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Sound and Fury

Author: Edward J. Lincoln, Director, Center for Japan-U.S. Business and Economic Studies, New York University
November 5, 2003
Newsweek Japan

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I truly regret that I haven't been in Japan the last several weeks so that I could have watched the daily drama of Prime Minister Junichiro Koizumi's government versus Haruho Fujii, up until last Friday the head of the Japan Highway Public Corporation. Nobuteru Ishihara demands Fujii's head! Fujii refuses to quit! Allegations are made of "secret" accounts! Fujii demands immunity from prosecution in exchange for disclosing names of crooked politicians! The prime minister (says Shukan Post) protects the mother of all expensive, useless, highway projects in his very own district! What great political theater.

None of it, however, really matters. By going after Fujii, Koizumi is only creating the appearance of undertaking reforms that will put the economy back on the road to long-term recovery. To be sure, the JHPC is full of corruption and needs reform. But it's not the major issue. If the prime minister is really serious about righting the economy, what he needs to do is deal aggressively with nonperforming loans in the banking sector, end deflation and improve the rules for corporate governance. The political spectacle over the JHPC simply diverts public attention from the key issues confronting the economy.

But let's turn to the problems of the JHPC. Here, too, the prime minister's focus seems curious. How Koizumi's proposed solution of privatization would serve to eliminate the corporation's corruption and inefficiency is not at all clear. Constructing and maintaining roads has been the job of government for at least the past two millennia. Only government has the coercive power to force people to sell their property for the construction of new roads for the sake of the greater public good. What advantage would there be in shifting an important part of the road network— high-speed limited-access highways— to the private sector? I have been a staunch proponent of capitalism throughout my career as an economist, but this carries privatization too far.

These highways may seem to be special and therefore separable from the rest of the public road network. Tolls charged for driving on these roads ensure that only those people using these highways pay for their cost. That may have been true 40 years ago when such roads were a novelty. But the reality today is that most people use these highways on a regular basis. For this reason, many societies have decided to fund these roads out of taxes rather than tolls (and hereby end the traffic congestion created by toll booths). Most highways in the United States, for instance, are toll-free and financed by taxes on gasoline.

Rather than creating a private company that must meet its operating costs out of toll revenues, why not follow the dominant world trend and finance these roads out of taxes? High tolls on Japanese highways may actually keep traffic levels artificially low. I have driven on highways in Shikoku that were virtually empty, while local roads were crowded with vehicles that presumably did not want to pay the toll. But if highways are financed out of taxes, then it would e inappropriate for the government to collect taxes and turn the proceeds over to a private company.

Supposedly, a principal reason for privatizing the highways is to stop construction of unneeded highways or end the corruption in the construction process. But would this really happen? A similar rationale was cited when the Japanese National Railways were privatized in the 1980s, but construction of new rail lines has been left to a completely separate organization (Nihon Tetsudo Kensetsu Kodan), allowing continued political shenanigans in the planning and construction of new Shinkansen lines. Privatization of the JHPC would likely end up with a similar solution—a private company to operate highways, with a separate, corrupt public organization to construct them. Koizumi would declare victory, but the problems would continue unabated.

The real answer to the problem lies in cracking down on the corruption and poor planning. For starters, the process of planning, constructing and operating highways should be far more transparent. A private company could well be less transparent than a public one. The public— both directly and through their elected officials— should be able to debate the need for new

highways on the basis of public information about cost and expected traffic patterns. Construction and maintenance contracts should be awarded on the basis of open bidding. Without an informed public and elected officials determined to make decisions through open debate on how to best spend public money and then equally determined to monitor the contracting process, no shift in institutional setting will make a difference.

So, the political show has been terrific. And if Fujii appeals his dismissal as he has threatened, I am sure that there will be more revelations and indignant posturing that will make entertaining television coverage. But the public needs to realize that this game is not about fixing the economy. In fact, it's not even about fixing the highway problem.

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