The United States and European countries can take steps to avoid making the same economic mistakes that Japan committed during the latter's "lost decade," a Stanford economist wrote in a new paper.

The study, published in the IMF Economic Review, describes the reasons Japan was not able to pull out of its long recession in the 1990s, offering some lessons for U.S. and European leaders in the wake of the 2007-09 meltdown.

In particular, the delay in bank recapitalization and the lack of structural reforms in the economic sphere kept Japan from realizing a full recovery, wrote Takeo Hoshi, the Henri and Tomoye Takahashi senior fellow at Stanford's Freeman Spogli Institute for International Studies.

"Bank recapitalization" refers to a governmental reorganization of failing banks, often involving the use of public money to keep them solvent. "Structural reforms" describes how a government might overhaul its economic structures to increase business competition – such as deregulation to cut costs for firms.

The shortcomings in these two policy areas "retarded Japan's recovery from the crisis and were responsible for its stagnant post-crisis growth," said Hoshi, whose co-author was Anil K. Kashyap, an economics professor at the University of Chicago Booth School of Business.

Risky bank lending

Japan's "lost decade" originally referred to the 1990s, though the country has still not regained the economic power it enjoyed in the 1970s and 1980s. Some say Japan has actually experienced two lost decades if the 2000s are counted as well.

Faced with a huge financial crisis at the dawn of its lost decade, Japan had to navigate challenges that other advanced economies had not confronted since the Great Depression, Hoshi and Kashyap wrote.

However, government leaders made mistakes, Hoshi said. One was failure to rehabilitate the banks and another was to misunderstand the nature of the problems afflicting the Japanese economy. For example, much like the United States in 2007-09, the Japanese banks had made many dubious loans to risky customers.

"Instead of recognizing that major structural adjustments were needed, much of the policy response was calibrated under the assumption that Japan faced a simple cyclical problem that could be addressed with indiscriminate fiscal stimulus," wrote Hoshi, the director of the Japan Program at the Walter H. Shorenstein Asia-Pacific Research Center.

For example, on the demand side, monetary policy was not as expansionary as it could have been, he said. Deflation persisted for a long time. And fiscal stimulus packages – such as tax cuts – were inconsistent. Meanwhile, much of Japan's fiscal spending took the form of public works projects that had low productivity.

As for structural reforms, the Japanese government lacked a sense of urgency. For example, even in the reform-minded administration of former Prime Minister Junichiro Koizumi, only eight of the proposed 35 reform initiatives would have directly boosted growth. Of the others, 16 might have indirectly supported growth and 11 would have had no effect on growth, Hoshi said.

Drastic change needed

Unfortunately, some European nations seem to be following Japan's lead, Hoshi said.

"In France, Italy and Spain, bank recapitalization has been delayed and the structural reforms have been slow. Without drastic changes, they are likely to follow Japan's path to long economic stagnation," Hoshi and Kashyap wrote.

The problems that held back Japan seem to be less serious in the U.S., Hoshi said: "Employment protection is low in the United States and the labor market shows high mobility. The regulatory advantage for incumbent firms is smaller than in Europe or Japan and starting new business is relatively easy."

As the researchers noted, the United States and Germany are in a bit better economic shape, partly due to the fact that they did undertake structural reforms sooner rather than later. The U.S. was able to recapitalize its banks more quickly, for example.

Still, five years after the failure of the Lehman Brothers investment bank left the world's financial markets in chaos, the U.S. and Europe are not yet back to what had looked normal before the crisis, according to the research. For instance, employment levels have not reached the levels seen before the 2007-09 crash.

"The U.S. recovery has been tepid despite a number of extraordinary macroeconomic policies (at least in the traditional sense). This suggests that the U.S. economy also has problems, but they are just different from those in Japan and in Europe," Hoshi said.

In the years leading up to the financial crisis, the researchers wrote, U.S. growth was fueled by a consumption boom from rapid housing price increases and rising debt levels.

"In a broad sense, the U.S. economy before the crisis was similar to the Japanese or Spanish economies," noted Hoshi, adding that in Japan, the speculative investment boom in the late 1980s masked structural problems.

Clifton Parker is a writer for the Stanford News Service.

Stanford scholars are urging Japan to take advantage of an upcoming opportunity to show clear, heartfelt remorse for its actions surrounding World War II.

Making such amends will give Japan credibility as it seeks to assume a global leadership role well into the future, they say.

On Aug. 15, Prime Minister Shinzo Abe will publish a short statement to commemorate the 70th anniversary of the end of World War II, which follows similar practices of his predecessors.

Stanford's Walter H. Shorenstein Asia-Pacific Research Center (APARC), which has long advocated wartime reconciliation in Asia, recently issued a 15-page report in English and Japanese featuring eight hypothetical statements suggesting what the Japanese prime minister might say in his August address. The report, which is available in both English and Japanese, was recently made available to academics, media and the general public and has already received interest from the Japanese media.

The wording of Abe's statement will be scrutinized by governments and experts in Asia and around the world, the Stanford scholars say. During WWII, China and Korea, as well as other Asian nations, endured brutal Japanese military occupations.

"Many have been speculating what the (Abe) statement will be like," wrote Takeo Hoshi, director of the Japan Program at the Shorenstein Center, and APARC associate director for research Daniel Sneider in the report.

For example, Hoshi and Sneider asked, will Abe follow the direction set by prior Japanese prime ministers by expressing remorse for the suffering of Japan's Asian neighbors while apologizing for past aggression and colonization? Future collaboration in world affairs is also important, they added.

"We asked our colleagues what they would say in the 70th anniversary statement if they were the prime minister of Japan, and to write their own version of the statement," Hoshi and Sneider wrote.

"Our goal is to understand the diversity of reasonable views on the issue of Japan's responsibility for the cruel and violent war and Japan's role in building a peaceful and prosperous world," Hoshi and Sneider said.

The Stanford experts who wrote the statements included Hoshi and Sneider as well as Alberto Diaz-Cayeros, a senior fellow at the Freeman Spogli Institute for International Studies; Peter Duus, a professor emeritus of Japanese history; Thomas Fingar, a distinguished fellow at the Freeman Spogli Institute; David Holloway, a professor of international history and of political science; Yong Suk Lee, the SK Center Fellow at the Freeman Spogli Institute; and Harry Rowen, a professor emeritus of public policy and management.

For example, Fingar said in his version, "Let us also resolve to make the 80th anniversary of World War II the 10th anniversary of a more cooperative, more inclusive, and more secure region," and Hoshi wrote in his version, "To avoid any potential misunderstandings, Japan needs to recall past failures, remember the suffering of neighboring Asian peoples, and reaffirm the commitment to world peace more than ever."

On the subject of women, Lee's version noted, "The war and Japan's colonial rule created much suffering, but I would like to especially ask forgiveness to the women from many nations who suffered under colonial rule."

In August 2014, the Shorenstein Asia-Pacific Research Center issued a report on a Stanford-hosted dialogue on World War II memories in northeast Asia. Heightened tensions the last few years among the governments of China, Japan and South Korea have revolved around territorial disputes and the way WWII is portrayed in speeches and educational materials.

"Each nation in northeast Asia and even the U.S. has selective or divided memories of the past, and does not really understand the views of the other side," said Stanford's Gi-Wook Shin, director of the Shorenstein center, in a 2014 Stanford news release.

Clifton Parker is a writer for the Stanford News Service.

Responses to the project

Toyo Keizai, a leading Japanese business weekly, published all eight verisons in English and Japanese stating, "we hope this will provide an opportunity to bring about a wide range of discussion."

University of Tokyo professor Tetsuji Okazaki wrote about the project in the Asahi Shimbun (the article is in Japanese and also attached as a PDF below).

4th Annual Korea Program Prize for Writing in Korean Studies

Application Deadline: May 15, 2015


Eligible Students: All currently-enrolled Stanford students

Application Instructions:

Submit the following items by email to John Groschwitz, CEAS Associate Director:

•   Current CV

•   One Korean Studies paper/essay (minimum 20 pages double-spaced, Times 12pt., 1″ margins)

•   One recommendation letter from a Stanford professor (emailed by the professor directly to John Groschwitz at CEAS)

The Korean Program Prize for Writing in Korean Studies recognizes and rewards outstanding examples of writing in an essay, term paper, or thesis produced during the current academic year in any discipline within the area of Korean studies, broadly defined. This competition is open to both undergraduate and graduate students. The prize will be awarded at a special ceremony in the fall, and the winning essays will be published in the Stanford Journal of East Asian Affairs. The first place winner will receive a certificate, a copy of the Stanford Journal of East Asian Affairs, and $1,000; Honorable mention winner(s) will receive a certificate and a copy of the Stanford Journal of East Asian Affairs.

For more details, please visit Center for East Asian Studies prizes website.

Political fragmentation early on exacerbated the post-communist economic transitions in the Soviet Union and Eastern Europe, new Stanford research shows.

In a new paper, Stanford sociology professor Andrew Walder says that the neoliberal economic policies introduced in those former communist countries did not cause their economic collapses. Neoliberal is a modified form of liberal policies tending to favor free-market capitalism.

In an interview, Walder said, "Policy choices mattered, but they did not create the initial problems that they were intended to solve."

Rather, the longer the decline of the communist system before regime change and the greater the uncertainty over state ownership of assets, the more likely the country fell into prolonged decline.

The lesson for surviving communist or socialist regimes is that future transitions will be less economically damaging if they are rapid and political certainty exists about the ownership of state-owned assets, wrote Walder and co-authors Andrew Isaacson and Qinglian Lu, both Stanford graduate students in sociology.

The worldwide transformation of state socialism during the 1990s saw many of those countries plunge into recession, usually far beyond initial expectations, he said. Most analysts originally expected short-run hardships as those societies and their economies were restructured. It did not happen that way.

"Sharp recessions in the first states to emerge from the revolutions of 1989 were followed by much deeper economic crises in new states that emerged from the breakup of the Soviet Union," said Walder, the Denise O'Leary and Kent Thiry Professor in the Humanities and Sciences and a senior fellow at the Freeman-Spogli Institute for International Studies.

The few surviving communist autocracies that retooled their economies avoided recessions and grew more rapidly, despite once being considered the least promising places for market reform. China and Vietnam are two examples.

Recessions and politics

The researchers examined economic and growth-rate data from 31 countries for the period from 1989 to 2007. They analyzed three competing explanations for post-socialist economic performance – policy choice, initial economic circumstances and reform-era political institutions.

They found that by far the largest differences in growth rates across some 31 transitioning economies were due to wide differences in the initial years of the 1990s. After these initial crises passed in the mid-1990s, growth rates were similar.

They studied those countries that experienced no regime change, like China; those that experienced rapid regime change, like Poland; and those that experienced a prolonged and deep deterioration of political institutions before their eventual collapse.

The initial recessions were a result of the political disruption that accompanies regime change, and state socialist economies were particularly vulnerable to the collapse of communist parties. The political nature of state socialism makes it unusually vulnerable to this problem, Walder said.

"Communist parties played a central role in defining and enforcing the state's property rights over assets – especially important because almost all assets were the property of the state," the authors wrote.

So, when a communist party's ability to perform this function declined for a prolonged period, the economy was undermined by uncertainty over ownership claims.

"This was a problem in all communist regimes that collapsed shortly after 1988, but the political decline of the Soviet Union in its final years was far more protracted and severe than in other communist regimes, where regime change was much more abrupt," they wrote.

The big picture

In the big picture, Walder noted that at the time of the collapse of many post-Soviet economies in the 1990s, everyone's attention was focused on "what is to be done," and this pitted proponents of Chinese style "gradualism" versus "big bang" reforms prescribed by many Western economists.

"It later led to charges that neoliberal policy advice led to the collapse of economies, and to counter-arguments that it was a failure to properly carry out these policies – or something about a country's fundamentals – that was actually the cause of economic collapse," according to Walder.

In retrospect, he said, the worst economic crises were well advanced before any of these policy approaches were carried out, and the real causes were political in nature and rooted in different patterns of decline of communist parties in the prior period, something that eluded the attention of those on both sides of these debates.

It also shows that the heated debates about privatization – its speed and extent – were of secondary importance during the initial years of post-communism.

Walder said, "What mattered most was the capacity of a state to define and enforce property rights of any kind. This is the root cause of the economic collapse in so many of the former Soviet republics."

And so, the alleged merits of Chinese-style "gradualism" were confused with the advantage of not having political institutions collapse, he added.

Soviet Union collapse

The Soviet decline was far more prolonged and pronounced than in all of the other states where communist parties eventually surrendered power, said Walder. Two factors contributed to this:

One was a set of ill-conceived economic reforms that undermined the communist party's control over state assets several years before the Soviet collapse. The other factor was the fall of the Soviet communist party-state. By 1989, the party was already disintegrating, so ownership claims over state assets became unclear, Walder said.

"When communist parties deteriorated deeply over the medium run – as in the USSR – it set off a struggle to control assets, leading to deep economic crises that were intensified in states that broke apart into new entities, which in turn often led to hyperinflation and armed warfare," said Walder.

Clifton Parker is a writer for the Stanford News Service.

The attack on Mark Lippert, the American ambassador to South Korea, made headlines worldwide on Thursday. Since his arrival in Seoul last October, Lippert received high marks from the Korean people and the media for his accessibility to the public there. Lippert, a Stanford graduate, is a very close friend of President Obama, who has called him “brother,” and attended his ambassadorial swearing-in ceremony.

The Shorenstein Asia-Pacific Research Center asked David Straub to discuss the incident and its significance. The associate director of the Korea Program at Stanford, Straub served as a career diplomat at the U.S. embassy in Seoul from 1999 to 2002 and is the author of the forthcoming book about that period called Anti-Americanism in Democratizating South Korea.

What actually happened?

A South Korean extreme left-wing activist, Kim Ki-jong, slashed Ambassador Lippert with a kitchen knife Thursday morning at a public event in Seoul. Koreans at the event immediately wrestled the assailant to the floor, but not before he had inflicted several wounds on the ambassador: a long, deep gash on his cheek and cuts to his wrist and fingers. The ambassador was taken straightway to hospital, where surgeons repaired the damage in a three-hour operation. The prognosis is that he will regain the full use of his fingers in about six months, and that the scar on his face will be barely noticeable in one or two years. His doctors plan to remove the eighty stitches on his cheek on Monday, and, if all is well, release him from the hospital then. But it was a close call. Had the face wound extended only one inch farther down, it would have severed his carotid artery.

How is Ambassador Lippert doing?

He told his doctors on Friday that the facial wound was not bothering him particularly, but he did have some pain in his wrist and fingers. Doctors say he has some nerve damage there but the pain should ease soon. Ambassador Lippert’s response has been laudable. Consistent with the outstanding way he has comported himself in Korea since his arrival, he promptly tweeted on Thursday that he was “Doing well & in great spirits!” I am also aware that he was even responding to email wishes from some Stanford friends on Thursday.

Was Kim acting alone? How was it possible for him to perpetrate this attack?

Kim was the only person who attacked Ambassador Lippert, and he has stated that he acted alone.  Kim was a member of the organization that hosted Ambassador Lippert, but had not been invited to the function. The incident is still being investigated but Korean press reports say that the U.S. embassy declined South Korean police protection some time ago. Korea is considered a relatively safe country for American diplomats. This will all be sorted out in coming days and weeks, and U.S. and South Korean authorities will determine if other security arrangements are needed for Ambassador Lippert. In any event, it does not appear that this was an egregious security or intelligence failure on anyone’s part. Ambassadors are public figures and it’s not possible to provide them with perfect protection.

What was the assailant’s motivation?

Kim said that he wanted to emphasize that the United States is responsible for preventing improved inter-Korean relations because it does such things as participate in the ongoing combined military exercises with South Korean forces. North Korea cites the annual exercises as a pretext for not talking with the South, claiming each year that they are a prelude to an invasion. But Kim is a sad sack figure even within South Korea’s anti-American far left, which is a very small but vocal minority. Kim has been arrested many times in the past for outrageous and violent behavior, such as throwing pieces of concrete at the Japanese ambassador in 2010. He heads his own little NGO, but the Korean left has mostly avoided him because of his bizarre behavior. He even set himself on fire in 2007 near the Blue House to protest an alleged attack on an associate. Although I have never met him, it is my impression that Kim is clearly mentally and emotionally unstable.

How have the Korean government and people responded?

From the people who wrestled the assailant to the ground, to the surgeons and the thousands of people who are wishing Ambassador Lippert well, South Koreans have responded with an outpouring of support. Ambassador Lippert has already conveyed his deep gratitude for that on Twitter. President Park, who is currently on an official visit to the Middle East, telephoned Ambassador Lippert on Thursday; so did Foreign Minister Yun Byung-se. President Obama also called the ambassador to wish him a speedy recovery. Unfortunately, North Korea’s reaction has been very different: its official media applauded the attack as “deserved punishment” for “a warmongering United States.”

There are press reports that South Koreans are worried that this attack could hurt U.S.-Korean relations.

There is indeed considerable concern being expressed in South Korea at the moment that the incident could hurt bilateral relations, but there is no reason at all to believe that will be the case. Top U.S. officials have already stated that the incident will only strengthen U.S.-Korean relations. I recall the reaction in Seoul to the mass shooting by Seung-hui Cho at Virginia Tech in 2007. Cho had grown up in the United States but remained a Korean citizen. Many South Koreans were very fearful that the U.S. government would punish South Koreans, such as by not issuing visas, and that Americans would attack South Koreans on the streets in the United States. Of course, nothing like that happened. Americans understood the tragedy for what it was: not a “Korean” but a fellow human being with severe mental illness and access to guns.

You say that Kim appears to have a mental disability. But there are press reports that he lectured for the South Korean unification ministry’s education institute as well as at a major university in Seoul. How could such a person get those positions?

I am curious and concerned about those reports. For me, the bigger question about that is not Kim’s particular policy views but how someone with such obvious behavioral and apparently mental issues could receive such positions. But he held those jobs several years ago, so perhaps his behavior has become worse in the meantime.

I understand that Kim has already been charged with attempted murder and that Korean authorities are considering whether to charge him under the National Security Law owing to frequent travel to North Korea and possible other links with the North Korean government.

Unless Korean authorities find evidence that Kim was working for North Korea, which I doubt was the case (but which should of course be investigated due to his numerous trips to the country), it would be unfortunate for U.S.-South Korean relations to charge him under the controversial National Security Law. The U.S. government has criticized that law for decades for the McCarthyite way South Korean governments have sometimes implemented it to suppress alleged “pro-North Korean” thinking. Some South Korean leaders are calling the incident “pro-North Korean terrorism” and the work of “pro-North Korean forces.” That seems to me to be unwisely elevating the violent behavior of one deranged person and ascribing to it a significance it does not deserve.

Ambassador Lippert’s Twitter handle is @mwlippert.