（英語）English Summary drafted by Chatham House.

Open Economies and the Challengeof Innovation in an Era of Populism
and Economic Nationalism
20 April 2018

Introduction
This note summarizes the key points to emerge from an expert meeting which brought
together a diverse group of experts from government, international organizations,foundations, the private sector and research institutions.
The event was held on the record and was co-hosted by Chatham House and the Japan
Economic Foundation.

Background
Populist and nationalist pressures in Europe and the United States are calling into
question some of the core assumptions underpinning globalization and the integrative
elements of international trade and finance. In response, a number of national
governments, including Japan, have reinforced their commitment to international
institutions and stressed the mutual benefits of maintaining an open global economy.
This meeting assessed how policy innovation in trade, social and welfare policy, and thetechnical changes associated with the Fourth Industrial Revolution, are helping tooffset some of the negative effects of rising economic nationalism.
The resilience of free trade initiatives in Europe, Asia and North America and thesustainability of traditional, mass employment in advanced economies are under threat
in the face of technical change. Further, how can individual economies best respond to
major demographic challenges - both aging and migration - in developing appropriatesocial welfare policies? The meeting explored the role of entrepreneurship andtechnical innovation in fostering long-term growth and increasing productivity inadvanced economies.

Session 1: Globalization, rising populism and economic
nationalism and free trade
Populism, polarization and democracy
The rise of populist politics and the challenge it poses for democracy in its current form
is certainly alarming to Western governments. However, participants noted that
populism is not a completely new concept and that it is arguably not an entirely bad
thing. Populism possesses regenerative elements, it forces elites to adapt and respondto grievances they have ignored or failed to address. Hence, populism may havepotential to be a corrective moment in the history of democracy.
This leads to the question of what type of democracy we currently have and how it canevolve. Representative democracies are losing their appeal as citizens increasingly wantmore involvement in how decisions are being made in the system. This desire is clear in
the rise of grassroots movements, as well as with the rise of populism. The discontent
with democracy in its current form is evident, hence the clear shift towards
participatory democracy and increasing government accountability.
The factors that lead to populist politics were also explored, and participantsquestioned why the extreme left has seemingly been unable to mobilize in response to
the rise of the extreme right. Populism is encouraging increased political engagement,
especially with large numbers of non-voters re-entering the system, but the debates on
key voter issues continue to be dominated by the far right. Therefore, it raises thequestion of whether democracy benefits from non-voters reengaging with the system,
given that they are arguably doing so because it gives them a sense of agency in aprocess that they have previously felt alienated from.
Non-voters are far more receptive to populist politics given their prior lack ofengagement; it is therefore a challenge for traditional political parties to find a way tobetter relate to the disillusioned, both voters and non-voters. This led to the question ofwhether populism is about voice and increasing accountability, or about excluding
other voices in society.

Participants questioned the best ways to combat polarization given that people willcontinue to digest information that corresponds with their own values. The opportunity
for politicians to engage voters through social media and new technologies has thepotential to counter this polarization in cases where political parties are able to relate totheir publics and communicate clear messages. One suggestion was that populism isthe shadow that follows democracy, that populist politics challenge democracy to adapt
and, whilst democracy remains, populism will continue.

Key Political Trends in Europe
In the context of the rise of populist politics, the meeting identified five key trends
within Europe that have emerged as factors in the development of populism, including:1) Political realignment: voters have lost faith in traditional parties andincreasing numbers of voters have identified as independents in countries
such as Germany, Sweden, France and the UK.
2) An increase in voter volatility: the number of voters switching party choices in
between European elections in unprecedented. This creates a space forunconventional and sometimes extreme parties to breakthrough.
3) Population fragmentation: recently, 62% of Americans stated they would
prefer a third party in their political system. The record numbers of active
political parties, combined with the minimal points of differentiation between
parties means that coalition governments are likely to become the norm.
4) The collapse of social democracy: traditional party longevity is increasingly
being challenged due to the emergence of far-right parties which are attracting
a significant number of working-class voters.
5) Finally, the rightward drift in European party systems is evident, especially incontrast to the parties of the 1980s. It was noted that the approaches of centerleft parties at present on issues such as identity and migration align with the
stances of right-wing parties in the 1980s.
These five trends are common throughout Europe and reflect a fundamental shift in thenature of politics in the West. In considering the nature and durability of these trends,
participants discussed whether the world is approaching the end of a period of politicalvolatility or whether we have reached a turning point and are at the beginning of a new
period of political change. Upon reflection, the consensus was that these are durable
trends, and populist politics will continue to challenge political norms. Thus,
pragmatism is required on the part of politicians to respond to the new politicaldynamics, and to address the lack of enthusiasm for traditional parties.

Populism in the Japanese context
The Japanese political environment resembles the Western, public opinion-focusedenvironment. As a result of recent controversies, Prime Minister Shinzo Abe isincreasingly sensitive to public approval ratings; however, it was noted that this does
not necessarily qualify as a populist driven phenomenon. In terms of economics andmigration, two key voter issues, Japan is somewhat stable. The country has relatively
low immigration numbers and a consistent trade balance surplus, which has meant thatthe anti-globalism and nationalistic sentiment evident in many other countries is not as
prevalent in Japan.

Globalization and voters
Participants questioned whether voters being irrational or un- and/or mis- informed
are really a driving factor behind the increase in economic nationalism. Participantssuggested that increased detachment and alienation from existing political andeconomic systems may have led voters to increasingly choose the easiest solution to, or
explanation for, difficult and complex questions. In terms of politics, information
shortcuts mean voters will typically vote for their previously preferred parties or a party
which claims to address the issue of most importance to them. It is thus the challenge,
not only for traditional political parties, but increasingly for intermediaries such as themedia, civil society and academics to not only better inform but to effectively reengage
with voters.
In terms of economics, participants noted that the majority of median voters in the UK
and Europe favor economic protectionism to free trade despite the clear benefits ofopen economies. Free trade increases overall economic gain, yet the median voterseither do not believe or accept this. Hence, redistribution of the welfare gains from free
trade to ensure that median voter reaps the benefits from trade liberalization will help
to maximize public support going forward.

Economic nationalism
As global GDP growth has slowed, the impact of the economic slowdown have been felt
heavily across the world. The political response to the challenges posed by lower ratesof economic growth has been polarization and economic protectionism. Government

objectives to stop migration, limit globalization and heavily regulate international
corporations reflect a nationalistic approach which reduces opportunities for trade andeconomic growth.
The validity of this approach is questionable in some respects. For example, given that
there is no fixed amount of work in an economy, the idea of migration causing job loss
for local populations is inaccurate. Economics and migration are dynamic and wheremanaged effectively migrants can have a notable impact on economic growth.
Whilst trade nationalism is a harmful approach in a globalized world, the motivations
behind it also need to be understood. Global trade was constructed and regulatedaround the practice of comparative advantage, but participants noted that it has shiftedto a system dictated by those with the most economic leverage. Thus, to regain public
and political support for free trade, participants suggested that a collective
international effort be implemented, to limit tax arbitrage and identify where value isbeing added and what should be taxed.
Additionally, on the theme of economic reform, regulation convergence was highlighted
as a key issue to be addressed through the creation of global uniform regulations which
incorporate understanding of the benefits of particular environments and thedevelopmental elements of trade. A key part of the regulatory discussion is the questionof who is leading the international value chains of suppliers. Are these currently stateled or corporation-led, and how can this be reformed to ensure fairness in the system?
Open economies are emerging from a period of rapid economic growth where global
trade had an impact on income, but growth cannot continue at such a rate, hence thebenefits of trade are becoming less apparent to the public. To increase publicsatisfaction, it is important for governments to ensure wealth redistribution from tradeactivity reaches lower income families and workers.
Value chains of suppliers that have been built are now well established and the processof globalization is seemingly irreversible, hence the logical step for governments is to
fix the current system and make it more universal. Regulating trade so that
corporations are unable to take advantage of weak government regulations and law
enforcement is a good first step to counter the populist-driven resistance to free trade
agreements.

Economic nationalism and free trade agreements
There is growing public resentment towards free trade agreements for a number ofreasons. This can partly be attributed to slowing global GDP growth and themisunderstanding that free trade has undermined individual countries’ economic
success.
Participants questioned whether the growing economic nationalism we are seeing
across the globe is inherently linked to the rise of populism, as well as a fear of
globalization. The consensus was that global economic growth had begun to slow prior
to the Global Financial Crisis, but increased visibility of this slowing in recent years has
become a platform in populist politics. The public has become increasingly weary of
globalization, fearing that it entails a loss of both identity and sovereignty, and thesubsequent loss of control to global corporations and actors. It was noted that part ofthe problem is the way in which free trade is presented to the public and the failure ofgovernment to ensure that the benefits are enjoyed by the working class. Finally, tradereform is also required to ensure that trade agreements and practices adhere to theprinciples of trade, including comparative advantage, thus restoring public faith ininternational trade.

Addressing populism in the long term
Participants discussed the longevity of these political and economic trends, and it wasagreed that populism will continue so long as populations feel a sense of a loss ofidentity making identity a much more important element of voting practices than it has
been previously. Thus, government has a role in adapting to this new environment, andreaffirming national identity, without taking a hostile approach to trade andinternational relations.

Session 2: Immigration, aging society and the political economy
of social welfare and healthcare
What happens to social security with an aging population?
Participants discussed immigration and aging populations and whether they weakensocial welfare provision. Japan feels a sense of urgency in addressing these issues given
it is currently challenged by its aging population. Financing social security is becomingincreasingly difficult, as the country’s pay-as-you- go finance scheme relies primarily on
the younger population to fund the social benefits scheme. Whilst the pay-as-you-gosocial security system works well to take account of different population demographics,
it is an unsustainable system where there is a rapidly aging population, combined witha sharply declining birth rate, as is the case in Japan. The challenges posed by Japan’schanging demographics require pragmatism and policy innovation in addressing social
welfare issues.
To highlight the severity of Japan’s social security challenges, in 2015, the older age
dependency ratio stipulated that 100 young people were supporting the pensions of
42.7 people, whereas in 2000, they were supporting just 24.9 people. Further, a large
portion of social security funding is also directed to fund the medical costs of the aging
population. The sustainability of the country’s current scheme is decreasing, and Japanhas proposed a number of reforms to ensure future support for its population.
Subsidizing the growing social security deficit through government general accounts
was one of the government’s initial approaches, however the longevity of this approachis questionable given that it is only sustainable in the short-term whereas the aging
population is a more permanent issue.
A more promising proposal is the ‘Abenomics’ fiscal consolidation policies, which
involve a strategy to make up the deficit through economic growth, without serious
economic reform so as not to disrupt the system too deeply. Further increasing theconsumption tax is another potential solution, given that this is currently the only way
the government collects money from elderly and retired people, who are no longer
paying income tax or social security premiums. However, this is a contentious issue forJapanese voters.

Stimulating economic growth to combat aging population
As Japan’s population continues to age and the country suffers from a labour shortage,
the question remains as to why its immigration numbers remain so low. Increased
immigration was proposed as a potential solution to Japan’s population crisis, giventhat migrants are commonly highly-skilled and skilled workers, there is potential thatthey will stimulate an economic boom. Currently, there are just eight million foreigners
living in Japan, which has a population of over 125 million people. The same number
live in Sweden, which has a population of less than 10 million. Participants pointed to
the Swedish reaction to its own population decline and economic stagnation, where theresponse was to increase career opportunities for women rather than increase
migration. In the case that Japan remains opposed to increasing migration numbers,
mobilizing the female workforce was suggested as an alternative approach.

Migration challenges
Temporary migration is preferred in Japan, emphasized by the fact that foreigners
must have lived in the country for five years to apply for citizenship and ten years toapply for permanent residence, with the citizenship application process being morechallenging than the latter. Additionally, it is a challenge to integrate migrants into
Japanese society; there are currently 25,000 non-Japanese speaking students inschools. Higher incidences of criminality are often cited among foreign residents inJapan. However, these individuals are commonly caught committing ‘special code’
offences, which Japanese cannot commit, such as migration crimes. Integration is
crucial to mobilizing the migrant workforce and these are issues which need to beaddressed in Japanese government policy.
Participants noted that there is a strong sense of entrepreneurship among migrantcommunities which is clearly economically beneficial. Approximately thirty percent ofventure capitalists in the United States are foreign-born, so why could this not be asolution to Japan’s demographic challenge? It was also noted that most migrants will
retire in their home country, meaning that they will not burden the Japanese social
welfare system. Hence, increasing migration is a viable strategy to stimulate economic
growth in the immediate short term whilst not threatening Japan’s social welfare andhealthcare system in the long term.

Depopulation
With low population growth and low migration numbers, Japan is not only facing thechallenges of an aging population but also of depopulation, with half of Japan’s landarea depopulating since 1990.
Japan has the world’s 11th largest population, and this population boom, combinedwith economic development has caused substantial environmental damage.
Depopulation is a potential opening for environmental restoration yet no benefits havebeen seen in these depopulating areas in decades. Rather, per capita energy
consumption continues to grow in these areas. This is an area of opportunity for Japanto take a leadership role in environmental restoration and to utilize depopulation as atool in the political- economic approach. It does not have to remain a zero-sum game,where increased economic activity reduces environmental effectiveness.
The energy demands of depopulating countries have been underestimated in IEA
energy consumption predictions. Additionally, the underuse of housing andinfrastructure is inefficient in energy terms. For example, it is increasingly common tosee one person living in a house where six people once lived. The lack of change inenergy consumption boils down to government employment policy, such as that infactories and agriculture. Depopulation should be seen as a policy opportunity to
improve environmental sustainability through energy reform.

Session 3: Productivity, educational and technologicalinnovation and the growth of smart cities

The meeting considered the challenges of the ‘Fourth Industrial Revolution’ in relation
to human well- being in advanced economies and its impact on productivity. The
world’s rapid technological and cyber developments, coined as the Fourth Industrial
Revolution, is presenting unprecedented challenges to societies for a number ofreasons, which has negative political and economic impacts.

To put the revolution into context, participants briefly revisited the previous
revolutions to differentiate the Fourth from its predecessors. The first revolution of the
18th and 19th centuries in the US involved mechanization, and the transition from rural
to urban, agriculture to factories. The second revolution, between 1870 and 1914, saw
the emergence of new industries such as steel, oil and electrical power, as well as theinvention of the telephone and increased power. The third revolution of the 1970s and1980s prompted a shift from analogue to digital across many industries, theintroduction of automation and increased mass production, as well as newcommunication and information technologies.

What is the Fourth Industrial Revolution?
The fourth revolution focuses on rapid cyber developments, including real-timecommunication as well as cloud computing, 3D printing, autonomous vehicles andsmart cities. In contrast to previous revolutions, some participants suggested that thisrevolution will prove more difficult for societies to adapt to. The challenges are being
presented by companies such as Tesla creating an autonomous truck, which will have asignificant impact on jobs in the United States, as well as IKEA launching a robot in
Singapore that is able to assemble the framework of an IKEA chair within twenty
minutes.
Participants questioned what this means for the global labour force going forward, andwhether the global minimum income is a practical and sustainable idea to address thesocio-economic challenges of large- scale job loss. Arguments in favour of the basic
minimum income suggest that it will foster increased creativity and has the potential togenerate better job and life satisfaction.
Whilst it was accepted that the fourth revolution is presenting a number of newchallenges, the discussion highlighted that every revolution involves a period of social
disruption during the adjustment period.
Arguably, we are in the period of adjustment and setbacks are to be expected, butmoving forward, new processes for building technology will emerge.
Why is this revolution different? Participants noted three key differences between the
Fourth Industrial Revolution and its predecessors. Firstly, the sheer volume of datathat is being generated is creating a new economy which is a challenge to regulate.
Secondly, the emergence of new IT-enabled business models along with a range ofplatforms (including iPhone, Airbnb, Uber) have created an ecosystem for innovators
to build upon. They have also enabled a system of entrepreneurship which is not easily
controlled by governments. Thirdly, artificial intelligence has the possibility of selfimprovement meaning that technologies will evolve even more rapidly than ever.
The risks of such rapid technological development are obvious, and innovations in job
creation are essential to address the job paradigm shift, especially in developed
countries such as Japan. Where artificial intelligence substitutes jobs in various
industries, including agriculture and the service industry, there is also the danger ofwage reduction in those jobs that are now carried out by artificial intelligence.
However, participants also highlighted potential opportunities created by the Fourth
Industrial Revolution to resolve social issues. Finding the balance between investment
in new technologies and the benefits of the investment return is therefore essential toreap the benefits of the industrial revolution.

Moving forward with the Fourth Industrial Revolution
The primary challenge of the Fourth Industrial Revolution is its impact on theeconomy, and the job shortage it is bound to create where robots replace humans forexample. Participants discussed how to recreate meaningful social activity that
responds to new technologies and job shortages created by robots replacing the humanlabour force. Whilst governments will attempt to replace these jobs in new industries,
the question is whether it can create enough jobs and whether it can maintain social
cohesion in the transformation process. In the instance that the government is unable
to generate enough new jobs, it is likely they will need to explore the idea of theminimum basic income as well as meaningful work. The discussion turned to thepotential that volunteerism could become a new mechanism for social cohesion.
In addition to work shortages, participants discussed the notion of productivity and its
future. Will there be less incentive for productivity in a labour market where humanlabour and contributions have become less valuable? Considering the scenario where
lower-level jobs are replaced by computers, participants discussed whether this willlead to increased laziness in workers and declining creativity.
Another issue to be addressed by governments during this technological revolution isthe emergence of cryptocurrencies, and the decreasing need for a central bank.
Although the impact of this is yet to be seen, the replacement of central banks signifies
that there is less need to trust in and rely upon governments. Whilst the role ofgovernment going forward is not entirely clear, the introduction of new technologies
and industries creates an entirely new ecosystem that will need to be regulated.
Arguably, these new challenges mean the government has a greater role to play as theworld navigates the Fourth Industrial Revolution.
Given people are generally satisfied when their work is contributing to a cause, social
entrepreneurship and social innovation are clearly the next steps forward. Enabling
entrepreneurship and innovation through education is vital. The discussion highlighted
that adapting education system to include more practical, real-world learning, rather
than theoretical is a potential way to foster innovation.

Entrepreneurship – a Western concept?

On the subject of entrepreneurship, the discussion considered the concept in theJapanese and UK context. Whilst entrepreneurship is an established practice inEurope, the idea is yet to find its place in the Japanese economic ecosystem. Start-ups
are not particularly active in Japan, which can be attributed to the unwillingness oflarge companies to collaborate with them. The competition between large companies tofind new ideas and to take ownership of innovations prevails over the potential toinvent more rapidly with a partner.
This reluctance to take advantage of entrepreneurs is not only an issue amongst large
companies, but also with the government. Whilst Abe’s ‘Abenomics’ policy is centred on
innovation, participants questioned the government’s commitment given its investment
in entrepreneurship. Japan has the world’s third largest economy (by GDP ranking)and yet invests less than two percent of what the United States does in venture
capitalism.
Given that UK investment in venture capital is far higher than other European
countries, participants discussed the potential for cooperation between the UK andJapan, especially in relation to science, with the aim of boosting innovation in bothcountries. In terms of global innovation, the UK currently ranks third on the list, whilst
Japan comes in at thirteenth. Collaboration between the two could see both parties
move up the rankings.
Participants also acknowledged the challenges created by entrepreneurship, andpotential reasoning behind reluctance in Japan to embrace the concept. As Germany isadapting and creating Industry 4.0, with the objective of allowing the consumer tocustomize everything they are purchasing based on their needs, this generates issues
with security, stability and reliability of products, legal concerns and, most notably, job
losses.

Smart cities and Society 5.0
The innovation discussion considered smart cities, an initiative aiming to utilize
technology to improve efficiency, share information with the public and improvegovernment services and the quality of life in cities. There are currently more than 160
cities and over 400 companies involved in this program. The overall objective is tomake replicable models through sharing of information on key clusters includingtransportation, health and the environment, and energy. The key ideas of this concept
are clear in Japan’s Society 5.0, which is framed in terms of social needs rather than atechnological push.
Connected to the idea of smart cities, the Abe government has introduced the conceptof Society 5.0, a model which seeks to address the economic and social challenges
Japan is currently facing, including its ageing population and weak economic growth.
Part of the country’s 2017 Growth Strategy, the idea is that Japan will become a smart
society, where everything is connected by technology, and all necessary goods andservices are provided in a timely manner and in the quantities needed, thus ensuring
better quality of life.
Whilst Society 5.0 is an attainable idea given the current direction of technologicaldevelopment, the discussion highlighted several obstacles to its attainment. Japan iscurrently facing a severe labour shortage, mainly due to low immigration numbers andits aging population, and this is an issue which needs to be addressed to mobilize alarger and perhaps more diverse workforce. Additionally, participants highlighted thatwithout innovation and entrepreneurship, Japan’s Society 5.0 is highly unlikely.
Hence, promoting innovation is critical in working towards Society 5.0. It was notedthat there is an underestimation of company contributions towards innovation in
Japan, however the lack of collaboration between large companies and start-ups isconcerning given that, in the US and other innovative countries, large companies arepurchasing many of their innovative ideas from technology start-ups. This culture has
not yet developed in Japan, as large companies seek ownership of their innovation but
increasing these partnerships it crucial to achieving Society 5.0.

Conclusions
The meeting generated a balance between optimistic and precautionary thoughts on
addressing the challenges of innovation, populism and economic nationalism.
Populism has generated increased grassroots activity, and thus created an appetite forgovernments to address limitations within their own societies. The question is whether
this can be expanded more broadly to address global problems, such as technologicalinnovation and adapting economically. Participants also noted that populism
challenging democracy may not necessarily be entirely negative, given that it has forced
mainstream parties to adapt and progress in the face of various challenges.

However, one area which governments have failed to address is the issue of
globalization, and the established perception within society that free trade agreements
are a threat to national economies. This impression needs to change and free trade
should be encouraged in order to stimulate economic growth across the globe.
Globalization was a rapid process and economic growth cannot possibly remain at thesame rate forever, hence the slowing of the global economy should not be attributed tofree trade agreements.
Whilst populism has created a sense of uncertainty in politics, and the Fourth
Industrial Revolution is creating economic insecurity internationally, there are clear
attempts by stakeholders to address these challenges. There was general consensus in
the meeting that the opportunities for collaboration and information-sharing areincreasing, both between governments as well as the public and private sector. Further,outside the government realm, there is evidence of innovation and adaptation withincompanies of all sizes, which is a positive signal towards the resilience of different
societies. Given that innovation is a shared challenge across the globe, cooperation
between stakeholders is critical to overcome challenges and stimulate economic growthand productivity.