Free Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram G. Rajan Page B

workers still in agriculture, and with labor organizations docile, postwar wages initially did not keep pace with the extraordinary rate of productivity growth (a measure of the growth in efficiency with which inputs are used and thus a measure of the profit margins that can be distributed to workers through higher wages). As a result, corporations were able to generate substantial profits for a while.
    In both countries, the mature banking sector took on part of the role that was played by the government in the countries discussed earlier. Close cooperation between firms and universal banks in Germany, cemented by share holdings by firms and banks in one another, led to domestic cartels and diminished domestic competition, allowing corporations to focus their energies on competing in foreign markets. Similarly, in Japan, the ties between firms and banks in the bank-centered networks called
keiretsus,
which were overseen by the powerful Ministry of Finance and the Ministry of International Trade and Industry (MITI), resulted in a canonical version of managed capitalism.
    Once the excess labor in agriculture was fully drawn in to the manufacturing sector, however, wages inexorably increased to keep pace with productivity growth in the efficient export sector. By 1975, hourly wage rates in manufacturing in Germany had caught up with those in the United States, and Japan caught up in the early 1990s. Low wages therefore no longer offered a competitive advantage for the exporters. More problematic, once the initial phase of catch-up was over and Germany and Japan approached the levels of capital per worker that existed in advanced economies such as the United States, the growth rate of investment slowed considerably, and so did imports of capital goods. With the postwar households conditioned to limit consumption, and successive governments intent on disciplined macroeconomic policies, both Germany and Japan started running large trade surpluses. These initially helped them repay foreign borrowing but eventually resulted in increasing pressure on the currency to appreciate. 21
    To stay competitive, both countries had to move up the value chain of production and to the frontiers of innovation, making more and more high-tech, skill-intensive products. More important, they also had to improve productivity steadily. They certainly managed to do this in the sectors that exported or competed with imports, the so-called tradable sector. But problems eventually emerged in the domestic nontradable sector, in areas like construction, retail, and hotels, where foreign competition was often naturally absent and sometimes deliberately kept out. Although the extent of government intervention to support exporters was naturally disciplined by international competition—after all, regardless of how much the government helps, if you produce a shoddy product at too high a cost, you will lose export market share—there were no such constraints in the nontradable sector. Productivity growth eventually lagged because the market forces that would force the inefficient to shrink or close were suppressed.
    Japan has fared worse than Germany in this respect. As a part of the European Union (EU), Germany is subject to the EU’s rules on fostering domestic competition—though because it has substantial power in the union, it plays a big role in watering them down. Japan has not found any equivalent external discipline in Asia. As a result, the close relationship between government and incumbents has been particularly detrimental to efficiency in the domestic-oriented production sector.
    Many a visitor to Japan is surprised at the sight of elevator ladies in hotels—women whose job it is to usher guests into the next available elevator, even though bright lights and buzzers clearly indicate, to anyone who can hear or see, which elevator is next. Perhaps these women had a function when elevators were a new invention, when spotting the next elevator was a