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News Release

Japan's Urgent Need for a Federal System of Government
- Promoting the revitalization of local economies and society through true independence -

October 3, 2007


Japan has already seen a number of reforms of local governance, including the Comprehensive Decentralization Law and the merging of municipalities. However, the revitalization that was the objective of these reforms has not been achieved. If anything, economic stagnation has worsened and many communities are in danger of collapse. Some observers believe that local economic and social stagnation and the opening up of income gaps are inevitable in an age of global competition. If this is true, other developed nations should be facing the same problems and have come up with a remedy. Meanwhile, in Japan, the debate on local governance is intensifying in the search for a solution to regional stagnation. How should Japan address the problems of local governance? Given this perception of the issues at stake, this report begins by outlining Japan's "regions vs. cities" problem. It goes on to examine recent developments in other developed nations and concludes with a summary of the issues that Japan needs to address for the future.

In the provinces, the stagnation is worsening. The employment situation is going against the general trend of economic recovery with a fall in the number of people in work, and, owing largely to migration to the cities, population decline is accelerating from year to year. In the cities, the productive-age population, which has until now been growing, is expected to start declining. Moreover, although population migration is making cities the center of employment growth, income levels continue to fall. There is a considerable risk that a growth scenario that relies on cities will fail.

While other major developed nations show some similarities, overall, none appear to share Japan's problems.
A survey of the trend of incomes in the 20 major economies of the OECD in recent years, in terms of per capita GDP on a purchasing power parity basis, reveals increasing disparity. Japan is third from the bottom although many other countries have achieved substantial growth. The argument that globalization has led to increased pressure for a fall in incomes lacks force.
A survey of the trends of regional impoverishment and urbanization reveals that, in the second half of the 20th century, Japan is the only country to have experienced a one-way urbanization of its population. In other countries, the share of population accounted for by the major cities has fallen, while population in the regions has risen. The view that the problems of regional impoverishment, population decline and the opening up of income gaps are due to globalization would also appear to be unfounded.
The problem of birthrate decline also differs considerably from one country to another. In Japan, the downward trend of the fertility rate shows no sign of slowing but, elsewhere in general, countries with a traditionally low fertility rate have seen a rise, while countries with a relatively high fertility rate have maintained a high rate. Vigorous economic development and income growth, in the regions as well as major cities, have been contributing factors.

The achievements of other countries in this area are due to a range of initiatives implemented over many years, of which the most important are as follows:
The first is labor market reform. In the past, employment measures tended to be geared to helping the weaker members of society, e.g. the payment of unemployment benefit. In recent years, however, they have been the keystone of growth strategies. Measures designed to foster the supply the human resources needed for the creation of higher value-added industries are being pursued with vigor.
The second is a strategy of differentiation, aimed at drawing out the unique strengths of each region. An essential precondition for the creation of higher value-added industries and employment is the freedom to pursue a wide range of new strategies.
The third is a further review of the public sector. With the exception of "safety-net" areas, Japan has a bigger government than not only Anglo-Saxon countries including the United States and the United Kingdom but also many countries of continental Europe including Germany and France.

The most important issue that Japan must address if it is to achieve economic regeneration is the dismantling of its system of centralized government authority. First, a comparison of the relationship between per capita GDP on a purchasing power parity basis and total population reveals that, in recent years, per capita GDP has tended to be greater in countries with a small population than in countries with a large population. Although the United States has a total population of the order of 300 million, the individual State governments have extensive powers. All the individual States but California have a population of less than 20 million, about the size of one of the smaller European countries. How is it that small countries with populations of around 10 million have so great a potential for growth? An examination of past conditions with this question in mind suggests that, in the past, size of domestic market was the key to growth. However, globalization has eased the restrictions presented by national borders and, today, the single most important factor determining a country's growth potential is its ability to pursue unique employment and industrial policies closely tailored to local needs, with vigor. Yet this is not to say that smaller is always better. Countries that to their own way may find that public services become inefficient, as is the case for Luxembourg, which outsources its higher education to other countries.

In summary, it may be possible to hypothesize that, in today's world, a population of 10 million is the ideal size, representing a point of equilibrium between the merits and demerits of larger or smaller populations. In this light it would appear that, if Japan is to regain its social and economic vitality, especially at a regional level, it must, as a matter of urgency, dismantle its the current system of centralized government authority and abandon strategies aimed at achieving a uniform national standard in favor of finely tuned individual regional strategies.

Japan's Comprehensive Decentralization Law came into force in April 2000 and considerable progress has been made with initiatives at the basic level of municipal government, as evidenced by the Heisei Dai Gappei (the great wave of municipal mergers since the beginning of the Heisei era). However, the impoverishment of Japan's regions suggests that this has not been enough.
So what has been lacking from the initiatives undertaken to date? From this perspective, the example of France, which was once a leading example of centralized authority but achieved economic regeneration following the implementation of decentralizing reforms in 1982, may be instructive. The essence of these reforms was to dismantle the vertically integrated central-prefectural-municipal structure of government and greatly increase regional autonomy. The scheme gives the regions the freedom to pursue their own strategies without interference by central government. From this perspective, it would appear that the key to success is to adopt a federal system of local governance that does away with vertically integrated relationship between central and regional government rather than a system in which there is still a risk, however small, that central government will be able to interfere in the affairs of regional governments.

A federal system fully transfers sources of tax revenue to the regions. However, in Japan, there is the problem of the two taxes on business enterprises. The example of Germany, a federal republic, is instructive. Germany has established an overall system for the adjustment of sources of tax revenue that combines the vertical adjustments between central and regional governments traditionally operated in Japan, with a system of horizontal adjustments between State governments. Moreover, in many countries, corporation tax is a national tax in the first place, and the tax is predominantly treated as a vertically distributed source of revenue.

In recent years, Europe and the United States have seen a growing movement to implement further administrative reforms using information technology. The United Kingdom leads the way. Substantial cost savings have already achieved through government institutions merging services, where these are similar or duplicated, to create "shared services". The British government appears intent on pursuing further reforms that will change the very way in which the nation is organized, doing away with the divisions between central and regional governments and between the public and private sectors.

For more information on the content of this report, please contact Hidehiko Fujii, the Japan Research Institute, Limited.

Tel: 03-3288-4615

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