CHAPTER 1: JAPANESE PRIVATIZATION, A IN COMPARATIVE PERSPECTIVE

Distinct patterns in national policy pattern can bestonly be illustrated through comprehensive comparison among nation states. Suleiman and Waterburys framework cited in the introduction listed the economic, political, and international factors elements that typically drive privatization movements, which show revealing a general pattern of privatization. What makes privatization reform distinct atin aeach given countrylocation, however, depends upon the relative importance of each driver. In this section, we would like to ask: What are the significant patterns of privatization in other industrialized countries? How do the economic, political, and international factors work together to shape privatization in these countries? How and why In what ways and for what reasons is Japan is different when compared to other industrialized countries? By approaching these questions through the perspective of a comprehensive comparative analysis, this study will attempt to answer the questions listed aboveThese are important questions need to be answered through comprehensive comparative studies. This chapter compares the Japanese privatization process with three major industrialized countries: the United Kingdom, Germany, and the United States. The comparison will explains why various nation states have chosen to conducted privatization through methods that are in significantly different ways from each other. The comparison will also examine how nation -states approach the subject of privatization, select differentgo through different processes of privatization, adopt

particular strategies in privatizing, and develop their distinctive national patterns of privatization.

Privatization in the United Kingdom: The Primacy of Politics Historically, Pprivatization in the United Kingdom has been dominated by political purposesmotivations. As table 1-1 shows, major privatization movements in the UK centered around policies adopted duringat the the Thatcher administrations, with only a small number of privatization projects occurred infalling into the domain of followingother governments administrations. The move to privatize happened during a period of rather intensely felt economic decline. After decades of relative economic decline,Under growing public discontent with the poor economic growth, the rising inflation rates, the growing unemployment rate and poor labor relations, the Thatcher government was elected to turn the tideunder growing public discontent with poor economic growth, rising inflation, growing unemployment and poor labor relations in the UK. As a key part ofKey points of the the 1980s economic reform that occurred in the 1980s, involvinged cutting taxes cuts, putting caps on public spending caps, reforming the trade-union reform, and closing the closure ofdown declining industries,. While the Thatcher ministry it contributed to the economic recovery of the UK, . But privatization could not solve all theseof its problems.

Table 1-1: Privatizations in UK: Centerifocusing onat the Thatcher Governmentsministry

BritishPetroleum 1979, 1983 1987

BritishAerospace 1981, 1985 Cable&Wireless 1981, 1983, 1985 National Freight Corporation 1982, 1985 Associated British Port Holdings 1983, 1984 EnterpriseOil,Jaguar 1984 British Telecommunications 1984, 1991, 1993 British Shipbuilders and Naval Dockyards 1985 BritishGas 1986 BritishAirways 1987 BritishSteel 1988 Water 1989 Electricity 1990 BritishCoal 1994 Railtrack, British Energy, AEA Technology 1996 National Air Traffic Services 2001 Source: David Parker, The UKs Privatization Experiment: The Passage of Time Permits A Sober Assessment, CESifo Conference Paper, November 2003, p. 32

Public enterprises in the United Kingdom wasere more extensively developed than those ofin Japan before the 1970s. According to a survey conducted by the National Economic Development Office in 1976, public corporations contributed to 11 percent of the national GDP and 8 percent of employment. Thesee figure reachedbecame 12.7 percent of GDP contribution and 9.4 percent of employment, share when the direct and indirect government investment in a number of semi-private companies wereas included.1 Like in Japan, political leaders in the UK played a crucial role in advocating for privatization reform. After the victory of the Conservative Party won the general election in the 1979 general election, Prime Minister Margaret Thatcher strongly opposed state ownership of many industries. It was Uunder Thatchers leadership

Dennis Swann, The Retreat of the State: Deregulation and Privatization in the UK and US , New York and London: Harvester and Wheatsheaf, 1988, p. 7
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that, several privatization programs were successfully carried out. Prior to the Conservative Partys rise to power in the 80s, the Labor Party had nationalized many industries in Great Britain including iron, steel, coal, railways, postal services, etc. After Thatcher took office, Sshe firstly reversed many of the decisions made by the Labor PartyGovernment in the 70s, and moved to privatize many industriess nationalizations of the 1970s, such asincluding the privatization of the British Aerospace. British Shipbuilders was split up and sold off piecemeal. Another prominenthigh-focus sale involved the states road-freight and storage business, the National Freight Corporation, which had almost gone bankrupt in the mid-1970s. Early privatizations also included state enterprises that the public in general wasere almost certainly unaware of, such as Amersham International and Enterprise Oil. In addition, Tthe Thatcher government also began began an ambitious sale ofselling portions of the governments stock of housing. Only , although other areas such as health and education, which werehad been regarded as a central componentspart of the welfare state, were little affected by privatization. Privatizations of these areas were seen as rather too extreme a step too far politically; and . Ffaceding with strong public outcryobjection, Thatcher repeatedly claimestated that the Conservative Party would not dismantle welfare projects such as the National Health Service (NHS).2 The privatization of British Telecom (BT) was privatized in 1984, (almost at the same time as NTT.T) is a particularly notable case, in part due to its remarkable

David Parker, The UKs Privatization Experiment: The Passage of Time Permits A Sober Assessment, CESifo Conference Paper, November 2003, p. 32
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success It became a particular success in many respects. In the 1970s, British Telecom had quite an entire monopoly ofover telecommunication services and equipment supplies within the UK before it was privatizedUK. Hence in 1980, it became separated from the Post Office and became a new public corporation owned by the UK government. Since tThe 1980s, however, ,saw the rapid technological change in the telecommunication industry and had experienced rapid technological changes and BTs earlier natural--monopoly advantages gradually declined. At the same time, large-scale investment wereas still needed to meet the growing demand for telecommunications services development, especially in data transmission and cellular phones, investment to which scale the UK government itself was unable to provide. In 1980, British Telecom was separated from the Post Office and transformed into a new public corporation owned by government. InBy 1983, , the decision was takenmade to privatize BT. In contrast to AT&T in the U.S., however, BT maintained its vertically integrated network. At the time, privatizing BT privatization was took then the largest single flotation in the markets history. After privatization, BTs profitability increased from 1.5 billonbillion pounds inin the years 1984-1985 to 2.1 billion pounds infrom 1986-1987. The sale of BT had major political motivations that went far beyond the scope of simple market efficiencypurposes.. For one, Tthe government underpriced the dealissue, giving enormous profits to those who bought the BT shares. The share opened at a premium of 45 pounds on their partly paid price of 50 pounds, giving a 90

percent profit to those who sold their shares immediately. Such a strategy was more a ploy to bring in support for the Conservative party, than a strictly capitalistic business decision aimed at raising revenue. SinceM most of the profits went to people who were potential conservative voters., privatization of BT It aided investorspurchaser, not the state finance like it did in Japan. For the most partIn fact, most, privatization programs helped to meet the Conservatives objective of creating a share-owning democracy. Figures show that the percentage of Ssmall investors who bought shares and the percentage of adult shareholders s holding shares rose sharply during the 1980s, from around 7 percent to 25 percent.3 Later many small shareholders would soldell their holdingsshares forto make a quickfast and easy capital gainreturn on their investment, with . Most of thosethe conservative voters being the individuals who profited the most from this arrangement. investors who benefited from the shareholdings became conservative voters. Another aim of the The Thatcher agendadministration was also aimed to to weakenattack the power of public-sector unions. This was for two reasons. Ideologically, t The Thatcher administrationgovernment believed that union power had caused many problems for the country through, including exacerbating inflation rates and undermining the competitiveness of industry (for example by by pushing for higher wages). ThatcherSecondly, the administration also also struck at unions for political reasons, attempting to weaken the Labor Partys support base, which

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centered center upon public firms. Thus, Pprivatization transformed public sector unions into private-sector unions, which were typically less unified and less active than their public predecessors. Privatization also gave privatized enterprises the opportunitythe right to shed excess workers, which further reduceding the number of organized Labor supporters. Thus privatization was a way for the Conservative party to reduce the power of their main competitors, the Labor Party, and gain a firmer footing within the British governing system. From a different perspective, Pprivatization further decreased the power of the bureaucracy. More than any other country, the United Kingdom had, through its privatization process, coupled regulatory reform with institutional reform, shifting power from the central government to new independent regulatory agencies. The government created twelve new independent regulatory agencies after 1979, including agenciesthose for telecommunications, financial services, gas, water, electricity, and broadcasting.4 These non-state independent regulatorsing agencies significantly reduced the power of bureaucracy in distinctivenumerous ways. Had this sort of institutional reform been emulated by the United States,This sort of institutional reform it would have been extremely difficult in the United States if not impossible because of due to constitutional limits on reorganizing the state. It would have been be even more unlikely in Japan where the central ministries so zealously obsessively guard their authorityative power. In the endgeneral, privatization for many industries did not bring as much active

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competition as would have been expected. When BT was privatized, the gGovernment allowed only one competitor in the long-distance telephone market., For and the British Gas, their monopoly remained intact even after its privatization. In the airline industry, the prevailingdominant market power of British Airway persisted even after theits formal privatization of 1987. Ever Ssince the end of the 1980s, the Thatcher governmentadministration has triedstarted to promote market competition and conduct major regulatory reforms. The British Gas was privatized and the vertically integrated national monopoly was divided into generation, transmission, distribution, and access components. In the generation sector, the government even established two generating companies and encouraged the newly established companies to compete with each other. In telecommunications, the government widely distributed new licenseding new entry intofor long-distance calls, and allowed the local telecom companies to run cabletelevision services. On the other hand, Privatization in the UK has had a rather prolonged implementation stage due to the tendency for agencies to remain gridlocked over certain policies. This was partly because Wwithout the corporatist links between government and industry, effective policy coordination within the government was extremely difficult. and nNo one agency was able to have controla clear say in the process of arriving at the process of applying concrete resolutions tin the midst of o regulatory policy debates. Hence, Tthe histories of the new regimes in telecommunications, financial services, and the public utilities industries are had all

been characterized by replete with repeatedrecurring clashes between the new regulators and the regulated industries. Across the European Union, European Commission Directives also had played a part in stimulating privatization. Directives had required, in particular, the opening up of telecommunications and electricality power to market competition. There had also. In addition, there had been measures liberalizing the provision of services providing industry in posts, gas, and rail transport. However, because the UK had been athe leader in privatization, the EU directives haddid not have become the the same impact on same stimulausting for privatization in the UK as they had beendid in some other parts of Europe. The EU directives had an impact in UK in terms of harmonization of regulatory rules across Europe rather than in terms of triggering state asset disposals. Instead of being an impetus for the disposal of state assets, the EU directives were simply measures that coordinated regulatory rules, ones sometimes already adopted by the UK, across all of Europe. Since the 1990s, the pace of privatization in the UK has slowed down. In the 1990s, the Conservative government under John Major continued the privatization movement, but many of its privatization programs failed and led to renationalization of the corporations, such as that of the privatization of British Railways (BR) in 1997. The British Railways was formed in 1948 after the nationalization of the big four large railway companies. Over time, and started running most of the British railway system. Ssome lines on the network becamewere unnot profitable, and the general financial position of BR was gradually started deteriorating. From 1994 to 1997,

British Rail was officially privatized. Since 2000, however, the service reliability of Railtrack had significantly decreased and itsthe financial condition continued deteriorateding, yet . Tthe government refused to supplyincrease funding to the company while it still remained under private ownership. Hence, Iin October 2001, Railtrack was placed back into government control and. byIn 2002, the government had replaced Railtrack with Network Rail, a company limited by guarantee but effectively a new state enterprise. In the end, althoughdespite the governments rrefusedal to concedeadmit that this amounted to renationalization of the railway infrastructure, the UKs railway system was effectively back under government control. By the 1990s, Ppartisan orientation was no longer had major impactclearly connected with oneither support or opposition to privatization policy in the 1990s. In 1997, the Labor Government regained power in the UK and also made several efforts towardson privatization, such as privatization of the Post Office. Initially, it was Tthe Conservative Government who had initiated introduced privatizingation of the Post Office in early 1990s, but they backed away eeventually backed down due tobecause of the potential adverse impacteffects on rural post offices and the possible possibility of losssing a of uniform postal charges across the UK. Many Conservative politicians elected by rural constituencies feared of losing their seats after theif introduction of marketprivate competition in the industry were to be introduced. However, Aafter 1997, the subject once again was introduced by the Labor Government which began started further commercializationation of of the Post Office. Thus, Tthe Royal Mail

Holdings Corporation and its subsidiary Post Offices wereere created in 2001 and became public limited companies. In 2007, the government published the Dissolution of the Post Office Order, under which the Post Office was formally abolished, effective with effect from May 2007 onwards. At that time, Tthe government still owned more than 50,000 ordinary shares and some special shares. With the passagesing of the Postal Services Act 2011, however, the government privatized up to 90 percent of Royal Mail, with only 10 percent being held by Royal Mail employees. Post Office Ltd was thus separated from Royal Mail Group and remained a public company. Thus Royal Mail became completely privatized and Post Office Ltd separated out and remained a public company.

Privatization in Germany: Strong Influence of Bureaucracy and European Community Pressure TheFor Germany, it was the sweeping privatization movement around the world that pushed the German government to consider changes in their public sector as well. Compared to the comparatively drastic deregulation and privatization movements in many otherthese countries, however, privatization in Germany had beenremained quiterather inconspicuous.5 There wereThis is for several reasons. Firstly, there had been long tradition-Germany traditionally that favored government regulations and public-owned enterprises; secondly, trade unions of the time were powerful and strongly opposed privatization and deregulation. Thus, despite the conservative

Gunter Knieps, Seven Privatization of Network Industries in Germany: A Disaggregated Approach, in Marko Kothenburger and Hans-Werner Sinn, Privatization Experiences in the European Union, MIT Press, 2006, p.202
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governments pledge to undertake bold public sector reform, privatization it had in Germany lagged behind most other European countries. Even Aafter two decades of a slowthe liberalization process, many public services still remain firmly under the control of the government,. Furthermore, and the newly privatized enterprises tend to can hardly be consideredlack a competitive edge and can hardly be considered successful. Germanys first attempt at reform occurred Iin December of 1987, when the German government appointed a special commission onwith the specific goal of bringing about deregulation. Yet, However, no major reform was actually carried out. the weakness of coalition government made it hard for the ruling coalition to impose any dramatic change on the public sectors. And although Tthe move toward German unification beginning in 1989 did have a small impact on initially reviveding the governments enthusiasm for neoliberal reforms, butit was ultimately unsuccessful and the government eventually abandoned its efforts eventually. Hence, during this period no major reform was actually carried out. The weakness of coalition government also made it hard for the ruling coalition to impose any dramatic change on the public sectors. It has only been Ssince the 1990s that, the German government has earnestly started to enactput into motion a series of pragmatic measures andaiming to achieve a piecemeal revisions of the public sector. Once such reforms began, German ministries actually had considerable authority to make modificationsies within their specific areas. After Ginitiatingovernment officials initiated regulatory reform, and

tgovernment officialshey had enormous power to control the process. They also established independent policy networks in various industrial agencies, andwhich effectively facilitated regulatory change. Thuserefore, privatization in Germany was essentially a very orderly and consensual modification produced a strong bias toward orderly and consensual changewith close supervision on the part of the government. For Germany, as in the UK, Tthe privatization of the telecommunications industry was also onea major focal point part of thepublic sector reform. Historically, Tthe German federal government had been playinged a primary large role in telecommunications and the Deutsche Bundespost (DBP) was the leading ministryenterprise, with for a clear telecommunications monopoly.6 The DBP was formally run by a council with representatives from the conservative and progressive parties, the state government, the unions, and the telecommunication industry. Hence, the DBP itself had considerable influence in determiningover the issues regarding telecommunication privatization. In 1982, a new conservative coalition government came to power , with themainly controlled by Christian dDemocrats, dominating thewho were in the majority within the coalition. The coalition government showed its interests in telecommunication reform early onfrom the very beginning. The new posts and telecommunications minister, Christian Schwarz-Schilling, was a particularly enthusiastic about thesupporter of reform. Hence, in 1985, Tthe government appointed a twelve-person commission in 1985,, chaired by Eberhard Witte, and

Steven Vogel, Freer Market, More Rules: Regulatory Reform in Advanced Industrial Countries, Ithaca, London: Cornell University Press, 1996, p. 224
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includedwith representatives from the unions, the state governments, and the media, to draft athe reform plan. The DBP heavily influenced the content of the Witte Commission report. Before the Witte report came out, the DBP organized some officials to draft proposals for telecommunication privatization. Witte report resembled the DBP draft very closely, with a large portion reflecting the content of the DBP proposals, with merely a few important differences.It is of interest to note, however, that the reform plan drafted by the Witte Commission was not simply the product of the twelve government appointed representatives. Before the commission even drafted their proposal, a previous proposal had been drafted by DBP officials who produced their own proposal for telecommunication privatization. When the Witte report finally came out, it became clear that it very closely resembled the DBP draft, with only a few minor differences. Hence we see that although telecommunication reform was encouraged by the new coalition government, the privatization process was still influenced by the DBP itself. On the other hand, Tthe postal workers union, the Deutsche Postgewerkschaft (DPG), strongly opposed reform. In response to reform proposals, tThe union launched a massive campaign to protest theagainst the proposed privatization measures. , They particularly opposed the separation of the telecommunications and postal divisions of the Bundespost. They also organized public demonstrations and even mobilized d support from politicians at both the federal and state levels to speak out against privatization. Under the unions continueduing resistance to the reforms, the government was forced to make several concessions, such as abolishing the DBPs

governing council, creating a new board with union representation, and establishing an organization within the DBP to protect workers rights. The government also agreed not to separate the postal and telecommunications division entirely, since the union was afraid that such a complete split cwould divide the union. Externally, Tthere were also pressures from the U.S. government which required thefor DBP to open its procurement system. The U.S. government pushed the equipment manufacturers, Siemens in particular, to support domestic liberalization as the quid pro quo for a presence in the U.S. market. Finally i In November of 1993, DBP telecom was privatized. In 1996, 25 percent of DBP stock was sold. Over time, T he DBP Telekom has gradually gained access to private capital markets as well asnd the global marketplace; yete. Tthe government has retained substantial control, however, with government officials filling in five of the ten top positions on the Telekom board. In other areas, the German airline market was liberalized in 1998. Whereas navigation and truck transport services were alreadytypically provided by private firms, the German national airline company, Lufthansa, was not completely privatized untilin 1994. In the railway sector, the Bahnstrukturreform (railway reform) was enacted in 1994. Tariffs for truck transport, shipping market, in Germany had been liberalized since January 1994. Even aAfter decades of privatization, state ownership ofon the infrastructureal level still plays an important role in Germany. Highways are owned by the state, and German railways are only formally privatized. Airports are to a large extent owned by

the state, but, increasingly more and more, private investmentcapital in airports ihas become attractedive. Since 1997, the heavily usedhigh traffic airports ofin Dusseldorf and Frankfurt, and subsequently in Hamburg and Hannover, were partly privatized. In the railroad sector, there has been an intense controversy overon the issue ofthe separationg of railway infrastructure from railway services and thenot only complete formally privatizingation of the service companies likeof the Deutsche Bahn AG. To this day, Thisthis debate has not yet beenremains unresolved. The privatization reform process in Germany had been strongly influenced by the European CommissionsEC policy of liberalizing European service markets. For example, the European airline market was liberalized by the so-called three liberalization packages in 1987, 1990, and 1992, that includinged the reducingtion of airline tariffs and the liberalizing of market entry for international flights. In accordance with EU liberalization policy, the German airline market was liberalized in 1998. Privatization in other areas such as navigation and, truck transportation has also followed the speed and pace of the European Commission (EC) liberalization processdirectives. After the reforms above, the government has cautiously protected the private sector from tooa hasty and disruptive of a deregulation process and has buffered firms from the full force of market competition. The government, at the same time, has maintained its principlescapacity into formulatinge coherent policies for individual sectors. Although governmental functions were largely realizedcontrolled by a few powerful central ministries, a more complex system whas been adopted to facilitate

increased coordinateion between multiple authorities.

Privatization in the United States: The Classical Economyics-Driven Case Privatization in the United States has beenis a classical economyic-driven case. From theThe U.S. government has been very direct in encouragingadvocating a free market economy. Although there are substantial government regulations in the United States, it takes place to a lesser degree, they are slightly less restrictive than isthose observed in other industrialized countries. TheSince the U.S. economy iwas not based on a tradition of public ownership to begin with, and the public sector overall istarted out smaller than in most other nations. Data shows that the United States economy is much less state-directed than other equivalent industrialized nations The United States had a less state-directed economy when compared to other industrialized nations. In 1979, public enterprises in the US only produced only 1.5 percent of national income.7 Unlike those in the UK, there had beenis a notable absence of nation-wide public corporations in sectors such as transport, electricity, gas and telecommunications. OnAt the federal level, there were only a few public enterprises, including the Tennessee Valley Authority, a few airports, and rail transportation. On theAt state and local government level, public enterprises were only dominantted in activities areas such as municipal mass transit, ports, airports, water, and electricity. In general, the US government does not engages in neither long nor short-term

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economic planning, nor does it coordinate economic policy. Also, it is not the role of the government, to provide The government also does not provide guidance to various sectors of the economy, although there arewith exception to a select few casess. Unlike most European countries, Tthe United States is not a typical social welfare state as most European countries, whichere the social insurance programs maintained by the government are limited in its scale.8 In contrast to countries like the UK, Germany, or Japan, Pprivatization in the U.S. has largely been based on deep-rooted philosophy, such as free market, deregulation, and efficiency, rather than short-term expediency as in other countries like the UK, Germany, and Japan. In general, when speaking about Pprivatization in the United States, we refer to not only referred to the sale of public enterprise, but also to other less dramatic policies,. These include policies such as contract working out, imposition of users fees, and vouchers, with regardthe implementation of to which the United States had beens taken a the leader. The U.S. government first startedbegan to formalize and even encourage national agencies to and formalize contracting outservices out to private industry by national agencies during the 1950s. In 1955, the Eisenhower administration explicitly stateressed that the Federal government would not start or carry out n any or begin commercial activity to provide a service or product for its own use if such a service or product couldan be procured from private enterprise through ordinary business channels.9 In the 1970s, contracting out arrangements further expandedspread amongto local governments,. whichAt the time, local
Jessica R. Adolino and Charles H. Blake, Comparing Public Policies: Issues and Choices in Six Industrialized Countries, Washington DC: CQ Press, 2001, p.76-78 9 Jeffrey R. Henig, Privatization in the United States: Theory and Practice, Political Science Quarterly, Vol. 104, No. 4, Winter 1989-1990, p. 660
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governments, faced with considerable financial pressures, were eager to find ways and strived toto seeks ways to ease their e increasing fiscal burdens. Contracting out services and the impositiong of user fees were simply easy solutions part of the suggested solutions to relieve the financial situation. Other tactics, including hiring freezes, improved revenue collection, multiyear forecasting, and creative capital financing, were also adopted during this period. In the United States, Pprivatization in the form of the actual sale of public enterprises assets was relatively new in the United States. Early sale of public enterprise included the privatization of the Federal National Mortgage Association (Fannie Mae) in 1954,, originally which was established in the 1930s, as a nationwideal governmental corporation to provide a a new, and reliable secondary mortgage market for consumers. During the mid to late 1970s, public enterprises were increasingly became criticized for inefficiency and unresponsiveness to the needs for theof consumers. Into the late half of the 1970s, such a belief became more and more prevalent. Therefore, over time, This was advanced with greater conviction in the second half of the 1970s and after. The the national government therefore showed a strongbecame even more willingness to substantially reduce its regulatory involvement in the private sector. This was accompanied by, with actionsthe passing of policies such as the Securities Acts Amendments of 1975, the Airline Deregulation Act of 1978, the Motor Carrier Act of 198, and the Depository Institutions Deregulation and Monetary Control Act of 1980.10 Under theThe Ford administration,

Dennis Swann, The Retreat of the State: Deregulation and Privatization in the UK and US , New York and London: Harvester and Wheatsheaf, 1988, p. 231
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began to advocate deregulation in congressional hearings was promoted; and while . Kennedys administration began with the deregulation in the airlines, but the movement quickly spread to other areas, including trucking and energy. Political leadership also played an important role in initiating large-scale of privatization in the United .States. For instance, Tthe election of Ronald Reagan in November 1980 marked an important shift in the privatization movement. Reagan made deregulation a pillar of his economic program and further accelerated the privatization trends that had been beginning to unfolding since the Carter administration. From the very beginning of his presidential campaign, Reagan advocated for small government policy early in his campaign for the presidency, stressing the need to restrain meddlesome bureaucrats, reduce taxes, aid private businesses, and unleash thethe natural entrepreneurial spirit of America, and provide help to private businesses.. For Reagan areas such as telecommunications and finance were of vital significance. AfterIt wasnt long after he washis electedion, that the White House began to formulate proposals very similar in nature that emulated to the privatization reformsprocess already underway in Great Britain under Thatcher government. Reagan even interacted dynamically with it in areas like telecom and finance. The Reagan administration began to target programs and assign assets for privatization early in its first term. In early 1987, the first wave of major privatization reform includedwas carried out with the sale of the governments 85 percent interestshares in Conrail, a freight rail corporation in the Northeast corporation

established by Congress in 1976 to provide freight rail service in the Northeast. TheA PPresidents Commission on Privatization, established in September 1987, proposed further efforts to increase participation in private participationenterprise across a broad range of policy areas including low-income housing, air-traffic control, the postal service, prisons, and schools. As in the UK and Germany, Tthe most strategic and selective aspects of the privatization movement werebecame most apparent in the telecommunications area, including the forced dissolution of the AT&T monopolywhere the long-time monopoly held by AT&T was forcefully dissolved. The break-up of American Telephone & Telegraph was regarded as a success in many aspects. It was aAccompanied by a deliberate scaling back by the Federal Communications Commissions deliberate efforts to hold back of efforts to superviseion on rates and limit the involvement of the phone companies involvement iin many peripheral areas including data processing., Iit encouraged the entry of many new firms and the expansionded of the range of options available to consumers. Furthermore, thisThe aggressive action was supported by the federal courts, which confirmeding the strong stance that a very strong position for the national government took in support of on privatization. In 1989 when President H.W. Bush took office, he continued Reagans privatization programs and supported market mechanisms as the vehicle forto promote reform. He named oOne of Bushshis cabinet members, Jack Kemp, was a leading advocate of enterprise zones and the sale of public housing to existing tenants.

The 1988 report of the Presidents Commission on Privatization concluded that contracting out services out on a selective basis had been one of the governments primaryncipal ways of doing business. Bush also established the Council on Competitiveness and pushed for regulatory relief. In 1992, , and he declared a threemonth moratorium on new regulations in early 1992. During President Clintons administration, asked Vice President of the time, Albert Gore, trano run a program to Reinvent Government by streamlining regulatory procedures and cutting red tape. ByIn February of 1995, the U.S. government had declared a suspension on new regulations and passed a bill to restrict new regulations. The bill subjected new regulations to strict risk assessment and costbenefit tests analysis and gave regulated firms the right to sue if thesewhen tests are notwere improperly conducted.11 In the US, Thethe outcome and effect of privatization projects varyied. Projects such as Conrail, National Airport, and federal utilities created substantial benefits, but suchthese benefits were geographically limited. The privatization of public housing and the U.S. Postal Service hasd been regarded for many years as a failure. The effect of other privatization projects, such as governmentally owned satellites and Naval Petroleum Reserves, wasere contingent upon uncertain scenarios. One purpose of privatization in the US was to reshape The U.S. government mainly used privatization to reshape the interest-group environment. In 1986, the Office of Personnel Management proposed a Federal Employee Direct Corporate

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Ownership Plan, which created new, employee-owned, independent companies that would compete for governmental contracts, initially on highly favorable terms. The 1988 report of the Presidents Commission on Privatization concluded with a strong statement strongly in favor of structuring privatization initiatives to create new interest groups with direct stakes in accelerating the process of shrinking the size and scope of governdecreasing the mentscope of government control and promoting small government. According to Butler, it was an efficient political strategy because privatization involved concentrating benefits, such as assuming tax relief and other special privileges, on a limited segment of the population, including beneficiaries and service providers, while the costs were spread widely.12 At the same time, U.S. private-sector actors were able to challenged the government rules and regulations much more direct aggressively than in many other countries. They challenged the existing regulations through both marketplace innovation and political action, both of which were facilitated by athe highly codified and legalistic regulatory regime. Under a more discretionary system, such as that of Japan, private actors arewould be hesitant to outmaneuver the system because they understand the risk of being sanctioned if they disobeyed the governments authority. In the United States, however, challenging the interpretation of the rules is part of the give and take legaladversarial system of regulationwhere laws and regulations can easily be overturned by changing circumstances or decisions made by the judicial system.

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The courts played a much more central role in the process of regulatory change in the U.S. than they did in the United Kingdom, continental Europe, or Japan. In several cases, the British government had made it abundantly clear that it had little tolerance of judicial policymakingThe British government had demonstrated its intolerance for judicial policymaking on several cases. In contrast, Tthe U.S. government, however, due to its unique history as well as its inherent checks and balances sort of nature, had always continued the tradition of alloweding the court to takehave final say over the constitutionality of regulationslaws and policies. At the stage of implementation stage, the American privatization exhibited similar characteristics to that inof the U.K. The U.S. federal government had nohad no intentions for maintaining firm control in the process of privatization. No one agency hads been ablebeen completely in to control of the process, and privatization has tended to progressed slowly,. As is the case with the passage of many laws in the US, policies not only tend to remain in gridlock for significant periods of time, there is no guarantee that it with any clear resolution likely to bewould not be challenged at a later stage. Thus, pPrivatization in the States has had been uneven, adversarialerratic, and unpredictable.

Conclusion: Japanese Privatization in Comparative Perspective Although various privatization processes and outcomes presented in this chapter are only rough descriptions, they inevitably lead themselves to a study of comparisonnevertheless lend themselves to analysis through looking at the underlying

factors in their similarities and differences. As showneen in this chapter, privatizations in countries like the UK, Germany, and the United States are all more or less influenced by macroeconomic concerns, politics, and international influences. The influence of each factor, however, varioues greatly in each country, which determinesing the different patterns of privatization that prevails in a given country.

Table 1-2: Determining Factors of Privatization in UK, Germany, US, and Japan UK x x Germany x x US x x Japan x x x

Macroeconomics Politics Foreign pressure

Privatization in the UK was motivated highly political undertones. Like in Japan, privatization in the UK came after relative economic decline, and major privatization programs, together with and other reform measures, such as tax cuts and public spending caps, were aimed toat recovering the rapidly declining national economy. However, more than just the economic push factor, Pprivatization in the UK, was a double edged sword that not however, mainlyonly helped to meet the Conservative Partyss objectiveultimate goal of creating a share-owning democracy, but also gained conservative supporters through throughthe sale of underpriced stock sale to potential conservative supporters. Like in Japan, political leaders had been able towere able to push for top-down corporate reforms that had served as catalysts for large-scale economic change. But in sharp contrast to the situation in Japan, Tthe British government favored independent regulators which, substantially reduceding

the power of the bureaucracy, which is also in sharp contrast to Japan.. German privatization, on the other hand, had beenwas characterized by the heavy handed control dominated by the elite bureaucracy. Due to faction struggles and constant change of the cabinets in power, the coalition government had great difficulty imposing drastic change on public sector reform. The coalition government changed frequently due to factional struggle and change of various cabinets and had great difficulties to impose drastic change on public sector reform. German ministries, instead, had considerable authority to acties within their specific areas. Like the powerful MOF bureaucrats in Japan, German government officials not only initiated regulatory reform but also and they had enormous power to control the process. Since the 1990s, the privatization process in Germany had been strongly influenced by the EC policy of liberalizing European service markets, with many industries, such as airlines, navigation, and truck transport, being privatized during the EC liberalization process. After decades of privatization, state ownership still plays an important role in Germany and the government continues to protect the private sector from dramatic deregulation and competition. Since the 1990s, the privatization process in Germany had also been strongly influenced by the EC policy of liberalizing European service markets, with many industries, such as airlines, navigation, and truck transport, becoming privatized during the EC liberalization process. Perhaps the most different from Japans privatization process was Pprivatization inas it happened in the U.S. had been theAs the classic economics-driven case, which is in sharp contrast to Japan., U.S. privatization hasd been centered upon encouraging

deregulation, developingment of the private sector, and reshaping the interest-group environment. While theThe United States has the most fragmenteddecentralized political regimefederal government among all the nation examined here, it does have very and strong interest groups. But like in Japan, political leaders still exert considerable influences on public sector reform. For example, Pprivatization in the U.S. was stronglyinitially advocated by President Reagan and hads since been followed by a variety of administrations. Compared to the three Western countries considered here, Japanese privatization has had a distinct pattern. Privatization in Japan has been continuously also been driven by factors such as financial insolvency, political concerns, and foreign pressure. Financial insolvency had beenwas a leadingmain concern for many privatization initiatives, such as the case of JNR and highway privatization where reducing corporate debt was the ultimate goal in the case of JNR and highway privatization. Raising government revenue was also central in the case of NTT and Tobacco. Privatization in Japan has also beenwas also highly political, such as in the case of the Nakasone administration weakening the public-sector labor unions during the Nakasone administration and or the attacking on the Tanaka faction during the Koizumi administration. Foreign pressure was also a major driving force forbehind the governments decision to carry out public sector reforms, particularly in the privatization of NTT and Tobacco in the 1980s. Compared to other industrialized countries, all the three factors appear stronger in Japan. The strong influence of finance, politics, and foreign pressure, are due to the

unusual problems Japan faces, such as the ever increasing financialstructural gap between rising government expenditure and revenue, one-party dominance and intense the strong political intervention in public sector development, and the existence of stronginfluence of the U.S. influence. As the following chapter demonstrates, all these factors have gradually deepened the embedded dilemma in Japans public sector political economy. Thus, for all the above reasons, the public sectors had increaseding difficulties to surviveing and privatization became a choice that the an inevitable option for the government was compelled to make.

CHAPTER 2: HISTORIC REVIEW OF JAPANS PUBLIC SECTOR AND PRIVATIZATION

The previous comparative chapter has shown the distinct privatization patterns of three major industrialized countries: such as the UK, the United States, and Germany, all , driven by diversevarious macroeconomic, political, and international

prioritiesconcerns. This chapter reviews the general development of the public sector in Japanese history and then the major privatization projects thats played outoccurred. In analyzing the unique features of postwar Japanese privatization pattern, the major role of institutions and historical context in determining policy outcomes are crucial. Analysis of public sector reform and privatization therefore requiresHence, this study proposes to analyze public sector reform and privatization through usage of consistent information, accumulated data, andcareful examination, that draws on accumulated information and knowledge, particularlyfocusing onon policy outcomes at a critical juncture which often provoke the recurrence of a particular pattern into the future. The historic review seektends to answer the following questions: What was the role of the public sector in prewar period? How did privatization occur and what were the long-term implications? How did privatization then occur they differently from privatization later and why? What were the political-economic functions of the public sector in the postwar period? What wasere the driving incentives to privatize themafter the war and what were the consequences?

Public Sector in Prewar Period and Previous Privatization Attempts In general, public enterprise refers to an undertaking that is owned by a national, state, or local government, supplies services or goods at a price, and is operated on a more or less self-supporting basis.13 A broader definition, however, asserts that the organization of public enterprise takes three main forms in which the activity may be operated as a government department, as a public corporation, or as a joint stock
13

Public Enterprise, Encyclopedia, Britannica, Vol. XVIII, 1968

company in which the government is the majority or the only shareholder.14 After the Meiji Restoration of 1868, the Japanese government inherited a small number of mines, dockyards, and cotton mills from the Tokugawa Shogunate. The new Meiji government also realized the growing need to establish new industries, and started to invest in yarn plants, cement factories, cotton-spinning mills and woolengoods factories. Hence, Afterin 1870, the Japanese public sector experienced its first major expansion. During this period, one of the first major industries to be developed by the government was the For example, the government was highly successful in developing the telegraph industry. By 1880, almost all of Japans major cities had been linked by telegraph. Another focus of state enterprise development was Tthe railway system, one of whose were another major field of state enterprise development. Japans ffirst lines railway line betwopened between Tokyo and Yokohama was opened under government auspices in 1872. The government later completed another line between Kyoto and Kobe in 1877. The mining industry was another industryalso under rapid development. Before the 1880s, tThree modern reeling mills were established by the government before the 1880s had , which encouraged the establishment of more twenty private mills by efore 1885.15 In 1880, nine mines were also put under thegovernment management of government. Though the number was small, they were all equipped with modern machinery and soon started to produce on a large scale under government supervision.
N. Branton, Economic Organization of Modern Britain, London: The English University Press, 1966, p. 132 15 Kiyohiko Yoshitake, An Introduction to Public Enterprise in Japan, Thousand Oaks, California: SAGE Publications, 1973, p. 39-42
14

The significant thing about theose early government factories mentioned above is that although they were a constant drain on national resource and were total failures in terms of profitability, they were extremely important in supporting economic development, but were total failures in terms of profitability, and proved of Japan during the early Meiji period a constant drain on national finances. Between 1868 and 1884, state investment in public industrial enterprises totaled more than 32 million, or approximately 5.5 percent of ordinary government revenue. Such investment was almost equaledequivalent to naval expenditures and was not quite nearly half of Aarmy expenditures ofat theat time. Yet Ttotal profits of these government factories, however, were merelyonly 17.2 million, only a little more than half of the investment.16 Facing financial difficulties and challenges abroad that required strong commitments of their ownfrom the Japanese governing authority, the Japanese government started its first wave of privatization in the 1880s. The cotton spinning mills set up by the government in 1881 at Hiroshima and Aichi, for example, were sold to the Hiroshima Prefecture and to the Shimoda Company, respectively. The Shinagawa Glass Factory was handed over to the Ishimura Company in 1885. Similarly, , the Simmachi spinning mill was handed to Mitsui in 1887, and the Fukuoka Filature to the same company in 1883. The Fukagawa Cement Factory was leased to the Asano Company in 1883 and the Fukagawa Cement Factory was leased to the Asano Company the same year.17
Kent Calder, Public Corporations and Privatization in Modern Japan, in Ezra Suleiman and John Waterbury, ed., The Political Economy of Public Sector Reform and Privatization , Boulder, San Francisco, and Oxford: Westview Press, p. 168 17 Kiyohiko Yoshitake, An Introduction to Public Enterprise in Japan, Thousand Oaks, California:
16

Unlike the sales of NTT stocks sales in the 1980s, the Japanese government sold thoese industrial assets at a highly concessionary rate to the zaibatsu,18 athe rising entrepreneurial class who was slowly becoming to have confident the confidence enough to manage major enterprises on its ownindependently. As Yoshitake pointeds out, one long-term implication of privatization during this period was that it greatly strengthened this small group of private entrepreneurs who were on close terms with to the government, including individuals such as Mitsubishi group founder Iwasaki Yataro. These private business groups would later played a central role in the growing Japanese economy. As suggested by Thomas Smith, however, that during this period the government enterprises were sold mainly for financial reasons, like the NTT privatization during the Nakasone period. The rapid depreciation of paper money during the mid-Meiji period was deprivinged the government of important revenue sources, eroding Japans trade comprehensiveness, and discouraging private investment in industry. The government hoped to raise capital through the sale of government enterprises to restore its finances and promote exports. Although the sales of public firms were made at bargain prices and on easy terms, it was not, Smith argued, primarily to benefit the privileged insiders who later were to becaome dominant figures in the private sector of Japans,. According to Smith, the sales were adventurous result of the sale of government enterprises, not its object.19 In other words, tThe government could not get any more money the sales than it did. In fact, Mmost of the enterprises
SAGE Publications, 1973, p. 39-44 18 Zaibatsu, means financial clique in Japanese 19 Thomas C. Smith, Political Change and Industrial Development in Japan: Government Enterprise, 1868-1880, Stanford, CA: Stanford University, p. 100

sold were losing money, and the government had difficulty disposing of them even at the admittedly low asking prices asked. The Sino-Japanese war however marked a turning point in sale of public enterprises. After the Sino-Japanese war was, Japan began to build up many strategic industries to support its military, thereby once again expanding the public sphere in the process. In 1896, the largest Meiji government enterprise, Yawata Iron and Steel Works, was established, financed through indemnity payments from China. In 1906, the Japanese government nationalized the railway system, acquireding seventeen of the major private lines,, and boosteding the proportion of government-owned railway mileage from 32 percent to 91 percent. Moreover, during this time, many government enterprises were established in the colonial areas, such as the Bank of Taiwan, the South Manchurian Railroad Company, the Yalu River Extraction and Lumber Company, the Bank of Korea, and the Japan-Russia Fishing Company. , aAlthough only in the cases of the Yalu River Company and the South Manchurian Railroad did the government own a majority of the shares. In 1934, the Japanese government merged Yawata Steel with some other small firms and created Japan Steel, which markeding the milestone of state enterprise expansion. By 1939, the Ministry of Finance had become the major shareholder in a wide range of strategic firms in Japan, including Japan Steel, a synthetic fuels corporation, and several metals, fabricating, and trading firms.20 Soon after World War II, public enterprise further expanded in Japan, driven by

Kent Calder, Crisis and Compensation, Public Policy and Political Stability in Japan , 1949-1986, Princeton: Princeton University Press, 1990, p.170
20

both economic and ideological driving factorsmotives. Between April and December 1947, the Japanese Diet established 15 new state corporations. The Katayama Cabinet of 1947-1948, the only Socialist-led government in Japanese history, personally itself created 6 public corporations. After 1949, another wave of privatization came as part of the so-called Dodge Line shift in Occupation economic policies. The United States had been restless due to ever the increasing costs of supporting the Japanese economy, and proposed to reduce the direct state controlrole in economic affairs. Moreover, the major occupying occupation authority intended to reduce the public sector workforce, which had long supported the militant and leftist-oriented labor party. This large public sector retrenchment was strongly supported by the new conservative Yoshida government. Hence, Iin December 1950, the Nippon Hassoden Electric Power Corporation was dissolved,. Japan Steel was also privatized., and Bby the spring of 1951, all fifteen of the new public corporations (kodan) established in 1947 had been abolished.

The Public Sector in Postwar Japan and its Political-Economic Functions The Japanese government has since the 1950s and 60s established numerous public corporations since the 1950s and 1960s, including public units (kodan), eidan, special companies, and government affiliated entities.21 Chalmers Johnson constructed a useful typology framework to divide Japanese public enterprises into six

Eki Uekusa, Koteki Kisei no Keizaigaku [The Economics of Public Regulation], Chikuma Shobo, 1991
21

categories.22 Based on the proximity of an organization to its official government ministry or agency and on the degree of direct government direct control, he divided the Japanese public companies into direct government enterprises, special legal entities, local public companies, auxiliary organs, quasi national policy companies, and broadly defined national policy companies. Direct government enterprises include the postal service, the forestry service, government printing, the mint and the industrial alcohol. Special legal entities (or tokushu honjin) include Japan Housing Corporation, Japan Highway Public Corporation, New Tokyo International Airport Corporation, the Japan Foundation, the International Corporation Agency, and the National Space Development Agency. Local public companies included 3,324 local public entities atuntil the end of March 1973. Auxiliary organs (gaikaku dantai), included foundations, promotion associations, and so forth. Quasi national policy companies were not based on special laws, but were established through governmental initiatives and had limited private capital involvement. Broadly defined national policy companies were not directly controlled directly by the government, but had strong connection with retired government bureaucrats and heldad powerful formidable influence onver government policies. These six categories were not completely fixed; and the organizationss may sometimes shifted from one category to another given enoughover time. The 112 tokushu hojin (special legal entities) had the clearestmost clearly delineated public corporation character. Not only were Tthey were created by

Chalmers Johnson, Japans Public Policy Companies, Washington DC: American Enterprise Institute for Public Policy Research, 1978, p.27
22

separate, Diet-enacted laws, they also took out loans and were directly subsidized through the Ministry of Finance and the Ministry of Finance agreed to provide subsidies and loans and that, as approved by the Administrative Management Agency of the Prime Ministers Office approved. ByDuring 1974, the tokushu hojin employed 821 full-time executives, 260 part-time executives, and 919,743 workers. InRecords also show that 1972, the 112 special legal entities spent 80 percent of the funds in the Fiscal and Investment and Loan (FILP) Plan, whichequivalent to about equaled 49.1 percent of the General Account Budget and 6.3 percent of the GDP.23 Most of them 112 were eligible for receiving investment and loans from FILP until 2000, with. Llocal public enterprises received the restmaining 20 percent of FILP funds. Within the bureaucratic institutions themselves, Tthere were often intense bureaucratic struggles among the ministries regarding the jurisdiction over the public corporations. Most of the important public corporations were thus firmly controlled by bureaucrats. As of 1975, MITI controlled 27 public corporations. The Ministry of Agriculture and Forestry controlled 19 public corporations; the Ministry of Finance controlled 16; the Ministry of Transportation controlled 14; and the Ministry of Construction controlled 10.24 InBy 1973, out of the 384 members of the boards of directors of the 61 most influential tokushu hojin, 302 were retired officials from the ministries that controlled the corporationss.

Rising Incentives for Privatization

Chalmers Johnson, Japans Public Policy Companies, Washington DC: American Enterprise Institute for Public Policy Research, 1978, p.34 24 Chalmers Johnson, Japans Public Policy Companies, Washington DC: American Enterprise Institute for Public Policy Research, 1978, p.23
23

Since the late 1970s, there werehave been rising incentives for privatizing the public sector in Japan. The primary reason for privatization was public finance. Driven by the concept of developmental state, the Japanese government had been adoptinged policies encouraging high growth in strategic sectors which deemed vital to the national economy. The MMinistry of Finance and its subsidiary government financial institutions like the Japan Development Bank had been providing substantial subsidies and low-interest policy loans to industries, which weredeemed vital to national economic development. Other policy tools included the waiving of import duties on designed machinery, acceleratedpromoting depreciation and providing tax exemptions for R&D expenditures, as well as offering low-interest policy loans for the introduction of designated foreign technology.25 Over time, these measures proved to be a drain on the national economy and became a driving factor for the move to privatization reform. At the same time, the welfare expenditure of the government had been increasing substantially. By the end of the 1960s, Japans development orientation and strong preference for capital investment had generated a great deal of resentment. Social problems such as pollution and an unequal income distribution also led to frequent public protest. These problems encouraged the rise of progressive social movements and left-wing labor unions. In 1970, members of the the Socialist party had beenwere elected to the post of as governors atof three majorcritical local governments:, including Tokyo, Osaka, and Kyoto. Out of the nine large cities, sSocialist politicians
Penelope Francks, Rev. of Japans Fiscal Crisis: The Ministry of Finance and the Politics of Public Spending, 1975-2000, by Maurice Wright, The Economic History Review, New Series, Vol. 56, No. 3, (Aug, 2003), p. 589-590; Gavan McCormack, Breaking Japans Iron Triangle, New Left Review 13, January-February 2002, p. 20
25

had taken six 6 of the 9 big cities and out of the 643 smaller cities, they had taken 138.138 of 643 small cities. At the same time, the mass media began to dwell on welfare-related issues, emphasizing Japans backwardness in providing social services,, thus which attracteding widespread attention from the general public. In 1973, Sstimulated by the radical movements of local governments and the Socialist parties at the national level, the LDP started to drastically increase welfare provisions such as pension benefits and medical payments in 1973,. This became which become known as the first year of welfare. Stimulated byAs a result of these changes, the share of social-security expenditures in the national budget rose from 14.1 percent in 1970 to 19.35 percent in 1975. The average annual increase in welfare spending fromin 1971-74 also reached 26.2 percent.26 Although the Japanese government tried to control the speed of this increase, welfare spending still maintained a 21.4 percent rate of increase infrom 1975-78. Only in 1979 was the Ministry of Finance able to bring down the annual increase to 12.5 percent. In By 1980, it had feallen into the single digits.27 Theis increasinged government expenditure inevitablyultimately became a financial burden for the government, one that they were unable to bear for an extended period. Finally, Aafter the 1964 Tokyo Olympics, the Japanese economy suffered a recession, and . Tthe Japanese government started began to issue national bonds in order to cover the rapidly increasing government deficits. In 1965, the Japanese government issued 260 billion yen in deficit-financing bonds. In 1966, 740
Shibata Tokue, Japans public sector: How the Government is Financed, Tokyo: University of Tokyo Press, 1993, p. 41 27 Bai Gao, Japans Economic Dilemma: The Institutional Origins of Prosperity and Stagnation , Cambridge and New York: Cambridge University Press, 2002, p. 215
26

billion yen in construction bonds were issued.28 It marked was the turning point of Japanese public finance forcing it to as it abandoned the balanced budget principle that it had maintained since 1949. Thise change of fiscal policy brought about a rapid economic recovery of the economy which continued until about 1970. The oil shocks, however, ended the high-growth period., and, by 1975, Tthe government bonddependence ratio rosehad risen to 25.3 percent in 1975 and remained at highthat level until the mid- 1980s. The deteriorating government finance canould also be traced to seen in the Fiscal Investment and Loan Program (FILP), which was one of the most important macroeconomic policy programs in JapanJapanese history. In order to raise capital, the Japanese government had been paying charging high interest rates to raise funds from postal savings and related sources while charging much lower rate of interest rates on long-term FILP loans than private-sector financial institutions.29 TheseSuch high-cost postal-savings funds eventually became a burden to the government banks, and giving the government banks had increasing difficultyies in finding Japanese customers. Since the 1980s,By that point, the FILP program had accumulated such a huge high amount of debts and deficits . that tThe government purposely did not release chose to withhold critical information about the hiddenfinancial losses inof FILP and the general budget program,. It was a a secrecyconcealment which meant to had insulated the government from public criticism. In October 2000, the Ministry of Finance for the first time declared that the state was between 130 and 780 trillion yen
Bai Gao, Economic Ideology and Japanese Industrial Policy: Developmentalism from 1931 to 1965 , Cambridge University Press, p. 259-260 29 Yoichi Takahashi, Saraba Zaimusho! Kanryo Subete wo Tekini Shita Otoko no Kokuhaku [Confession to Bureaucrats in Ministry of Finance], Tokyo: Kodansha, 2008, p. 376
28

in the red.30 Unable to cover up the issue anymore, Tthe government, however, failed to resolve the tension and facedfaced even more increasing criticism for failing to bring the problem to light over the issue. From that point onward, Ffuture developments and welfare retrenchment became unavoidable without a drastic increases in tax revenues. Unfortunately, Japanese public finance, however, had always traditionally been based on extremely low tax levels, which did not not very conducive to generateing a very strong high amounts of revenuerevenue-raising capability. As Table 2-1 shows, tax revenue as a percentage of GDP has consistently been consistently low in Japan, when comparedespecially in comparison to other major industrialized countries. In 1965, the total tax burden for Japan was only 18.3 percent of GNDP, whereas for the United States, it was 24.3 percent, for the U.K., 30.4 percent, and for West Germany 31.6 percent. In 2000, Japan successfully increased its tax revenues to 27.1 percent of GDP. When compared to many other industrialized countries, however, the share percentage of tax revenues in Japans GDP still remains fairlyed low.

Table 2-1: Total Tax Revenue as Percentage of GDP

1965 Germany UK US Japan
Press, 2003, p. 9-12

1980 38.2 35.3 26.9 25.4

1995 39.2 35.3 27.9 28.5

2000 37.8 37.7 28.9 27.1

31.6 30.4 24.3 18.3

Sources: Kato Junko, Regressive Taxation and the Welfare State, Cambridge: Cambridge University

Gavan McCormack, Breaking Japans Iron Triangle, New Left Review 13, January-February 2002, p. 10
30

Since the 1980s, Tthere haved been numerousrecurrent proposals since the 1980s to raise revenues through the consumption tax, so asin order to finance mounting government expenditures. But this idea had been was strongly opposed by the Japanese public, leadiresulting into several electoral losses by the LDP. Reluctant to shoulder the fiscal burdens, Tthe business world as well opposedwas also reluctant to shoulder the fiscal burdens by increased paying more corporate tax rates. They Many argued that Japans corporation tax was already very high when compared to other industrialized countries. In factndeed, corporate tax at the time was the second largest source of revenue in the Japanese national tax system,Japan only less than after individual income tax, in the national tax system, which was estimated atto be 29.3 percent of total national tax revenues. Comparable figures for 1989 wereas 17.0 percent in the United States, 16.1 percent in the United Kingdom, 7.4 percent in the Federal Republic of Germany, 11.0 percent in France, and 6.1 percent in Italy.31 Ultimately, the declining financial situation in Japan was a major push factor, encouraging the government to move towards privatization. The second reason for privatization was the increasingly intense political struggles involved intertwined with in the development of the public sector development. On the one hand, the public sector had been traditionally aligned with the Socialist party. The Socialist party being , which was tthe long-terime rival of the dominant conservative party , the LDP. The, who had LDP had long aimedfor many

Foundation for Advanced Information and Research, Public Finance and Tax System in Japan, April 1992, p. 173
31

years aimed to weaken the Socialist party through privatizing those large public enterprises;. On the other hand, the public sector had increasingly become a battle field among different factions of the LDP itself. Thus, Tthe public sector had for many years often suffered from excessive political intervention and pork-barrel politicking. Unlike the private sector, which had been relatively free of political meddling, the capital-intensive character of the public sector and its numerous postretirement positions had beencome an extremely appealing targetattractiv e for politicians who constantly seeking a comfortable arrangement banking on their political background immediate and tangible electoral rewards. It appeared that Tthe liberals attemptedplanned to expand the public sector infinitely in order to gain more funds and votes. The conservatives, however, preferredtend to use privatization to create a more liberalized national market and attack their leftist rivals. The third reason was foreign pressure. From the beginning, Tthe United States had been very active aboutstrongly pushing Japan to privatize its numerous public enterprises, hoping that through privatization, the American products cwould have more shares of a foothold in the Japanese market. In the 1980s, the United States was particularly interested in the privatization of the telecommunications and tobacco industries, and exerted strong pressure toon the Japanese government to privatize the two industries. Since the late 1990s,, the United States hasno longer refrained from pushesing Japan too directly to privatize its economy or open more of its markets, but it still showeds strong interest in various privatization programs such as the postal privatization.

Privatization: A Forced Option for the Government Facing rapidly increased government deficits, the Japanese government started a third wave of privatization in the 1980s. During 1981, the number of public corporations was reduced from 99 to 92, although the reduction was achieved largely through the merger and integration of existing functions rather than by actual abolitionsale of public corporations. During the Nakasone period (1982-1987), JNR, NTT and Japan Tobacco were privatized. There wasere also disposal of government assets in several public companies, such as Japan Air Lines (JAL), the Japan Automobile Terminal Company, the Tohoku Development Corporation, and the Okinawa Electricity Company.32 ThroughoutIn the 1990s, there were consistent attempts at further privatizing the public corporations, but they numerous attempts were constantly rrejected or curtailed by the the bureaucratic organscy. Both the Hosokawa and Murayama governments tried to exploit the revenue potential of privatization. For instance, Iin 1994, the Murayama government proposed drafted a plan to abolish three special corporations, privatize twenty-two, and streamline another twenty-four. In the end, however, the Cabinet agreed only on only a modest reduction in the number of public corporations,, from 92 to 84, achieved through the merger of 12 pairs of organizations and the abolition and privatization of two other small public corporations. In 1996, the Hashimoto cabinet proposed the abolition of five corporations and the privatization of

Shigeaki Owaki, Mineika Hori no Ruikei no Kousatsu: Doitsuho wo Chushin Toshite [Investigation of Different Privatization Types: Centered on the German Law], Hosei Keikyu [Journal of Laws And Politics], Issue 66, No. 1, p. 324
32

another one. By 1998, the number of public corporation had been reduced to 81.33 The Koizumi Cabinet started the fourth wave of privatization in 2001, including the dismantling of the Japanese postal system and the reorganizingation of Japan Highway Corporation. The Koizumi cabinet also passed the Special Legal Entities Reform Law in June of 2001 and started to extensively reorganize the governmentowned special legal entities. Until By March of 2006, eight tokushu hojin were abolished, two were changed into private legal entities, seven were fully privatized, and thirty-eight were changed into special agencies whoich will no longer received government fundsing. In 2008, the Japan Development Bank itself, one of the most influential public entities, was privatized.

Conclusion Thise historic review has shownreveals that the public sphere had been extremely important in Japanese political economy. However, facing embedded dilemmas, such as the rising public debt, coupled with over-expansion and inefficiency inof the public sector, public firms faced ever increasing difficulties in surviving,. Ultimately, and privatization became an inevitable optionunavoidable route for the Japanese government. The following chapters will examine the privatization process during the Nakasone and Koizumi periods (1982-1987 and 2001-2004 respectively), focusing on the rational preferences and strategic behaviors of key political actors during those eras. These two periods are chosen because thoseey awere critical periods in Japanese

Maurice Wright, Japans Fiscal Crisis: The Ministry of Finance and the Politics of Public Spending, 1975-2000, Oxford, New York: Oxford University Press, 2002, p. 65
33

history, marking the momenttimes when globalization became a majorreal challenge for Japan and, while public firms in Japan were facinge the urgent the imperative need to adjust themselves to athe more increasingly more ternationalized and competitive global market. As can been seen in Appendix I, these two political leaders achievedwere involved in the most important privatization projects in Japanese history, either in terms of both scale orand exintensity. Other leaders made numerous efforts on public sector reform but failed due to a vvariousety of reasons. These These two major privatization movements nevertheless have shown the great importance of leadership. They also show contrasting patterns of privatization:, financially-driven during Nakasone administration, while more politically inspired during the anti-Tanaka movements of the Koizumi years.