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IMD’s 2007 Competitiveness Ranking: Japan Slips, Passed by China. Why?

IMD has released their annual index of World Competitiveness, and there has been what they term a “Big Shakeup” in the rankings. Two former top ten nations have slipped from the upper echelon: Australia, who slid from 6 to 12, and Finland, who dipped from 10 to 17. They were replaced in the top ten by The Netherlands, which jumped eight places to number 8, and Sweden, which rose from 14 to 9.

But the big news for Japan watchers was the country’s slide out of the top twenty. Japan moved down eight spots, from 16 to 24. In doing so, it allowed China to pass. Mainland China rose from 18 to 15, and now sits one spot behind where Japan did last year. Without getting into a debate over whether or not China truly deserves to be ranked ahead of Japan (I tend to doubt it), let’s take a look at why Japan has fallen:

In her article explaining the challenges facing Japan, IMD Research Fellow Suzanne Rosselet-McCauley notes some of the positive developments that have come from Japan over the past few years: better corporate balance sheets, better-than-expected GDP growth, the end of the bad loan era, and increases in foreign direct investment that have been a result of fiscal reform.

Nonetheless, Rosselet-McCauley proves adept at pointing out why Japan is slipping, noting some of the factors that we have been discussing on this website. As she puts it:

Japan’s high budget deficit (ranking 56th out of 61 economies at -6% of GDP) and persistently high debt levels (at more than $5,000bn, nearly 120% of GDP). The business community also suffers from high corporate tax rates (59th) and costly levels of remuneration (58th for the services professions). Entrepreneurship is not widespread (57th), business managers are not characterized as having much international experience (52nd) and there is a low participation of women in business (47th). Skepticism about the effective implementation of auditing and accounting practices remains an issue (51st). Other obstacles to global integration include a national culture that is closed to foreign ideas (54th) and strict immigration laws (55th), despite the fact that Japan ranks higher for its “attitudes towards globalization” (14th).

Many of the items mentioned by Rosselet-McCauley would fall under the category of economic reform. This project, however, seems to have been pushed to the side as Prime Minister Shinzo Abe remains focused on his pet project, constitutional reform. As the Tokyo Shimbun pointed out on May 6 (Translated by Adam Richards of the Mutant Frog Travelogue):

The Council for Economic and Fiscal Policy, which is supposed to be an “engine for reform,” has started to lose steam. Most papers emanating from the Council look like they were written by the bureaucrats, and we do not see an attitude of striking at the vested interests.

As Mr Richards comments:

Abe’s pet causes, like constitutional reform and education, along with the possibly disruptive results of the upcoming Upper House Election, leave little room on the agenda for the relatively less sexy issues of economic reform. Abe will be happy to leave economic issues relatively out of the public light as long as the economy remains stable.

What does this mean for Japan? As we’ve pointed out, the education system needs to focus on turning out a new type of high school graduate: one who is ready for the service economy of the 21st century, able to think independently and display problem-solving skills, and able to operate in the international marketplace. This, unfortunately, is not what Mr Abe’s educational reforms are focused on: His ideas are based in instilling students with a greater sense of patriotism, having teachers sit for examinations to renew their teaching licenses, and allowing the Education Ministry to have greater control over curriculum by usurping any power left away from the prefectural school boards.

In his policy speech made to the Diet on September 29, the Prime Minister said:

The kind of society that Japan should aim at is a society in which the efforts of people are rewarded, a society in which there is no stratification into winners and losers, and a society in which ways of working, learning, and living are diverse and multi-tracked- in other words, a society of opportunity where everyone has a chance to challenge again.

What has happened thus far? Nothing.

I will support fundraising by challenge-again entrepreneurs, and I will promote financing that is not overdependent on personal guarantees.

Haven’t heard anything yet.

In order to reduce the GDP ratio of government debt in a stable manner by the mid 2010s, I will systematically carry out expenditure reform during the next five years. Firstly, I will definitely achieve a surplus in the primary balance of the central and local governments in FY2011.

You won’t be around that long. Nothing’s changed so far.

We cannot ask the people to bear an increased burden while doing nothing to cut waste and inefficiency by central and local governments. I will organize a simple yet efficient lean government by steadily promoting fundamental administrative reform.

I could piss myself laughing at this one. Your minister for Administrative Reform, Genichiro Sata, was forced to resign after it came to light that he had secured himself 8 million yen in political donations from his father’s construction company by channeling the money through political organizations.

I will work on the issue of consumption tax with the posture of neither running away from it nor seeking refuge in it.

You mean ignore it until after the Upper House elections?

Although the latest birthrate level is running above last year’s, we must take measures within the next five years or so, while the second baby boomer generation is still in their 30s. My Cabinet will make every effort to advance measures to address the falling birthrate and build a child-raising friendly society.

The clock is ticking. Nothing is happening.

And on education reform?

…In recent years there has been a downturn in [children’s] morals and also in their desire to learn, and it has been pointed out that the families and communities are less and less able to provide the educational function they once did.

So, Abe formed the Education Rebuilding Council, which has assembled for sporadic meetings and made several policy proposals. Their most recent brainstorm: That parents breastfeed their children, sing them lullabies and don’t let them watch too much TV. The proposal was scrapped as being ‘beyond intrusive,’ which means that the council not only wasted precious time discusing and writing up this nonsense, but that they wasted the time of lawmakers who had to read the proposal and tell the council to stuff it.

Foreign labor? According to Kyodo:

The Japanese government is planning to improve its industrial training and technical internship program for young foreigners after revelations that Japanese firms exploited the program to save costs, officials said Friday.

The Ministry of Health, Labor and Welfare has drafted specific improvements for consultations with relevant ministries in a bid to have legislation passed for the improvements in 2009, they said.

That’s just sad. 2009? It has been in the news for over a year that this system is broken. Many trainees are not paid during their first year, as companies face no legal recourse for abusing the foreign workers. 2009?

It looks like it’s going to be some time indeed before Japan starts climbing back up those rankings. I’ve only barely scratched the surface here…

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