May 30, 2006 Japan, Moving Toward a More Advanced Knowledge Economy Ho-Chul Lee

May 30, 2006 Why Japan Study?  Japanese economy has shown ‘resilience.’ Ex: oil crises, yen shocks  Japan has many leading companies. Ex: Toyota  The strong industries coexist with weak industries. The Japanese experiences offers many useful insights.

May 30, 2006 Lessons and Implications  Economic and Institutional Regime Ex: Better supervision of the financial sector, corporation governance, transparency, flexible labor market, open economy…  Telecommunications Infrastructure  Skills and Human Resources  National Innovation System

May 30, 2006 Evaluation of Japan ’ s Economy  The evaluations of J-type firm model are capricious. from the best practice to a forgotten model  The evaluations of Japan’s economy shifted from ‘rising sun’ to ‘a lost decade.’

May 30, 2006 Q1. How to explain Japan ’ s ups and downs consistently?  Japan was “a victim of its own success.” To Korea, “shock of the East Asian crises in 1997” was a blessing.  The Japan’s systems worked well at an earlier stage of development but were ill- suited to cope with changes of knowledge economy.  The J-type model is shop-floor-based knowledge but the Silicon Valley model is a open-standards approach.

May 30, 2006 What ’ s Knowledge Economy  Economic paradigm has been shifted to ‘knowledge economy,’ - due to globalization, IT, capital market.  New economy differs from the traditional economy. - The economics is not of scarcity, but rather of abundance. - Pricing and value depends heavily on ideas.

May 30, 2006 Manufacturing E. vs. Knowledge E. 4 Pillars framework Manufacturing Economy Knowledge Economy Institutional regime Lifetime employment Seniority-based salary Reward system based on performance transparency SOC(Information infrastructure) Highway, harborInformation infrastructure EducationLarge number of well- disciplined labor Small number of the elite armed with creativity Innovation system Buying patents R&D budget Silicon Valley style open model

May 30, 2006 Dynamic Development Model Yang Traditional system Yin New Trend Principle of Progress: Yin & Yang Theory( 陰陽論 ) *West: Hegelian Dialectic Yin (shaded) and Yang (sunny) are opposite but complementary, and continuously evolving. Balance and Harmonization Approach By introducing new trend(Yin) and achieving new balance between Yin and Yang, society will develop.

May 30, 2006 Basic Conditions for Progress  Introduction of new ideas (Yin and Yang) - Openness and cultural tolerance  Leadership or Coordination system - Coordinated by nature (Taoism) - If impossible, then the government intervenes. Strong, but small; leader with morals (Zhong Yong)  Human-oriented approach - Well-educated people with morals (Analects, Mencius)

May 30, 2006 Apply to Japan ’ s economy 1970’s-80’s1990’s opennessCatching up Western technology Japan that can say “No.” Low level of inward FDI Coordination (Leadership) Free market Stable government Malfunctioned market unstable government Education (Human capital) Education boomTransition to education reform BalanceCreation of J type firm model Economic Miracle Lost decade

May 30, 2006 Apply to Korea ’ s economy Before the crisisAfter the crisis opennessK-style globalization Low level of inward FDI Introduction of global standards Rewards system Coordination (Leadership) Fail to reform bills Tension of labor relation IMF bailout program leadership of government Education (Human capital) Collapse of public education Flexible labor market Educating IT users BalanceEconomic crisis in 1997Achieve new balance Broadband based K-type model Rapid recovery

May 30, 2006

Q2. What ’ s Next?  Japan emerged from a lengthy stagnation.  Evolution to more advanced knowledge economy(Yang) -Ubiquitous network societies  New challenges(Yin) -Widening of income gap, skyrocketing prices of raw materials, bursting of asset bubble  Can Japan create new model?