At the beginning of the discussion, after the welcome remarks of Mr. Konoike, Minister of State for Special Zones for Structural Reform, Messrs. Naohiro Yashiro and Masayasu Kitagawa gave the keynote speeches (see the Japanese materials of Yashiro's keynote speech on our website). A panel discussion was then held, including questions from the general public and an exchange of opinions.

1.Outline of the Keynote Speech by Mr. Naohiro Yashiro (President of the Japan Center for Economic Research)
 

• The main aim of regulatory reform is to protect consumer interests through the promotion of competition. For this reason, it is necessary to eliminate all ex ante restrictions hindering competition and, at the same time, to strengthen the ex post checking and monitoring functions that stimulate competition. In some sense, it is a combination of easing and tightening of regulations. This does not mean laissez-faire. At the same time, the reform of a government-made market, characterized by strict regulations, will lead to the creation of new industries and employment. It might be compared to a shift from trade protectionism to trade liberalization. Medical care, education, and agriculture may also be positioned as industries. Moreover, delegation of authority from the national government to the local authorities is required.
• The special zones for structural reform are extremely useful for conducting a social experiment in breaking the wall of opposition to nationwide uniform reform. The aim is to adopt a system analogous to the institutional competition between the states in America. It is different from the government's model projects or from the Chinese and North Korean special regions. The reform should be conducted based on local needs and initiatives. Fiscal support involving government intervention is not assumed.
• The system of promotion of the special zones for structural reform has many innovative characteristics unprecedented in the history of Japan's administrative system. First, local authorities and the Headquarters for Promotion of Special Zones for Structural Reform in the Cabinet work together, and local initiatives become a national system. Second, preferential measures of specific regulations of the Law on the Special Zones for Structural Reform constitute a positive list, but they approach a negative list through the addition of amendments twice a year. Third, the full disclosure of official information is designed. All information, including negotiation processes between the Headquarters for Promotion of Special Zones for Structural Reform and all ministries and agencies, is disclosed on the website. Fourth, a minister neutral to the institutional reform is leading the full-time organization.
• The process of accreditation of the special zones includes, first, acceptance of the proposals of local authorities, individuals, and enterprises, then arrangement of them in the Headquarters for Promotion of Special Zones for Structural Reform. Next, negotiations proceed with various ministries and agencies. If consensus is reached, the proposals are added to the list of the Law on Special Zones in the form of preferential measures for regulations. Based on this, the applications are accepted once more and the special zone is created. These procedures are simultaneously conducted with a focus on the semiannual amendments of the law.
• 117 regions were established as the primary special zones. Concerning medical care, flexible criteria for application for the advanced medical hospitals was implemented all over the country. The special zone is a milestone for nation-wide application. There is nothing better than nation-wide application from the very beginning. The regions registered as special zones should expand promptly on a nation-wide basis in the future.
• The problem is that there are few special zones that are really experimental. It is necessary to create more innovative forms such as allowance of the joint-stock companies' participation in hospitals that will become possible under the next amendment. Furthermore, it is necessary to aim at the creation of new businesses, promoted by preferential measures for multiple regulations bestridden by ministries.
  
• A Special Zones Assessment Committee-which will be created soon- will need to evaluate both the achievements and harmful effects of the special zones. The evaluation of the results of the special zones should include essential qualities such as costs and others. If there are no substantial adverse effects, it is possible to permit nation-wide adoption.
  
• 30 percent of the members of the Special Zones Assessment Committee will be selected from among the public. It is considered the first attempt of that kind of committee. There is even dispute about entrustment of management to the private sector. The special zones are experiment sites for institutional reform. They are also considered applicable to such problems as highway-related public corporations or the national postal service, savings, and life insurance.
  

 

2. Outline of the Keynote Speech by Professor Masayasu Kitagawa (Waseda University, former governor of Mie Prefecture)
 

• I strongly support the concept of special zones. I would like to talk about two issues. The first is a manifesto, one that focuses on achievement of democracy at the initiatives of politics through making a public commitment to the actual and clear targets described by figures, resources, and periods of time.
• And then there is the story of the Beijing butterflies. If one butterfly flaps its wings in Beijing, other butterflies will follow suit and flap their wings; the sympathetic resonance will spread over the world resulting in a hurricane in New York. This is a metaphor of chaos theory. And the idea of these special zones is precisely a flight of Beijing butterflies. The changes began in one autonomous community will involve the entire country in very little time if a similar resonance phenomena arises.
• Regulatory reform is necessary to eliminate the detrimental effects of public administration, such as government's compartmentalized public administration and hierarchical structure. Mie Prefecture launched a special zone idea to revitalize the Yokkaichi industrial complex. It was the staff members of the Yokkaichi fire station participating in the project who created a plan and persuaded the Director-General of Fire-Defense Agency to listen to them. This plan was accepted as a model project and bore many fruits. This was previously unthinkable.
• From the standpoint of the subsidiary principle that the private sector, towns, and prefectures do the things they are able to do in turn, the discretionary policy of the government cutting subsidies arbitrarily and promising to hand over the tax resources instead seems strange. Not only has the national government become too dependent on such a system, the local authorities have, too. Nevertheless, it is indispensable to knock the bottom out of it.
• The central government took the position of the supply side and formed protective and dependent relations with business world. This led to the creation of an extremely exclusive system. As opposed to this, designated structural reform zones put themselves in the position of the consumers and taxpayers trying to break through the conventional system. Therefore, strong opposition comes as no surprise.
• Nonetheless, the breakaway from the protective and dependency relations and collaboration among the central government, local authorities, and the private sector is expected to generate a multiplier effect. People who win elections should develop the vision and bureaucrats should do their job based on that vision. The contents of the regulations should reflect the will of the people, and bureaucrats should conduct transparent man
• Designated structural reform zones do not receive subsidies. It is crucial to change the paradigm from the conventional one, in which the government or local authorities reallocated fiscal resources, into a new one that stimulates competition of the policies.
• Until recently, the laws accepted by the national government were absolute, but now the Cabinet provides counseling. Both the private sector and local authorities have recognized that it is possible to amend wrongheaded regulations. Consequently, the local authorities began to work based on the principles of self-determination and self-responsibility.
• The disclosure of official information is extremely useful in facilitating mutual understanding between the local authorities and the private sector. Furthermore, provision of information on the policymaking and budgetary processes and mutual information sharing will result in excellent policy. As a response, people and budgets would be able to do a hundred times the work at the half cost. The bureaucracy and private sector would be able to build new relations of mutual trust.
• Under the Devolution of Power Law, it became possible to impose special taxes for specific purposes. Mie Prefecture and industrial complexes argued with great heat over the tax on industrial waste. This helped to enhance maturity. And when the concept of special zones was elaborated, the consortium of industry, academia, government, and the private sector functioned well.

 

3.Panel Discussion
 

    (Okutani)

• I am a member of Administrative Reform Committee. The special zones were developed because regulatory reform did not proceed obviously, and it was necessary to establish something special to spur it. Concerning the participation of joint-stock companies in hospitals and other places, the biggest problem was opposition from the bureaucrats.
• The special zones cannot be used as shelters. There is no sense if the assessment of the special zones will be made by the central government imposing regulations. It is essential to grant the power to the private sector and to selected members of the Assessment Committee.

    (Sueyoshi)

• Kitakyushu City invites foreign companies to its coastal landfills. It has some important advantages, including skilled workers, developed infrastructure, and low price land near other parts of Asia. However, even if candidate emerges, the formalities concerning the usage for purposes other than those stated takes half year or a year. Due to this, many cases ended up in failure. If we cannot reach a conclusion three months or less, it will be difficult to invite foreign companies.
• The reasons of failure are different: sunken reefs in relations between urban planning areas and port areas, or transmittal. Eventually, deregulation as an international logistic special zone was applied only to three fields and seven items.
• The merits brought by the Law on the Special Zones for Structural Reform are: 1) support of community plans by the cabinet, 2) replies to enquiries within two weeks, and 3) issue of provisional license necessary to build trust-based relations in the negotiations with the opponent company.
• I think the preferential treatment in subsidies and taxes should better be established if the plan for regional development is good. In any case, it is better to move forward while making experimental trials than to be deadlocked in general statements.
• The most important problem is that the policymaking ability of local public agencies is called into question. What is needed is human resources development, and a study that includes interviews with the private sector.

    (Fukui)

• Since the legal rationale of special zones is important, I would like to talk about it here. There is a dispute about one country and two systems. For example, in the U.S. judicial system, verdicts on capital punishment and narcotics violations vary from state to state. Comparing to that, the local differences assumed by the special zones are much smaller. Since Japan is not a federation like the United States, local governments cannot act only on the basis of bylaws neglecting the state law. Nevertheless, there is no problem if the state law puts the emphasis on the projects of the local public agencies and the private sector, and creates a framework better suited for the actual conditions of the regions. This was a starting point of the special zones.
• If the results of the experiment in the special zone show no harmful effects, it should be immediately applied to the entire country, even if it does not have merits. First of all, the central government should not make any judgments on merits. It is the users who are free to decide whether to make use of it or not. There is no necessity to unify the country by foreclosing the possibilities.
• If it should create adverse effects, the next decision would be whether it is possible to launch substitution measures that would putting an effective curb on them. Moreover, it is necessary to examine the relative merits to the case the regulations are maintained; the sides effects of regulatory reform must be taken into account. The projects authorized until now are small in scale. Since they are expected to have no harmful effects, they should be introduced all over the country.
• In perspective, the success or failure of the special zones system depends on the extent to which the items of the regulatory reform will be altered. Specifically, it concerns the entry of joint stock companies into the fields of medical care, education, and agriculture, and the sale of medicine in ordinary retail stores, mixed medical practices, education vouchers, and others.
• As long as the special zones remain like an experimental laboratory, the broader the coverage and the more samples we have, the better it will be. In this case, hypothesis tests become easier. It is desirable not to be overwhelmed by the emotional dispute; we must make decisions on the basis of the basic knowledge of economics.

    (Kitagawa)

• Even if the first step of the reform is small, a great outcome can be expected, like in the story of the Beijing butterflies. At that time, whether we take the position of taxpayers or tax-eaters-in other words, whether we take the position of demand side or supply side-a big paradigm shift has been called into question.

    (Yashiro)

• There was discussion about the opposition of the bureaucrats. They are not monolithic. The problem is the creation of a system under which it is possible to make the best of them. The Headquarters for Promotion of Special Zones for Structural Reform is a group of bureaucrats, but the fact that they are working on the first wave of the structural reform means that they are different from other government offices and frameworks. This is in principle a neutral organization led by a highly motivated minister. Isn't it a good example of the feasibility of reform?
• This can be said not only about Japan's bureaucratic machine, but also about its economic organizations. For example, medical care reform is impossible without the collaboration of the people and organizations in that field, and the medical society as a whole is not monolithic. In this sense, it is important to join hands with reform-minded groups of the medical field.

    (Kosai)

• The question is whether the special zones are established to rejuvenate the Japanese economy or to rejuvenate the regions. I think they are identical in general. However, depending on which one is considered main, some differences are possible.
• Putting it another way, Article 1 of the Law on the Special Zones stipulates the revitalization of the regions. From the standpoint of the regions, it is so, but from the logic of the central government, the special zones are admitted in accordance with the specific characteristic of the regions, and nation-wide adoption does not benefit the government. Are there any problems in connection with this?

    (Okutani)

• The purpose of the special zones is to inspire the local regions to work harder, since the center has lost power. If the local regions lack endogenous necessities, they will end up in failure. A big problem is what will happen when different attempts spread all over the country.

    (Yashiro)

• President Kosai points out an issue that has long been a problem: whether the authorization of the special zones should be limited or the special zones should be authorized as long as they meet the minimum requirements. The projects that involve fiscal measures can be accepted only to a limited extent. Nevertheless, according to the Law on the Special Zones, all regions that raised their hands should be principally authorized. In this sense, this framework hides the possibility of nation-wide adoption.
• There is no exclusiveness in the special zones; other local authorities can easily and completely duplicate the other zones. This is aimed at the overall development of the entire country. The Cabinet Legislation Bureau did not authorize without clear indications of the specific features of the region. But this was done to prevent an emergence of "one country and two systems." In my understanding, there is no problem even if there are no specific features.

    (Fukui)

• The specific features of the regions are a kind of expedient because if the region has some specific characteristics, the side effects are expected to be smaller. From a more positive standpoint, since ability and enthusiasm vary from region to region, under the framework of decision-making by region, the highly-motivated regions will come up with suggestions. In this case, it is highly desirable to design the development of these regions first. In case of success, the logical consequence will be an adoption of it all over the country. I think it is a very meaningful set-up.
• However, it cannot be said that all local authorities will undertake the reforms actively. I think there is much room for improvement in connection with the fact that the local authority is a main body that may apply. Under normal circumstances, it is the private sector that has to come up with proposals.

    (Kitagawa)

• 70-80 percent of local industries have gone bankrupt. If we continue administration of public subsidies, the rest will become dependent on the government. The regions should create their own policies. Here, what is necessary is a paradigm shift from the supply side to the demand side.
• The manufacturing industry faces intense international competition, but the share of personnel costs in initial costs is approximately 15 percent. A "big bang" can help the manufacturing industry keep up with the other countries.
• Mie Prefecture gave subsidies to certain companies, and soon the government followed and gave Grants-in-Aid for scientific research. It is often said that the local authorities have been looking for government subsidies until now, but the situation is quite the opposite. If all local authorities had done that, the result would have been tremendous.

    (Kosai)

• As a next step, I would like to ask the opinion of the panelists on the future outlook. Do you have any proposals that seem appropriate?

    (Yashiro)

• Economic regulations have been liberalized considerably, but this is not the case with social regulations. Especially big fields are medical care, education, and agriculture. In particular, it is essential to admit the entry of joint stock companies into these fields of social regulations. Competition in the true sense of the word is impossible without new entry of people who have different concepts. It is consumers who must choose.
• Furthermore, it is good if the local authorities develop appealing frameworks to invite foreign capital that has different way of thinking on these fields.
• Regulatory reforms bestridden by different ministries and agencies are expected to become a pillar in the future.

    (Kosai)

• Were there proposals that were turned down but deserve to be made revived? Besides, I would like to an explanation of what the problems were.

    (Sueyoshi)

• The highest wall is the problem of introduction of foreign labor. There was a project to construct a foreign-style tomato plant. An idea to invite foreign workers was turned down. In this connection, it is planned to make an application to the Cabinet once more. I would like to work on preferential measures including the possibility of tax breaks.

    (Kitagawa)

• There were problems with National Policy Agency in connection with distribution of goods, but it was solved eventually. The efforts of Minister Konoike were significant, but the decisive point was a disclosure of debate.

    (Okutani)

• The problem of unification of kindergartens and nursery schools will be settled soon in the regions where the local authorities have been long working on it. One more problem is what the next steps of reform should be.
• Medical care, education, and agriculture face strong opposition. Earlier, Mr. Yashiro pointed out that there are forward-looking and backward-looking bureaucrats. I think there are many forward-looking people among young government officials, but their power is still too weak.
• In connection with medical care, the entry of joint stock companies is associated with the general belief that medicine is a "benevolent art." Equality must be given in the treatment of people who cannot use a computer or fax after hospital admission, to people who are injured but who are able to work, and to elderly people who are confined to their beds for extended periods. It is necessary to introduce more diversified services that patients can choose. Now in the special zones only free medical examinations are permitted, but this does not make much sense. Perhaps it will become clue, but too concessions were made.

    (Yashiro)

• We have not lost yet. It is necessary to stretch the meaning of the advanced medical care.
• The problem of preferential measures in form of subsidies and tax-breaks that were mentioned by Mayor Sueyoshi is a problem that touches on the substance of special zones. The special zones with these measures are powerful. If they are implemented, however, there is a possibility of application to regions other than those that emerged as designated structural reform zones due to political reasons. Moreover, these kinds of measures are likely to become obstacles to nation-wide adoption. In conjunction with this problem, as Mr. Kitagawa mentioned earlier, it is local authorities rather than the national government who should first reduce taxes and give preferential treatment.

    (Sueyoshi)

• Kitakyushu City already subsidizes the projects according to the amount of investment on the basis of the by-laws issued by the special zone.

    (Fukui)

• There are many people who think that things classified as social regulations are sacred. Regardless of whether the regulations are economic or social, they are both characterized by the necessity of clear rationale regarding public goods, external diseconomies, or asymmetry of information. Governing agencies sometimes come up with some pretty stunning logic, without rational foundation, concerning the regulations.
• For example, they say that medicines cannot be sold in the supermarkets, because there are no pharmacists. However, there are a lot of cases when pharmacists cannot explain properly the side effects or the pharmacies work under the name of pharmacist, but they do not have such specialists. Moreover, in Toyama, if a person has a three-year record of sales after graduating from high school, even without pharmacist qualification, he can sell medicines that can be sold only by pharmacists. When I point out that the same thing can be done in convenience stores as well, the governing agencies do not have an answer.
• If a new medicine not covered by health insurance is used in the treatment for cancer, an ordinary treatment for cancer will no longer be covered by insurance (free medical treatment). When I say that it is a preferential treatment of the rich, people respond by saying that it is an admission of mixed medical practice that is the preferential treatment of the rich. It is said to be done for safety reasons, since the presence of the treatment covered by insurance will prevent dangerous experimentation. This means that it does not matter whether the present allowed free medical care is dangerous or not.
• Despite the fact that there are already 62 hospitals that are converted into joint stock companies which provide safe and high-quality medical care services, there is still dispute about the impossibility of acceptance of joint stock hospitals as they ignore patients.
• Due to the aging of farming households, the number of leftover farms is rapidly increasing. In spite of the data from the agriculture community that individual farmers generally leave land cultivation easier, there is still an argument that possession of farming land by joint stock companies should not be admitted since they can and do leave the cultivating land easier. According to the examples in the United States or France, there are no adverse effects, but still the governing offices seem to be reluctant to admit that.

The list of such arguments is too numerous to mention all. This information is released on the website of the Council for Comprehensive Regulatory Reform, Special Zone WG, or Action Plan WG. For anyone interested, please visit the website.

    (Kitagawa)

• Proclamation of a manifesto, participation in the elections, and acquirement of overwhelming power in the Cabinet if the party wins a majority is the normal way of things in Japan. As Thatcher says, bureaucrats will follow the line without question and do the job they are supposed to do. It is necessary to create this kind of beneficial circle.
• For this reason, it is necessary to promote reform at the initiative of people and to decentralize the central government to local governments, since the local governments can easier clarify the individual burdens and benefits through disclosure of information. This is bound to trigger a paradigm shift one day.

 

4.Discussion with audience
 

    (Audience)

• Mayor Sueyoshi said that the introduction of foreign personnel was not permitted. However, there are a lot of those cases; Canadian workers assemble imported log houses, for example.
• It is good idea to disclose these troubled cases on the website and to introduce similar examples.
• In connection with the farming land mentioned by Mr. Fukui, local authorities recognize that the situation in desolated areas is terrible, but they are caught in regulations and are beginning to give up on the idea of improving the situation. Is there any good method to break down this?

    (Fukui)

• It is crucial to unite the efforts to publicly voice the requests and needs.

    (Sueyoshi)

• There are a lot of cases such as assembling of log houses in my town as well, but I was talking about large-scale schemes.

    (Audience)

• I think total management is important in stimulating revitalization of regions. However, the help of the government will have adverse effects. It is better to incorporate local financial institutions into the core of total management.

    (Kitagawa)

• In Mie Prefecture, industrial, academic, governmental, and private circles formed a consortium in connection with Yokkaichi. Three local banks also expressed their willingness to participate and to provide low-interest loans. With the collaboration of the conventional government it is necessary not to step on the brakes, but to use accelerator.
• The reasons behind the success of the special zone in Mie Prefecture lies in the fact that the private sector and governmental officials were able to build equal relations, allowing the frank exchange of views while arguing about taxes on industrial wages. The disclosure of information contributes to the development of the discussion with mutual responsibility.
• The centralization of administrative power of the private sector is not good either, since there are a lot of cases factory managers cannot make decisions. For this reason, I met with some chief executives several times. It is necessary to open the eyes of the private sector on the detrimental effect of its centralization and to change the paradigm.

    (Sueyoshi)

• The whole of Kitakyushu City is designated as a special zone. The regions for the business establishment are stipulated by the by-laws, but the range is wide. Since the mayor, who is also a port manager, decides on land utilization besides that designated for landfill purposes, the mayor takes an active part in urban development.
• Even if the private sector comes up with requests, in many cases we do not know what the regulations are. It is necessary to check them thoroughly, one by one. In this case the most important thing is a relationship of mutual trust. In Kitakyushu City, the network was built to some extent while overcoming a different problem: environmental pollution.
• As pointed out by Mr. Kitagawa, the problem is that the branches of companies do not have negotiation rights. Companies should delegate the authority to regions.

    (Audience)

• Okinawa as a special zone similar to China and Hong Kong, or one country and two systems, designated as a financial reform zone. Isn't it easier to carry on ambitious development programs through the application of preferential measures in such removed areas as Okinawa or Sado Island than to do it sporadically all over again?

    (Yashiro)

• I cannot say that the systems of China or Ireland are mistaken, but I think that the financial special zone in Okinawa will end up as a failure. The reasons why it is necessary to develop a banking business in Okinawa are not clear. It is simply said that it is necessary to develop Okinawa at the government's initiative since it is a backward region. If we are to create a financial special zone, it is necessary to create it in Tokyo, where the financial industry is most developed.
• The concept of designated structural reform zones is diametrically opposite. The aggregation effect is probably small, since the regions work in unsystematic ways, but it may become a starting point for nation-wide adoption.

    (Kitagawa)

• In Mie Prefecture, the regions adjacent to Nagoya and those at the tip of the Kii Peninsula are quite different. I am a supporter of one country and two systems, but I am basing that view on the decentralization of government to local jurisdictions. The regions should compete by self-determination and self-responsibility.

    (Audience)

• One serious problem is how to bring up future generation in Japan. What steps are being taken in the designated structural reform zones?
• I think the young do not know much about the concept of special zones. It is important to inform uninterested people. Is publication in newspapers enough?

    (Audience)

• Isn't it more effective to launch projects not in separate regions, but in several regions that coordinate their efforts?

    (Kitagawa)

• The special zones are aimed at making rights and responsibilities clear, and at promoting the independence of regions and human resources.
• It is important to get into the habit of thinking that the society will change due to our efforts. For this reason, it is useful to show the successful examples to the regions. Otherwise, democracy will not flourish.
• Cooperation seems to be developed across the bounds of regions.

    (Sueyoshi)

• An application of projects made by several regions has already been completed. For example, Fukuoka Prefecture, Fukuoka City, and Kitakyushu City have already applied for robot projects.

    (Yashiro)

• The proposal of the special zone can be duplicated by anybody. Consequently, there is no need to make alliances from the very beginning. The alliances will be formed later, by themselves. Certainly, many may be formed intentionally.
• The Cabinet Office makes different remarks on its website, but NPOs are expected to put more pressure on local authorities; moreover, it is desirable to make comparison on the situation in all prefectures. This will create more pressure. According to a report from a think-tank, the number of applications for special zones is smaller in the prefectures highly dependent on public investment.

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