Privatizing Japan's Railroads; D. J. Senese

Visitors to Japan in the last two decades have been impressed with Japan's "bullet trains" which carry passengers at speeds up to 130 miles an hour. The new Tokaido Line, linking Dr. Donald J. Senese has writtenfour books on Asia and is a freelance writer on public policy issues. He is a former Assistant Secretary of Education. Tokyo and Osaka, began operation in 1964 and Japan has continued to run superexpresses be tween these two key cities. While the trains traveled quickly, inefficient railroad management was causing growing concern among top Japanese officials. To un derstand the problem, we need to focus on the role of government in the Japanese economy. Japan has built its economic success by fol lowing the general principles of private enter~ prise, but the Japanese government, partly through influences of history and culture, has continued to exercise extensive controls. Japan maintained a monopoly on salt and tobacco through its Japan Monopoly Corporation.

Japan's telephone and telegraph services were conducted through the Nippon Telegraph and Telephone Public Corporation. And railroads fell under a government-owned company called Japan National Railways. The JNR exercised powerful control, maintaining responsibility for two-thirds of rail transport in Japan. (The Japan government did maintain a hands-off policy on such areas as gas production and electricity generation.) The management of Japan's railroads is along the lines' of a government bureaucracy, rather than a profit-seeking firm. With no market incentives, costs have mounted. The number of government employees on the railroads has grown enormously, and this large personnel force is isolated from economic ac countability by strong union pressures. At a time when Japanese government officials and economists are questioning the role of govern ment and its rising costs, the deficit for Japan's railroads has continued to climb, placing an evergrowing burden on taxpayers.

Defenders of the public sector claim that such services as railway transportation and telecommunications are so important that they must be run by government for the public good. This argument proves shallow. Government bureaucrats, while professing to serve the public good, have strong incentives to expand their power and increase their own benefits, rather than serve consumers. This becomes evi dent when attempts are made to cut costs by reducing employees, or increase productivity by using more advanced technology. Growing evidence has demonstrated to the Japanese that railways are too important to leave to the mercy of a growing bureaucracy. A Better Way? The most visible problems of the Japanese railroads have been the soaring deficit and the growing labor force. Could these problems be solved by more government controls? Or is a new approach needed? Does the private sector offer a better way?

A special blue ribbon committee was asked to examine various alternatives. The committee members opted for a private sector solution, suggesting that the gigantic Japan National Railways be split up and that management be shifted to the private sector. Japan's Prime Minister Yusuhiro Nakasone enthusiastically embraced the recommendation, and began to push it through Japan's legislative assembly, the Diet, where his Liberal Democratic Party has a strong majority, thus virtually assuring its passage. The committee suggested that Japan National Railways be divided into six companies. There would be one separate company for each of three of Japan's four islands (Hokkaido, Shi koku, and Kyushu). The largest island, Honshu, which contains Tokyo and the bulk of Japan's population, would be served by three companies, with one each in charge of the northern, central, and southern parts of the is land.

The companies operating on Honshu island would be expected to earn a profit and therefore would need to assume a part of the huge 207 railway debt. The companies on the other is lands would have more difficulty in turning a profit, but would benefit from the payment of interest from a special fund. The Shinkansen lines and the "bullet" trains which run on them would be leased to the three companies oper ating on Honshu island. A completely separate company would handle freight operations. The plan is scheduled to go in operation this year. Opposition to this plan soon surfaced. Bu reaucrats and their supporters argued that the railways should continue to be operated by the central government, with even greater govern ment support, since it is in the "public in terest" to have the government maintain con trol. Toshikazu Yamazaki, chairman of the Na tional Workers' Union (Kokuro), largest union in the Japan National Railways work force, criticized the plan because it would reduce the number of railroad workers. A total of 61,000 workers are scheduled for transfers to central and local government agencies or the private railway companies.2 (The debate over the Nakasone plan demon strates how the political debate can be shifted by advocates of freedom. The left wing of the National Railway Workers' Union strongly op poses the effort to tum the railways to the pri vate sector. And yet possibly sensing the public mood, the Japanese Socialist Party endorsed a halfway approach which supported the idea of privatizing Japan National Railways but op posed dividing it into separate companies.)3 The argument that the "public interest" is being served by the government-run railways is refuted by the growing inefficiencies in the system and by the bureaucracy's failure to cor rect them. For example, trains have not been permitted to run 100 kilometers and back without permission from the central office. An other example involves schedule changes, which often result in simultaneous departures for connecting trains. Engineers must delay trains so that passengers can make the connec tions, thus causing trains to run late. Even such simple schedule changes get bogged down in the government bureaucracy.

As with other national monopolies, Japan National Railways has been responsible for the decline and disappearance of local railway lines which have difficulty competing with the gov208 THE FREEMAN·. JUNE 1987 Tohoku Shinkansen train ernment-subsidized national system. Hiroshi Kato, a member of the blue ribbon panel which recommended turning the railways to the pri vate sector, addressed the importance of this change: After reviewing why the JNR (Japan Na tional Railways) is no longer working for the public be:t;lefit, we concluded that more ef forts must be devoted to bringing efficiency levels up again. If the railways are efficient and competitive, they can protect even local lines. As things are now, all the JNR can think of to solve its troubles is to abolish local lines. And that's exactly what it's been doing. If the JNR had been denationalized a decade ago, I'm sure we could have saved a lot of local lines.4 Observers of the Japanese system recognize that transferring the railways to private hands will be a major undertaking. The inefficiency of the present system, the burden of the growing debt which the taxpayers of Japan must bear, the stagnant bureaucracy, and ex cessive workers are readily apparent. However, can the private sector do a better job? Despite the cries of alarm from advocates of the public sector, there is firm evidence that the private sector can succeed.

Telephones: A Shift to the Private Sector One can look to the Japanese experience with telecommunications as a guide. The gov ernment of Japan, through the Nippon Tele graph and Telephone Corporation (NTT), dom inated communications for over a century, creating the second largest telecommunications system in the world. Government exercised monopoly control over this enterprise, and few suggested that the private sector could do a better job. However, the government of Japan estab lished an Ad Hoc Commission for Administra tive Reform which recommended that the com pany's operation be turned over to the private sector so that it could efficiently meet the changing and diverse needs of the public. An historic event took place in December 1984 with the adoption of three pieces of legislation which shattered the government monopoly and permitted any firm to enter the telecommunica tions business. In April 1985, telecommunica tions shifted to the private sector with the re naming of the operating group as the NTT Cor poration. The NTT Corporation, with its 380,000 employees, ,~s Japan's largest private corporation.

A number of moves were made to increase telecommunications efficiency. The NTT was reorganized along the lines of a modem com pany, rather than a government bureau. Almost 25 thousand tons of documents and data were thrown away and the new corporation kept only those which were vital for operations. The company through its employees began pro moting the sale of telephones and telephone cards, providing greater contact with the cus tomers so as to better ascertain their needs. Re search and development efforts, opened to competition, have gone forward with a number of companies seeking new technologies to im prove telecommunications. The almost two years of private sector tele communications demonstrate that the public in terest is better served by the new system. Hi sashi Shinto, who headed up the old Nippon Telegraph and Telephone Public Corporation and became president of the privately owned NTT Corporation, emphasizes the change in spirit and approach with the new ownership of telecommunications: "When I became the head of the 'old' NTT, there was no concept of the customer. But now I see the word 'customer' used instead of 'subscriber' even in formal doc uments. In other words, people at NTT have readily begun to understand that they earn their living because customers use their services. "5 Fortunately, the change in telecommunica tions was made when even the government-run operation was making a profit. The new NTT Corporation has produced a larger profit, up 30 William Graham Sumner PRIVATIZING JAPAN'S RAILROADS 209 per cent in its first year of operation. In addi tion, any profits in excess of a 10 per cent divi dend will go to reduce customer charges. On the other hand, Japan National Railways has experienced tremendous losses and carries a heavy debt. The record of losses will have to be reversed as the new companies work to tum the railways into profit-making operations.

The decision by Japanese political leaders to tum the debt-ridden and inefficient Japan Na tional Railways over to private corporations is an important one with significant consequences for the Japanese public and the expansion of the private sector in Japan. As the telecommunica tions experience has already shown, govern ment can divest itself of long-time monopoly operations, with consumers reaping important gains. However, in the long run, the real benefi ciary is the cause of freedom. A new avenue for competition, creativity, efficiency, technolog ical innovation, and service is opened up com pared to the rigid regulations and productivity disincentives built into government monopo lies. The privatization of Japanese railways will likely signal another great economic and polit ical advance for Japan. One of the most pow erful economies in the world is demonstrating that individuals operating in an atmosphere of economic freedom can greatly benefit the public in providing essential services. D 1. Edwin O. Reischauer, The Japanese (Cambridge, Massachu setts and London, England: The Belknap Press of Harvard Univer sity Press, 1977), p. 28.

2. Hiroshi Kato and Shun'ichi Yamazaki, "The Plan to Privatize the National Railways," Economic Eye, December 6, 1985, No.4, pp.24-25. 3. "Socialists' Plan for JNR Backed by Biggest Union," The Japan Times, March 18, 1986, p. 2. 4. Kato and Yamazaki, "The Plan to Privatize the National Railways," ,po 26. 5. "Science and Technology: One Year Later-Improved Ser vices in the Wake of NIT's Privatization," Look Japan, May 10, 1986, p. 13. IDEAS ON LIBERTY C ompetition can no more be done away with than gravitation. Its incidence can be changed. We can adopt as a social policy, "Woe to the successful!" We can take the prizes away from the suc cessful and give them to the unsuccessful. It seems clear that there would soon be no prizes at all . . .