What is an economy for?

Moreover, the British and Dutch economies were wide open for American investment. Japan's economy was not. Indeed, the share of Japan's economy that is owned by foreigners is the nation's most distinctive economic trait -- because it is so tiny. Systems for measuring foreign ownership vary, but approximately 10 percent of the U.S. economy is now foreign-owned. For most European nations the foreign-owned share is higher, since the countries are smaller and their economies are more integrated. Yet for Japan the foreign-owned share is about one percent, and is virtually zero in certain crucial industries. The foreign-owned share of North American and European economies has been steadily rising. The foreign-owned share of Japan's economy has fallen for several years -- despite the collapse of prices on the Japanese stock market in the early 1990s, which should theoretically have attracted bargain hunters from overseas.

For the first few decades after the Second World War, Japanese laws flatly prohibited foreigners from buying Japanese companies. The handful of foreign companies that are well established in Japan -- Coca-Cola, IBM -- are the exceptions that prove the rule. For various reasons they were able to grandfather themselves into the system. Their success is usually cited as proof that anyone who tries hard enough can find a way into the Japanese system. But most other companies were forbidden to do the same thing thirty or forty years ago, when it would have been cheap -- and they can't afford to do it now.

Dennis Encarnation, of the Harvard Business School, has pointed out that when Japanese enterprises invest in plants in Europe or North America, they almost always buy a controlling interest -- 100 percent if possible, 51 percent at least. When foreigners have bought shares of Japanese firms, they have almost always ended up as minority owners, and often receive no seats on the board of directors.

Technology. There is a final point to emphasize about a nationality-conscious business policy: it goes with an aversion to relying on foreigners. This desire for autarky is completely understandable in historical and psychological terms, although it is considered irrational in the realm of economics.

When Japan suddenly became industrialized, in the opening decades of this century, it lost the ability to feed its own people from its own soil. When its leaders and generals considered making war on America, in the 1930s, what drove them was the fear that they would run out of oil. One nightmare they faced was that their shipping would be cut off and they could be starved out. Today is a very different time -- supplier cartels can be broken, as with OPEC; people who have money, as Japan does, can find food to buy. Yet much the same mentality runs through many Japanese -- and other Asian -- approaches to technology. In ways that no economic theory can fully explain, the goal of national policy is to bring control of the technology into Japanese (or Korean, or Chinese) hands -- even if this is irrational, even if it violates the spirit of the borderless world.

Japanese corporations do practice a form of conventional economic competition, but all within their own borders. This is known as the "one-set" philosophy: each big company makes a set of products that includes one of each kind. Each beer maker produces a draft beer, a "dry" beer, a lager, and so on; each electronics company tries to produce a full range of radios, TVs, and fax machines. Successful Japanese students are expected to get top marks in every subject. Economists say that specializing in everything is in principle not possible. But in practice the urge to be on top in every field, rather than concentrating on some and leaving the rest to competitors, is a stronger impulse in Japanese society than in most others.

Americans may complain about the decline of their steel and semiconductor industries -- that is, areas where the United States once enjoyed a lead and has had to watch factories shut their doors. But few Americans really think it is a problem if we have to buy our entire supply of CD players from overseas. The United States has no government project under way to create a domestic fax-machine industry, and when government guidance is proposed -- for semiconductors, HDTVs, and superconductors -- it is always controversial. The Japanese assumption is very different. In 1988, after an agricultural-trade conference in Montreal, a Japanese negotiator spoke to a Canadian colleague. "You know what really makes Japan unusual?" he said. "We are the only major industrial power that is not also a food exporter. If we could improve the productivity of our rice farming by fifteen percent a year, in eight years we would be competitive with California." Not even Japan's least competitive industry, agriculture, should be conceded to foreign competition.

The Japanese emphasis on the country's "unique" capacity for high-quality manufacturing provides an argument for national self-sufficiency. In 1985 the most disastrous crash in Japanese air history occurred outside Tokyo. A Boeing 747 owned by Japan Air Lines took off from Tokyo's Haneda Airport, bound for Osaka. Shortly afterward it crashed into a mountainside, killing 520 passengers. Officials from Japan Air Lines visited the bereaved families to express the company's contrition. On investigation it proved that the principal cause of the crash was a faulty repair job carried out by Boeing engineers, which had left one of the plane's pressure bulkheads in a weakened state.

Many lessons might be drawn from the catastrophe. The high death toll was in part an indictment of bureaucratic infighting within Japan's Self-Defense Force, which squabbled for hours over which branch would do what in going to aid the victims. Autopsies showed that many people had survived the crash but died later of exposure or injuries; they could have been saved with a faster response. Nonetheless the crash was taken in Japan as a symbol of the across-the-board shoddiness of American equipment; over the next few years I heard it mentioned in that context dozens of times.

I moved to Japan half a year after the JAL crash, and less than a month after the space shuttle Challenger blew up shortly after being launched. Several times during the next year I heard quite similar responses from Japanese: if we had done it, it wouldn't have happened. A Canadian friend was at the Japanese space center that day and recalls the air of schadenfreude. The unspoken mood was, what can you expect? This gloating was unwarranted on the part of Japanese quality-control experts, since their country's own H-2 rocket, usually described in the press as the first "pure" Japanese aerospace project, kept blowing up on the launch pad in the late 1980s and early 1990s.

But the general perception of shoddy American production perfectly reinforces the Japanese view of the JAL crash and the Challenger explosion. Early in 1992, when the speaker of the Japanese House complained about American work habits, a Wall Street Journal story quoted a Japanese pollster, Takayoshi Miyagawa, as saying that the comment "represents a general perception of Japanese people on the quality of American labor." The result of the JAL crash and similar U.S.-made catastrophes, he said, is that "the Japanese people think we should make by ourselves whatever concerns human life."

Sometimes the strategy of saving lives by restricting imports backfires. In 1988 Japan's Ministry of Health and Welfare coordinated a drive by the country's three largest vaccine-making companies to produce an alternative to an American vaccine that had not been approved for sale in Japan. The American vaccine, produced by the Merck Corporation, had the trademarked name of MMR and was used to protect children against measles, mumps, and rubella (German measles) with one inoculation. Merck's vaccine was extremely safe; after it had been used on more than 100 million children, no cases of serious side effects had been confirmed. Japanese doctors at the time administered three separate shots for the three diseases. To promote the growth of Japan's pharmaceutical industry, and to avoid using Merck's product, the Japanese government asked each of the three companies to produce its best vaccine for one of the diseases covered by MMR. These the government combined into a new vaccine, which it also called MMR. When the vaccine was ready, in early 1989, the Ministry of Health and Welfare began a mandatory nationwide inoculation program for children. "Rather than use foreign products, we wanted Japanese products because they are of better quality," an official of Japan's Association of Biologicals Manufacturers told Leslie Helm, who reported the story in the Los Angeles Times.

In fact Japan's MMR was of much worse quality than the foreign alternatives. Based on the safety record of Merck's MMR and similar foreign vaccines, the Ministry of Health and Welfare had expected that its vaccine would produce side effects in no more than one case per 100,000 inoculations -- but the incidence of side effects was at least 100 times as great as predicted. The most serious side effects were meningitis and encephalitis, which killed some children and left others paralyzed or brain-damaged. By the end of 1989 the government had made the Japanese MMR vaccine optional rather than mandatory, but it left the vaccine on the market while the remaining stocks were used up and did not approve the safer Merck product for sale in Japan. (Japanese doctors have now returned to giving separate immunizations for the three diseases.)

The preferences of such a system cannot be explained by a desire to save lives -- or to protect consumers. By modern Western standards such preferences seem illogical and self-defeating at best, brutally misguided at worst. Yet they are in keeping with the belief, widespread outside the English-speaking world, that inconvenience to consumers is less damaging in the long run than weakness of a nation's productive base. The fastest-growing modern economies, in East Asia, reflect this view. Like it or not, we live in the world that Asian success stories have shaped. We need to figure out how to compete in it.