Thursday, 24 October 2013

Leopards and spots, Japanese style

Here's a potted (though I think fair) summary of the current consensus view on Japan: Prime Minister Abe's got his "three arrows" (monetary expansion/reflation, fiscal stimulus, structural reform), he's successfully fired the first two, but the third is still sitting in its quiver.

There's certainly evidence that the first two are working. The Economist's latest (October) poll of international forecasters has Japan growing by 1.8% this year, and 1.6% next year, and price deflation is being turned around, with consumer prices expected to be essentially stable this year (+0.1%) and to rise by 2.2% next year.

What's somewhat bothering me, though, is that second arrow of fiscal stimulus through public works. And not for the reason you might have expected (the wisdom of running more deficits when already heavily indebted).

What's bothering me is the likely gross inefficiency of the spending. And maybe what it says about the underlying ethos of the Abe administration.

Now, I know that from some perspectives (eg immediate job creation) it doesn't matter what the money is spent on. As Keynes put it, "If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again...there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing" (General Theory, p129).

More sensible, indeed - but that's not what the Abe administration is doing. It's gone the old bottles route: more roads to nowhere that aren't needed, more civil engineering works that achieve nothing of lasting worth.

It's straight back to the worst practices of the Liberal Democratic Party, when the construction companies and the LDP were deeply in each others' pockets, when rivers got paved over, and bridges and motorways to nowhere were built everywhere.

Here's an illustration of how bad it has been. Earlier this year the McKinsey Global Institute and the McKinsey Infrastructure Practice published a fine report, Infrastructure productivity: How to save $1 trillion a year, well worth reading in its own right. Along the way, though, the McKinsey folk came up with this.

Spot anything strange about the relative scale of Japan's spending on roads?

So what this says to me is that, when given the option of what to spend the fiscal stimulus on, the LDP went straight back to what they used to do in the bad old days before the electorate chucked them out in 2009.

And that's a worry on two fronts. Unproductive 'scratch my back' pork-barrel deficit spending was one of the things that got Japan into its mess in the first place. And if it is indeed an unreconstructed LDP we are seeing, as beholden to special interests as it ever was, then I wouldn't get too optimistic about the prospects for the third arrow of structural reform.

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