COVER STORY • Can Economics Save the World from Rising Geopolitical Incertitude? • 1

Economic Policy in an
Age of Rising
Geopolitical Risks

By Naoyuki Haraoka

Introduction
Many people today in the OECD nations and some developing
countries as well feel completely deprived of any ability to participate
in the policy decision-making process and that they are not well
represented by the political elites heading their national
governments. They feel their interests are being ignored and evendisrespected by them. One result of this is that they have turned
against the policies being pushed by these establishment elites, aswitnessed by the increase in anti-free trade or anti-globalization
movements. Although free trade and globalization have usually been
considered the best economic policies by the governing elites, they
have not always been consistent with the interests of ordinary
people. Globalization, for example, could threaten job opportunities,
while more nationalistic or protectionist policies could work tosecure ordinary people’s jobs. Geopolitical crises, including theUS-China tech cold war or trade conflicts triggered by such abacklash, seem to be intensified by this anti-elite sentiment.
But it is true that globalization has some negative aspects that arerecognized even by the governing elites. Some industrial sectors orindividuals that have failed to adapt to globalization have sufferedfrom loss of income or employment as a result of losing
competitiveness to global rivals. Such drawbacks should have been
mitigated by maximizing the benefits of globalization, but in reality
this has not happened. So these reactionary movements may as well
be welcomed as providing a good opportunity for addressing theseissues.
Expanding income disparity is certainly a big drawback ofglobalization and a principal cause of anti-elite political movements.
But this is an old issue that economists have examined even before
globalization got fully underway. About 100 years ago at the peak ofindustrialization based on new revolutionary technologies such as
automation, a significant income gap began to develop between therich, who earned revenues from the industrial revolution, and thepoor, who were mostly laborers left behind by the trend towardinnovation and replaced by machines.
So we do not need new economics to resolve this issue today.
While we may need political science to examine today’s antiestablishment movements since income inequality is not the sole
reason for it, the old economics can handle this issue. Even 100
years ago, economists knew that income equality would notnecessarily be assured, even at the point of optimal resource
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Author Naoyuki Haraoka

allocation, by market mechanisms. Government intervention would
be necessary to correct inequalities.
In this short essay, I would like to look at how current economics
can contribute to resolving the challenges arising from today’s
geopolitical crises.

Causes of Income Inequality
Globalization has produced both winners and losers and increased
income inequality between them. But in the long run, this inequality
will disappear, since the losers – companies that have lost theircompetitiveness under globalization such as steel companies in theRust Belt region of the United States – will leave the business andtheir production elements such as labor and capital (productionfacilities) will be transferred to the winners (successful companies).
This is what we call the structural adjustment process, whichgovernments are expected to promote as smoothly as possible. In
the short term, these loser industries or companies may need help
from their government to make these transitions much lesschallenging and avoid a radical rise in unemployment. In thestructural adjustment process, governments are expected to play akey role in mitigating the income inequality between winners andlosers.
While inequality born of globalization is by nature transitory, there
is another aspect of inequality that is structural in nature, as pointed
out by Thomas Piketty in his book Capital in the Twenty-First Century(2013). He referred to the famous episode in Honoré de Balzac’s
novel Le Père Goriot (1835) in which a poor college student learning
law is convinced that in order to be wealthy, it would be far easier toget married to a girl from a wealthy family than work hard to be alawyer. The episode shows that whether you are from a wealthyfamily or not can be a major factor in causing inequality rather thanindividual efforts. As the economy matures and stabilizes, thewealthy would become wealthier by earning stable revenues fromtheir investments, while the poor would remain poor as their wages
will not rise much due to stable prices. Social status is almost fixed
for all people. This fixed income inequality would remain even with amarket economy that functions well. Global competition could
achieve optimal resource allocation and economic efficiency, but it
could not change fixed income inequality as such.
Educational background is another important structural inequality.
This is more crucial now than ever, with the advent of the Fourth
Japan SPOTLIGHT • November / December 20195COVER STORY 1

Source: Ministry of Internal Affairs and Communications; Ministry of Health, Labour andWelfare

Industrial Revolution. AI and IoT and other information technologies
will replace human labor, both simple and intelligent, and eventuallya large part of the human working population. This will lead tosignificant income inequality between people with high skills andadvanced knowledge and less intellectual ones. We should not
overlook the fact that only wealthy families will be able to give theirchildren a high-level education in light of costs. Such labor-saving
technological changes could encourage further non-permanent labor
employment and this would increase another income gap between
permanent workers and non-permanent ones.
The rapid aging of societies in developed nations, and in the near
future in many developing countries, will be another source ofstructural income inequality. Elderly people are mostly retired andwith limited income sources. The growing ratio of such people to thetotal population will lead to structural income inequality. For
example, in Japan, the country with the most rapidly aging
population in the world (Chart 1), the increase in households withheads over 65 years old pushed up the poverty rate (the percentageof households whose head has an income below around $10,000 peryear) significantly during the first decade of the 21st century.
However, it is true that poverty among young people today isincreasingly affecting changes in the poverty rate (Chart 2). The peakof poverty in 2012 was seen in the young age group of 20-24 years

CHART 2 (a)CHART 2 (b)CHART 1

Age factor of heads of households
pushing up poverty rate in Japan(changes during 1999-2009 & 2000-2012)
2.0(% point)
over 65

Increase ofpoverty rateover 65

1.5
1.0

30-49

0.5

less than30

50-64

0.0-0.5

less than 30

30-49

50-64

-1.0
-2.0

Statistical Researchby Ministry of Internal Affairs
and Communications

Statistical Researchby Ministry of Health,Labour and Welfare

1999: 9.1%
2019: 10.1%+1.0% point rise

2000: 15.3%
2012: 16.1%+0.8% point rise

Change in poverty rate among men
in different age groups (1985-2012)30%

Comparison between 1985 & 2012
30%

1985

25%

20091994
2012

2003

2006

20%

20%

15%

15%

10%

10%

5%

5%40-

9 4 9 4 9 4 9 4 9 4 9 4 9 4 9 0
5- 0-1 5-1 0-2 5-2 0-3 5-3 0-4 5-4 0-5 5-5 0-6 5-6 0-7 5-7 r 8
1 1 2 2 3 3 4 4 5 5 6 6 7 7 ve
O Age

1985

25%

0%

40-20129 4 9 4 9 4 9 4 9 4 9 4 9 4 9 0
5- 0-1 5-1 0-2 5-2 0-3 5-3 0-4 5-4 0-5 5-5 0-6 5-6 0-7 5-7 r 8
1 1 2 2 3 3 4 4 5 5 6 6 7 7 ve
O Age

Notes: 1. The peak of poverty in 2012 is seen clearly in the young age group of 20-24 years old.
2. In the working age groups, the poverty rate has been clearly rising since 1985, though its rising trend is recently slowing down.
3. In the age groups over 60 years old, the poverty rate has been significantly decreasing in 2012 in comparison with 1985 and it is still continuing to decline even now.

Source: Poverty Statistics (2015) by Prof. Aya Abe of Tokyo Metropolitan University from “Combatting Poverty Among Young People” (Cover Story 6) from Japan SPOTLIGHT Nov./Dec. 2016
issue.

6 Japan SPOTLIGHT • November / December 2019COVER STORY 1

old. This was largely due to the increased ratio of non-permanent
employees to total employees in Japan whose incomes are much
lower than those of permanent employees. This shows that poverty
in Japan cannot be entirely attributed to the aging society.
According to OECD statistics in 2016, the Japanese poverty rate
was 15.7%, ranked 14th among the 42 surveyed countries, while therate in China was 28.8%, the highest among those surveyed, in India
19.7%, ranked fifth, in the United States 17.8%, ranked sixth, and inSouth Korea 17.6%, ranked eighth. This means income inequality is
as important a policy issue for Japan as for those nations. It is often
said that having a relatively small immigrant population in Japan may
not provoke more anti-globalization or anti-elite political movements
than in nations with larger immigrant populations, but this income
disparity could provoke such movements even in Japan.

Suggested Economic Policies
Even now when skepticism about globalization is growing,mainstream economists, usually well regarded by today’s politicalelites, speak of the advantages of globalization, in the belief that overthe long term globalization will produce the largest economic
benefits for all nations. These benefits may contribute to mitigating
income inequality by a trickle-down effect to the poorer levels. But asI have mentioned, we are now faced with structural income inequality
caused by a number of factors that will not be allayed even in thelong run without relevant economic policies. Economists will need toreturn to what economists in the 19th century said about thedoctrine of laissez-faire and income equality, namely the latter cannot
be ensured by the former. The absence of a convincing theory ofrising inequality, downward social mobility and resulting pathologies
must be corrected, and criticisms of market mechanisms thatoriginally existed in economics should be restored. But as capitalism
proceeds and markets expand, this view has been marginalized. It is
now only economists themselves who can reverse thismarginalization, and the rise in anti-elite political movements should
be considered as providing a good occasion for them to reflect onpolicies to correct income distribution that favors the incumbent
wealthy. They could, for example, consider the following
prescriptions for the maladies possibly caused by income inequality.
In coping with digitalization replacing human labor and obliging an
increasing number of employees to follow non-standard contracts as
non-permanent employees, the government should establish a“basic income” to ensure the minimum wage for all workers, inparticular for the interests of non-skilled labor. This would assure all
citizens of a minimum standard of living regardless of their status of

employment or amount of wages. Assuming that digital technologycould replace a large portion of the workforce who would not be able
to earn enough wages to maintain an ordinary standard of living
regardless of their qualifications or skills, economists shouldsuggest a drastic reform of the existing social security system.
There is a belief among OECD nations including Japan thatstagnant real wages for less educated workers are one of theprincipal causes of widening income inequalities. We need to know
why real wages for the less educated fail to rise. We must examine
the behavior of corporations, their increasing reliance onoutsourcing, and how their market dominance as a monopoly oroligopoly under the waning of antitrust enforcement influences theiremployees’ wages. We also need to study the role of anti-labor
politics and policies and labor law, and also the decline of the powerof the unions.
It is also necessary for us to eliminate implicit discrimination
against minorities that could lead to inequality. For example, gender
discrimination can lead to serious inequality of opportunity. We see avery low percentage of female managers in Japan, because theopportunities for management positions given to Japanese men havenot been equally shared with Japanese women. In education as well,there has been a dominant presumption in Japanese culture thatgirls will not be good at mathematics or natural sciences, while boys
will not be good at handicrafts, meaning a loss of opportunity for
those in both categories to realize their natural gifts. We need toeliminate these implicit discriminations rooted in our culture in orderto achieve equal opportunities for all and take full advantage ofeveryone’s abilities.
And this is true of not only gender discrimination but also age or
nationality or discrimination based on handicaps. Direct intervention
in such implicit discrimination against minorities is necessary, suchas imposing obligations on companies to ensure a certain
percentage of their managers are women.
Industrial policy to empower the private sector should also berecommended by economists. To create an economy caring for aworker’s interest, the public sector should engage in a public-private
partnership in which it plays a vital coordinating role and enhances
the competitiveness of private business, ensuring its efforts are notscattered, haphazard or wasted in order to secure jobs for workers.
Naoyuki Haraoka is editor-in-chief of Japan SPOTLIGHT & executive managing
director of the Japan Economic Foundation (JEF).

Japan SPOTLIGHT • November / December 20197