Deregulation speed counts most

Song Khee-hong

Last week, foreign investors cashed in a net $10.7 billion from the Tokyo Stock Exchange. Considering foreign net sales that hit Korean stocks earlier this year had reached $1 billion, the recent rout in Japanese shares has been disastrous. It may be due to temporary capital migration or a correction of last year’s steep gains, but many believe foreign capital is selling out on the year-old experiment called Abenomics.

Abenomics refers to the aggressive economic solution introduced by Prime Minister Shinzo Abe as soon as he came into office in late 2012 determined to end the deflationary cycle and pull the country out of the gutter for good. The idea did not just come from one bold politician, but was built upon public desires to fight persistent stagnation and shake off the lethargy that had come from fears that the economy would worsen after the catastrophic earthquake and tsunami in 2011.

Backed by enthusiastic public support from the start, Abenomics involved an unprecedented level of monetary stimulus - or printing money to finance virtually limitless quantitative easing - fiscal spending of 200 trillion yen ($1.93 trillion) in public projects over the next 10 years, and structural reforms to revive Japanese companies and foster new industrial growth.

Despite doubts in its early stage, Abenomics showed immediate positive results. The fiscal and monetary easing devalued the yen by 20 percent, bolstering exports. Thanks to heavy fiscal spending, gross domestic product grew at a rate of 4 percent in the first half of 2013. The first two arrows of Abenomics - fiscal and monetary stimulus - were successful, but the third arrow, structural reforms, did not come through on time. Investors grew impatient and skeptical when the Abe government balked at mid-term and long-term structural reforms in key fields and deregulations to pave the way for new growth.

Among Japan’s long-delayed reforms are privatization of public utility services and expanding IT, energy, environment and medical industries. But little progress has been made in deregulations and companies have deferred investment amid foggy prospects so that all the monetary stimulus failed to produce any meaningful input in the economic cycle and were wasted without building lasting confidence in businesses. Structural reforms bottlenecked against Japan’s deeply-seated bureaucracy. The trial of Abenomics should provide a good lesson for Korean President Park Geun-hye and her government after it announced an ambitious three-year economic agenda largely committed to structural reforms and deregulations.

The president was passionate about the economic plan and stood at the forefront to command the reform drive. Despite specific goals, it remains doubtful if we would see a dramatic reduction in administrative red tape at the end of the day. Past governments had their go at removing red tape and none of them were successful. In order to avoid repeating past mistakes, the government should first study what went wrong.

First, there always will be resistant forces that will not give up regulations. Even if a government organization is restructured and rearranged, we cannot expect any dramatic changes in output as long as the same people are involved. Not all public employees are partial to regulatory power. But a bureaucratic society is prone to protect its self-interests. Such habits serve as a stumbling block to reforms in regulatory authority. Second, regulations are by-products of collective selfishness. They are born to protect one group’s interest by hampering that of the competition. Large companies have been restricted from opening businesses that could hurt smaller shops and businesses. In order to solve the complicated web of conflicts of interest, it is essential to establish an accurate and balanced study of regulations and prioritization of public policy goals.

Third, authorities should rethink how to carry out deregulations. Bureaucrats would be tempted to knock out the easy regulations and leave those that actually need to go in order to fill the quota. Progress should be assessed by seeking feedback from companies and consumers.

Japan’s structural reform goals are similar to ours and the challenges and setbacks are no different. Both countries must develop new growth engines and vie to draw foreign investment. Whichever country first combats bureaucratic resistance successfully will gain the traction in structural reforms necessary for sustainable economic progress.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, March 28, Page B10

*The author is a managing partner for Deloitte Consulting Korea.

By Song Khee-hong