Monday, September 05, 2005

Japan's 9/11

I am not suggesting anything like the tragedy that occured on 9-11-01 in the US is going to repeat in Japan on that day. However, something equally important is also going to happen in Japan that same day this year. I am talking about the parlimentary election that will be held on that day. Here, I try to provide a story about why events are unfolding this particular way. Comments are open.

In Mancur Olson's 1982 book "The Rise and Fall of Nations", he attributes the post war economic success of Japan to the devastation of intimate ties formed between various interest groups and the government.

Such ties tilt the playing field towards those who are connected to the government. Without such connection, the rest of the society suffers from all sorts of discriminatory policies. As a result, the cozy relationships between interest groups and government retard economic growth. WWII changes all this. Without the hinderance created by the tight connection between special interests and the government, Japanese economy recovers rapidly in the aftermath of the war.

However, with social and political stability in Japan soon restored after the war, interest groups reappear and ties are once again formed between them and the government. A symbol of this tight link between the interest groups and the government is the almost uninterrupted rule of the LDP in Japan for the past five decades since the war. Signs of weaknesses begin to surface in the Japanese economy in the late 1980s.

Japan has to reform to survive under such circumstances. But reform will not be easy to push through as long as the cozy relationships between the LDP and its supporting interest groups are intact. The burst of the property bubble in the early 1990s together with the gradual accumulation of huge governmental debt that simply cannot be maintained indefinitely into the future thus act sort of like what WWII does to the tight relationships between the interest groups and the LDP old guards. These factors generate momentum for reform.

When the attempt to privatize postal service failed earlier last month, prime minister Junichiro Koizumi immediately called for a snap election of the parliament. This election, held on the eleventh of this month, will definitely be a watershed in Japanese history. For if Olson is right, and Koizumi's faction within LDP wins, that will mean ties between the LDP old guards and the special interests (like the construction companies, farmers, and postal workers) are permanently gone. And Japanese economy's rise from the ashes will only be a matter of time.

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