Privatizing Japans Railroads
JUNE 01, 1987 by DONALD SENESE
Dr. Donald J. Senese has written four books on Asia and is a free-lance writer on public policy issues. He is a former Assistant Secretary of Education.
Japan is one of the world’s economic success stories. After suffering defeat and destruction in World War II, Japan, with American assistance, adopted the principles of free enterprise which have made it the leading economic power in Asia. Japan may once again show the world an economic lesson with its recent efforts to remove its railroad system from government control and turn the system over to private enterprise.
Railroads have played an important role in Japan’s development, providing essential links for this unique nation which consists of four is-lands—Kyushu and Shikoku in the south and Honshu and Hokkaido in the north. In the words of the famous historian of Japan and former U.S. Ambassador Edwin O. Reischauer, a “complex and efficient railway network ties the whole country together.”
Japan began developing railroads in the 1870s. The first railroad constructed in 1872 linked Tokyo to Yokohama. British engineers built it and British investors financed it. A railroad in 1874 linked Osaka with the port of Kobe and another one in 1877 linked Osaka with the port of Kyoto. And while the years of World War II saw a slowdown in internal railroad construction, the trend toward rapid railroad expansion resumed after 1945.
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 Tokyo and Osaka, began operation in 1964 and Japan has continued to run superexpresses between these two key cities.
While the trains traveled quickly, inefficient railroad management was causing growing concern among top Japanese officials. To understand the problem, we need to focus on the role of government in the Japanese economy.
Japan has built its economic success by following the general principles of private enterprise, 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 accountability by strong union pressures. At a time when Japanese government officials and economists are questioning the role of government and its rising costs, the deficit for Japan’s railroads has continued to climb, placing an ever-growing 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 evident 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 island.
The companies operating on Honshu island would be expected to earn a profit and therefore would need to assume a part of the huge railway debt. The companies on the other islands 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 operating 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. Bureaucrats and their supporters argued that the railways should continue to be operated by the central government, with even greater government support, since it is in the “public interest” to have the government maintain control. Toshikazu Yamazaki, chairman of the National 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.
(The debate over the Nakasone plan demonstrates how the political debate can be shifted by advocates of freedom. The left wing of the National Railway Workers’ Union strongly opposes the effort to turn the railways to the private sector. And yet possibly sensing the public mood, the Japanese Socialist Party endorsed a half-way approach which supported the idea of privatizing Japan National Railways but opposed dividing it into separate companies.)
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 correct them. For example, trains have not been permitted to run 100 kilometers and back without permission from the central office. Another example involves schedule changes, which often result in simultaneous departures for connecting trains. Engineers must delay trains so that passengers can make the connections, 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 government-subsidized national system. Hiroshi Kato, a member of the blue ribbon panel which recommended mining the railways to the private sector, addressed the importance of this change:
After reviewing why the JNR (Japan National Railways) is no longer working for the public benefit, we concluded that more efforts must be devoted to bringing efficiency levels up again. If the railways are efficient and competitive, they can protect even local lines. As things axe 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.
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 excessive workers are readily apparent. However, can the private sector do a better job? Despitethe 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 government of Japan, through the Nippon Telegraph and Telephone Corporation (NTT), dominated 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 established an Ad Hoc Commission for Administrative Reform which recommended that the company’s operation be tamed 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 telecommunications business. In April 1985, telecommunications shifted to the private sector with the renaming of the operating group as the NTT Corporation. The NTT Corporation, with its 380,000 employees, is Japan’s largest private corporation.
A number of moves were made to increase telecommunications efficiency. The NTT was reorganized along the lines of a modern company, 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 promoting the sale of telephones and telephone cards, providing greater contact with the customers so as to better ascertain their needs. Research and development efforts, opened to competition, have gone forward with a number of companies seeking new technologies to improve telecommunications.
The almost two years of private sector telecommunications demonstrate that the public interest is better served by the new system. Hisashi 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 documents, in other words, people at NTT have readily begun to understand that they earn their living because customers use their services.”
Fortunately, the change in telecommunications was made when even the government-run operation was making a profit. The new NTT Corporation has produced a larger profit, up 30 per cent in its fast year of operation. In addition, any profits in excess of a 10 per cent dividend 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 turn the railways into profit-making operations.
The decision by Japanese political leaders to turn the debt-ridden and inefficient Japan National 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, government can divest itself of long-time monopoly operations, with consumers reaping important gains.
However, in the long run, the real beneficiary is the cause of freedom. A new avenue for competition, creativity, efficiency, technological innovation, and service is opened up compared to the rigid regulations and productivity disincentives built into government monopolies.
The privatization of Japanese railways will likely signal another great economic and political advance for Japan. One of the most powerful economies in the world is demonstrating that individuals operating in an atmosphere of economic freedom can greatly benefit the public in providing essential services.