The Right Coast

June 21, 2005
How Wal-Mart Saved the US from Japan, Inc.
By Mike Rappaport

William Lewis, the director emeritus of the McKinsey Global Institute and author of The Power of Productivity: Wealth, Poverty and the Threat to Global Stability, explains why productivity grows in some countries but not in others. Once again, the free market is the key. The most interesting part of the interview involves the reasons why the US has a more productive economy than Japan.

The paradox was that in the 90s stories on the front pages of the New York Times, the Wall Street Journal, and the Economist were all about how the Japanese manufacturing industries through trade were driving US manufacturing industries into the ground and virtually wiping them out. And of course that did happen in consumer electronics -- the US basically got out entirely in the consumer electronics business. And the steel industry and the automobile industry came very close to being bankrupt -- yet the GDP per capita numbers at purchasing power parity exchange rates show that GDP per capita in Japan was roughly 30 percent below the US. So how could this be?

What we found is that Japan has a dual economy. Yes, it does have some selected manufacturing industries that have high productivity, yet, the traded part of an economy is always a tiny fraction of the total GDP. [Thus,] the standard of living is determined because the productivity of the country is determined by what happens outside these traded goods.

[Our study] showed was that [outside of the traded goods manufacturing sectors], Japan's productivity was very low. Say, in retailing, 50 percent of the US; in food processing about a third of the US. And food processing, although it's a manufacturing industry and it's not heavily traded, it has more employment than steel, automotive, computers, and machine tools added together. So it's much more important.

In the US, there is much more level and free competition for the leading consumer's demands. So if Wal-Mart moves into an area, it sets up new operations. Because of its higher productivity, it is able to under price these much less productive operations. Whereas in Japan, there all sorts of obstacles.

[Wal-Mart has] great difficulty in Japan getting hold of land. The local zoning authorities for a long time just outright banned big box stores, stores of over something like 10,000 square feet. That ban was put in place at the political influence of the small shopkeepers and others. The US objected to that and finally got that overturned, but it just got overturned into something almost equally ineffective which setup a lot of environmental and traffic and other kinds of potential obstacles, with the board determining whether to go forward dominated by local interest, local producer interest, local retailing interest.