FX Intervention Trifecta: Korea, Malaysia, Thailand

Oh, will the combatants ever cease from "international currency war" so we can celebrate the holidays in relative peace? With the US dollar doing another of its habitual swoons due to much-lamented American free money policies, Asian economies not particularly keen on shooting themselves in the foot are having to wade into the open market and buy the godforsaken and hapless greenback to stem the appreciation of their currencies. From the Wall Street Journal comes this snippet:

Central banks in South Korea, Malaysia and Thailand are believed to have intervened in foreign-exchange markets Thursday as Asian currencies surged against the dollar on optimism about the region's economic outlook, underscored by strong economic data from China and signals that the yuan will continue to strengthen.

Taiwan, meanwhile, unveiled measures to buttress its banking system against rapid movements in foreign capital, the latest Asian economy to introduce stricter regulations to control the risks posed by such capital flows...

In Kuala Lumpur, traders said Malaysia's central bank was suspected of buying dollars to curb a rise in the ringgit, which hit a three-month high Thursday. Bank Negara Malaysia may have bought dollars at around 3.0810-3.0820 ringgit per dollar, dealers said. The dollar was at 3.0846 ringgit in late trade.

Traders in Seoul said they suspected the Bank of Korea entered the market, buying more than $500 million at several intervals between 1,135 and 1,140 won per dollar. The dollar closed at 1,134.80 won, bringing the won's gains against the dollar to 2.6% for the year.

In Bangkok, the dollar was at 30.15 baht in late trade—down from 30.16 baht late Wednesday—with suspected buying by the central bank around that level to limit the downside, two dealers said.

In Taipei, which has been trying to temper gains in the New Taiwan dollar—a favorite among investors seeking exposure to China, given Taiwan's increasingly close economic ties to the mainland—Taiwan's central bank announced new measures to control capital flows. Starting Saturday, local banks will have to set aside 90% of foreign investors' new deposits as reserves, a leap from the current level of 9.775%.

So the usually America-friendly Martin Wolf believes Asian countries cannot win in the US-led "international currency war." I don't see any sign of many of these Asian countries relenting just yet, though. 2011 promises to be more of the same unless something major changes the outlook of these nations. For, Bernanke's chopper will surely be strafing us with greenback emissions from greater heights--of that you can be as certain of as death and taxes.

A More Optimistic Take on the 'Seoul Consensus'

There's an interesting article in TIME by its long-serving Asia correspondent Michael Schuman on the re-emergence of South Korea on the world stage. Potentially, it challenges notions of how the country is (still) evolving vis-a-vis what we are familiar with from heterodox economists like Alice Amsden or Ha-Joon Chang. While many would trace the 1988 Seoul Olympic Games as its coming out party, Schuman has other ideas. For him, the real story is not the previous industrialization drive which he believes met its end in the 1997/98 Asian financial crisis. Instead, it's South Korea reinventing itself as a more open society--both politically and economically. Witness the election to the highest office of the former Korean dissident and Nobel Peace Prize winner Kim Dae-Jung [RIP]. Or, consider the emergence of major Korean consumer brands like Samsung and LG for consumer electronics or carmakers like Hyundai and Kia in the commercial realm.

Hearkening to a recent post, you can say Schuman generally acknowledges there is such a thing as a "Seoul Consensus." That is, Ha-Joon Chang's criticism that this consensus does not accurately describe how South Korea developed does not account for its reinvention post-Asian financial crisis:

When I relocated from New York City to Seoul, South Korea's capital, in 1996, I found the city vibrant and fascinating, but also surprisingly provincial. Koreans preferred their fermented kimchi over any other food, and though I grew to enjoy the spicy staple, a longing for familiarity and the feebleness of my digestive system occasionally demanded a respite from the chili-laden cabbage. That proved challenging. Aside from some fast-food joints and wallet-straining restaurants at five-star hotels, foreign cuisine was hard to come by...

A few weeks ago, I returned to my old neighborhood in Seoul for the first time in 10 years, and much to my surprise[,] it wasn't the same place where I shopped in the 1990s...goodies can now readily be found at supermarkets and Costco outlets...

The results are striking. Thirty years ago, Korea was poorer than Malaysia and Mexico. Since then, its GDP per capita has surged by a factor of 10 to $17,000, more than double the levels in those countries. GDP growth was 0.2% in 2009, when much of the rest of the world was contracting, and is estimated to be 6% this year. Yet when I left Korea in 2000, it was an open question whether its success could continue. The embarrassing memories of the 1997 Asian financial crisis were still fresh, and Koreans were worrying that they would lose out to a rising China.

Over the past decade, however, Korea has reinvented itself — it's an Asian miracle again. Korea has become an innovator, an economy that doesn't just make stuff, but designs and develops products, infuses them with the latest technology, and then brands and markets them worldwide, with style and smarts. Samsung and LG, not the Japanese electronics giants, are dominating the hot new LCD-TV business. In 4G phone technology, Samsung is poised to become a leading force, while Hyundai Motor, an industry joke a decade ago, is a top-five automaker, its rising market share fueled by quality cars and nifty marketing. "'Made in Korea' used to be synonymous with cheap and imitative," says Bernie Cho, president of DFSB Kollective, a start-up that markets Korean pop music internationally. "Now it's become premium and innovative." New industries, from online games to pop music, have emerged as powerhouses. Politically as well, Korea is stepping out of Washington's shadow and becoming an influential voice in its own right. Symbolic of that new role, Seoul is hosting the G-20 summit on Nov. 11 and 12, the first Asian country to do so. This nation is a global leader-in-waiting.

Part of Korea's success is simple commitment. Koreans spend some 3.5% of their GDP on R&D, compared with 1.5% in China and less than 1% in Malaysia and India. Innovation, however, isn't something that can be conjured up in government offices or corporate boardrooms. You can tell people to work harder or build a more modern factory, but you can't order them to think better or be more creative. That change has to take place inside people's heads. In Korea, it has. Koreans have become more accepting of diversity and outside influences and quicker to shed old prejudices. Such an outlook was brought about by a fundamental (and continuing) reformation of Korean society. Koreans are breaking down the barriers that held the nation back, a process fostered by political freedom and a passionate embrace of the forces of globalization. Says Cho: "Korea has gone from being a hermit kingdom, from a closed door, to open arms." (See pictures of South Korea's brawling legislators.)

Globalization has always been the engine behind Korea's economic miracle. Beginning in the 1960s, a destitute Korea capitalized on its cheap labor to competitively export toys, shoes and other low-tech goods to consumers in the West. That jump-started income growth; as costs rose, Korea shifted into ships, microchips and other advanced products. Yet to Koreans, globalization was a one-way street. They were happy to sell things to the world, but wanted no more than the profits in return. Koreans didn't care much for foreign cars, foreign investment — or foreigners. Empty taxis would ignore my frantic hails, while locals sometimes swore at me while I walked in Seoul with my Korean-American girlfriend (now wife). Behind its crenellated walls, the Korean economy developed on its own dynamic, and boosted by their unexpected economic success, Koreans came to believe their system was special, even superior. But dangerous problems were festering. Companies were shielded from competition and heavily supported by tight links to the government and banks, allowing them to borrow and invest willy-nilly while building up frightening debt burdens. When I would mention these flaws to businessmen or officials, I got brushed off. The normal rules of economics didn't apply to Korea.

And then the crisis came along:

That self-delusion evaporated during the Asian financial crisis of the late 1990s. As Korea's most prominent companies collapsed into bankruptcy and the government endured a humiliating $58 billion International Monetary Fund bailout, Koreans had to rethink the ways they did business, managed their careers — even their entire economic system. The crisis "was the catalyst" for change, says financier Tom Kang. "The old ways didn't work..."

The 1997 crisis broke apart the cozy government-banking-corporate networks, forcing the big companies to become truly profitable, independent and internationally competitive for the first time. That process was egged on by a new influx of foreign money, ideas and people. Foreign investors began to play a much larger role in the domestic economy, increasing competition. Korean companies brought low by the financial crisis in banking, autos and other industries were sold off to international giants. Storefronts in Seoul now boast more foreign names than I thought possible in the 1990s, from H&M to Kate Spade to Zara. After Apple's sudden success in a Korean economy where foreign handsetmakers had almost no presence — its iPhones claimed more than a quarter of the local smart-phone market in the first half of 2010, according to research firm IDC — Samsung was pressed to accelerate its own product development. The number of foreigners living in Korea has exploded, from fewer than 250,000 in 2000 to more than 870,000 in 2009. Business before the financial crisis "was more like a club," Kang says. Now "there's a lot more competition, and that's forcing people to be innovative. If they don't, they're going to die."

And here's the punchline: Schuman believes the greater political and economic openness which accompanies South Korea's resurgence challenges the so-called "Beijing Consensus" of state-led capitalism. South Korea may have been like that before the crisis, but it is perhaps ironically moving into a more conventional "Washington Consensus" phase that challenges conventional wisdom:

Above all, Korea offers a counterpoint to those political leaders — like China's — who believe "state capitalism" is superior to free enterprise, or that they can create an innovative economy without civil liberties. Of course, that doesn't mean the Korean system is perfect. Despite its progress, Korean society still remains too wary of foreign influence and too biased against women in the workforce. Businessmen complain that too much red tape clogs their way. The outdated education system is so rigid that parents flee the country in droves to put their kids into high schools in the U.S. and elsewhere. The Korean economy is still not a fair place where everyone is governed by the same rules. And North Korea hovers as a relentless threat.

Let's just say I'm not entirely sold on what Schuman writes, but it's certainly food for thought that deserves consideration.

Korea-US FTA Still Not There Yet

[NOTE: This should be the last South Korea post for a while after--count 'em--three consecutive ones.] It has been a very hectic week in the Asia-Pacific region with any number of things going on: US President Obama visiting our large neighbours India and Indonesia; the not-so-consensual G-20 in Seoul; and the annual Asia-Pacific Economic Cooperation shindig, this year in the Japanese industrial town of Yokohama (more on that in the post above). Something that bears mention, however, is the continuing Obama administration futility in concluding any sort of trade agreement. From the Bush administration, Obama inherited pending deals with Colombia and Panama in the Americas as well as with South Korea in the Asia-Pacific. Speaking of which, legislative approval in both countries does not yet appear to be on the horizon.

Let us begin with the Korea side. In early January 2009, Korean legislators from the opposition were literally smashing up parliament over plans to put the Korea-US Free Trade Agreement (the rather unwieldy KORUSFTA). Korean lawmakers apparently enjoy a vigorous democracy for they were beating each other up again by mid-2009 over another issue. Like Japan, South Korea has some of the most protected agricultural producers in the region, and the continuing fear is that KORUSFTA would unleash a flood of American imports. There is also the related and quite frankly nonsensical Korean retention of age limits on US beef imports to consider as a barrier. Previously in place for the mad cow scare that has long since died down Stateside, many Koreans--especially their lawmakers--retain a quite frankly unreasonable fear of US beef contamination. So serious is this mass delusion that Korea's government was nearly toppled over it. Again, if such Korean hysteria were true, there would be thousands of Americans keeling over, but there is absolutely no sign of that happening.

On the US side, there is an equal delusion that American automakers hold of opening the Korean automotive market to their wares. In the mid-1990s, these same US car manufacturers were keen on exploiting the also secluded Japanese auto market. Simply put, it won't happen as there is little demand for American gas guzzlers in these Asian markets. Market liberalization, while categorically desirable, is a ploy that certainly didn't work for the likes of GM, Ford, and Chrysler in Japan as they still have minuscule market shares there. I have little reason to believe that opening up the Korean market will do them any better.

At any rate, that's my reading of events. The Wall Street Journal summarizes what happened in South Korea that resulted in...a continuing legislative stalemate for both the Americans and the Koreans:

The presidents of the U.S. and South Korea were unable to overcome disputes over cars, cattle and domestic politics, potentially killing the biggest bilateral trade deal the U.S. has taken up in more than a decade. The failure to resolve issues by Barack Obama's self-imposed deadline was a blow to the president, who has put export growth at the center of his jobs agenda and had invested political capital in getting a deal by the Group of 20 summit in Seoul.

A U.S. trade official said working-level staff from both sides will meet Friday. But chances for a deal look dim given opposition Mr. Obama faces from Ford Motor Co., labor unions and Democratic lawmakers. Labor leaders and some powerful politicians from both parties praised Mr. Obama for not going ahead with a deal they characterized as bad for U.S. workers. "President Obama is exactly right in holding out for a deal that puts working people's interests first," said Richard Trumka, president of the AFL-CIO.

Polls suggest U.S. political support for trade-opening deals is weakening amid high unemployment. While Republican congressional leaders have suggested they would support moving forward on such deals, some newly elected GOP lawmakers have expressed doubts. Without presidential pressure, trade experts say the South Korea agreement, which has languished in Congress since 2007, could return to limbo along with pending trade agreements with Colombia and Panama and the dormant Doha round of global trade talks. In addition, Mr. Obama hasn't moved to resolve a festering trade dispute with Mexico because of pressure from Democratic lawmakers and unions...

One stumbling block was Korea's refusal to change a provision in the 2007 pact that provided an immediate end to a 2.5% tariff the U.S. levies on imports of Korean cars, said House Ways and Means Committee Chairman Sander Levin (D., Mich.). The U.S. wanted the tariff reduced gradually, while Korea eliminates safety and environmental rules that U.S. auto makers, led by Ford, said help keep Korea the world's most closed car market. The effect of reducing the U.S. tariff more slowly likely wouldn't be large because South Korea's Hyundai Motor Co. already gets around it on more than half of the cars it sells in the U.S., by making them in Alabama and Georgia...

The U.S. also wants Korea gradually to drop its ban on imports of U.S. beef from older cattle, which began after the U.S. had a case of mad-cow disease seven years ago. Previously thought the easier of the two issues, it is a hot button politically for Korea and prompted a walkout by Korean negotiators.

In the end, the parties ran out of time. U.S. Trade Representative Ron Kirk said, "We won't be driven by artificial deadlines," though it was Mr. Obama who set the G-20 deadline. The president alluded to the political pressures. "If we rush something that then can't garner popular support, that's going to be a problem," said Mr. Obama, who had criticized the moribund 2007 Korea pact when he was a candidate. "We think we can make the case, but we want to make sure that that case is airtight."

His plan to revive the Korea trade deal originated in the spring, with a conversation with then-Chief of Staff Rahm Emanuel about broadening the national-security relationship with South Korea. The idea was that reviving the pact could broaden that relationship; help meet Mr. Obama's goal of doubling U.S. exports by 2015; and further U.S. economic interests in Asia as a counterweight to China.

Limiting new trade talks to cars and beef allowed the White House to convince Korea, which had paid a heavy political price for the 2007 agreement, that the pact wouldn't be "renegotiated" but "supplemented" by two side agreements. The narrow reopening also made success more likely, and Mr. Obama in June set the deadline to coincide with the G-20 summit, in part to pressure negotiators to get the job done. The bruising election season chilled the climate for new trade action, as Democrats trumpeted opposition to the Korea deal and some populist Republicans expressed skepticism of free-trade deals...

The Korean auto rules the U.S. wants changed are a blend of American and European emissions and other standards, which force foreign producers to make slight modifications to enter the Korean market. Doing so is expensive, and when unit shipments are low it can force car makers to raise prices. "Free-trade agreements should be about free trade, and we greatly appreciate President Obama's and Ambassador Kirk's commitment to that fundamental principle," said Ford Chief Executive Alan Mulally.

Detroit auto makers and the United Auto Workers got fresh backing Thursday from two prominent Michigan lawmakers who will likely be gatekeepers for any trade pact, should one be reached. House Ways and Means Chairman Mr. Levin and the panel's senior minority member, Michigan Republican Rep. Dave Camp—who are likely to switch positions in the next Congress—jointly said that the effort to salvage a U.S.-Korea trade deal will succeed only if it addresses "the dangerously lopsided trade in automotive vehicles."

South Korean President Lee Myung-bak also faces a political dynamic, including pressure not to change an agreement that was portrayed as a victory over U.S. negotiators when it was first struck in 2007.

I see limited scope for KORUSFTA going forward soon given that it is such a political hot potato in both countries. Sitting on the desk since 2007 and not being put to a vote in either country is a surefire sign that things are amiss. Legislative attention is concentrated in other places in the US, while Korean anxiety over mad cow borders on the irrational. With the Obama administration being unable (or unwilling) to move KORUSFTA forward, there's also a question of whether resistance is specific to Korea or generalized aversion to trade, period.

Meet the 'Seoul Consensus' (Enough DC & Beijing)

So we've heard all about the now much-disparaged Washington Consensus. There's also been much discussion of a so-called Beijing Consensus [1, 2]. But, in the wake of the G-20, we now have--get this--the South Koreans coming up with their own shtick, the "Seoul Development Consensus for Shared Growth." This consensus is the offshoot of South Korea's aim to make a mark as G-20 chair by emphasizing development.

Already, there are complaints that the Seoul Consensus sounds awfully reminiscent of the Washington Consensus in not speaking about heterodox measures such as loosening intellectual property regulations or using tariffs to promote infant industries. In other words, the Seoul Consensus isn't very reminiscent of how South Korea actually developed according to its critics. In the Koreans' defence, note that the text mentions there is no "one-size-fits all" approach to development. Ha-Joon Chang discusses a number of these points.

I myself would note that there was not much if any observable consensus among G-20 participants to speak of. At any rate, here is the full text for your consideration:
--------------------------------------------------------

Seoul Development Consensus for Shared Growth

In the wake of the most severe economic shock in recent history, the G20 has the
opportunity to contribute to the reconstruction of the world economy in a form conducive to strong, sustainable, inclusive and resilient growth. Through the Seoul Development Consensus for Shared Growth, we seek to add value to and complement existing development commitments, particularly those made at the recent High-Level Plenary Meeting on the Millennium Development Goals, and in other fora.

Why Growth Must be Shared

At Pittsburgh we agreed to work together in an unprecedented process of mutual assessment to ensure our individual economic policies collectively achieved an outcome of strong, sustainable and balanced growth. This Framework was borne of a recognition that for the world to enjoy continuing levels of prosperity it must find new drivers of aggregate demand and more enduring sources of global growth. We recognize as a crucial part of this exercise that we need to enhance the role of developing countries and low income countries (LICs) in particular, for the following reasons:

· First, because for prosperity to be sustained it must be shared.

· Second, because we acknowledge that the impact of the recent crisis demonstrated a global interconnectedness that is disproportionately affecting the most vulnerable in the poorest countries. It has been estimated that, as a result of the recent crisis, an additional 64 million people will be living in extreme poverty (i.e., living on less than USD 1.25 a day) by the end of 2010. We therefore have a responsibility to fulfill.

· Third, as the premier forum for our international economic cooperation, because the G20 has a role to play, complementing the efforts of aid donors, the UN system, multilateral development banks (MDBs) and other agencies, in assisting developing countries, particularly LICs, achieve the Millennium Development Goals (MDGs). Our role must relate to our mandate on global economic cooperation and recognize that consistently high levels of inclusive growth in developing countries, and LICs in particular, are critically necessary, if not sufficient, for the eradication of extreme poverty.

· Fourth, because the rest of the global economy, in its quest for diversifying the sources of global demand and destinations for investing surpluses, needs developing countries and LICs to become new poles of global growth – just as fast growing emerging markets have become in the recent past.

Our overarching objective of helping LICs improve and maintain the levels and quality of growth, thereby reducing poverty, improving human rights and creating decent jobs, requires strengthening the relationships among high, middle and low income countries. This entails promoting sustainable economic, social and environmental development; honoring equity in the partnerships that exist; building stronger and more effective partnerships among advanced countries, emerging countries and LICs; engaging the private sector and civil society; and refocusing our priorities and efforts to remove the bottlenecks for LIC growth. We further believe there is no “one-size-fits-all” formula for development success and that developing countries must take the lead in designing and implementing development strategies tailored to their individual needs and circumstances.

G20 Development Principles

We therefore commit ourselves to a Multi-Year Action Plan to achieve these objectives. This Plan will be based on the following principles, intended to capture the key characteristics of our actions and policies:

1. Focus on economic growth. Be economic-growth oriented and consistent with the
G20 Framework for Strong, Sustainable and Balanced Growth, which requires
narrowing of the development gap. More robust and sustainable economic growth in
LICs will also go hand-in-hand with their capacity to achieve the MDGs. Actions and
policies should have the capacity to significantly improve the prospects for inclusive, sustainable and resilient growth above business as usual.

2. Global development partnership. Engage developing countries, particularly LICs, as equal partners, respecting their national ownership and recognizing that the most important determinant of successful development is a country’s own development
policy. Ensure that actions foster strong, responsible, accountable and transparent
development partnerships between the G20 and LICs.

3. Global or regional systemic issues. Prioritize actions that tackle global or regional systemic issues such as regional integration where the G20 can help to catalyze action by drawing attention to key challenges and calling on international institutions, such as MDBs, to respond. Focus on systemic issues where there is a need for collective and coordinated action, including through South-South and triangular cooperation, to create synergies for maximum development impact.

4. Private sector participation. Promote private sector involvement and innovation, recognizing the unique role of the private sector as a rich source of development knowledge, technology and job creation. Encourage specific ways to stimulate and leverage the flows of private capital for development, including by reducing risks and improving the investment climate and market size.

5. Complementarity. Differentiate, yet complement existing development efforts,
avoiding duplication, and strategically focus on areas where the G20 has a comparative advantage and can add value focusing on its core mandate as the premier forum for international economic cooperation.

6. Outcome orientation. Focus on feasible, practical and accountable measures to address clearly articulated problems that are serious blockages to significantly improving growth prospects for developing countries. Such measures should have the potential to provide tangible outcomes and be significant in impact. Implementation
of G20 action on development should be monitored through an adequate accountability framework.

In close consultation with our developing country and LIC partners, as well as relevant international and regional organizations with development expertise, we have also identified nine areas, or “key pillars,” where we believe action and reform are most critical to ensure inclusive and sustainable economic growth and resilience in developing countries and LICs. These areas are: infrastructure, private investment and job creation, human resource development, trade, financial inclusion, growth with resilience, food security, domestic resource mobilization and knowledge sharing. Creating optimal conditions for strong, sustainable and resilient economic growth in developing countries will require reform and transformation across each of these interlinked and mutually reinforcing key pillars.

Guided by our development principles and oriented around the key pillars, we have developed the following Multi-Year Action Plan on Development. We believe these action plans address some of the most critical bottlenecks to strong and sustainable economic growth and resilience in developing countries, in particular LICs, and have high potential for transformative, game-changing impact on people’s lives, helping to narrow the development gap, improve human rights and promote gender equality. We commit to full, timely and effective implementation of these action plans and, to this end, will continue to closely monitor their progress, in synergy with other processes, including preparations for the Fourth High-Level Forum on Aid Effectiveness to be held in Korea in late 2011.

Slowing Japan's Galapagos Syndrome

Enjoy, a play by Japanese playwright Toshiki Okada, opens with two characters working at a comic book cafe in present-day Tokyo who spend nearly the first act solely ruminating about the etiquette of public toilets. The brilliant drama reveals the world of a Japanese generation of self-centered but lovable slackers who are accused by their peers of "destroying the future of Japan." While watching this play in Manhattan this month, it occurred to me that like these characters, who were lost in the minutiae of their own lives, Japan too has turned inward.

It's true that shyness is so common in Japan that it almost considered a virtue. Where else would one find DVDs for sale to practice "just looking" at people or "Miterudake," as the product is called? But given its cultural proclivity for and historical experience with isolation (during its policy of sakoku), the last thing Japan needs is a reason to curl up inside its shell. An isolated Japan would be especially unfortunate as it would further erode the country's relevance in international politics as well as its economic competitiveness and prosperity.

Amid economic doldrums and deflationary mentality, a declining population and growing anxiety about Japan's place in the world, and an enormous letdown after high hopes in the governing Democratic Party of Japan (DPJ), there is a danger that Japan might further withdraw. Japan's "Galapagos syndrome," a phrase originally coined to describe Japanese cell phones that were so advanced they had little in common with devices used in the rest of the world, could potentially spread to other parts of society. Indeed signs suggest it is happening already.

The first sign is the current generation of Japanese in their 30s and 40s who have been distinguished by market experts for their adeptness at online shopping and generally avoiding the rest of society. More dramatic is the number of hikikomori or shut-ins who have given up on social life. According to a Japanese government website, the figure may stand at 3.6 million or about 3 percent of the entire population. This figure is far larger than the previous estimate of 1 million by renowned Japanese psychologist Tamaki Saito.

As I argued earlier this year, Japan as a nation seems to be withdrawing and giving up on the world. Akiko Ikeda-Wei, a Japanese sociologist based in New York told me recently, "I am saddened by Japan's economic slump that has caused misery: the record-high unemployment rate and extremely unsettled and insecure feelings among thousands of Japanese employees."

Echoing many of the Japanese professionals I have met in New York, Ikeda-Wei advised her countrymen to look for opportunity away from home--and don't look back. "If I were one of them, I would forget about seeking employment in Japan and leave, and look for a volunteer job somewhere in Africa or in the Middle East and try to use this opportunity to explore something new and innovative that can help others who are in great need."

The problem is that the attitude of Japanese younger people today results in just the opposite. While her advice might be apt for many Japanese, "The fact is actually the other way around. Young people especially have become more inward-looking than ever, totally not interested in going abroad to work or to study," she said.

An odd expression of this phenomenon is in the puzzling decision this month by Japan's largest business newspaper Nikkei to dissuade readers from linking to its website. As part of its strategy to require readers to pay for access, Nikkei has stipulated that people who wish to link to its website must fill out a written application. Nikkei's print circulation surpasses that of the New York Times and even The Wall Street Journal. But in the Internet world, the move looks as if the company were saying, "We are doing just fine with our print edition, so go away, Internet."

Jean-Pierre Lehmann, a Japan expert at IMD Business School in Switzerland, has noticed a shift in attitude at companies such as Toyota Motor. In the 1980s, Lehmann would accompany Western managers to Japan to learn about its venerable production techniques. But over the course of the decade, he noticed "a subtle change." As he wrote this month in the Taipei Times, "Western management delegations continued to be politely received, but more often than not professional guides were appointed to show them around, and there was no dialogue with the Toyota managers, who previously had been keen to teach and learn. On the contrary, there was an undisguised sense of condescension toward the visiting foreign executives."

Most distressing is that, like the creatures of Galapagos, the products of Japanese research and knowledge generation are becoming increasingly evolved yet nonetheless separate from global society. As recently chronicled by Japanese economy experts Hajime Ito and Jun Kurihara, Japan leads in number of patents in solid waste management and is number two after the United States in air pollution control, water pollution control, medical technology, pharmaceuticals, and biotechnology. Yet despite these impressive accomplishments, the country lags in cited research or core articles in the same fields, not even making the top ten. Why is this the case?

Ito and Kurihara point to one possible cause: Japan's lack of international cooperation in the area of knowledge creation and the falling number of Japanese students attending U.S. universities.

At elite American universities like Harvard and Berkeley, the number of Japanese students is falling and relatively small compared with their counterparts from South Korea and China. Japanese enrollment at Harvard has been declining for 15 years while enrollment from China and India has more than doubled. Only five Japanese students attended Harvard as undergraduates in 2009, and only one of them matriculated as a freshman. According to a study by the Institute for International Education, overall India is the leading sender of students to the United States, and while Japan was the fourth largest sender, its number was down by 4 percent to 33, 974 in 2008, down for a third straight year. Since 2000, undergraduate enrollment in U.S. universities has dropped 52 percent. These are figures incommensurate with the world's second largest economy.

In March, Harvard President Drew Gilpin Faust even made a special trip to Japan to encourage more Japanese high school students to apply to the university. Faust met students in Japan who preferred to stay in the comfort of their own homes rather than going abroad. A Washington Post article this month featured students from Japan who passed up degrees from top U.S. universities to stay in Japan.

To be sure, Japan's population is shrinking and the number of children under 15 has declined for 28 consecutive years. But these trends don't entirely explain this more inward-looking attitude, which comes from a combination of domestic political dysfunction and economic malaise that has crept into popular culture. While Japan was once a larger consumer of American degrees, "an international degree is not as valued" in Japan, Faust is quoted as saying in the Washington Post article. While U.S. college degrees are becoming ever more expensive, enrollment from developing countries India and China have nevertheless led the pack and have risen in 2008 by 13 and 20 percent respectively.

Pointing to the falling enrollment of Japanese in U.S. top universities, Ikeda-Wei told me, "Economic difficulty is already sad enough but I am even more saddened by this very short sighted, pessimistic, and unproductive attitude of young Japanese." She concluded, "If young people's attitude remains as such, it is very difficult to hope for Japan's bright future."

Okada's play Enjoy whose endearing characters brought the world of Japan to audiences abroad was made possible by support from Japan Foundation and Japan Society, as well as the U.S. National Endowment for the Arts. With a declining population and exploding government debt, the future of Japanese military or "hard" power is uncertain. That is why for Japan to remain relevant, prosperous, and influential, institutions like the Japan Foundation, which is supported by the Japanese foreign ministry and promotes international exchange, and the Japan External Trade Organization (JETRO), which is supported by the economy ministry and promotes international trade and investment, have become increasingly important. (Full disclosure: I have worked with both institutions.)

"Isolation hurts Japan's economy, especially in services," Robert Dujarric of Temple University Japan has recently noted. "If so few Japanese conglomerates have managed to establish themselves in the premier league outside of manufacturing, it is partly due to their mono-cultural and exclusively Japanese management. It puts them at a severe disadvantage when competing with foreign rivals run by multinational and multicultural staffs." Japanese language, which is considered by experts to be among the most difficult to learn, is highly adaptive to the Japanese high-context culture but irrelevant in most of the world outside this island nation.

Institutions like the Japan Society in New York can act as powerful vectors of positive influence, coalescing Japanese innovators abroad to bring change to Japan. Unfortunately, just as the role of these cultural and economic institutions has become more critical, the mood in Japan for spending has unsurprisingly turned sour. While the government's approval rating has fallen to 24 percent, the one bright spot for Prime Minister Yukio Hatoyama has been the public spectacle he has made of the budget review process or "shiwake." Like corporate restructuring or "risutora" years ago, "shiwake" has become a word laden with controversy in Japan today--to some it is the democratization of the country's spending process, bringing openness and transparency; to others it is a sign of the country's decline and malaise. The fears were epitomized by a now-infamous comment downplaying scientific spending by a Japanese lawmaker who asked, "What's wrong with being number two?"

For Japan to slow its Galapagos syndrome, it will need to support its soft power and foreign engagement institutions. The question mark in my mind is: Do the majority of Japanese want to slow their country's withdrawal from the world or would they prefer a comfortable decline? That's to be determined.

Reposted from the Huffington Post.
Photo by Strana.