Evaluation of the Degree of Attainment of the Government and Ruling Party Manifesto

1.Slow Progress on Structural Reform

The pace of progress on structural reform has been slow. In the three major areas of reform where progress can be seen - (i) transfer from public sector to private sector, (ii) transfer from central government to local government and (iii) ensuring a national lifestyle offering peace of mind - progress is as follows:

(1) In the reform of special corporations, most of the progress achieved has been the reorganization of corporations as independent administrative institutions, the benefits of which have been limited. The attempts to reform the Japan Highway Public Corporation have failed to slow the building of new roads.

(2) With regard to the sanmi-ittai kaikaku, the argument is that, under the present difficult fiscal conditions, central and local government should share the pain, and some even take the view that the power to issue government bonds should be transferred to local government. With regard to the "special zones for structural reform", it is argued that hasty reviews and exceptions made to allow for social constraints risk leaving severe problems for the future.

(3) With regard to pensions reform, it is argued that, if the sustainability of the system is to be ensured, it must be reviewed promptly to reflect changing conditions. Some take the view that only this will secure public confidence in the pension system.

The confusion in the debate on the reform process today is partly due to the fact that the reforms have now reached a stage at which individual and specific problems are coming onto the chopping board and the focus has shifted to conditions for the application of systems and technical issues. However, given that, overall, the debate today is still concerned with the pros and cons of reform, it cannot be denied that the problem is partly due to the fact that the language of the manifesto is too inclusive and lacking in concreteness, with the result that it allows conflicting interpretations. Moreover, an important cause of confusion is that the government has failed to secure an adequate consensus on the meaning and purpose of structural reform.

2.The Purpose of Structural Reform

So what, in the first place, is the meaning and purpose of structural reform? To summarize the experience of the major Western economies, structural reform is a long-term, ongoing initiative, centering on conversion from the kind of "big government" that developed during the postwar period of rapid economic growth to "small government", which is better suited to an age of slower economic growth, with a particular focus on the downsizing of central government.

(1) The privatization of state-owned corporations is a movement that began in the United Kingdom in 1980. The movement spread to France in 1986 and, in Germany, took off in earnest in the 1990s. The key elements of fiscal and administrative reform in the United Kingdom are conversion to agencies, market testing, PFIs and PPPs. France, the only other developed nation originally operating a system comparable to Japan's fiscal investment and loans program (FILP), launched, in 1986, an exhaustive program of rationalization and downsizing of institutions at the exit stage of the system and is now considering a similar review of institutions at the entry stage.

(2) Devolution started in France in 1981and got under way in the United Kingdom, too, in 1997. Its aim is to regenerate and revive local economies. The arguments for and against devolution have focused on the pros and cons of transferring powers and sources of funding. The French constitution of states explicitly that the transfer of powers and funding measures must go hand in hand.

(3) Pensions reform began in the in the United Kingdom in the 1980s, spread through the whole of Europe in the 1990s, and in 1999 reached Sweden. Each country has set limits on the role of the public pension system, reduced the fiscal burden and lightened the burden on the corporate sector with a view to boosting employment and stimulating economic regeneration.

3.The Motivation for Structural Reform in Western Europe

The motivation for structural reform in Western Europe was severe economic stagnation. In the 1970s and 1980s, in addition to the two oil crises, Japan and Germany were achieving spectacular economic growth and having fallen behind the competition in terms of product development, Western European countries started to face the problem of industrial hollowing-out. In the early 1990s, the end of the Cold War led to the rapid economic emergence of China and the countries of Eastern Europe, with the result that the pace of economic growth slowed still further. In other words, structural reform among the countries of Western Europe was aimed at recovering and enhancing competitiveness through the revival, generation and promotion of private-sector activity.

4.Issues for the Future

Since 2001, Japan's unemployment rate has risen to around 5%, the level at which the United Kingdom and France began to reform. Although, at a macro level, there are signs that Japan is now emerging from the worst of the crisis, competition in the corporate sector is still fierce and the unemployment rate remains high. Looking to the future, (i) China and Eastern Europe are making spectacular gains even in the high added value sector so that the competition is likely to intensify still further, and (ii) international competition on a systemic basis is also likely to intensify as governments step up their drive to reduce the public burden (taxation, social security, etc.), and deregulate. Moreover, given that Japan is expected to see birthrate decline and population aging continue in the medium term at a pace unmatched in any other country, there is little time to spare, and it is vital that Japan should pursue reform at a faster pace and on a larger scale than has been the case in other countries. The three points vital for the success of the reform process are as follows:

(i) Reconfirm the purpose and necessity of reform and time limits on reform This would put a stop to the sterile arguments that abound at present and allow Japan to focus on the pursuit of reform. Moreover, given the hopeful signs on the economic front, this is also vital if the tendency to put off painful decisions is to be avoided and economic growth is to boost Japan's ability to reform.

(ii) Set priorities and designate role models Simply reconfirming the purpose of reforms and the time limits on reforms is not enough to ensure their success. By steadily accumulating successes and ensuring that the merits of reform are felt, it will be possible to focus the efforts of the nation and boost the motive force for reform. To this end, the government should establish priorities and set about clearing them, one by one. Moreover, it is important that the government should indicate specific examples of success and increase public support for reform. In this light, it is clear that "the special zones for structural reform" are an ideal example of successful projects.

(iii) Draw up a plan for the promotion of reform The government should clearly set out individual targets and milestones of reform, reform methodology, and sources of funding for reform, identify the organization(s) responsible for the promotion of reform, and indicate the merits and benefits of reform in specific terms. Besides enhancing public awareness and understanding and boosting the ability to pursue reform, this will allow checks during and after the process of reform, and transfer expertise and know-how.

The manifesto is potentially a powerful tool for the development of democratic government and for the promotion of structural reform. However, to be effective, it must at the very least include the above 3 points. In this light, it is clear that the battle to establish a manifesto-driven style of government in Japan has only just begun. Further progress is needed.

For more information on the content of this report, please contact
Hidehiko Fujii
Economics Department

Tel: 03-3288-4615
E-mail：fujii@rsc.jri.co.jp

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