Dealing with Neoliberalism in Japan, Denmark

♠ Posted by Emmanuel in at 12/06/2007 07:13:00 AM
The International Herald Tribune has two fine stories on the challenges facing two traditionally welfare-heavy states in the age of globalization, Japan and Denmark. What these stories depict is an unsurprising conflict between striving to be a "competition state"and maintaining an extensive welfare regime. Are these two mutually incompatible? First, let's take the case of Japan. It seems that the urban-rural divide there is widening as traditional redistributive measures to rural areas are being cut back on by the Japanese government. This may undermine the prized Japanese concept of social cohesion. That the fiscal situation of Japan has been woeful for a long time is well-known as the leadership has tried to buy off politically important rural constituencies. Particularly interesting to me is the contempt shown in rural areas for big box retailers, echoing concerns in the US over Wal-Mart and in the UK over Tesco:

There is widespread concern here that these changes are turning Japan into a nation divided into winners and losers, split geographically between prosperous cities and the depressed rural areas. Many here attribute this growing disparity to Japan's embrace of American-style economic liberalization, begun in the 1990s to end the nation's decade of stagnation.

The measures to open up markets helped revive cities like Tokyo and lowered prices for Japan's long-suffering urban middle class. But elsewhere in Japan, they are seen as bringing unwelcome and wrenching change.

And now, with recent signs of a coming economic slowdown in Japan, divisions could deepen. On Monday, Japan's top central banker, Toshihiko Fukui, warned of ripples from the housing downturn in the United States, one of Japan's largest overseas markets. He said he was particularly concerned about the impact on Japan's small and midsize companies, many of which are in rural areas.

The new economic policies are blamed for undoing one of Japan's proudest achievements after World War II, the creation of an egalitarian society that was almost uniformly middle class. They have also eroded one of the pillars of Japan's postwar political stability, rural voters' stalwart support for the ruling Liberal Democratic Party.

The changes began during Japan's doldrums, when the government tried to revive growth by slowly but steadily deregulating entire swaths of the economy, like banking, insurance and groceries. As seen in Noshiro, some of the biggest upheavals followed the lifting of restrictions on large stores, a step originally urged by Washington to admit American retailers.

As in the United States, this has filled the countryside with large shopping malls and strips of chain stores, some American but most domestic, at the expense of town centers.

Rural areas also lost out in the 1990s because of the gradual dismantling of government-sanctioned price cartels, which had guaranteed jobs by protecting industries from "excessive competition." As Japan's markets opened, a flood of cheaper industrial and textile products from China and other Asian countries gutted local economies, which still depend heavily on manufacturing.

Rural areas were hit hard again in the early 2000s, when Junichiro Koizumi, then prime minister, tried to unshackle the private sector by shrinking the government. Akita lost thousands of construction jobs as Koizumi made deep cuts in public works projects, which had been a way to redistribute Tokyo's tax revenue to the countryside.

The economic hardships have led to a growing sense of resentment that began to spill into national politics in July. Angry rural voters handed the Liberal Democrats a crushing defeat in elections for the upper house of Parliament. This rural discontent has helped the opposition Democratic Party of Japan, which made closing Japan's regional economic gaps the central plank of its campaign.

Many opposition politicians now talk about halting or rolling back American-style liberalization to protect traditional ways of life. Many blame Washington for having pushed Japan into opening markets. Stung by defeat, the chastened Liberal Democrats and their new leader, Prime Minister Yasuo Fukuda, have backed away from their support of economic liberalization and have begun emphasizing steps to fix regional disparities.

"The elections were the first scream of distress by Japan's regions," said Daigo Matsuura, an opposition Democratic Party member from Akita who defeated the ruling party incumbent in July for a seat in the upper house. "America pressured Japan into making these changes. The result was the birth of regional economic gaps..."

Whatever the cause, the widening of these gaps is apparent in government statistics. Over the last decade, Tokyo's economy has grown 6.9 percent. Land prices in the capital are rising so fast that there is talk of a property bubble, and the city's population has grown by 900,000, to 12.7 million residents, at a time when Japan's overall population growth has flattened.

By contrast, Akita's economy and population have both shrunk by about 7 percent in the last decade, and land prices have been dropping for 15 years. Akita's average annual income has fallen to 2.3 million yen, or about $20,000, exactly half Tokyo's average.

Last year, after the restrictions on building large stores were lifted, Aeon, one of Japan's largest retail companies, proposed a 378,000-square-foot shopping center near Noshiro that would be the largest in northern Akita. The mayor and consumer groups in this city of 60,000 have supported the plan, saying it would bring more jobs and cheaper prices. But they face bitter opposition from the local business establishment, particularly merchants.

Residents say it is the first time they have seen the community so divided. Opponents have erected red flags saying "Oppose Aeon!" and are seeking a referendum on whether to allow the mall. The notion that a company, and particularly one from near Tokyo, can come in and compete with their businesses runs against the grain in rural communities like this one, where a tradition of harmonious coexistence has made the creation of economic winners and losers abhorrent...

For all of Japan, the question now is whether this sort of reaction will be strong enough to stop or reverse economic liberalization. The central government has already begun to tighten restrictions on large stores, and many in rural areas are calling for more public works. But many in Tokyo and regions like Akita say Japan's soaring fiscal deficits make it impossible to return fully to the old ways, and many advocate opening markets further...

So far, regions like Akita have not adapted on their own to the changing economic environment. In interviews, local business leaders bemoaned their declining fortunes, but also quickly dismissed suggestions that they seek new opportunities in nearby emerging markets like China or Russia, which sits just across the narrow Sea of Japan from Akita.

Meanwhile, the Danish case is somewhat different. Denmark has some of the highest tax rates in the world because maintaining flexicurity-style arrangements and other state benefits is not exactly cheap. However, a problem is emerging in that young, skilled, and (very) English-fluent Danish labor often trained at public expense is starting to flee the country and its high tax rates. Heck, if I were being charged a top tax rate of 63%, I too would start thinking about working in income tax-free Dubai no matter how high the quality of life is Denmark. The mobility of this skilled labor is making it difficult for quite a few Danish employers to find qualified workers:
As a self-employed software engineer, Thomas Sorensen broadcasts his qualifications to potential employers across Europe and the Middle East. But to the ones in his native Denmark, he is simply unavailable. Settled in Frankfurt, where he handles computer security for a major Swiss corporation, Sorensen, 34, has no plans to return to the days of paying sky-high Danish taxes...

Born and trained at Denmark's expense, but working - and paying lower taxes - elsewhere in Europe, Sorensen is the stuff of nightmares for Danish companies and politicians searching for solutions to an increasingly desperate labor shortage.

People like Sorensen, and there are many, epitomize the challenges facing the small Nordic country, long viewed across Europe as an example of how to keep an economy thriving and a society equal.

Young Danes, often schooled abroad and inevitably fluent in English, are primed to quit Denmark for greener pastures. One reason is the income tax rate, which can reach 63 percent. "Our young people are by nature international," said Poul Arne Jensen, chief executive of Dantherm, a maker of climate-control technology. "They are used to traveling and have studied abroad. They are no longer 'Danes' in that sense - they are global people who have possibilities around the world," he said.

Denmark is the home of "flexicurity," the catchy name given to a system that pays ample unemployment and welfare benefits but, unusually in Europe, imposes almost no restrictions on hiring and firing by employers. The mixture has served Denmark well, and its economy barreled ahead in 2006 by 3.5 percent, one of the best performances in western Europe. The country is effectively at full employment.

But success has given rise to an anxious search for talent among Danish companies, and focused attention on émigrés like Sorensen. The Organization for Economic Cooperation and Development, which is based in Paris, projects that Denmark's growth rate will fall to an annual rate of slightly more than 1 percent for the five years beginning in 2009, reflecting a dwindling supply of a vital input for any economy: labor.

The problem, employers and economists believe, has a lot to do with the 63 percent marginal tax rate paid by top earners in Denmark - a level that hits anyone making more than 360,000 Danish kroner, or about $70,000. That same tax rate underpins such effective income redistribution that Denmark is the most nearly equal society in the world, in that wealth is more evenly spread than anywhere else. The movement toward lower taxes passed Denmark by, even as it took root in much of Europe.

Small East European countries, notably Estonia and Slovakia, started the trend by imposing low, flax taxes on income and corporate profits about five years ago. Those moves helped prod Austria, and eventually, Germany, to slash high marginal rates as well.

Danish taxes also contrast sharply with those in nearby London, often jokingly referred to among Danes as a Danish town, because so many of them live there. Lower taxes on high earners have been a centerpiece of the policy mix that has fed the rise of London as a global financial center since the 1980s.

But today young Danes can easily choose not to pay for the system's upkeep, once they have siphoned off what they need. For starters, as citizens of the European Union they are entitled to work in any of the 27 EU countries.

Sorensen, who graduated from business school in Copenhagen, found himself earning the equivalent of more than $100,000 before he was 30 - and paying 63 percent of it in taxes. His work as a computer consultant for Deloitte also took him to Brussels, where he met the Spanish woman he would eventually marry. But the high taxes, mixed with his wife's discomfort in Denmark, meant that a job offer in Qatar three years ago was all it took to pry him away from Copenhagen. Now, he is ensconced in Frankfurt, setting up a new business on the side and planning to pay no more than 25 percent of his income to the German state.

"When you are at 63 percent tax, you don't look forward to the evaluation with the boss to get a raise," Sorensen said. "You look for more vacation or a training course in the tropics - something that you get the full benefit of." There are many more Sorensens out there in a work force that is culled from a country of just 2.4 million people.

The Confederation of Danish Industries estimated in August that the Danish labor force had shrunk by about 19,000 people through the end of 2005, because Danes and others had moved elsewhere. Other studies suggest that about 1,000 people leave the country each year, a figure that masks an outflow of qualified Danes and an inflow of less skilled foreign workers who help, at least partially, to offset the losses.

Danish business normally keeps its distance from politics, but in parliamentary elections this year, a few companies jumped into the fray. Lars Christensen is co-chief executive of Saxo Bank, a Copenhagen financial services firm specializing in currency trading and retail brokerage services. New employees at Saxo Bank get a copy of "Winning," the playbook of Jack Welch, the brass-knuckled former chief executive of General Electric, and "Atlas Shrugged," the libertarian manifesto by Ayn Rand, suggesting that the boss has little time for solutions that beat around the bush. [And has poor taste in reading materials to boot with the latter choice.]

"The high tax rate is the No. 1 problem we have," Christensen said. "It's that simple." Christensen said about 150 positions at Saxo Bank had been created outside Denmark because filling them at the home office would have been either prohibitively expensive or simply impossible. Finding people at its offices in Britain, Switzerland and Singapore, where tax rates range from 19 to 40 percent, proved easier. But it forced the bank to break up teams of people that it wanted to be concentrated in Copenhagen.

Acknowledging the need to reduce the tax burden, [Prime Minister Anders Fogh] Rasmussen's previous government approved slight reductions in taxes for lower earners, but he has avoided promises of quick fixes. In 1998, Rasmussen's party narrowly lost a national election focusing on a message of business-friendly reform, an experience that colors the current message of incremental change. "Denmark is a country of consensus," Rasmussen said recently. "Occasionally that fact tends to lower the speed of reforms, but in exchange we are efficient in our implementation."