Wednesday, December 18, 2013

Passing the Baton

Only a few years older than I was at the time, my son Jonathan is making his first business trip to Japan and China (having traveled extensively on his own in those regions, and having lived there as well).  The confluence of his eduction, business experience, and language abilities has led to this moment.  I had no such language skills and whenever I traveled in Japan I needed a translator.  This left me at a disadvantage when it came to negotiations which usually entailed a team of Japanese executives on the one side and me on the other, they free to converse among themselves in my presence without my being able to understand a word.  It was the collective "them" against lonely "me."

While my son is there on a business mission that doesn't directly involve negotiating, his language abilities are key to his success there.  He reports on the number of Japanese women that are now in the executive ranks, a far cry from when I first went there in the 1970s.  The photograph below (circa 1977) shows me in a meeting with all male executives, a translator to my left.  When tea was served, it was brought by women but they were not allowed to cross into the conference room -- a sacred domain of the men -- instead handing us the cups at the door.  Oh, how things have changed there.  The Japanese are finally becoming a more heterogeneous society.

From the depth of my files, I unexpectedly came across the speech I had referred to in this entry about a trip I made at the turn of the New Year, 1990 (I had presumed the speech lost to time).

I've reread that speech and am amused by many of its observations.  Japan was the economic juggernaut at the time, reveling in a sense of exuberant nationalism that comes with that territory.  To an extent I bought into that then, but Japan since --- when the Nikkei 225 reached its peak of 40,000, certainly a genuine case of irrational exuberance -- has paid an economic price for that incredible bubble, and, making matters worse, their government "zigged" (raising interest rates) when it should have "zagged" (monetary accommodation).  It only made their recession, and deflation a multi decade affair.

They too have been impacted by the economic rise of China and the creative destruction of the Internet.  When I review this speech which I delivered to Tokyo's Rotary Club, consisting of executives of leading Japanese companies at the time, I'm now fully conscious of those two giant forces no one at the time could have fully anticipated. I'm also acutely aware of how China is now in the position of Japan -- an economic juggernaut that is also flexing its nationalistic muscles.  Just witness its recent landing on the moon, a highly symbolic statement of where it stands today and the rise of its navy.

And the Internet has forged forces of incredible change, breaking down trade barriers that had stood for scores of years, "flattening" the world's labor forces, allowing manufacturing to follow where it might be done best and cheapest.  When one looks at the components of a car or a cell phone, one needs a world map to track the many places they come from.  And the impact of the Internet on the publishing industry in which I worked for decades are self evident, rendering some of the observations I made in the speech about the future of huge multinational publishing conglomerates more a figment of past imagination.   Google and Amazon rule!

So, completing the entry I wrote in March, 2011, I can now add that speech itself which I made at the end of 1989.  Still many of these issues exist, although, now, the trade battle, and our trade deficit, relate to China.  The more things change, the more things do indeed seem to stay the same.  Over to you, the next generation!

Speech to the Tokyo Koishikawa Rotary Club on December 29, 1989
by Robert Hagelstein

It is truly an honor for me to stand before you today and to have an opportunity to discuss Japan and United States economic relations as viewed by an American academic publisher. By Japanese standards, our business is a fledgling one, established only 23 years ago. During that time, we have grown both internally and by acquisition and we have very successfully sold our books in Japan. This sales success is attributable to the excellent work of our Japanese business partner and the continued expansion of Japan's fine educational system.

Thus, I have had some first-hand business experience dealing with Japan, and I have watched it emerge as a leading economic power. One of the reasons I am particularly honored to speak on the topic of Japan-U.S. economic relations as the decade closes, is because we may be on the eve of a new stage in world economic development. Not only will there be an economically unified Western Europe in 1992, but the recent move away from communism in Eastern Europe and the embracement of democratic and capitalistic philosophies, even in the Soviet Union, will create a completely new political environment and new economic opportunities.

Unfortunately, with the opportunities come the danger of political instability, and we need to make the right decisions. What evolves over the next decade very much depends on whether Japan, the economic community of Europe, and the United States trade in harmony or whether splinter groups succeed in creating an environment of mutual suspicion.

Therefore it is important that Japanese business leaders, like yourselves, understand how many Americans perceive past Japanese growth to an economic superpower status and how Japanese relations with the United States are perceived. Incidentally, I do believe that many of these same perceptions are gaining ground in the European community, an arena where Japanese exports and Japanese investments are becoming significant.

But please let me underscore that I am talking about perceptions, how people think things are, not necessarily how they really are. If steel is the raw commodity most widely used in the business of selling automobiles, ideas are the main commodity of my industry, publishing. Therefore it is fitting, although perhaps unfortunate, that two recently published books may have a significant impact on U.S. - Japan economic relations. The first, The Japan Which Can Say No by Akio Morita and Shintaro Ishihara, is not available in the United States except in a bootleg translated edition, but it is already having quite an effect. The book is seen as a strong expression of burgeoning Japanese nationalism which views America's present trade dilemma as being rooted in bigotry and the decline of the American will and competitive ability. It argues that Japan can say "No" to any American suggestion by simply playing the U.S. off against the Soviet Union for technology components.

The second book that will undoubtedly have an impact on American policymakers and the media is one that was recently published in the United States, and which was named one of the outstanding business books by Business Week, The Enigma of Japanese Power by a Dutch journalist, Karel van Wolferen. This book argues that Japan is actually an oligarchy and while Japan professes to be engaged in free market trade and to have democracy, it is run by a tiny group of huge mega-corporations. These corporations have access to cheap capital and compliant labor, and they are protected by the government. Van Wolferen also contends that the Japanese standard of living is not much above that of some Eastern European nations, even though the Japanese worker is enormously productive.

As I said these books may very well have a negative effect on how Japan is perceived by the broader American public; they may give intellectual support to those who want to raise barriers to Japanese imports and Japanese investments in the United States. While even the vociferous protectionists recognize that Japanese workers are among the most productive in the world, and that Japanese industry has succeeded all too well in producing well engineered durable consumer goods, many Americans perceive that the transformation of Japan in the decades after 1945 into an economic superpower occurred, not because of hard work, sacrifices and ingenuity, but, rather, because the United States and Western Europe were left with the responsibility to blunt the threat of Communist aggression, thereby having to put extensive human and monetary resources into defense.

Even today, while the United States spends six percent of its gross national product on defense, Japan spends only one percent. Many in the West cite such figures (as well as the comparatively low--at least until recently--levels of Japanese foreign aid to developing nations) as one of the primary reasons for Japan's rise to economic power. By having been able to concentrate on internal industrial investment and foreign trade, Japan is perceived to have captured--unfairly to some extent--our overseas markets and thereby transforming itself into the economic power it is today.

The argument continues that while the United States was forced to play the role of the world's policeman, making the huge miscalculation of becoming involved in the Vietnam War in the 1960s and then having to pay for it in the 1970s, Japan, under the leadership of Prime Minister Tanaka, methodically pursued its strategy of building exports. Automobile exports to the United States, for instance, rose from some 381,000 units in 1970 to 2,527,000 by 1985. By 1985, the U.S. - Japanese trade balance, which had been tilted in the U.S. favor in the early 1970s, became a U. S. deficit of some $46 billion.

Fortunately, as I said at the onset, we may well be on the eve of a new stage of world economic cooperation, and the widely held negative perception of how Japan got to where it is today may become far less important. The major changes, of course, are the rapid disintegration of the Eastern European military bloc and the continued steps toward military disengagement and disarmament. If these changes continue, tremendous amounts of capital and technical manpower can be shifted from creating new generations of advanced weaponry, and maintaining large military forces, into devising new generations of industrial and consumer products as well as rebuilding America's infrastructure, from schools and-hospitals on the one hand, to highways and housing on the other.

You and I recognize, that these economic and political changes will not be completed overnight. But they are underway, and they will help to strengthen very significant economic changes already occurring in the United States.

This change began when America's self-image reached its nadir in 1979. American military and civilian personnel were seized by radical elements in Iran and held hostage for more than a year. The Carter administration appeared to be impotent and American feelings about themselves were at an all time low. The United States was completing a decade of inflation, stagflation, and high interest rates. Most of this pain was inevitable, as the United States had to pay for its policy of guns and butter in the 1960s and for the enormous cost of putting a man on the moon.

When Ronald Reagan became president in 1980, the stage was set for a significant turnaround. President Reagan promised to lower the inflation rate and restore American values while maintaining a strong military presence, and to promote capitalism throughout the world. It is remarkable that, in his decade, he accomplished many of his objectives with the very notable exception of balancing the federal budget.

We also began to recognize that American schools, in contrast to Japanese schools, were graduating poorly trained students, who, in contrast to Japanese students, were inefficient workers. American industry, also in contrast to Japanese firms, could not design quality goods, could not organize their work forces efficiently, and would not invest for future growth.

However, it seems to be coming clear, at least to Americans, that our own "American bashing" has gone on for too long. Paul Craig Roberts, who is with the Center for Strategic and International Studies in Washington, said that it is America's own self-loathing that is giving Japan the mistaken message that we are really a declining economic power. He said that if we, ourselves, give the mistaken message that the 1980s were a failure from an American economic perspective, we will be failing to recognize the stunning accomplishments achieved in this decade by the United States. It will also be unlikely that our trading partners will also recognize those accomplishments.

In fact, while there are still many problems, such as the trade imbalance, lack of savings and a growing national debt, counterbalancing these are improvements such as more productive workers, lower levels of unemployment, stable inflation, and leadership in industries that have become truly global: software, entertainment and service industries. For instance, American engineers may have transformed the entire debate over high definition television, an area perceived in the United States to be a prime area for technology spinoffs in the 1990s and beyond, by devising a digital, not analog, approach. And even in the automobile industry, Detroit is now being seen, at least in the United States, as able to design and build a moderately priced and well-engineered durable product. Confidence in the long term prospects for the American economy is growing.

Perhaps of equal importance, in the fall President Bush convened a domestic summit conference in Williamsburg, Va., only the third such domestic conference in American history. It was specifically concerned with finding ways to improve American education. While no tangible improvements in education have emerged from that conference yet, as with reductions in military spending, this meeting could be the beginning of a movement that will have a significant impact on American economic growth in the 1990s.

Speaking in regard to my own industry, publishing, I believe that the global opportunities will also be significant in the coming decade. In the 1980s, two very significant trends emerged: one, a trend of consolidation through acquisitions by large multinational firms and, two, an explosion of information publishing which has now become even more dominant in the U.S. than trade publishing. In fact, by 1988, according to an estimate prepared by Veronis Suhler & Associates, gross expenditures on business information services was 19.7 billion dollars in the United States, surpassing book publishing's 18.4 billion dollars. Multinational companies, for example Reed Communications, Pearson, International Thompson, Elsevier, and McGraw Hill, are positioning themselves to become dominant forces in the 1990s. These companies are dedicated to information and scientific publishing. Meanwhile, the trade publishers have been teaming up with entertainment and consumer magazine conglomerates. John Suhler recently speculated that Japanese publishing firms may soon begin to acquire Western publishing properties, following the lead of Japanese investment in recording and film companies. Global giants will emerge in the publishing, entertainment and communications industries.

I have talked about how Japan's economic stature is perceived, how the United States (and perhaps others as well) perceived American economic power in the 1980s, and how Americans are beginning to perceive a stronger economic future for themselves in the 1990s. How Japan is perceived as an economic superpower in the 1990s is something that the leaders in this room can affect.

With a reduction in international tensions, I suspect few in the United States and Western Europe will be calling for Japan to shoulder the burden of increased military spending. But you can anticipate that calls for Japanese aid to the developing world will increase. Then calls for Japan to streamline its distribution system, to open them more to Western influences and to diminish the influence which its large business cartels have will also increase. But, by working to create the same conditions and environment for foreign goods and investment that you enjoy, or that you want for your goods and investment abroad, you will ensure that Japan is recognized as a responsible economic superpower. You will also help to ensure that Japanese workers will enjoy more of the material rewards of their decades of hard work.

Indeed, there are epochal opportunities in the 1990s and we must all decide how we can develop common interests and common goals. If the leaders in this room apply the same ingenuity and hard work you applied to transform Japan, you can be a very positive force in transforming U.S. - Japanese business relations and the world economy. Thank you.