24 Aug 2009

The Value Of Japanese Inefficiency

By Jonathan Gadir
Japan's inefficient domestic economy could show the world how to live without constant 'growth', writes Jonathan Gadir, but this weekend's election will be crucial
Among the many things which impress the visitor to Japan are the very low crime rate and the virtual absence of anti-social behaviour in public spaces. These things are connected to a sense of safety that's present in many parts of everyday life.

Hotels don't feel the need to have security measures to stop anyone picking up your room keys from reception. Automatic coin laundromats in the centre of Tokyo are unattended and remain clean and free of vandalism, their coins unpilfered; students go into a Starbucks, leave their $300 electronic dictionaries on a table and go wandering off.

Another aspect of city life in Japan is the incredible density of small — sometimes very small — retail stores, restaurants and bars. And then there is the routine experience of what appears to be over-staffing. One person opens the shop door, another person assists in distributing trays, another takes your money and operates the cash register and yet another deposits your items into a bag and wraps it.

There are old guys everywhere whose job it is to stand on the footpath next to a car park entrance and wave red flags around to "warn" pedestrians when a car is emerging.

These apparently disparate impressions are all actually related.

Japan has what some analysts call a "dual economy" — an efficient export-oriented big business sector including companies like Sony and NEC producing whizz-bang technologies, and a protected, domestic-oriented sector made up of small and medium-sized businesses. For customers of this sector, the standard of service and attention to quality are generally exquisite, but it is described by economists as inefficient because it is low-tech, staff-heavy and high-priced.

This inefficient sector is an important part of the fabric of everyday life in Japan.

The system of protection for this sector has various arms. There are the Government's "active" employment policies. For example, the Government subsidises small and medium-sized businesses to keep and hire staff. It also spends enormous sums on construction projects (including projects like the five-star subway lines in the city of Kobe which nobody uses) and purchases the crops of small farmers at way above the market price.

As for employment, the Government's preference has been to keep people on the job instead of collecting welfare payments. Indeed, the dole has strict eligibility requirements, benefits are low and their duration short. It is also difficult for people to move jobs — or as economists would say: labour market flexibility is low.

"Unemployment inside companies" is a peculiarly Japanese phenomenon as staff are often kept on even if they are not doing anything.

This way of doing things, until recently, has worked.

It has protected and promoted inefficiency as economists think of it, yes. But whether something is inefficient or not depends on what you think its function is. Is it to make money for shareholders — or to serve other social ends such as minimising economic inequality and preserving social cohesion?

In recent years, however, the system of protections has come under pressure. How can the spending be kept up if the efficient exporting sector isn't able to bring in the money it once did? What if the money is not there to be redistributed to all those job subsidies, construction projects, shopkeepers and farmers?

In the early part of this decade former prime minister Junichiro Koizumi tried to push through free market reforms and cut back the spending but these efforts were only slightly successful. Under Japan's political system, the executive simply was not able to impose its will on local politicians and stop them from doing what comes naturally — generating "inefficient" projects and subsidies for their constituents.

In Japan, relatively few politicians have been captured by neoliberal values — perhaps because there is very broad acceptance of the value of economic equality and social harmony. This co-exists with a resilient cultural heritage of hierarchical "groupiness". Schools, universities, neighbourhoods and workplaces are permeated with personal relationships of mutual obligation (usually of a rather unequal mentor-apprentice type). Within these various groups everyone has their place on the junior-senior scale and a stake in the social order. Most Japanese are quite aware of this distinctive feature of their society, and whatever frustrations they may have with it, the US-style neoliberal society is not an attractive option to most.

Survey research reveals the features of their social system most valued by Japanese people are: "maintaining employment", "personal relations at the community level" and "protection of small and medium enterprises and the self-employed".

This means that while it's possible to view all that inefficient public spending as "pork barrelling", another way to interpret it is as protection and preservation of a remarkable level of social harmony.

Japan has chosen, consciously or unconsciously, to make a trade-off at the expense of maximising GDP growth, higher shareholder returns and career-choice for individuals in favour of social harmony. And, indeed, why not? To see the benefits, compare the carefree experience of walking through the centre of Tokyo late on a Saturday night with a similar walk through Sydney, Melbourne, Brisbane or Perth, with their crime, aggression and social dysfunction.

But the social model is looking increasingly shaky. Income inequality in Japan has risen from well below the OECD average to just above the average in the last two decades. Meanwhile, Japan's crime rate, while still low compared to other developed nations, has risen dramatically.

Paradoxically under tougher economic conditions, the commitment from successive Japanese governments to protecting jobs has played a part in undermining the very economic equality it was supposed to protect. In the last decade, in order to avoid onerous legal obligations which make shedding regular staff difficult, firms have stopped hiring or hired only temps on much lower pay-rates. There has been an explosion in the proportion of temp and contract workers who can be fired at will and do not benefit from any of the job security and the system of mutual obligation enjoyed by regular staff. Contract workers now account for over one-third of the workforce.

Strict eligibility criteria for welfare benefits have meant an unprecedented number of people with these insecure and low-paying jobs have fallen into poverty. One can see them in Tokyo — mostly young — sleeping in 24-hour internet cafes because rent is unaffordable.

Japan is at a turning point. The ruling LDP has failed to address any of the country's fundamental problems. After 50 years of almost unbroken LDP rule, the Japanese finally seem ready to take a punt on the opposition, perhaps more because of the many scandals that have plagued the LDP rather than a deep belief in the main opposition party, the Democratic Party of Japan (DPJ). Can a new government re-design the system of social protections to properly maintain the values of economic equality and social harmony that Japanese rightly cherish but which are now threatened?

There is more at stake here than the well-being of 127 million people in northern Asia. Japan's social model is valuable for other reasons. A society which has already shown itself willing and able to make trade-offs in favour of its economically inefficient social values offers the intriguing possibility they might also be able to make similar choices in response to the worsening global environmental crisis.

There is another crucial facet to this situation. Part of the package of Japan's commitment to social harmony is stubborn resistance to immigration, one of the key drivers of economic growth in other developed countries such as Australia and the US. There is therefore no quick fix to Japan's widely discussed ageing population and near zero population growth. If they maintain their resistance to immigration, the Japanese will have to break new economic policy ground.

Japan seems to be uniquely positioned to show how such ideas as a no-growth or steady-state economy could work and redefine for the world what a healthy economy is.

If it is able to hold on to its social structures and values, perhaps it can show the world how we can have a high material standard of living with no population growth and even low (or no) GDP growth.

That's why the world, as well as Japan, has a lot to gain if Japan succeeds in protecting its "inefficiency" and its unique heritage of social harmony.

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Posted Tuesday, August 25, 2009 - 12:02

Thanks for this timely article.

Would be good to know more about the political ideology of the DPJ. Also, what models are government officials exploring with respect to an ageing population? Obviously the care/housing arrangements for the elderly in Japan are quite different from Australia/US...

If post-growth futures involve re-localising a good deal of global trade and shifting away from export-orientated national economies, does Japan provide any indicators of how support for social cohesion might continue without traditional subsidies? Here I'm particularly wondering if there exists the equivalent of something like the Local Exchange Trading System or alternative currencies. Perhaps domestically-focused social innovation and social entrepreneurship offer ways forward?

Donnie Maclurcan

Posted Tuesday, August 25, 2009 - 17:47

Like all communities, Japan irreversibly uses the limited natural capital, including natural resources, at a high rate. It has to import many of these resources but pays for this with its exports. It adds value to these exports and this enables the Japanese to have a high material standard of living, despite the lack of natural resources. However, the operation and maintenance of the infrastructure of Japan and meeting the needs and wants of its population entails irrevocable drawing down of the natural capital. This is an unsustainable process. The cessation of population and economic growth does not affect that principle. However, the social harmony could well make it easier for the Japanese people to adapt to the inevitable powering down. They go on this journey with an advantage over the spoilt Australians.

Posted Wednesday, August 26, 2009 - 12:31

I believe the term is 'sustainable growth' for an economy that maintains a healthy level of GDP, rather than an economy that keeps expanding its GDP beyond its natural limits.
Conservatism is a way of life for the Japanese, who are both frugal and efficient.
But I do admire the inefficient way some of the Japanese business' honour loyalty and human dignity by keeping people on, even when they don't really have a job for them.
If they can afford to do it - great - because ultimately it's far more important that someone is earning a wage, than some owner or investor is earning more profits or higher dividends.
Low income earners spend a high proportion of their income on other businesses, keeping the domestic economy healthy.
So if any business is to survive long term, it needs to consider the way it treats human resources and invest some goodwill into them, not just customers and shareholders.

Posted Wednesday, August 26, 2009 - 13:02

Excellent article, congratulations.

Economic growth is crucial for a society generating surplus and evolving from subsistence economy into a civilization that can be proud of itself.

Growth is also critical for a society restructuring or coming out of catastrophes such as war or famine.

Just when and how growth became the chief long-term measure of an economy's health, supposed to keep increasing without end, has got me completely baffled.

Posted Thursday, August 27, 2009 - 09:41

Good article but a couple of key points missed. Japan's aging population is causing enormous problems as there are insufficient young people to sustain the economy and increasing numbers of older people- particularly women- in dire financial straits.
Also there seems to be a very interesting shadow side to Japanese culture where books about murderous housewives and fantasy play an enormous role, and of course they all coexist with the ubiquitous yakuza.
It is also quite an isolationist culture where it's not uncommon to see a restaurant full of individuals sitting one to a table where the whole place is as quiet as a library.
But yes, the constant grab for more and more money in 'advanced western cultures' is what has led to what Paul Krugman calls 'cascading systemic failure' where growth economies based purely on financial indicators lead to corrupt practice and deliberate maladministration for which they are rewarded- leading to what economists call 'a society of moral hazards'