Japanese lessons for Italy

01.08.06 Publication:

When I was visiting Milan and Florence recently, I was reminded how appealing Italy is to Japanese visitors. Although Florence was also full of American students, visiting Europe after the end of their spring semester, for me the second most noticeable nationality of visitors was the Japanese. Perhaps it is just because I like Japan so much that I notice Japanese visitors.

Italy is, however, a wonderful place to visit. Walking through Rome, Florence, Venice, or lots of other Italian cities feels like walking through a living museum: beautiful old buildings and antiquities are all around you, constantly within an arm´s reach. It is also, unfortunately, a maddening place to write about and analyse. For the past decade its economy has been the sickest in Europe. Its politicians and even its people have resisted successive attempts to reform the economy and to modernise it. The old Japanese insult, often heard by Europeans during the bubble years of the 1980s, that Europe´s future is as the world´s museum feels almost fair and accurate if you narrow the geography down to just Italy.

Yet it was also true, for much of the 1990s, that western journalists became fond of drawing comparisons between Italy and Japan. In both countries, politics seemed disastrously corrupt, selfish and unproductive, with prime ministers and governments being changed all the time. In both places, government and corporate managements lacked transparency, with hidden networks of influence and power. In both places, there were regular scandals, revealing a lack of respect for the law and a poor record in enforcing it. And in both places the ordinary citizens didn´t seem to mind very much; they shrugged their shoulders, accepted the problems and just got on with their lives. Their tight family structures and community traditions helped ensure that in both countries there was social stability despite economic troubles.

These comparisons should not, of course, be taken too literally. The countries are different in so many ways: their histories, the structure of their economies, the role of religion and so on. Yet there was also another recent parallel. In 2001, both countries elected a charismatic new prime minister, who promised to bring reform, and whose parliamentary support proved strong enough to keep him in office for five years, the longest prime ministerial term in either of those countries for several decades. In May of this year, Silvio Berlusconi was voted out of office in a general election. In September, Junichiro Koizumi will retire voluntarily.

That difference in the fates of these two long-serving and charismatic prime ministers is important: it shows that the right question to ask now is not the old one of “Why are Japan and Italy so similar?”, but instead it is “Why has Japan succeeded in reforming and Italy has failed?”. For although I do not think Mr Koizumi should be given all the credit for Japan´s economic recovery in recent years, he nevertheless did succeed in introducing new reforms, especially to the role of government ministries and agencies, and he succeeded in properly implementing financial and regulatory reforms introduced in the late 1990s by the Hashimoto administration.

Mr Berlusconi, however, achieved only one success: he liberalised Italy´s labour markets, permitting workers to be hired more cheaply on short-term and temporary contracts, a reform that was quite similar to Japan´s own labour reform and has succeeded in reducing unemployment a little. But otherwise he failed, sometimes because he was blocked by powerful interest groups, but often because his real attention was not on Italy´s national prosperity but on his own prosperity and that of his huge media businesses, and on protecting himself from legal cases brought by Italian prosecutors who alleged fraud, bribery and other crimes.

So why has Japan emerged from its political and economic troubles while Italy has remained trapped? It is not, in my view, because Italians lack energy or entrepreneurial ideas, nor is it because they are simply happy to live as exhibits in a museum, welcoming tourists while eating good food and drinking fine wines. There are other explanations.

One answer lies in the unity of Japan´s society compared with the deep political divisions in Italy. Although Japanese politicians are often corrupt and frequently offer a rather depressing sort of dramatic scene, they are not deeply divided on ideological grounds. In fact, the main Japanese parties are strikingly similar to one another. That has meant that, despite lots of posturing and play-acting, there has actually been quite a widespread consensus during the past 5-10 years that reforms were necessary. In Italy, however, the leftist parties and the rightist ones are bitterly divided, almost as if they represented different tribes. This is a legacy of the strong communist influence in Italy, partly financed by the Soviet Union during the 1960s, and of the urban terrorism that hit Italy hard during the 1970s and early 1980s.

Another important difference, however, lies in the public finances. There has been no economic crisis in Japan, even if the 1990s brought stagnation. But beginning in the late 1990s, the government did face the real possibility that if it did not bring in reforms then there would eventually be a crisis. The government deficit soared to huge levels: almost 8% of GDP at its highest, which is more than double the level of George Bush´s much-criticised budget deficit in America. The overall public debt climbed towards 200% of GDP. The conclusion was unavoidable: something had to be done.

Hence, the Hashimoto administration began the process of cutting public spending in order to reduce the deficit, and the Koizumi administration began to privatise government agencies or reduce their role; the Housing Loan Corporation, the Public Highway Corporation, the Post Office. In Italy, there were quite a few privatisations during the 1990s, but none in recent years. The budget deficit was a problem for Mr Berlusconi, but not a disastrous one. Money talks, as the English say, and it has spoken much louder in Japan recently than in Italy.

Japan´s reforms were born of financial necessity, not any real social or political desire for change. Could the same now happen in Italy? The new government, led by Romano Prodi, a centre-left politician who was formerly president of the EU´s bureaucracy, the European Commission, is plainly hoping that it will. Since taking office in May, he has constantly talked about financial crisis, about public debt and the urgency of cutting the budget deficit (now 4.5% of GDP). That is his argument for why reform is necessary. Perhaps he has been studying Japan.