Comparing the 'miracle economies'

For students of political economy, the recent election results in Japan and Germany are of unusual interest. Historically, there are strong similarities between the two countries:

• Bismarck's unification of Germany and the Meiji restoration in Japan happened close to each other;
• More recently, they were defeated and devastated in the Second World War;
• Miracle economies of the post-war decades, based on a disciplined and highly productive workforce, scientific and technological innovation, and American help in the immediate post-war years;
• World competitive export manufacturing sector;
• Their economic performance started losing its lustre more or less simultaneously, from the late 1980s or early 1990s: in Germany, with the unification of the country and the huge costs of taking over the communist eastern half; in Japan, with the bursting of the equity and real estate bubbles in the early 1990s (at its peak, the Nikkei Index was almost 40,000 -- now it is less than a third of that level);
• Slow economic growth for the past 10 years; and
• High unemployment and ageing populations.

There is one difference, of course: for much of the past 60 years, Japan has been ruled by the Liberal Democratic Party (LDP), while Germany alternated between the relatively Leftist Social Democratic Party (SDP) and the more conservative Christian Democratic Union (CDU).

To be sure, in power, there was not too much difference between the two parties' approach to economic policy.

In the case of both countries, the recent elections were not in the normal course. The Japanese Prime Minister, angry at the rejection by conservatives in his own party, of the proposal to privatise the post-office, announced a snap election. In Germany, the provocation was a resounding defeat of the ruling SDP in a state where it had been in power for a long time.

In both countries, economic reforms were at the heart of the election campaign. The election results however have been different. In Japan, Koizumi won a landslide victory; in Germany, the two parties are neck to neck and at the time of writing, it is still not clear which one would rule.

Prima facie, the victory of the charismatic Koizumi appears to be a vote for economic reforms and privatisation. However, the temptation to read too much into the election result should be tempered by the fact that:

• The strongly reformist Democratic Party of Japan was soundly defeated;
• The only reform Koizumi talked about was the post office privatisation, that too by 2017;
• In any case, under the LDP constitution he has to quit the job in a year's time.

In Germany, while the SDP Chancellor at one time said that "creating jobs requires the courage to reform (labour laws)", and made this an integral part of his Agenda 2010, he could not carry his party with him on the issue.

As he saw himself trailing badly at the start of the election campaign, he increasingly turned to the Left in order to narrow the gap. This was also helped by an academic, who was then expected to be the finance minister should the CDU win, proposing a flat income tax and other radical measures, not palatable to the Germans.

The CDU tried to convince the electorate that the flat tax was not a part of its policy, but by then the damage had been done. The result is a hung parliament.

There are three minor parties who hold the balance of the seats. One of them will not support the CDU and another, the SDP. Given these polarised power equations, it is the third party that may well determine who the next Chancellor would be -- and that is a Leftist party consisting of former communists and the breakaway faction of the SDP. Will the Left, despite a small percentage of votes, get the veto power on policies, as in India? Quite possible!

If those favouring economic reforms should not draw too much comfort from the results, the fact is that Germany is rich enough to afford the luxury of policies that work against creating employment, and compensate the unemployed lavishly.

We, unfortunately, are not so rich and cannot afford not to reform labour laws which militate against creation of sustainable employment.

Tailpiece: On the parallel between Japan and Germany, I recently came across the following quote in an essay written by Mao Zedong in 1919, an essay which brought him countrywide recognition: "If the militarist adventures of the authoritarian Japanese government are not exterminated, if the German government is not overthrown by revolution, and if this lustful stud and lascivious bitch are still not separated, the danger will be truly great." Remarkable historical perspective!