advantage. Instead of aspiring to be an Asian tiger, perhaps the Philippines should aspire to be a Celtic one.

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How to revive Japan’s electronics industry

READER’S POST

In the 1980s and the 1990s, whenever a customer walks into an electronics store to buy a TV, his choices would almost always be either a Sony, a Sharp or a Panasonic. All were Japanese brands. But during the last decade, the story has become different. Korean brands like Samsung or LG, and even Chinese brands like TCL or Changhong, became the likely choices.

This change in consumer attitude is a result of aggressive efforts of Korean and Chinese manufacturers to challenge Japanese supremacy in the electronics market. For instance, when Samsung began massively selling LCD TVs in the mid 2000s, they offered them in much lower price than what Japanese brands would offer. But instead of matching the prices offered by Samsung, Japanese brands joined hands in camaraderie to keep their prices, perhaps thinking that, as the traditional dominant TV manufacturers, they have a solid market base. The result was devastating: Samsung took over that market base in just a couple of years.

The decline of Japanese electronics industry was historic. In 2011 alone,  Sony, Sharp and Panasonic registered a combined $20 billion losses. (Note: For the first half of 2012 alone, these three companies posted a combined losses of $12.5 billion -J) In contrast, Samsung made a historic profit of $15 billion. As a result, Sony, Sharp, and Panasonic let out waves of massive job cuts and plant closures throughout Japan and in countries where they operate. The gloomy reality is not confined in these three consumer electronics giants of Japan; the consumer electronics segments of such Japanese titans as Hitachi, Toshiba, NEC and Fujitsu have also been losing money for several years now.

It’s impossible not to miss the paradox: Japan’s electronics industry remains the world’s biggest and most technologically sophisticated, yet it’s also the fastest-shrinking industry of its kind in the world.

Yet, there are ways to revive the ailing titans. For instance, while Toshiba’s consumer electronics business is posting losses, its overall financial shape remains good. This is due to the company’s highly diversified business structure. It produces LCD TV, home appliances, medical devices, power plant turbines, railway equipment  elevators, semiconductors and nuclear reactors. This model insulated Toshiba from the threat of Korean and Chinese competition.

Another way out for Japanese electronics firms is to look for meaningful innovation. For instance, who would have thought that Apple, which almost went on the brink of collapse in the 1990’s, would rise to become the most important electronics-technology company today? Apple came back to the limelight when it revolutionized portable music players in early 2000’s by releasing the iPod, which evolved into the iPhone and the iPad. This innovative streak brought Apple back as a major player in the electronics-technology industry.

Sony itself has a rich history of innovation, creating the likes of Walkman and PlayStation. Innovations like these create new markets, which drive the growth of a company. Unfortunately, Sony’s creative side seems to be in a state of malaise; we haven’t seen any ground-breaking innovation from the company in the past few years.

Finally, perhaps Japan’s titans should give the home appliances and consumer electronics market up and find another niche. Samsung and Changhong can produce LCD TVs efficiently, but they are trailing their Japanese counterparts in terms of developing sophisticated high technologies. Japan, for instance, is a pioneer in the development and production of the Lithium-Ion battery, which is at the center of the quest to come up with durable batteries for electric cars. Perhaps focusing on these kinds of high technology production, on which Japan has an overwhelming comparative advantage, is the best way to revive Japan’s electronics industry.

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