Term Paper on "Discrepancies Between Britain and Japan in Governing the Economy"

Term Paper 5 pages (1730 words) Sources: 2

[EXCERPT] . . . .

Political Science

Discrepancies between Britain and Japan in Governing the Economy

According to Kesselman, the success of a government will be judged primarily by how well it can govern the economy (i.e., its "economic performance") in providing for its citizens. In a post 9-11 world, do you believe that such a statement is still accurate? Why or why not?

The ways in which Britain and Japan have governed their economies over the years have been very different from each other. Currently Britain theory is one of laissez-faire or free market economy whereas Japan's is Keynesian - the idea that state intervention is important in all economic activities. Historically the success of a government has been judged on how well a country's economy did for providing for its citizens. In today's global environment, post 9-11 this standard does not seem to carry as much weight as it used to.

Like many other states, whatever their commitment is to free markets, the British state often interferes in economic life, sometimes with considerable force. The British have not developed institutions for state sponsored economic planning or industrial policy. Instead, they have generally limited its role to broad policy instruments intended to influence the economy, generally by adjusting state revenues and expenditures in order to achieve short-term goals. The Treasury and the Bank of England dominate the macroeconomic policy, which has often seemed reactive and relatively unsuccessful (Kesselman,, p. 62).

Today, the economic policy in Britain is practical and eclectic. The political consequences of economic orientations are more significant than they have ever been before. Each economic doctrine helps to justify, provide motives for state policy, and advance alternative sets of values. Britain plays a meticulous role within the European and international economy, one that has been reinforced by international competitive pressures in the global age. Foreign Direct Investment (FDI) favors national systems, like those in Britain and the United States, that rely more on private contractual and market drive arrangements and less on state capacity and political or institutional arrangements. Because of such factors as low costs, political climate, government sponsored financial incentives, reduced trade union power, and a large pool of potential nonunionized recruits, Britain is thought of as a highly regarded location in Europe for FDI (Kesselman,, p. 69-70).

The UK does extremely well in international comparisons of microeconomic competitiveness and growth competitiveness. The UK ranked thirteenth in growth competitiveness and sixth in business competitiveness with very high rankings for the quality of the national business environment, financial market sophistication and the extent of incentive compensation. Britain also displays areas of competitive disadvantage in the areas of national savings rate, real effective exchange rate and government success in ICT promotion and quality of math and science education (Kesselman,, p. 69-70).

There are some very basic doubts that the economy in Britain can ever recover fully from the banking crisis and recession that put Britain lower than many other rich countries. The worry is whether a weak recovery that is dependent on fiscal and monetary life-support can survive on its own. There are fears that the strong, steady growth rate that had taken place the 15 years before the financial crisis can no longer be counted on. Another factor that is casting a dark shadow over the next parliament are public finances that have turned wildly into deficit and will need to be brought back severely from the edge (the Pain to Come, 2010).

In 2009 the economy shrank by 5% which was the biggest fall since the Great Depression. The reduction over the six quarters of the recession was 6.2%. This turn down was less severe than what happened in Japan, Germany and Italy, but the recession lasted longer than in any other of these economies. The outlook in regards to public finances is even worse. The budget deficit is at its highest, as a proportion of GDP, since the Second World War. This year's is expected to be the biggest of any G7 or even G20 economy. It is thought that the growth in government debt between 2007 and 2014 will be second only to Japan's (the Pain to Come, 2010).

Many experts feel that Britain's economy has more than a passing resemblance to Japan's, which never regained its economic stride after its banking crisis in the 1990's. The central idea is that the flourish of economic health in the period of non-stop growth after the recession of the early 1990s turned into a lot of debt. As the growth went on, it came to rely too much on consumer and public expenditures (the Pain to Come, 2010).

Japan's government has played a key role in the development of the modern day economy. In the mid nineteenth century, the Meiji state was founded and operated such things as munitions factories, mines, railroads, telegraph and telephone companies, and textile mills. Within the next decade and a half, most of these businesses had been sold at token prices to private entrepreneurs, some of whom subsequently emerged as heads of zaibatsu conglomerates. During the rest of that century and the first forty years of the next, these corporate empires dominated Japanese industry. They spearheaded the rapid expansion of the economy in cooperation with a fervently nationalistic and disciplined state bureaucracy. The bureaucracy provided zaibatsu affiliated firm's direct subsidies, tax breaks, tariff protection, roads, railroads, port facilities and communication networks with tax money (Kesselman,, p.226).

Japan's financial sector has remained under strong state control and protection. Administration guidance has led the nation's major banks and securities firms to form tight network's of mutual cooperation and assistance, backed by an implicit government commitment to bail out their members in trouble, if need be. The state has assumed the role of an implicit lender of last resort to the banks and securities firms, which has helped weak and internationally uncompetitive financial institutions, survive. In the hard times of the 1990's and the early 2000's many of these institutions were saddled with bad loans that had accumulated in the bubble economy and went bankrupt. Those entities that survived stopped lending, especially to small businesses, thus effectively starving them of investment funds and aggravating the recession that was already going on (Kesselman,, p.227).

The recession in Japan became official in Q4 2008 when the GDP growth tumbled 12.9% from the year before. This was the worst decline that had taken place since the recession in 1974. The economic collapse in Japan can as a surprise to many, since Q3 growth was only down .1%, following a decline of 2.4% in Q2 2008. The severe downturn was a result of slumping exports in consumer electronics and auto sales, 16% of Japan's economy and a powerful force behind the country's economic revival from 2002-2008. Japan's economy had only recently begun to recover from the depression that plagued it in the 1990's. Japan's economy had gone up 2.1% in 2007, and 3.2% in the first quarter of 2008. This lead many to believe it had finally grown out of its decade-long recession, but then again maybe not (Amadeo, 2009).

Japan is the world's fourth largest economy after the EFU, U.S. And China, so its decline will definitely have an affect on the global economy. Japan also hires a lot of provisional workers from nearby South Asian countries. These people are now being laid off in droves. In order to battle the recession of the 1990's, the Bank of Japan lowered interest rates to 0% and bought U.S. Treasuries. This kept the yen low which in turn allowed exports to be competitively priced. The low yen made investors to borrow money in yen at a low interest rate and re-invest it in higher-paying currencies, like those of the dollar. This practice was known as the yen carry trade. It created a lot of liquidity in the global marketplace. Unfortunately, last year, the yen carry trade collapsed, and the yen skyrocketed. The stronger yen made Japanese exports less competitive just as a time when demand in the U.S. fell (Amadeo, 2009).

The Bank of Japan has conventionally been the largest holder of U.S. Treasuries. It did this to keep the yen low in relation to the dollar. This kept Japan's exports very spirited. This strategy caused Japan's debt to be 182% of total GDP output, which ended up weakening its economy. A low yen though, made Japan's auto industry very aggressive. This was one reason that Toyota became the number one auto maker in the world in 2007. It is thought that a recession in Japan could cause it to purchase less Treasury bonds just at a time when the U.S. is issuing more bonds in order to finance the economic stimulus bill and bailouts. This lower demand and greater supply of Treasury bonds will cause yields to go up, which will make interest rates rise, all of which will additionally depress the housing market (Amadeo, 2009).

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