(repost from the Huffington Post, Jan. 17, 2013)
By Luke Ho-Hyung Lee and Jess Parmer
When the Japanese economy prospered in the 1980s,
every country in the world was envious. But
when Japan's Great Recession hit in 1990 with collapses in land and stock
prices, people were surprised but immediately thought that it was just a
correction in the regular economic cycle, and that Japan would resolve it soon.
The Japanese government and experts worldwide have
tried to figure out the real cause
for over 20 years, but to no avail. Moreover, it seems the United States is
following a similar path: it doesn’t
look as if it was only Japan’s problem any longer but every advanced economy’s
problem. What was wrong with Japan’s
economy? Why didn’t the remedies work? Was
the real cause of Japan’s Great Recession the same as that of the current
world-wide economic crisis?
If this is so, why did Japan have it
much earlier than elsewhere?
To answer these
questions, let’s imagine a situation: It is today well known that diabetic disease
occurs either because the pancreas does not produce enough insulin, or because
cells do not respond to the insulin that is produced, an overall body function failure.
Was there a market function failure something like diabetic disease in
Japan’s economy? That is, weren’t there several failed
market functions, like a failing pancreas and failed cell functions?
I suggest you
carefully examine Japan’s exclusive, privately owned supply chain networks.
These worked very
well in the Industrial Age, with its limited number of products and services,
by protecting Japan’s domestic industries, just as a healthy pancreas or robust
body cells work well. However, the market
situation abruptly changed in the Modern information Age. The number of products and services has
increased explosively, and ways of doing business have become more complex.
Especially during the
1980s, Japan’s prosperous period, many Japanese companies developed new
products and services and at the same time created supply chain networks for higher
profit and greater efficiency. That is, though
more effectiveness-oriented activities (such as securing new customers) were
required in its modern information-based market following the 1980s, only
supply chain systems for efficiency-oriented activities developed and advanced
in Japan. So, its markets became much more
efficiency-driven just at the moment when large efficiencies became hard to
find. And tooling up these electronic
supply chains had cost a lot, while making lower prices and more jobs seem impossible,
even silly, goals.
Due to this changed
market environment, many Japanese companies off-shored or outsourced their
manufacturing to lower labor-cost countries, mostly to China, and adopted full
automation processes in their remaining domestic manufacturing. The disease was to be cured by making all
healthy customers go on a diet; easy money in the form of lower borrowing costs
was to make this palatable.
In this situation,
Japanese companies couldn’t expand their customer bases enough (or create
enough jobs) to keep consumer spending at the desired level. Profit maximization, rather than lower prices,
was the irresistible reward; customer bases refused to grow. That is, something like diabetic disease emerged
in Japan’s economy. Let’s call that
something the Efficiency Disease.
To keep the level of
consumer spending up, Japan’s government adopted a series of excessive
expansionary economic policies, and accordingly many abnormal phenomena were
created and accumulated in the market -- and finally, the asset bubble burst in
1990.
Then, what caused the
occurrence of the Efficiency Disease in Japan’s economy at that time? Wasn’t
it the failed function of Japan’s privately owned supply
chain networks? Clearly, they failed to effectively handle all
market requirements in Japan’s changed economic situation in the Modern
Information Age. They were no longer suitable
to Japan’s modern information-based market.
Nevertheless, strangely,
Japan has never tried to treat its Efficiency Disease, that is, to fix its
failed supply chain networks, over the last two decades of its Great Recession.
Many Japanese companies continue to develop
advanced electronic supply networks. It
seems Japan has simply tried to solve its economic problems without knowing
what was causing them, and has added to its problems with a series of
ineffective economic policies and stimuli.
Ultimately, Japan is
not an isolated case: without being
aware of the economic impacts, almost all Western countries, including the United
States, have also developed massive private supply chain networks in their
markets and have induced similar Efficiency Diseases in their economies. At a minimum, a lost decade of growth will
also be unavoidable in these countries.
Strangely, even if it was
possible with our advanced IT and networking capability, no open and public supply
chain system as an electronic infrastructure has been developed at all--not a
single one in the whole world! This is the
“tragic flaw” of the modern IT-based economy, and I strongly believe it is the
real cause of Japan’s Great Recession -- and the current
world-wide economic crisis as well.
Japan was like a rich
man with a lot of savings, but it has spent too much over the last 20 years. The
United States is still a reserve currency country, but its deficits pose a threat
as the national debt becomes a serious issue for its economy.
If this Great
Recession persists for the next decade, what will happen to the U.S.? The short answer: “Catastrophe!”
Then, what should we
do?
We should immediately
replace our outdated, closed, and private supply chains with a new open and
public electronic infrastructure that is better suited to modern IT-based
markets. I believe this is the most effective
way to treat the Efficiency Disease in our markets and save our economy.
To suffer through a Lost
Decade or to build effective economic revitalization – it depends on our
choice.
