Prime Minister Kan’s ‘Third Way’ for reviving the Japanese economy

Author: Aurelia George Mulgan, UNSW@ADFA

Prime Minister Kan’s first policy speech to the Diet on 11 June utilises the core concept in the Hatoyama administration’s New Growth Strategy. Both documents refer to the ‘third way’ as the government’s fundamental approach to revitalising the economy.

The language of the two documents is almost identical. The New Growth Strategy specifies the ‘third way’ as a ‘growth strategy to create new demand and employment’, while Kan’s policy speech discusses ‘reviving the economy by a “third way”’, of turning the ‘problems besetting the economy and society into opportunities for creating new demand and employment’. The similarities are not surprising. Prime Minister Kan was National Strategy Minister in charge of the National Policy Unit when it produced the New Growth Strategy.

Although not a full-blown ideology, traditionally the ‘third way’ has been an approach that enabled left-of-centre parties to marry their preference for social welfare interventionism with support for market capitalism without adopting the full neo-liberal agenda.. Prime Minister Kan has been an adherent of the ‘third way’ since 1998 when, as leader of the opposition DPJ, he met Tony Blair. Later that year the DPJ came out with its fundamental ideology, arguing for the need to build a society that went beyond the traditional confrontation between free market principles and social welfare interventionism.

A detailed comparison of DPJ and LDP policies in the late 1990s and early 2000s by Miura, Lee and Weiner (Asian Perspective Vol. 29, 2005) showed a clear differentiation on social welfare policies between the LDP and DPJ at the time. The DPJ supported a universal welfare state and the LDP supported the minimal social safety net of the existing social security system..

But is Kan’s latest version of the ‘third way’ anything more than a convenient slogan? Not only is the concept itself inherently vacuous and slippery, but in its time, and particularly in the hands of Tony Blair, it was also derided as ‘meaningless blancmange’, ‘a clarion call to whatever’ and a ‘lifestyle, not an ideology’. Its current utility lies more in its description of how social democratic parties have accommodated the market, than as a complete policy strategy followed by centre-left parties.

Kan’s ‘third way’ does hark back to the earlier DPJ version in one important respect: it places increased government spending on social welfare at the absolute centre of its economic policies. Indeed, the new version is able to link strong social welfare orientation to economic growth, whilst at the same time rationalising a hike in taxes. Put simply, the basic idea is that ‘thorough reform of the taxation system’ (code for increasing the consumption tax) will provide the funds for a more secure social security system, which will encourage consumption as well as create employment.

The concept falls down where Kan uses it to differentiate his policies from those of the LDP and Koizumi administrations. In outlining his ‘third way’, Kan makes a superficial distinction between his approach to reviving the economy and LDP-style pork-barrel spending on public works (the ‘first way’) as well as Koizumi-style neo-liberal structural reforms (the ‘second way’). While Koizumi certainly stands for neo-liberalism, Kan’s depiction of the LDP’s ‘first way’ as merely ‘an economic policy centring on public works’ sells the LDP’s economic program well short. Fiscal stimulus policies oriented towards public works spending, certainly, but the LDP’s economic policies also espoused extensive intervention in the economy to promote growth industries and support and protect weak, internationally uncompetitive ones.

Given that Kan’s ‘third way’ also embraces some of these same elements, viz., support for ‘growth industries’ (in areas such as tourism, the environment, and health and welfare) as well as for weak industries such as agriculture, and for small and medium-sized enterprises, the differentiation is blurred. Kan’s ‘third way’ is also very close to the LDP’s ‘first way’.

Kan’s policy speech also includes references to ‘improving infrastructure to reinforce the hub functions of airports’ and ‘creating new transport road networks to revitalise the forestry industry’, which are little different from ‘first way’ public works projects. In reality Kan misrepresents LDP economic policies in order to exaggerate the difference with his own approach. Furthermore, Kan’s policy speech embraces a commitment to undertake ‘regulatory reforms’ (unspecified), a key aspect of ‘second way’ neo-liberal economic policies. In short, the Kan blueprint glosses over commonalities with both ‘first’ and ‘second way’ policies.

Most importantly, how does Kan’s ‘third way’ stand up as a strategy for promoting economic growth in Japan? It’s difficult to conclude that building ‘a strong economy, strong government finances and strong social security programs at the same time’  is anything more than wishful thinking. Kan certainly needs to raise the consumption tax if he wants to deal with the demand for ever-higher social welfare spending and debt reduction simultaneously. However, his policy speech is less convincing when explaining how the ‘third way’ will expand domestic demand and employment, which it advocates as the source of economic growth.

Kan’s speech is big on goals but short on means, and particularly short on the specific measures it will take to achieve the goals it sets forth. Perhaps the answers to the many questions it poses will be contained in the government’s new growth strategy.