Lessons from Japan
Buenos Aires Herald, February 21, 2012
When I recently asked the a Japanese friend what lesson Latin America could learn from Japan, I expected him to say something about being prepared for natural disasters or about being resilient in times of adversity. Instead, he told me that most important lesson other countries can learn from Japan is that the time to undertake the reforms without inflicting too much pain on the people does eventually run out. If you don't reform when you call the shoots, you will need to do it under more adverse circumstances.
I was in Japan on an invitation by its government to visit the areas hit by the 2011 earthquake and tsunami. As Chile prepares for the second anniversary of its own devastating earthquake and tsunami, I went there to learn how Japan has moved forward in its reconstruction efforts. Affected by student protests and other signs of discontent, President Piñera’s government has used the recent decision by an independent prosecutor to indict officers from the former center left Concertación government to associate former President Bachelet with the post-earthquake institutional failure. No tsunami alert was issued, despite available information. The slow government response allegedly helped trigger food riots one day after the quake. In response to the government attack, the now opposition coalition, the center left Concertación has put the focus on the slow reconstruction efforts under the Piñera administration. The government claims a 47% completion in housing reconstruction. Yet, most of the progress is on fixes and repairs. Only 10% of houses fully destroyed have been rebuilt. Visiting Japan to learn about that country's experience with reconstruction seemed a good way to put the Chilean experience in context.
After verifying that reconstruction efforts are moving ahead faster than in Chile, I found a big contrast between Japan and Chile on the level of trust people have in their institutions. In Japan, people repeatedly told me that if the government issues a tsunami warning, you better believe it. If there is no official warning, you can trust there will be no tsunami. For sure, many Japanese criticize the government for not being sufficiently transparent with information related to the Fukushima nuclear plant. Still, the Japanese trust their institutions. In Chile, the slow government response immediately after the earthquake and in the reconstruction process has deepened the already declining trust in institutions. Chile is not alone in the region. For years, polls in Latin America have reported low levels of trust in state institutions. Unless Latin American governments show they can live up to the occasion in moments of crisis and disasters, we should not expect trust levels to increase.
A more important lesson one can learn from Japan has to do with taking on painful yet necessary reforms. As ,my Japanese friend commented, for several years, Japan put off making a number of necessary structural reforms. The aging of its population, its large social welfare provisions and its insufficient levels of competition and openness in key areas were for many years well known challenges. Yet, the political leadership of Japan chose not to tackle those issues. Vested interests, the complexity of the reforms and the uncertainty of the policy proposal on the table led successive governments to put off undertaking reforms. The potential benefits of undertaking reforms were outweighed by the negative immediate consequences of swallowing a bitter pill. The painful consequence of not reforming on time has been two lost decades for Japan in terms of economic growth. The country is less globally competitive today than two decades ago. China has now become the second largest economy in the world, relegating Japan to a third place. Japan remains far more developed than China and its per capita GDP is several times superior. However, China has captured much of the world respect and admiration that Japan almost solely had three decades ago as the leading Asian power.
Latin American countries can certainly learn the lesson. The region has experienced a period of rapid economic growth fueled by high world demand for its natural resources. Poverty has declined and the middle class has expanded. However, several key reforms must be undertaken to make the economic expansion last longer and transform the export boom into sustainable development. Most Latin American countries have lagged behind on state modernization initiatives, social reforms, tax reform and political reforms to induce more competition, foster transparency, reduce red tape and strengthen the regulatory framework. Precisely when the economic conditions make it easier to undertake the reforms and swallow a bitter pill—combined with the sweet trade surpluses—Latin American countries are putting off reforms. As Japan painfully learned in the early 1990s, good times do not last forever. Those countries that are brave and smart enough to choose the timing of needed reforms will be better prepared for the harsh years. Those who put off reform until they can no longer choose the timing nor the conditions under which reforms will eventually have to be implemented might end up living their own lost decades.