I am very grateful to you for inviting me to give today's lecture and for choosing this title: the topic is undoubtedly a challenging one.
There might seem something a little presumptuous in a foreigner giving her views on a matter which, in the first instance, essentially concerns the Japanese people. What you have realised, however, is that it concerns others too.
We all have an interest in seeing that Japan finds and fulfils the world role to which she is called.
Of course, different nations will always seek out different roles in the world; and not just because of their economic strength or geographical circumstances, but because of their culture, their history, in short their distinct identity. [end p1]
Japan's distinctness is manifest in the nature of her achievements. And truly remarkable is her ability to combine in harmony what seem contrasting qualities. Her culture is expressed not just in that wonderful art, portraying a lost world of rural idyll, but equally in her highly efficient automated mass production. Her industrial enterprises manage to succeed in combining the energetic pursuit of personal fulfilment with total loyalty to the interests of the company. Her very history expresses a still deeper contrast: an unsurpassed capacity to draw upon skills, first practised by others, in order to modernise—and yet, while changing, to remain herself.
Today, Japan is seeking harmony between two other apparently discordant themes. She is striving to combine pursuit of her own national well-being with wider international cooperation. She is doing so because she rightly recognises that it is only in this way that her long-term progress can be secured.
This is something we British readily understand.
Like Japan, we are an ancient island nation. Over the centuries, we have developed our own ways of doing things. Yet we have learnt that as a nation we can only look forward—if we are prepared to look outward too.
At least from Elizabethan times in the seventeenth century, intrepid English captains and their crews explored distant oceans and charted foreign shores. Merchants and then settlers followed. Statesmen then gave political form to human realities. [end p2]
And today's great diaspora of English speaking peoples across the world is the result.
No nation which reaches a certain level of development can be fully satisfied with merely looking inward: it feels impelled to find a wider role. In the past this led to empires and sometimes wars.
Nowadays nations can find peaceful and more constructive satisfaction by putting their own distinctive qualities at the service of the wider international community. But today, as in the past, success abroad depends above all on success at home. So the first duty of any foreign visitor to Japan is to recognise the scale of your success and pay tribute to your remarkable achievements.
For without doubt, Japan is the most dynamic economic power in the world today. Second in size only to the mighty United States, Japan's GNP constitutes over a tenth of total world output. For the last six years, Japan has been the world's largest creditor nation. Her annual direct investments in manufacturing abroad now outstrip the level of any other country: a higher proportion of that investment comes to Britain than any other European country—there are now 160 Japanese companies which have invested in the United Kingdom, supporting 40,000 jobs.
Adaptable in taking advantage of new opportunities, resilient in facing up to external shocks—expert at bringing investment and jobs to other countries—Japan's success has made a hugh contribution to world prosperity. [end p3]
Sources of Misunderstanding
Japan was expected after the War to regain her economic strength so as to relieve the burden on the United States. She did so—faster than anyone expected.
Her industries satisfy customers' needs in ways which bring yesterday's luxuries of the few into the hands of the many. Yet now she is accused of a kind of economic imperialism.
She responded to the expectations of the rest of the world in an even more fundamental way.
After the War, she turned her back on militarism and her face towards peace, reinforcing the effect of her own constitution's prohibition against waging war or building up arms.
Yet now she finds herself accused of failing to fulfil her military obligations.
These misunderstandings arise because the world has no previous experience of an economic super-power which positively does not wish to become a considerable military power. And so Japan today finds herself criticised for being at the same time too strong and too weak.
Japan and The Wider World
I believe with you that the time is right for Japan and her friends to consider not just how to overcome these recurrent difficulties but how Japan can contribute to freedom, peace and justice in the wider world. [end p4]
Events in the Soviet Union should have reminded all of us that these things have to be worked for, paid for and sometimes died for.
Democracy, human rights and the rule of law are extending across continents and countries. As they do so, people's prosperity will grow. So will their peace and security.
But, for all its evident benefits, freedom is fragile.
There will always be individuals and small groups determined to subvert political freedom: — sometimes using the apparatus of the State to intimidate and if necessary destroy dissent; — sometimes using the bullet and the bomb to undermine morale by terrorism.
And there will always be those who are prepared to sacrifice economic freedom: — sometimes in favour of cosy cartels; — sometimes in favour of a steady supply of subsidies and protection.
We can never eliminate the risks to freedom. But we can watch for them, prepare for them and counter them.
Above all, we can exert the strongest international pressure in favour of democracy, human rights and free enterprise.
Again, recently in the Soviet Union, we saw that when international condemnation is combined with heroic resistance by the people and their leaders, criminal dictators tremble. [end p5]
I am certainly not alone in believing that the free nations must unite to defend our system and to bring its benefits to millions more.
Prime Minister Kaifu, too, has strongly emphasised Japan's commitment to these goals. He is right to do so.
For modern Japan is herself a living tribute to the way in which liberal democracy and free enterprise capitalism can bring undreamed of opportunities with unprecedented speed—and improve the quality of people's lives.
Prime Minister Kaifu is correct for another reason too.
For Japan's post-War prosperity and security could never have occurred unless the fruits of the talents and efforts of her own people could be enjoyed against a background of international order. Japan needed the economic order guaranteed by the institutions created at Bretton Woods, especially the GATT with its momentum for free trade.
And she needed the guarantee to her security which was provided by the military strength and commitment of the United States.
Japan's stake in both prosperity and peace has grown with her wealth and her international stature. It is good that Japan already plays a leading role in the IMF: indeed, in 1990 Britain joined others in relinquishing some of her voting power in the IMF to help make this possible. The question for all of us now is not whether Japan will play a leading role in the post-Cold War world, but how. We have to gain international agreement on the nature, scale and purpose of Japan's contribution. [end p6]
A Military Role?
Japan has already shared in the benefits of the Free world's victory in the Cold War. For Japan, which has resolutely refused to be tempted by marxism of any variety, and whose economy is a dramatic expression of capitalism to, the political and economic triumph of the West is her triumph too.
Moreover, the United States, the country with which Japan has perhaps closest association and which—is still Japan's largest single trading partner—has become the only super-power.
There is no doubt that strong defence will remain vital to the security and extension of democracy.
If the West had not been militarily strong, the Soviet Union's Communist masters would not have first chosen and then followed Mr Gorbachev along the path of reform: they would have gambled that intimidation and aggression would make up for economic weakness and popular dissatisfaction.
The failed coup in the Soviet Union should have given the democracies a salutary jolt.
We were reminded of the vast arsenal of weapons of mass destruction in the USSR. Many, I suspect, breathed a sigh of relief that our planned defence cuts had not been put into effect. Now that legitimate government has been restored in the Soviet Union and that reform is likely to gather pace, we must not again be tempted by complacency. [end p7]
Defence is not just another public expenditure programme to be assessed on financial rather than strategic grounds: strong defence is the essential condition for all the benefits of life in a free, peaceful and prosperous society. Some of us are perhaps inclined to forget that.
We have all seen the dramatic events surrounding the fall of Communism in Eastern Europe and now in the Soviet Union. But you in Japan remain conscious of the military threats in your region. The USSR continues to dispute the Kurile Islands.
The Soviets retain powerful military forces in the area, which they continue to modernise. Moreover, Japan has powerful Communist neighbours in China and Indo-China.
The question now naturally arises as to the contribution which Japan can now make to freedom's defence, particularly in South East Asia.
Neither Japan nor her neighbours wish her to become a substantial military power. But, in view of the strengthened authority and wider role of the United Nations since the crisis in the Gulf, it ought to be possible for Japan to play a larger role in peace keeping with her Self Defence Force.
She could also use her maritime forces in order to keep open the sea lanes in the event of any future conflict. And in that context we welcomed the sending of Japanese minesweepers to the Gulf.
Much of the criticism of Japan's response to Saddam Hussein 's aggression turned out to be unfair—both because it did not recognise the constraints imposed by the Japanese constitution and because it underestimated the substantial scale of the financial contribution which Japan ultimately made. [end p8]
But there is another non-military way in which Japan can contribute and that is through a steadily closer involvement in political consultation on international issues. As we need to look more to international organisations to deal with world crises, so Japan's influence and responsibilities will increase. The G 7 is the forum in which these things—as well, of course, as the economic scene—are increasingly discussed. As the prosperity of the Pacific countries increases, so Japan's role as the principal democracy in the area will also have increasing significance.
However, it seems to me that for the foreseeable future it is in the economic sphere that Japan's world role must principally lie. Japan not only has much to teach the world about efficient management, design and innovation.
She also has a vital interest in seeing that the world economy is strong. I want now to suggest three economic questions of the highest importance which should concern Japan in the months and years ahead.
First, I would like to see Japan become a foremost champion of genuine free trade.
The end of the Cold War has brought with it one less welcome development. As military tension between the free West and the Communist bloc has subsided, so greater attention has been paid to the tension arising between economic competitors. [end p9]
Understandable this may be: unwise it certainly is. It is only because we resisted protectionist pressures in the years since the War that world trade has continued to grow.
This would not have happened without the framework for free trade provided by the GATT.
There is nothing inevitable about the post-War move towards lower tariffs and the progressive elimination of non-tariff barriers. The disastrous world-wide descent into protectionism in the 1930s testifies to that. So too—and more topically—do the present problems which jeopardise free trade.
For it is precisely the lack of any GATT rules to govern agriculture, services and intellectual property rights which have led to the present distortions and unfairnesses in these areas.
But in financial and industrial matters it is non-tariff barriers which are the main problems today. Very topical here in Japan, of course, are the efforts by France and Italy to restrict the free flow of Japanese cars around Europe—even though these were manufactured within the United Kingdom, that is within the European Community itself.
Mainly as a result of Britain's resolve, that matter has now been dealt with.
Of course, there are real difficulties about reducing protection and subsidies for agriculture, about extending GATT rules to services, respecting intellectual property rights and other matters. In Japan you are conscious of the interests of your rice farmers: in Europe and America farming interests are powerful too. [end p10]
Within the European Community we are already seeing the damaging effects of subsidy and protection under the Community Common Agricultural Policy on Eastern European economies; their farmers find it almost impossible to compete with the subsidised agricultural products grown in the Community.
What these countries need above all is free access to Community markets.
In the United States, as well, there are voices calling for protectionism, not least against Japan. But President Bush rightly prefers to move in quite the opposite direction, extending free trade agreements throughout North America. We should not see this as an indicator of disillusionment with multi-lateral free trade.
Rather, it demonstrates the Administration's determination to extend the full benefits of free trade far more widely. In the same spirit, I myself strongly advocate the creation of a North Atlantic Free Trade Area which would include the European Community and, as soon as possible, the newly liberated Eastern European States as well.
All the wealthier nations—including Japan—have an obligation to help the poor countries of the world by opening up new markets for their producers. If the open trading system were replaced by one of competing protectionist trade blocs, it is the poor that would suffer most.
Japan has the strongest possible interest—and increasingly the ability—to assume a much more prominent role in the GATT. For the reasons I have indicated Japan is not able to take a leading role in defence of the Free World: all the more reason for her to take the lead in increasing the world's prosperity [end p11] by using her role in the GATT to extend genuine free trade. That is the first great challenge.
Promoting Democracy and Enterprise
The second area in which Japan can make a special contribution to a task, which falls to all the developed nations, is in helping countries ruled by totalitarian and authoritarian governments to learn the ways of democracy and enterprise.
A) The Soviet Union
Nobody, since the coup in August, can possibly doubt how important it is for the free capitalist countries to help the Soviet Union cope with the huge strains of transition. It has to move as fast as possible from a socialist command economy to an economic and social system based on limited government, private property, free enterprise and a rule of law.
This is a revolution of institutions and attitudes far more radical than the first disastrous revolution of Lenin and the Bolsheviks.
I do not believe that it was the West's response to Mr Gorbachev 's requests for aid which precipitated the coup against him. But I am sure that in the new circumstances we should reconsider precisely how we can help.
In the Soviet Union and the separate republics, they need advice and help with the creation of the structures of political and economic liberty—a proper legal system and an [end p12] independent judiciary, financial and banking institutions, systems for the storage and distribution of goods, particularly of food. They also need training in business management and in the techniques of good administration.
Once they have made these changes and businessmen have confidence in them, investment by private enterprise will increase.
Before the coup, many of us were worried that assistance—particularly credits—would simply go to shore up the old failed system.
But with the humiliation of the hardline Communists and the great increase in the influence of Mr Yeltsin and others the prospects for rapid economic reform have improved enormously.
The wealthier nations now have to rise to their responsibilities. It is in our interests, not just those of the people who live in the Soviet Union, that democracy and free enterprise should take root there and flourish.
Different countries will be able to help those emerging from Communism and the command economy in different ways. For example, in recent years, Japan's relations with Communist China have been closer than with Communist Russia.
We all know how enterprising the Chinese people are.
They demonstrate it across the whole Pacific region from Hong Kong and Taiwan through Singapore to San Francisco. As economic reform proceeds in China itself, the talents and [end p13] industry of the Chinese people will be liberated. I believe that in time China could become an economic power which will astonish the world.
Upholding Confidence in Capitalism
The third issue which I believe Japan can help the world address is the need to maintain and further confidence in the soundness of our capitalist free enterprise system.
In part, this is a matter of vigorously and persuasively defending our beliefs and practising the highest possible standards in all our dealings.
Let us never waver in our conviction that free enterprise capitalism is not only practically but morally superior to socialism. It depends on virtues like honesty, hard work and self-reliance: more than that—it encourages them. Through capitalism people can fulfill their talent and master their destiny. And they gain both a taste for freedom and the material means to secure it.
So, whatever shortcomings there are in people's behaviour and whatever failures there are in the way markets sometimes work, our commitment to capitalism must be unshaken, indeed unshakeable.
As we all know, the market does not provide answer to every problem.
But I believe that we—politicians, civil servants and sometimes businessmen—fail the market much more often than it fails us. [end p14]
And one fundamental way in which we weaken the free market economy is by turning aside, for whatever reason, from basic financial and economic orthodoxy.
If governments fail to keep a close control on monetary growth;
if they allow public spending over a period of years to increase as a share of their national income; if they continue to borrow to finance expenditure and so build up a huge burden of debt; if they do these things, they cannot reasonably complain if the world economy weakens.
Governments have to concentrate on getting the fundamentals right. That is what my Government did in Britain.
We recognised that the first duty of government is to keep its own finances sound. That, in turn, means keeping spending within your capacity to finance it by taxation, strictly limiting what you borrow. For three years in Britain we had a budget surplus.
We also recognised that government's other main economic role is to create the right framework of laws and taxes to encourage enterprise. So we slashed regulations, promoted competition and cut tax rates on businesses and people.
There is a similar orthodoxy which applies to business. Japan's extraordinary economic success is something for you to explain to me rather than I to you. [end p15]
But it warrants—you'll agree that it has only been possible because owners, managers and employees have not sought to take out more than they put in.
You have invested in the scientific research and technology which are vital to modern industrial success. You have developed new products and adapted your working practices—not only to the requirements of customers today, but to the demands of the markets of tomorrow.
So I hope that—with all the other economic expertise you bring to the rest of the world—you will also bring this message: that we must keep our economies strong by keeping our finances sound and keeping our businesses competitive.
The other source of international economic confidence is rather different. We have to practise, not just preach, the ethics of capitalism.
Japanese companies are well known for their sense of responsibility to their employees, their suppliers and increasingly to the wider community. But we all have to recognise that as the years go by more people will have savings which they want to invest; more will be running their own businesses; and so more will be dependent on the high standards of integrity of professionals in finance and industry.
Popular capitalism is spreading world-wide. It is vital that everyone, especially those who have no experience in financial markets, should be able to trust them.
There must be no room in any country in the world for sharp practice or under-the-counter deals. The same treatment must be extended to the small investor as [end p16] to the large. The rules must ensure fair competition and must prevent cartels. This must not only be done; it must be seen to be done. Only that way will people's belief and confidence in the free market be upheld. And that matters not only for the sake of confidence in capitalism but also for the health of democracy.
As the second greatest economic power, Japan, like other great economic powers before her, has a vital role in ensuring that the international financial and economic systems remain sound.
Forty years ago, John Foster Dulles remarked that the new Japan had “a great opportunity to exert influence in Asia by what the Founders of the United States called conduct and example …”
Japan has: — demonstrated that within a framework of free enterprise and democracy there is nothing which a talented and industrious people cannot achieve. — she has shown that those who learn and practise the arts of peace contribute more to their country's well being and renown than those who prefer to apply the instruments of tyranny and aggression. — she has held out new hope to millions in Asia that they too, through their own efforts, can enjoy standards of living equal to or surpassing the countries of the West.
Increasingly, too, Japan has taken a more prominent role in international affairs. [end p17]
Now she has reached—and I suspect knows that she has reached—one of those infrequent points in a nation's history when it feels the need to define more clearly the role it intends to play.
In becoming the leading exponent and practitioner of free trade; in taking a more prominent role in bringing former Communist countries to democracy and free enterprise, helping alleviate the tensions and reduce the risks that such transition brings;
and in upholding ethical standards throughout the international free enterprise economy;
in all these ways Japan has an indispensable contribution to make to our world's prosperity and progress.
And it is for the friends of Japan—and I include her British friends—to help her to fulfil this true and high vocation.