Feb. 19, 2015
Europe should treat Japan's economic malaise as a cautionary tale. 
Japanese Prime Minster Shinzo Abe is trying to turn things around.
The economist Simon Kuznets used to tell his students that there were four types of countries: developed countries, undeveloped countries, Argentina and Japan. His aphorism pithily captured Japan as the positive outlier, the non-Western country that industrialized in one generation in the 19th century, and rebounded even more quickly after the devastation of World War II. By the 1980s, Japan was a global economic powerhouse, giving us Sony, Toyota and Nintendo, pioneering the bullet train and buying up American real estate. Business leaders the world over scrambled to learn the secrets behind the country’s success.
But Japan has since lost its luster. Today it may be the first major economy feeling the full effects of post-industrialization. It has experienced two decades of little or no real economic growth. With a median age of 45, its shrinking working-age population struggles to support a growing number of elderly. Low-cost imports and robotics have slashed the demand for wage labor. And Japan now suffers from a discernible lack of economic dynamism as a homogenous society with a rigid work culture that continues to be hostile to immigration. Ironically, the very characteristics that once made Japan so successful are now among its biggest liabilities.
Japan’s example serves as a cautionary tale for other industrialized societies, and Europe in particular. The European Union’s median age is already high at 42. Non-competitive wages and low trade barriers mean that only high-skilled and non-tradable jobs (such as in health care, education, construction and retail) are secure. And while less severe than Japan, Europe’s immigration, education and employment policies often stifle innovation and competitiveness, with many of its successful researchers and entrepreneurs drawn to more favorable American climes. Europe does have the common market going for it, which means a larger talent pool and a more heterogeneous society than Japan’s. Yet Europe’s existing problems will only be aggravated by even greater increases in productivity from technological advances and further international economic integration.
The specter of Japan-like economic stagnation would be bad enough without post-industrialization’s potentially negative effects on social stability and security. A job means more than an income. It also provides a sense of community, an outlet for creativity and ambition, a means of social mobility and a reason for self-respect. Japan has already witnessed the phenomenon of hikikomori, young people who withdraw into their homes, abandoning education, work and the outside world – a lost cohort that may number as many as 700,000. It is a trend that researchers have also begun to document in European countries such as Italy.
Withdrawing into the isolation of one’s room or home may seem harmless enough. But Europe’s unemployed, educated and healthy youth could just as easily find recourse in violent enterprises such as the Islamic State group or nationalist insurgencies such as that underway in Ukraine. The perils of post-industrialization could therefore present the big question – and the big problem – of our times, particularly as its effects are already beginning to be felt in less developed economies. How does a post-industrialized society escape the vicious cycle of burdensome entitlements, spiraling debt, high unemployment and slow growth?
Policymakers in both Europe, Japan and elsewhere are aware of this challenge. But their calls for austerity or stimulus packages offer only near-term fixes, while alternative solutions offered by political populists, xenophobes and Luddites are specious. Japan under Prime Minister Shinzo Abe is making a serious attempt at redressing its problems through a structural reform program that involves gradually relaxing immigration controls, altering work culture, integrating technological research with commercial opportunities and increasing the country’s workforce by encouraging women in the workplace. These are steps in the right direction, with the potential to bolster growth and gradually revitalize the economy. But they are still modest and incremental.
The real solution to post-industrialization – be it in Europe or Japan – may require a deeper embrace of globalization. This, ideally, would lead to greater innovation in emerging technologies and more internationally competitive work forces. It may explain, in part, why the United States – with its innovation infrastructure and more liberal immigration policies – has so far been shielded from post-industrialization’s most severe effects. It also means that the major economies can partner each other in overcoming post-industrial sluggishness, rather than approach their competition as a zero-sum game.
At a press conference last month, Japanese-born scientist Shuji Nakamura, who won a Nobel Prize in physics last year, publicly criticized his native country’s absence of incentives for innovation and lack of international exposure. He had a pointed message to young Japanese: “Go abroad,” he said, “see Japan from outside.” His exhortation could just as readily apply to Europe, which is in danger of condemning itself to long-term stagnation through economic and social retrenchment and incremental policy changes.
Dhruva Jaishankar is a transatlantic fellow with the Asia Program of the German Marshall Fund in Washington.
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