Perseus Publishing · 2000 · 208 pages · $27.50

Reviewed by Victor A. Matheson

What a difference a decade makes. In the late 1980s Japan seemed poised to dominate the world economy. The Japanese had seemingly discovered an improved version of capitalism in which active government intervention in vital export-oriented sectors of the economy, along with protection of domestic firms from foreign competition, led to high growth rates, huge trade surpluses, and a highly equitable distribution of income.

In the ’90s the Japanese economy came tumbling back to earth, suffering ten straight years of anemic growth with per capita GDP growth averaging less than 1 percent per year since 1990. Stock-market and real-estate prices have fallen to one-third of their astronomical highs of the late ’80s. The unemployment rate in Japan has eclipsed the U.S. rate for the first time in recent memory. The Japanese government’s budget deficits dwarf those run by the United States during the ’80s and early ’90s as a percentage of GDP, and the looming Japanese banking crisis makes the American savings-and-loan debacle appear like a mere bump in the road. What has happened to the Japanese juggernaut of a decade ago?

According to Harvard Business School guru Michael Porter, Japan’s stunning success in highly visible fields such as automobiles and consumer electronics long masked a deeply inefficient and uncompetitive society and propped up an otherwise ailing economy. In their new book, Can Japan Compete?, a title that would have been unthinkable a decade ago, Porter and coauthors Hirotaka Takeuchi and Mariko Sakakibara make a strong case that the once lauded Japanese model of close government and business cooperation is largely responsible for Japan’s current malaise.

It is easy to point out the Japanese success stories. Following the oil crises of 1973 and 1979 the Japanese auto industry came out of nowhere to take the U.S. market by storm. In the 1980s, Americans bought large numbers of inexpensive, high-quality Japanese television sets, VCRs, and audio systems. At the time, much of Japan’s success in penetrating U.S. markets was credited to the actions of the Japanese government’s all-wise Ministry of International Trade and Industry.

The authors argue that the successful Japanese industries prospered in spite of government assistance rather than because of it. They point out that the government played virtually no active role in the sectors, such as automobiles, in which Japan came to dominate world export markets. Indeed, in the 1950s, the government actually attempted to dissuade Honda, now Japan’s most successful car company in terms of return on investment, from entering the automotive market.

On the other hand, Japan is not a major world player in sectors such as aerospace, chemicals, and most service industries, sectors in which the Japanese government has made its most concerted efforts to protect domestic producers and to engage in joint government and industry research-and-development projects. Similarly, Japan has made little headway in its bid to dominate the computer and semiconductor industries despite massive government investment.

Government intervention has not only failed to allow Japan to take over the world’s economy, but Japan’s protectionist policies have saddled the country with many inefficient and expensive industries. For example, the Japanese pay roughly twice as much for groceries, restaurant meals, apparel, and a multitude of other products and services as their counterparts in the United States and Britain.

Government intervention cannot take all the blame for Japan’s current economic problems. The Japanese penchant for corporate cooperation is also responsible in part. Cozy relationships among banks, suppliers, and companies in related fields have tended to relax competition within the economy. Suppliers have little reason to innovate when their customers are guaranteed through these networks. Furthermore, while on the surface corporate cooperation seems to promote efficiency in the economy, in practice these arrangements tend to lead to many companies’ producing essentially identical product lines.

All in all, the authors arrive at the conclusion that there is little substitute for vigorous competition in promoting productivity and economic growth, and government can best promote competition by staying out of the marketplace. If the past ten years of news reports about Japan’s economy have failed to dispel the myth of the superiority of the Japanese system for any prospective reader, this insightful and thoroughly readable book will do the trick nicely.

Victor Matheson is an assistant professor in the department of economics and business at Lake Forest College.