By JOHN MARTIN
The abrupt change in the economic fortunes of Japan that took place in the 1990s was the context for the 2002 Mansfield American-Pacific Lecture at the Library of Congress on Oct. 23, which was delivered by Masahiko Aoki, Henri and Tomoye Takahashi Professor of Japanese Studies in the Department of Economics at Stanford University.
Japan's economic reversal, the lack of measurable recovery (Japan's GDP is expected to fall 1 percent this year), and the slow pace of what many consider to be urgently needed structural reforms, have prompted some politicians and economists to speak ruefully of a "lost decade" when evaluating the Japanese economy.
Aoki challenged this view in his lecture, "Whither Japanese Corporate Governance: Symptoms of Institutional Change." He made his remarks as the second speaker in this year's Mansfield American-Pacific Lecture series. A companion lecture, "Corporate Governance and the Democratization of Finance," was given by author and columnist James K. Glassman in Tokyo on April 2.
Despite the problems that Japan has experienced since the 1990s, Aoki detects signs of change and evolution underway in Japan's corporate culture and business environment. "Japan is now at a very important turning point of institutional evolution in general, and one of corporate governance in particular," he said.
He takes issue, further, with those critics who view the past decade as one of little change and wasted opportunity. "I have come to feel at odds with the characterization that Japan's immediate past was a lost decade. I have become more and more convinced that Japan has actually entered an era of important institutional transformation, although the process is very slow … and not necessarily explicit or clearly visible."
Whether one concludes that Japan's economy is undergoing profound institutional transformation, or that reforms are again failing in Japan, Aoki explained, depends on how one views institutions.
"The conventional view seems to regard institutions as laws, regulations, and explicit rules. In contrast, I regard institutions as more than laws. For example, there are laws that are neither observed nor enforced. If people know that they can circumvent a drug regulation by paying a bribe to the law enforcement officer and such practices are widespread, it seems more appropriate for the purpose of public policy analysis to regard the bribery, rather than the unenforceable law, as an institution."
Aoki proposed a normative view of institutions, one that encompasses more than laws or regulations. "Institutions," he said, "are the shared beliefs in the ways the game is being played in society." This tacit understanding of the "rules of the game," further, cannot be changed quickly through legislation or other positive means. "In order for real change to occur, there must emerge a critical mass of people who start to question the old and accepted ways and start to competitively experiment with a new way."
In his lecture, Aoki examined three staples of the old economy to support his belief that Japanese institutions had entered a transitional phase: the expectation of lifetime employment; the demise of the main bank system; and the decline of one-party rule. Among the younger generation, Aoki said, the expectation of working for a single employer for one's entire lifetime is no longer taken for granted. And Japan's main bank, even if it overcomes the current financial crisis, Aoki predicts, will not regain the prominence it enjoyed during the boom. Nor, as in the past, will the main bank be expected to rescue financially distressed firms.
Finally, the erosion of one-party political rule signals a structural realignment of what Aoki termed "the three-way collusion" between interest groups, politicians and bureaucrats that previously controlled Japan's political economy.
Of course, these incipient changes are confronted by the traditional emphasis placed on achieving equality of outcomes in the Japanese-style "shared firm," and the continuing temptation to seek big government solutions to the bad debt problems of Japanese banks. The tension between the old and the new, Aoki noted, is itself a reflection of institutional change.
"The coexistence of the emergent phenomena that may gradually transform the organizational architecture with the persistent inertial forces, may be thought of as a typical characteristic of the juncture point of institutional evolution," he concluded.
In addition to his duties as professor at Stanford University, Aoki is currently the president and chief research officer of the Research Institute of Economy, Trade and Industry (RIETI) in Japan. His many books and publications include "Towards a Comparative Institutional Analysis" (MIT Press, 2001) and "Information, Incentives, and Bargaining in the Japanese Economy" (Cambridge University Press, 1988).
The Mansfield Center for Pacific Affairs is a public policy organization committed to promoting understanding and cooperation between the United States and Asia. The center and the lecture series are named in honor of the late Mike Mansfield, former U.S. ambassador to Japan, and his wife, Maureen.
John Martin is a copyright examiner in the U.S. Copyright Office.