Socio-political factors may explain Japan's perplexing stagnation in the global economy.
For a century and more Japan was regarded globally as a pacesetter for economic growth. Then, in the 1990s, its economic bubble suddenly collapsed. The country’s growth engine has never really re-started, despite two decades of macro-economic stimulus, a variety of reformist governments, and most recently Prime Minister Shinzo Abe’s “three arrows” stimulus program. Japan’s protracted stagnation has global implications, both economic and strategic. Most importantly, within the past decade, China has replaced Japan as the largest economy in Asia, and the second largest in the world. Japan’s ability as a US ally to balance China is eroding as a result, and its capacities as a provider of development assistance and global financial stabilizer are waning as well.
For a century and more Japan was regarded globally as a pacesetter for economic growth. Then, in the 1990s, its economic bubble suddenly collapsed.
Japan’s checkered economic course raises at least three puzzles of broader global and theoretical relevance. First, observers continue to debate what precipitated the country’s stunted growth of recent decades; Japan grew rapidly for generations, from the 1880s through the 1980s, and then abruptly stagnated. Second, questions remain around why the country’s response to globalization has produced mixed or less-than-ideal outcomes. It enthusiastically supported global institutions like the United Nations and became one of the world’s largest capital and goods exporters but failed to respond rapidly to sweeping international changes in communications, transport, and educational exchange. And third—to compound the paradox—there were significant cross-sectoral variations in Japan’s globalization response. While some industries excelled in globalized markets, others have struggled—why is this?
Previous political-economic analyses have identified bureaucracies like the vaunted Ministry of International Trade and Industry, or the country’s one-party dominance by the ruling Liberal Democratic Party as the sources of success and failure in Japan. These analyses unfortunately fail to account for the puzzles outlined above. Far less frequently discussed are the socio-political parameters that actually shape the incentives of real people—the “circles of compensation” that pervade sectors, ranging from transportation and communications to agriculture and finance. Such circles—industry associations, agricultural cooperatives, press clubs, and so on—internalize benefits and externalize costs. They encourage a stability bias and sense of mutual solidarity that facilitates cooperation and defuses the risk of large-scale undertakings during high-growth years, such as the construction of multibillion dollar steel mills. Even today their risk-defusion function can facilitate the large-scale capital investment needed for massive infrastructure, large power plants, or commodity electronics production. At the same time, however, such circles discourage the innovation, risk-taking, and responsiveness to rapidly changing outside stimuli that are increasingly critical to economic success in the twenty-first century, particularly in emerging sectors like mobile telephony and software development.
Take, for example, developments of the past two decades in micro-electronics and transportation. Japanese firms pooled risk, invested heavily, dominated successive generations of D-RAM memory chips, and developed the complex but globally uncompetitive i-mode phone. Encapsulated in circles of compensation, however, they lacked the entrepreneurial incentives to pursue paradigms like Apple’s iPhone and its related applications.
In air transport, circles of compensation have aided Japan’s small, non-competitive regional airports, through the subsidies they provided. At the same time, however, this egalitarian preference, generated from exorbitant landing fees at the large international airports, has crippled the aspirations of those airports to become global hubs, ironically aiding rivals to Japan’s own Narita International Airport near Toyko, like Korea’s Incheon (the Seoul airport is now among the largest and busiest in the world). The high landing fees and preference for parochial interests also helped bankrupt Japan’s own flag carrier, Japan Airlines.
Circles of compensation encourage a stability bias and sense of mutual solidarity that facilitates cooperation and defuses the risk of large-scale undertakings.
Circles of compensation do not, of course, exist everywhere, in either the Japanese or other political economies. Certain areas, such as consumer electronics, leisure industries, and to some extent automobiles, have traditionally weak circles. The distribution of such circles in other late-developing nations, including Germany, Korea, and Singapore, where the communalist logic that has spawned them in Japan also prevails, reveals how they can operate variably in different national contexts. These contrasting cases deepen insights into how and why circles of compensation prevail, in Japan and elsewhere, as well as what differences circles of compensation make for organizational behavior and national political-economic strength. Theoretical implications for the analyses of comparative social theorists like Mancur Olson, Chalmers Johns, and other comparative social theorists are also considered.
Presenting a new paradigm for how Japan’s political economy operates, looking to the socio-political factors that shape economic outcomes, like circles of compensation, has major implications for both US policy and for corporate strategy relating to Japan. Such an analysis stresses, for example, the importance of corporate governance reforms and direct investment promotion as policy tools. It emphasizes, in particular, the deeply symbiotic potential of an alliance between Silicon Valley entrepreneurship and Japanese organizational skills in creating “win-win” formulas for the Pacific future. Circles of compensation no doubt need to be broadened, to provide more ethnic and gender diversity. And they need to be supplemented by transnational cooperation. They remain, however, an important paradigm for supporting stable growth, which the world will need to understand better in the years ahead.
Comments