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Opinion

The Great East Japan Earthquake

Socialist Policies Don't Work
- Let Market Forces Work in Coping with the Crisis -

Mitsuru Taniuchi
Professor, Faculty of Commerce, Waseda University

Japan was stricken by a triple crisis of mega earthquakes, monster tsunami, and nuclear meltdown at Fukushima. In order to rebuild Japan's economy from this unprecedented crisis, the government has an enormous role to play in helping victims and rebuilding infrastructure in the afflicted areas. It is wrong, however, to think that government interventions are more important than market forces in times of crisis. Embracing socialist policies which stifle the functioning of markets would only prove disappointing, drawing retaliation from the economy behaving like a living creature. What is required now more than ever is to adopt policies that enable the market mechanism to do its job.

Higher electricity rates mitigate power shortages

Power shortages triggered by the disaster have been exerting immense impacts on Japan's economy. The government has asked all businesses and households residing in the service areas of Tokyo Electric Power (TEPCO) and Tohoku Electric Power to cut power consumption by 15% from last year's levels. Furthermore, the government has ordered, by law, large users such as big corporations to do so, and non-compliance will be punished with fines. Meanwhile, the government allows no electricity rate hikes, believing that it is unfair to pass on the costs to be borne by the culpable TEPCO to power users. TEPCO had operated the crippled Fukushima plants.

Individual industries and firms in the economy do have vastly different needs for power usage, so that uniform mandatory power saving would create significant inefficiency. The government gives some consideration to this problem, and exempts certain sectors such as hospitals, hotels, and airport facilities from the uniform obligations, allowing power saving of less than 15%. Because the circumstances of various industries and enterprises range widely indeed, it would never work well for the government to pick and choose individual sectors, telling one sector to save x%, and tell another to save y% during daytime. Socialist countries such as the former Soviet Union adopted a centrally-planned economy in which the government allocated important materials in a "planned" manner. The collapse of the Soviet Union is a testament to the view that socialist policies ignoring the power of markets do not work.

Shortage in power supply means that the current electricity rates are lower than required to align demand with supply. Higher rates would allow individual firms, self-employed workers, and households to choose how and how much the use of power is saved according to their own needs.

First, introduce a peak-load pricing, that is, charge higher rates for peak times and lower rates for off-peak times. This differential pricing would curb the demand for power at peak times, and boost that at off-peak times. In particular, it is necessary to raise the daytime rates on weekdays and set the summer and winter rates higher than the spring and fall rates. For this summer, however, a mandatory power-saving order is necessary to complement higher pricing in addressing expected acute shortages in power.

Second, raise the overall level of electricity rates. Higher rates would be justified because the current rate levels arguably do not reflect high risks of nuclear power generation. In addition, the government's approach to reducing usage only by requests and orders without raising electricity rates brings about significant falls in TEPCO's sales, and yields little funds to pay for indemnity for affected residents and the huge costs of shutting down the damaged plants. Higher rates encourage new entries into power production business, development of renewable energy, and technological innovation for power saving, which will in turn lead to lowering rates and revitalizing Japan's economy in the future.

Don't dump all the responsibilities on TEPCO

The government's handling of the issues concerning TEPCO and nuclear-damage compensation also exhibits its disregard for market. Well-functioning markets require various institutions and arrangements on which economic transactions are based. In other words, players in markets cannot perform a game without rules of the game in place. An important role of the government is to set out and enforce rules for market participants to abide by. Markets cannot function well if rules are unclear, or if rules are bended along the way.

The Act on Compensation for Nuclear Damage stipulates that nuclear operators shall be exempt from indemnity liabilities "in the case where the damage is caused by a grave natural disaster of an exceptional character or by an insurrection." If indeed the horrendous disaster this time does not fall under this provision, one wonders what disaster would make it applicable. The government is now proposing a scheme of compensation for the nuclear damage, but it remains unclear how much, if any, the government will cough up in the end. To be sure, TEPCO must slash costs and sell its assets to pay the costs arising from the accident. If, however, the government dumps all the onerous financial burdens on TEPCO (and partly on other power companies), TEPCO would be forced to keep squeezing costs on all fronts, yet yielding no profits for a very protracted period. Then, TEPCO would no longer be a viable private enterprise. TEPCO would not be able to recruit first-rate students any longer, and some of most promising workers would leave the company while the morale of the workforce would go down. The danger is that TEPCO would be too weakened to fulfill its pivotal role as the only provider of power for the most important regions in this country. The government must assume its own financial obligations, and place a cap on TEPCO's overall financial burdens.

Meanwhile, Mr. Yukio Edano, Chief Cabinet Secretary, recently requested banks to forgive the debts owed by TEPCO. In the event that TEPCO files for bankruptcy, its debts would be restructured. Otherwise, lenders are entitled to full repayments by TEPCO. A market economy would not work if economic transactions between private parties are swayed by the government's requests lacking any legal grounds.

Revive agriculture and fishery by cutting red tapes on private businesses

As Japan ages in an unprecedented pace, boosting long-term growth has become a top policy priority, in order for the county to support the ever-growing elderly population. Now, promoting growth takes on added urgency, because the enormous restoration costs are to be met by future tax revenues. In June last year, the government set out an ambitious New Growth Strategy as a Cabinet decision, which is the highest form in government decision-making, but disappointingly its implementation has been put off.

Deregulation is the most important pro-growth policy. While slashing unnecessary regulations are needed in all sectors, deregulation can play a major role in reviving agriculture in the stricken Tohoku region. Japan's agriculture coddled by the government with high tariffs and other protections has fallen into a steady decline, beset with low productivity. Last year, the government has introduced yet another subsidy program under which all farmers receive cash handouts if their farm incomes fall below certain thresholds. Such a program does not in any way contribute to reinvigorating agriculture.

Private companies play central roles in production activities throughout Japan's economy. An exception to this is agriculture. Japan's agriculture is in fact a peculiar industry in which, as a general rule, companies are not allowed to operate. In recent years, the government has deregulated the industry albeit in a rather timid manner, introducing a special type of company only for agricultural production and permitting farmland lease by farmers to private companies under tight conditions. Companies are still prohibited to own farmland, though.

Private businesses have capital and know-how, which are sorely needed for uplifting agriculture. In the afflicted areas where agriculture, the region's traditional industry, has been severely damaged, small inefficient farms must be integrated into larger-scale farming. Here private businesses can play a major role. As a first step, the government should consider a bold deregulation in the affected areas to allow private businesses to enter into agriculture. As a next step, this deregulation needs to be extended nation-wide. When that happens, younger people can find jobs as company employees in agriculture, which is a very aged industry where more than 70% of its workforce is 60 years old and over. Some of them may become independent farmers or start new companies in agriculture themselves. All such changes will eventually lead to more vibrant and productive agriculture in this country.

Entry of private businesses is equally vital in reviving Tohoku's afflicted fishery. In granting fishery rights, the government has hitherto given fishery cooperatives higher priority over private companies. Companies in food-processing, restaurant, and other industries may be interested in operating in fishery industry, and they should be allowed to enter.

The New Growth Strategy of last year called for considering participation in an emerging regional free-trade pact called TPP (Trans-Pacific Strategic Economic Partnership). The government's commitment has been sliding, however, not least over concerns about the devastated agriculture in the Tohoku region. Without changes in heavy trade protections, Japan's agriculture is destined to a further decline. Now is the time when Japan should announce its intention to participate in negotiations for TPP and promote farm-trade liberalization. Open-door policy will eventually lead to more competitive agriculture, but at the same time will affect the livelihood of traditional farmers. TPP provides member counties with a 10-year adjustment period for trade liberalization. Thus adjustment can be made, particularly if a proper system of income compensation for adversely-affected farmers is in place.

Mitsuru Taniuchi
Professor, Faculty of Commerce, Waseda University

[Profile]
Professor Taniuchi was born in 1949. He specializes in international finance and macroeconomics. He graduated from the faculty of law of the University of Tokyo, and earned a Ph.D. in economics at Brown University. He also completed the Advanced Management Program at the Wharton School.
He has extensive work experience in economic research and policy planning in the Japanese government, holding various positions including the director-general of the Cabinet Office's research bureau. He also worked for the World Bank as economist and for APEC as chairman of the APEC Economic Committee. In 2004, he left the public service and has since been teaching and doing researches at Waseda University. He has authored many books and papers in both Japanese and English.