Urban Studies, Vol. 37, No. 4, pp. 673–690, 2000. State Restructuring & Local Power in Japan

Richard Child Hill & Kuniko Fujita hillrr@msu.edu fujitak@msu.edu

Abstract. Western understanding of the postwar evolution of states in advanced capitalist societies envisions a moment of fundamental transition beginning in the mid-1970s indexed by reduced government spending, the privatization of public services and increased inequality among local governments. Regulation theory sees the process as a transition from a Keynesian welfare state to a Schumpeterian workfare state necessitated by the shift from a Fordist to a post Fordist regime of capital accumulation. Japan, a member of the OECD, and the world’s second largest economy, doesn’t fit the political-economic trends nor the model put forward by Western regulation theorists. Japan has not experienced the decline in state spending, privatization of public activity, and rising inequality among local governments characterizing Western OECD nations. The Japanese have selectively incorporated Keynesian and Schumpeterian ideas but in a spirit much closer to writers associated with the German historical school, and always within a framework rooted in Japan’s own historical traditions and exigencies. We document Japan’s departure from the Western model of state restructuring and explore the theoretical implications. State Restructuring & Local Power in Japan

Western understanding of the postwar evolution of states in

advanced capitalist societies envisions a moment of fundamental transition beginning in the mid-1970s indexed by reduced government spending, the privatization of public services and increased inequality among local governments. Regulation theory, arguably the most influential explanation of postwar transformation in the capitalist state, sees the process as a transition from a Keynesian welfare state to a Schumpeterian workfare state necessitated by the shift from a Fordist to a post Fordist regime of capital accumulation. This argument is

based upon the experience of Western Europe and North America, especially the U.K. and the USA, but it is often presented as if it included all advanced capitalist nations.

Japan, a ranking member of the OECD, and the world’s second largest economy, doesn’t fit the political-economic trends nor the theoretical model put forward by Western analysts. Japan has not experienced the decline in state spending, privatization of public activity, and rising inequality among local governments characterizing Western OECD nations. Japan’s developmental state possesses some features of the workfare state postulated by regulation theorists but not others; and since Japan has never been a welfare state on the Western model, the nation cannot be moving from a welfare to a workfare state. The Japanese have selectively incorporated Keynesian and Schumpeterian ideas but in a spirit much closer to writers associated with the German historical school, particularly Friedreich List, and always within a framework rooted in Japan’s own historical traditions and exigencies (Gao, 1998). In this paper we document Japan’s departure from the Western model of state restructuring and explore the theoretical implications. 1. State Restructuring and Local Power

Central and local governments clash continuously over the

distribution of taxes and spending. A central government spans the nation and therefore exercises more control over a larger resource base than a city government. But local officials are closer to the people they serve and better able to discern popular demands than are central bureaucrats. Efforts to alter the distribution of resources and responsibilities among levels of government are often embedded in larger social conflicts over the substance of public policy (Gurr & King, 1987; Hill, 1990).

Western scholars tend to divide postwar relations between central and local governments into two periods. From 1945 through the mid-1970s, national governments tried to counteract business downturns and sustain employment through Keynesian demand management policies. National settlements between capital and labor enabled Keynesian social expenditure, national ideologies supported central government outlays to ameliorate local poverty, blight and crime, and the welfare state altered the relationship between government and citizenry. Public services, the “social wage”, became a larger part of each citizen’s standard of living. Local governments, more often than central, delivered the expanded social services, and local spending absorbed a rising share of national income (Pickvance & Preteceille, 1991: 215).

Corporations assaulted Keynesian social policies in the mid 1970s when a global economic slump threatened their ability to

maintain profits through existing divisions of labor and government outlays. As market centered ideologies gained political strength, governments changed course, from buttressing employment through expanded social services to supporting private capital accumulation through tax subsidies and deregulation (Smith, 1988). Neo-liberals emphasized the costs rather than the benefits of state intervention. Public sector competition for labor and capital increased inflation, they argued, and high tax rates reduced work incentives. Pressures for program expansion from public sector unions, bureaucrats, professionals and politicians caused waste and inefficiency.

Neo-liberals couched their critique of local government in “public choice theory”, a market model of government in which cities are likened to business firms and voters express their “tastes” for government products. According to the theory, competition among local governments, and between municipalities and private firms, enhance efficiency in service provision. Consumer choice is maximized when each local government offers its own bundle of services and tax rates. The absence of variety in local government obstructs consumer choice. Keynesian policies, by expanding the size and power of central government, reduced productivity and increased inflation. Contracting central government, increasing competition among local governments, and expanding the private market would increase a nation’s productivity and global competitive power (Savas, 1987).

Chris Pickvance and Edmond Preteceille (1991) have collected studies documenting the shift in political ideology, state structure and local power in six OECD countries (the UK, France, Denmark, West Germany, Canada, and the USA) from the mid 1970s to the late 1980s. They identify three main trends.

Local governments reduced spending. Central governments

cut back financial support for localities, and local government spending contracted as a percent of gross domestic product in nearly all the countries surveyed.

Inequality among local governments increased. Fiscal

inequalities and social segregation among and within towns and regions increased while public concerns about social justice and redistribution, the values buttressing the welfare state, diminished. [1]

Local governments privatized some social consumption

services, and increased support for private economic development. Economic restructuring and rising unemployment pressured local governments to shift priorities from welfare services to economic development. Competition among localities for private capital and public projects intensified. Local initiatives to attract outside investors ranged from enhancing the image of an area to the provision

of direct subsidies. Pickvance and Preteceille believe the territorial restructuring of

the state is one manifestation of a broader transformation in the institutions regulating economic relationships in the OECD nations. Reduced local spending, increased inequality among localities, and the shift in local government priorities from social welfare to economic development indicate OECD movement away from a Fordist regime of capital accumulation, they hypothesize, and toward a Post-Fordist regime of flexible accumulation--one less equalizing and redistributive, more competitive and fragmented, and more dominated by the market and capitalist processes (Pickvance & Preteceille, 1991: 216). [2]

Pickvance and Preteceille’s interpretation of state restructuring rests upon regulation theory, an influential school of Marxian political economy which investigates how social and political institutions regulate property and market relations among economic actors (Hollingsworth, Schmitter and Streeck, 1994). Bob Jessop (1991) offers an exceptionally clear and systematic interpretation of the restructuring of capitalist states from a regulation perspective. During the Fordist era, Jessop argues, local governments were extensions of the Keynesian welfare state. Regional policy encouraged industrial relocation to spread employment and reduce local inflationary pressures. Cities built infrastructure to support Fordist mass production, provided social consumption and welfare services, and sometimes competed with each other to attract investment. But with the shift from Fordism to flexible accumulation, local officials changed course to emphasize economic regeneration and policies to make their local economies more competitive in the new global economy. Cities took on new development functions and formed new economic partnerships with unions, chambers of commerce, venture capital firms, and universities.

The move from Fordism to flexible production “decisively weakens” national governments, Jessop argues. Like big corporations, national states are hollowing out. Just as the hollow corporation transfers production abroad while retaining its command and control functions at home, so the hollow national state transfers public activities to other levels of government, the third sector, and the private sphere, while retaining its coordination functions (Jessop, 1991: 274).

In Jessop’s scheme, the transition from mass to flexible production transforms the Keynesian welfare state into a “Schumpeterian workfare state.” The workfare state intervenes on the supply side of the economy to promote business innovation. It downplays domestic full employment in favor of international competitiveness. And it subordinates redistributive welfare policies to “productivist” policies which enhance labor market flexibility. The workfare state thus constitutes a “complete break” with the welfare state, Jessop (1991:275) concludes.

As with the welfare state, there will be differences among societies in the way they institutionalize the workfare state, Jessop suggests. Pickvance and Preteceille’s research collection does, in fact, document variations in state restructuring and local power among the six OECD countries. National institutions, politics, and culture mediate global economic and ideological change to produce variations in urban outcomes, including the amount of local spending cuts, the degree of central control over local activity, and the scope of privatization. In particular, the authors find that the political impact of neo-liberal ideology was strongest in the OECD states which dispersed functions to local governments but retained centralized control, that is, in Britain and Denmark. [3]

In summary, research suggests the following trends, commencing in the 1970s, in state structure and local power among Western capitalist nations.

(1) Local governments reduced spending as a percent of GDP; (2) Fiscal inequality and social segregation among local

governments increased; (3) Local governments shifted policy emphasis from social

welfare to economic development; (4) the impact of neo-liberal ideology on state restructuring was

strongest in countries where local governments implemented centrally controlled policies;

(5) From the perspective of regulation theory, these trends in state structure and local power constitute a shift from a Keynesian welfare state appropriate to a Fordist mode of economic growth to a Schumpeterian workfare state more suited to a post-Fordist regime of flexible accumulation.

(6) The rise of the workfare state “hollows out” the national state and constitutes a complete break with the Keynesian welfare state. 2. State Restructuring & Local Power in Japan

Japan departs from the experience of Western capitalist states

and the tenets of regulation theory in the following major respects. (1) Japan more closely approximates an investment than a

welfare state. Japan’s financial policies in the 1930s anticipated Keynesian economic principles, and the nation’s income doubling policy in the 1950s was based upon Keynes’ theory of long term income distribution (Sakakibara, 1993), but Japan is better viewed as a Keynesian investment than as a Keynesian welfare state. The government has attempted to induce economic growth primarily through public outlays in infrastructure and incentives for private savings and investment. Since Japan has never had a welfare state on the Western model, Japan cannot be making a transition from a welfare to a

workfare state as postulated by regulation theory. Japan’s developmental state emphasizes social capital outlays

not social welfare services. [4] In contrast to the U.S. economy, for example, Japanese economic policy focuses on production not consumption as the primary engine for growth. Where the American goal has been to maximize consumer welfare at any given moment, the Japanese goal has been to maximize employment and thereby raise living standards over the long term. Where U.S. fiscal policy has emphasized government consumption expenditure and taxes private consumption lightly relative to returns on investment and savings, Japan’s fiscal incentives encouraged private savings and capital investment. And where the U.S. has only indirectly linked economic policy to national security, Japan has taken a strategic view of the national economy and supported capital intensive, high value added industries through legislation and administrative guidance (Huber, 1995; Gao, 1998).

Japan’s public sector engages mainly in finance and in public works. Over one third of government investment and loans flow to public financial institutions, and public works account for virtually all state transfers to localities and much of the funding for financial intermediaries (Sakakibara, 1993: 39). [5] While Japan’s overall government expenditure per capita is comparable to other OECD nations, government fixed capital formation, as a percentage of gross domestic product, is two to three times higher in Japan than in Western OECD countries; government social consumption expenditure, on the other hand, is about half the OECD average (See Table 1). [Table 1 About Here]

(2) Japan’s strategically organized national state disperses

functions to local governments while maintaining central control, and shows no sign of hollowing out. [6]

The reigning view of the Japanese state has long emphasized central control and local subordination (Steiner, 1965; 1980). [7] A second school of thought, partly in reaction to the first, gives more credence to local government initiative and political spontaneity (Reed, 1986). “Central control” and “local initiative” advocates tend to draw upon different kinds of evidence and different historical periods to substantiate their claims. The central control thesis is based primarily upon the administrative and legal powers possessed by the central government. The local initiative view derives mostly from the actual practices of prefectures and cities. The central control model emphasizes periods of national reconstruction and institutional consolidation, especially the Meiji (1868-1912) and early post World War II eras. The local initiative model emphasizes periods of political turmoil and social movements, especially the democracy movements in

the 1920s, environmental movements in the 1960s and 1970s, and pressures for state decentralization in the 1990s.

Proponents of the central control thesis focus on the “1955 system” of state administration, finance and public policy. The Liberal Democratic Party (LDP) organized this system in the 1950s to rebuild the national government and spur economic growth following Japan’s World War II defeat and occupation by Allied forces. In the 1955 system, local governments exercise functions delegated to them by national agencies, central bureaucrats fill important local government posts in rotation from the relevant ministries, and localities must conform to the regulations set by each national ministry (Kamo, 1997). The central government also controls local taxation and borrowing. The center collects two-thirds of the nation’s taxes and then reroutes half back to local governments. [8] Much of the transferred revenue is earmarked for the duties local governments must perform as agents of the central state. Central matching grants, which require equivalent expenditures from localities, reflect national policies and are vehicles for the exercise of administrative guidance.

Proponents of the local initiative thesis point out that local governments have never fully accepted the 1955 system. From the very outset, localities opposed agency delegated functions and the centralized tax system, and demanded greater local autonomy. Especially significant was the intense local opposition to central control that emerged in the late 1960s and 1970s. Big cities at that time mounted many policy initiatives, and localities had sufficient power to compel the central state to amend national laws to accommodate new local practices (Samuels, 1983; Reed, 1986). Moreover, Japanese local governments have more control over their national tax system than do local governments in other unitary states. Japanese localities collect one-third of national tax revenues, whereas localities in other unitary states average less than one-fifth (Reed, 1986: 19). [9]

Today’s analysts of the Japanese state tend to reject a simple dichotomy between central control and local initiative. Instead, they scrutinize the interdependence between central and local governments and attempt to explain changes in central-local interaction over time (Samuels, 1983). Michio Muramatsu (1997a; 1997b) is perhaps the best known proponent of the interdependence thesis. According to Muramatsu (1997b), the structure of Japan’s developmental state has been shaped by the imperative to mobilize scarce resources to catch up with Western capitalism. Japan’s bureaucracy has had to improvise to compensate for its lack of resources. [10] Using local governments to implement central policy is one such improvisation. While dispersing functions to localities has increased the number of local government employees in Japan, it has also considerably reduced the costs of government as a whole.

Huber (1995: 153) argues that Japan’s developmental state

possesses a number of characteristics associated with modern strategic organization. Central, prefectural and local governments engage in multilevel planning and coordination. Units are grouped together under a higher level to coordinate them, and this principle is followed at each successive level: ward, city, prefecture, and central government. At the top level, general ministerial staffs deploy strategic assets, make plans, and supervise their implementation. Lower echelon staffs have a high degree of operational freedom when implementing plans and can use a plurality of means to reach common ends. The top gives information to the bottom and will use initiatives taken by the bottom. Units at each level compete with each other for prestige and influence. If one unit discovers a better way to do something, others tend to implement it.

Although coordinated from the center, the structure of the Japanese state has many pluralistic elements, Huber finds, including competition among units, lower level initiative with respect to means, and the independent quest for superior methods. Muramatsu (1997a) also argues that the maximum mobilization principle doesn’t mean concentration of power in the center but rather the exchange of information between center and localities so as to create common objectives and policies.[11] The central government gives local officials discretionary powers to encourage their initiative, and then monitors the results. Such delegation is safe because the “organization orientation” of career bureaucrats ensures they share the interests of the central ministry. [12]

Muramatsu (1997b) emphasizes, however, that strategic organization in Japan’s public sector is multi-dimensional and affected by politics. The central government delegates many functions to local governments, and it involves itself in and supervises local activities to ensure central objectives are achieved. But in practice, localities often secure concessions from the central government. Local officials must act in accord with their own electoral and political constraints, and they have leverage with the central government because the state depends upon them to implement national policies.

The Ministry of Home Affairs (MHA) illustrates the mix of central control with local initiative in Japanese intergovernmental relations. The MHA is a cabinet level department connecting local governments to the central bureaucracy. [13] The MHA advocates for local governments and must be consulted by other cabinet departments before they can enact policies or implement programs that may affect the fiscal health of localities. [14]

The MHA coordinates the activities of local governments in various ways, but most directly, by managing and monitoring local finance. The MHA oversees local tax collection; it proposes amendments to the tax system; it authorizes changes in local tax rates, and it approves local borrowing. The MHA’s annual Local Finance

Plan, reported to the National Diet and the public, expresses the ministry’s preferred course for the coming year. The plan is distributed to all local governments and serves to guide local financial management. The MHA uses the plan to monitor local governments for excessive spending and mismanagement, and the ministry has the power to sanction local governments by cutting off grant money. Acceptance of a locality’s financial plan by the MHA brings favored treatment from the ministry when the local government wants to issue bonds or seeks special funds.

The intergovernmental career path followed by MHA bureaucrats expresses central-local interdependence. After brief training within the ministry, a fledgling official will be sent to a prefectural government for two years to work in the Planning, Local Affairs, or Secretariat sections. The official will then return to the ministry for two or three years, and go out again to another prefecture, this time as a section chief. The shuttling between the Tokyo home office and the prefectures, with some irregular assignments to other central ministries, embassies, or big city governments, will continue throughout the official’s career (Akizuki, 1995: 347). [15]

Akizuki’s (1995) research suggests central fiscal control with local policy initiative is a political tradeoff between central and local governments. The MHA curtails the autonomy of local governments but the ministry also reduces the likelihood of local financial distress, and it establishes rules of the game among local governments and between local governments and the central state. By helping to institutionalize and stabilize the local government system, the MHA creates the basis for local initiative. Citizens express their political will through the direct election of local executives and representatives. MHA officials try to coordinate the different needs and interests of municipalities. [16] The fact that MHA’s local finance plans do not always succeed further evidences the political power and constitutional autonomy of local governments, according to Akizuki.

(3) Local governments, in alliance with local cooperatives

and local firms, are important public actors in Japan but within a framework of central-local interdependence not national hollowing out.

The power of local governments, in alliance with cooperatives and business firms, has grown in Japan despite central control over the budget. Small firms in construction, retail trade and farming are organized into associations; they have strong ties with the public sector; they are often at the forefront of regional politics and administration; and they are the political mainstay of the Liberal Democratic Party. Land reform enabled local agricultural cooperatives to become a major political force after World War II. The power of local construction firms dates from the urban building boom and electric power projects fed by

domestic expansion linked to the Korean War. Members of cooperatives and public contractors often serve in local assemblies, and municipal governments often organize their own business enterprises. [17]

The symbiotic relationships among the Ministry of Construction (MOC), local construction firms and the Liberal Democratic Party also illustrate the reciprocal nature of central-local relations in Japan. The MOC licenses the entire construction industry and maintains 232 local construction, maintenance and research offices, 655 smaller area offices, and 162 extra departmental institutions, including public corporations. The ministry receives 8-14% of the national general accounts budget and about 25% of the Fiscal Investment and Loan Fund [18], and supervises most of the half million or so public works projects carried out in Japan every year. Construction investment typically equals around 15% of Japan’ GNP, and provides jobs for over five million workers (van Wolferen, 1990: 114-122).

Creating a local consensus around a public works project and carrying the project up the various ladders of prefecture and central government is a staple of Japanese politics. Local representatives to the national Diet lobby the central government for subsidies and permits and attempt to ensure local demands are incorporated into ministerial policy. Central bureaucrats use their control over the budget to mediate between various regional and political interests. Senior bureaucrats, in search of a policy consensus, consult with Diet representatives, with party bosses, and with industry associations.

Public construction projects keep millions employed and the LDP in power. Retired MOC officials often go into politics and they tend to do well in elections. They are well represented in the LDP where they help the MOC get its budget proposals and draft bills accepted in the National Diet. Local organizations under the control of the MOC help coordinate election campaigns in nearly every locality and support former ministry officials who run for office. MOC indebted heads of prefectural departments and unions also work hard to get out the vote (van Wolferen, 1990: 117).

Major construction firms who employ retired MOC bureaucrats receive tacit contract promises in return. MOC is known as the “Godfather” of some 350 local contractors whom it serves by including them among the nominees for public works contracts, by giving them vital information in advance, and by going easy on their site inspections. Local construction firms without ample political funds and the social networks to put the money to good use, are severely disadvantaged (van Wolferen, 1990: 119). [19]

(4) The political impact of neoliberalism has been quite weak

in Japan, contrary to the experience of Western OECD countries. Although Japan is not a welfare state on the Western model, the

nation’s welfare programs match or surpass most other industrialized countries and contrary to the trend postulated by regulation theory, they are increasing not contracting.

Care for the elderly, considered the core component of the welfare state in most societies, is illustrative. Japan began indexing pensions to consumer prices and wages in 1973. By the mid 1970s, the average pension in the system run by Ministry of Welfare equaled 41% of the average wage--higher than in West Germany and the U.K. (Brofenbrenner & Yasuba, 1987: 127-128). Currently, pensions in Japan’s Employee Pension Program, the nation’s largest, are higher than US social security and above national pensions in all Western European countries, save for Sweden. Japanese older people pay an average of 5 percent out of their own funds for health care, as compared, for example, to the USA where the elderly, due to cutbacks in medicare, now pay half their medical costs out of their own funds. Japan’s Gold Plan, created in 1990, was designed to double many kinds of old age services by the end of the decade, and the New Gold Plan, implemented in 1997, raises the targets higher. These services are transferring the burdens of care from families to the government, just the opposite of privatization (Campbell, 1997). [20]

Japanese local government expenditure as a percent of GDP declined between 1975 and 1987, following the trend in most OECD countries. But local government spending turned upward in Japan in the early 1990s, due to a sizeable increase in public investment. Japan’s upward trend in local government spending matches the experience of Denmark, Canada and France while contrasting sharply with the continued contraction in local government spending in the U.K., USA, and West Germany (see Table 2). [Table 2 About Here]

In sharp contrast to neoliberal public choice theory, Japan’s

intergovernmental system emphasizes standardization in service provision and equity in the distribution of tax revenues among local governments.

In contrast to the USA, for example, where the quantity and quality of services is linked to the wealth of a community, and where there is a variety of possible institutional and service arrangements among local governments, the Japanese system promotes consistency and equity in local service provision. The central government helps to ensure equitable service provision through the local allocation tax, a form of revenue sharing distributed to local governments that lack the capacity to fund required services (Ishi, 1993; Capaiuolo, 1994). Nationally collected taxes are transferred automatically to local governments whose basic revenue falls below their basic needs. The purpose is to secure a more even distribution of resources among local

governments and to maintain local revenue at a level high enough to provide adequate public services.[21] As can be seen in Tables 3 and 4, the local allocation tax grant reduces the revenue gap between better and worse off local governments, even sometimes reversing the position of tax rich and tax poor localities after adjustment. With no room for negotiation or special consideration, Local Grant Tax distribution is sheltered from political pressures. Lobbying concentrates instead on national subsidies (Ito, 1997). [22] [Tables 3 & 4 About Here]

Attempts to implement “neo-liberal” administrative reform in the

1980s, and more recent efforts at government decentralization have met with little success in Japan.

Yasuhiro Nakasone, during his tenure as Prime Minister, was often portrayed as Japan’s neo-liberal counterpart to Margaret Thatcher and Ronald Reagan. Before becoming Prime Minister, Nakasone belonged to the Ad Hoc Committee on Administrative Reform --a high level strategy group of business executives, university professors and retired bureaucrats mandated by the government to find ways to reduce the size and cost of government. Once in office, Nakasone managed to break up the Japan National Railways, create a Management and Coordination Agency, and privatize Nippon Telegraph and Telephone. Nonetheless, most state infrastructure spending was preserved and some types were expanded during the Nakasone administration [23] According to a number of analysts (van Wolferen, 1990: 152; Sakakibara, 1993; Ito, 1997; Muramatsu, 1997b) the bureaucratic incentives leading civil servants to devote themselves to a single ministry, and the vertical sub-governments consisting of ministries, ruling-party diet members and local interest groups have posed insurmountable obstacles to deep administrative reform.

Recent efforts by the Committee for the Promotion of Decentralization appear to have met a similar fate (Kamo, 1997). The Committee proposed to abolish the local governments as agents of the national state system; to transfer some central duties and authorities to local governments; to shift tax and untied revenue sources from the national government to local governments; and to legislatively restrict the national government’s involvement in local affairs. Central government ministries and agencies counter argued that these reforms, by reducing central-local relations to a mere formality, would eliminate nationwide consistency and fairness, and curtail the Constitutional protection of rights to life, education and work. The reform proposals were subsequently watered down (Kamo, 1997).

Co-existence, rather than privatization, better describes evolving relations between public and private sectors in Japan.

Japan’s economy consists of public and private sectors which

co-exist in their own fields. The public sector dominates finance, construction, and agriculture. The private sector dominates manufacturing and some service industries. The public and private sectors can be fierce rivals when their interests overlap, as in finance, where the two sectors compete in fund raising and then divide up spheres of investment activity. The state influences the private sector through finance, subsidies and taxation but corporations remain relatively independent. Public and private sectors continually negotiate to achieve a modus vivendi (Sakakibara (1993).

Japan’s postal savings system illustrates the competitive coexistence of public and private financial sectors. The public post office and private financial institutions have struggled for control over the nation’s savings throughout the postwar period. The number of private banks dropped from 1,541 in 1926 to 77 in 1987, while public postal savings as a percent of bank deposits rose from 15% to 50%. (Sakakibara, 1993: 47). [24]

Local governments and cooperatives are the hubs of public sector finance. The postal savings system is comprised of eighteen thousand special post offices. A special post office is often connected to the local postmaster’s own house which is provided at a subsidized rent by the government. Postmasters are often chosen on a hereditary basis, are rarely transferred, and are influential in their community. Most postmasters see postal savings as their main activity, and close community ties give postal authorities a powerful advantage in collecting grass roots deposits. Although closely linked to the local community, the postal system is operated by the central state. But postmasters wield considerable influence with the LDP through their nation-wide organization and their ability to deliver local votes at election time.

(5) Over time, Japan’s bureaucracy has become more

political and the party system more bureaucratic, weakening the strategic organization of the developmental state, and threatening the political economy with stagnation. A developmental state combines bureaucratic insulation with intense ties to society. This seemingly contradictory combination, called “embedded autonomy” by Peter Evans (1995: 12), enables successful state involvement in industrial transformation. Meritocratic recruitment and long-term rewards create member commitment and a sense of organizational coherence. Coherence enables a kind of bureaucratic autonomy, but not insulation, from society. Institutions simultaneously bind a developmental state to society and provide channels for continuous negotiation over goals and policies (Okimoto, 1989). A state that is one sidedly autonomous lacks access to information and the ability to decentralize policy implementation. Dense external networks without a strong sense of internal organization prevent the state from rising above

the demands of private interest groups and subgovernments. [25] Japan’s ability to resolve the conflicting imperatives of state

autonomy and embeddedness appears to have weakened over time. Relations between the government bureaucracy and the ruling political party, particularly between top bureaucrats and LDP policy specialists (“zoku”), have consolidated, making substantial reform increasingly difficult. The bureaucracy has gradually strengthened relations with the party system and come to play a role in party politics through the electoral system and public works; in turn, zoku lobby for their ministry’s policies. While zoku representatives are chasing after votes and political contributions, ministries are seeking bigger budgets and more influence.

Policy proposals travel a long path from local bodies to final Ministry decision and are looked at by many people. Any departure from the status quo threatens some interests and makes general consensus even more difficult. Many actors have veto power, and It is a huge task to change allocation shares among ministries. According to analysts inside Japan’s bureaucracy, this political bureaucratic relationship has substantially weakened the capacity of coordinating ministries, like the Ministry of Finance, to oversee overall state activity. [26] Policy is often segmented, and lacking in coherence and grand vision (Sakakibara, 1993; Muramatsu, 1997).

The need to reform the public sector represents today’s “great turning point in Japanese society”, most political analysts would agree (Gibney, 1998). But they disagree on what needs to be done. Oversimplifying, we can say that the main line of debate is between those who would selectively overhaul some components in Japan’s political economy so as to continue to uphold the system’s basic tenets, and those who believe the system’s basic tenets must change.

Not surprisingly, the most forceful advocates for the “reform to preserve the system” position come from within the bureaucracy itself. According to Eisuke Sakakibara (1998), MOF Vice Minister for International Finance, Japan’s political administrative regime, for all its faults, is still more decentralized and egalitarian than its American or European counterparts, and continues to form the nucleus of a more humanitarian economic regime. The Japanese system has been established under “closed conditions,” Sakakibara acknowledges, but the nation must continue to resist the tide of deregulation and privatization. Instead, Sakakibara calls for “bold reforms” to sustain the “impartiality of the public sector” and the “democratic features of the Japanese firm”, while helping to “internationalize their mechanisms” (Sakakibara, 1993: 134). However, such strategic reforms are difficult, he argues, so long as the great majority of the nation continues to have a vested interest in the status quo.

The contrasting position calls for a more thorough going transformation of the Japanese political economy. A leading advocate

for this view is Iwao Nakatani, Professor of Economics at Hitotsubashi University, and Acting Chairman of the Strategic Economic Council, an advisory panel to the Prime Minister on policies to achieve economic recovery. According to Nakatani (1998a; 1998b), Japan is suffering the consequences of its own past success. The Japanese system has created one of the most equal societies in the world, but the nation’s economy has become more and more sluggish.

Japan’s political economy is afflicted by a “moral hazard syndrome,” Nakatani (1998b) claims, a condition where people neglect to make efforts because of the social guarantees they receive from society. Losers are subsidized by the group they belong to, corporate failures are few, and unemployment has stayed low. People feel secure so long as they are fulfilling their own limited responsibilities; few are interested in seriously changing the existing system, or even facing up to its problems. Government offices, corporations and universities seldom reward innovative effort. Municipalities are dependent on grants, subsidies and public works budgets from the central government. As a result, they often lack the spirit to create competitive industries, and in any case, it is easier for localities to follow central government directives, because if they take autonomous action they risk incurring central government displeasure, and seeing their budgets reduced.

The moral hazard syndrome has weakened the constitution of the Japanese economy, Nakatani claims. If public works budgets were seriously diminished, regional economies would collapse. The cure requires the Japanese to behave more autonomously in various fields. This in turn necessitates an incentive system that rewards organizations and individuals who do their utmost and take innovative actions. 3. Conclusion

Japanese local governments operate within a developmental not a welfare or workfare state. The distribution of power among central and local governments has been shaped by efforts to maximize the mobilization of scarce resources. Central and local governments are strategically interdependent; the national state is far from hollowing out. The political impact of neo-liberalism has been negligible. Welfare programs are increasing not declining. Fiscal equity and consistency, not inequality and segregation, characterize local service provision. Co-existence among public and private sectors rather than privatization of public services is the rule. Japan’s current political-economic contradictions stem not from a Fordist crisis in corporate profitability brought on by high wages and welfare outlays in the context of increasing global competition, but importantly, from the declining ability of a developmental state to effectively balance autonomy and embeddedness, the twin prerequisites of developmentalism, as the

bureaucracy has become more political and the party system more bureaucratic. The Japanese experience forces us to expand our field of vision with respect to regimes of capital accumulation, state formations, political-economic contradictions and mechanisms of change in the world system. NOTES 1. Neoliberal ideology downplays social inequalities in favor of individual freedom to choose. As envisioned by public choice theorists, citizen consumers express their preferences for one or another bundle of services and taxes by ‘voting with their feet.’ Inequalities arise because local governments can’t offer the ‘high services, low taxes’ bundle desired by poor people without substantial financial support from the central government. Wealthy citizens, however, can opt for the ‘low services, low tax’ bundle, which reduces available tax revenue. Poor people end up in ‘high-tax, poor service’ localities with few opportunities to move elsewhere (Pickvance & Preteceille, 1991: 214).

According to Pickvance and Preteceille (1991: 216), public choice theory has had its greatest influence in North America. In Western Europe where welfare principles are more strongly associated with local government, public choice arguments have mainly encouraged charges for public services. 2. According to Jessop (1991: 251), change from one to another regime of accumulation is defined along four dimensions: (a) the labor process; (b) the overall dynamic of macroeconomic growth; (c) the social mode of economic regulation which guides and governs the prevailing mode of growth; and (d) the overall character of the political and social order associated with economic regulation. 3. Pickvance and Preteceille classified OECD intergovernmental systems according to the number of functions performed by local government and the degree of local discretion over policy and spending. The UK and Danish systems had the most functions performed by local governments and the least local control over policy and spending. The USA and Canada had the fewest functions performed by local government and the most local control over policy and spending. The French system ranked high in number of local functions and degree of local control.

According to Pickvance & Preteceille, the USA and Canada shifted federal welfare spending to individual financial assistance but without much consequence for cities because the welfare role in both societies is mainly performed by provincial and state governments. And

since business criteria already dominated local policies in North America, cities had less scope for reducing expenditures and taxes. The more welfare minded countries--Denmark, the U.K., and France--expanded the economic development role of local governments but not to the North American level. Germany, a mixed case, was hard to classify. 4. According to Peter Evans (1995: 342) “...the central economic mechanism of the capitalist developmental state is the use of state power to raise the economy’s investable surplus; insure that a high portion is invested in productive capacity within the national territory; guide investment into industries that are important for the economy’s ability to sustain higher wages in the future; and expose the investment projects to international competitive pressure whether directly or indirectly. The resulting intense cycle of reinvestment within the national territory leads to rapid rises in labor demand, and hence to increases in labor incomes and wide distribution of the material benefits of growth (even in the absence of collective labor organization).” 5. Japanese state sector finance includes pensions, insurance and postal savings. The state accounted for 40 percent of total investment in construction and 82 percent of all civil engineering works in 1985 (Sakakibara, 1993: 39). 6. Japan is a unitary state. The national Constitution stipulates the organization and operation of local government entities. Local governments are organized in two tiers. There are 3,245 municipalities on the first level, and forty-seven prefectures on the second. The Constitution also provides for local autonomy by guaranteeing citizens the right to elect local officials. City mayors and local assembly representatives are directly elected, as are Prefecture governors and representatives (Ito, 1997: 74). 7. Kurt Steiner (1965, 1980) is perhaps the best known Western advocate of the central control, local subordination thesis. Steiner claimed that the Meiji state subordinated local governments to the center in an effort to unify and mobilize the nation. Since the Meiji governments used Prussian and French ideas for building Japan’s state, Steiner emphasized the strong influence of the European unitary state model. There were, however, historical cases that didn’t fit. In the 1920s, for example, Osaka and some other large cities were led by progressive mayors who exercised considerable autonomy in making urban policy, who didn’t follow central guidance, and who challenged central control (Hanes, 1989).

Steiner also argued that the Occupation’s postwar reform of Japan’s intergovernmental system, based upon the American model,

stopped short of institutionalizing genuine local autonomy because it lacked a clear definition of local government functions and a local tax system to support independent governance.

Japanese critics of the central state tend to make the same argument and not infrequently conclude that only decentralization on the American New England town hall model would guarantee local autonomy in Japan. 8. Prefectures, cities, towns, and villages account for eighty percent of total government expenditure and most goes into the construction of public works, including roads, sewers, parks, land improvement, fisheries, forests, schools, hospitals, and flood control (Sakakibara, 1993: 53). 9. Transfers from central to local governments are much higher than other major economies (Sakakibara, 1993: 31). 10. Japan’s bureaucracy ranks among the bottom five OECD countries in number of government employees per capita (Muramatsu, 1997: Tables 1 & 2, pp 21-22). . 11. The maximum mobilization principle emphasizes collective not individual efficiency, and loyalty to the organization, not to the profession (Muramatsu, 1997b; Silverman, 1995). 12. Karel van Wolferen (1990) criticizes this conception of pluralism as not allowing for political choice, only administrative adjustment. Muramatsu (1997a), on the other hand, claims that the Japanese system has in fact evolved in response to local political dynamics. 13. The MHA has the fewest bureaucrats among Japan’s 12 central ministries but considerable power comes with its jurisdiction and allies, the more than 3,000 local governments. 14. In the USA, no one department has overarching control and influence over policy formulation and program implementation affecting local governments. American local governments thus have no consistent advocate on their behalf in the national government. 15. The MHA also serves as a business consultant to local government enterprises. 16. Usually half the career of an MHA official is spent in local governments, and the official’s status changes from national to local public employee with each shift from Tokyo to the prefecture. MHA’s small size limits top positions so the career aim is usually a prefectural

governorship. In June, 1992, 14 of 47 prefecture governors were former MHA bureaucrats (Akizuki, 1995: 248). Local governments often criticize the MHA center to local rotation system because the reverse rarely happens: those who begin their careers in local government seldom get central posts. 17. Coordination among prefectures is less institutionalized and therefore more difficult. 18. The Fiscal Investment and Loan Fund is mainly derived from the postal savings system. The Fund is about two thirds the size of the formal budget and administered by officials at their discretion. 19. To bid on public works projects, a construction firm must first payoff a powerful politician. Then the firm meets with the other nominated contractors for a negotiating session, called a ‘dango’ where it is decided who will get the job. The meeting is presided over by the local boss or a major contractor. The system ensures all participating contractors will get to work on a government project at one time or another (van Wolferen, 1990: 122). 20. Mandatory public long-term-care insurance, a new multi-billion-dollar social insurance program, passed the Lower House in May, 1998. According to the legislation, everyone 40 and over will pay into a fund, so that care services (at home or in institutions) can be provided for frail and disabled people 65 and over. Only Germany has a comparable program (Campbell, 1997). 21. Revenues for the local allocation tax are derived from a fixed portion of national income, corporation, liquor, consumption and tobacco taxes (Ishi, 1993). 22. As can be seen from Table 4, the local allocation tax reduces fiscal disparities among local governments within metropolitan areas as well. For example, before the local allocation tax, Sennan city has 35.8% as much tax revenue per capita (104,768 yen) as Osaka City (293,060 yen). After the local allocation tax, Sennan’s (147,329) revenues rose to 50.2% of Osaka’s (293,622). 23. While labeled a “neo-liberal” in the Japanese context, and so viewed by the Western press, Nakasone was in fact a firm believer in Japanese developmentalism. In “After the Cold War: A Joint Study,” Nakasone and his co-authors argue that Anglo Saxon capitalism can no longer claim universality because developmentalism, which is based on the market economy but admits active intervention by the state, is spreading out in East Asia. Whether these two types of market

economies can compromise with each other will determine the international order of the future, according to the authors (as quoted in Gao, 1998: 5). 24. The postal savings system consists of a government backed, low-cost, nation-wide network of savings institutions with the ability to offer competitive services in a regime of regulated interest rates. Postal savings are usually deposited in fixed amounts with six months or longer until maturity, and are redeposited in the Ministry of Finance’s Fiscal Investment & Loan Fund, mostly as long term deposits of seven years or more. Deposits receive the same interest rate for 10 years, and can be withdrawn without penalty after 6 months. The postal savings balance thus fluctuates with trends in interest rates, going into the black in low interest times and into the red in high interest periods. Such fluctuation can be handled because it is in the public sector (Sakakibara, 1993). 25. According to Evans (1995:33), "Institutions" are historically accreted practices and structures that are taken for granted. How autonomy and embeddedness are combined depends upon institutional history and social structure . Evan’s concern is with private capture of the state for political rents or free rides; but embeddedness should also include the state’s capacity to productively absorb and channel popular dissent from below. This aspect is missing from Evan’s analysis. 26. In Japanese political culture, majority rule is generally seen as undemocratic, especially if it means forcing through a measure over the objection of a minority (Cortazzi, 1998). The realization of plans is easier when based upon consensus rather than unilateral planning or the exercise of majority will against strong minority opposition. The consensus approach works when all involved are prepared to compromise to reach agreement, but it can also mean policies of the lowest common denominator, and a small determined minority can veto policies the vast majority of the population believe desirable. REFERENCES Akizuki, Kengo (1995). Institutionalizing the Local System: The Ministry

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TABLES

Table 1: Types of Government Expenditure as a Percent of GDP, Japan and selected OECD countries, 1975, 1987, 1997 _________________________________________________________ (1) (2) (1) + (2) Government Final Government Fixed Government Resource Consumption Expenditure Capital Formation*

Expenditure 1975 1987 1993 1975 1987 1993 1975 1987 1993 _________________________________________________________ Japan 10.0% 9.4% 9.4% 9.0% 6.8% 8.6% 19.0% 16.2% 18.0% Denmark 24.6 25.2 26.3 n.a. 2.0 2.2 n.a. 27.2 28.5 Canada 19.5 19.3 21.5 3.7 2.4 2.2 23.2 21.7 23.7 U.K 22.0 20.6 22.0 8.5 2.9 2.6 30.5 23.5 24.6 France. 16.6 18.8 19.8 3.7 3.0 3.4 20.3 21.8 23.2

West Germany 20.1 20.0 18.1 3.8 2.3 2.2 23.9 22.3 20.3 USA 18.6 18.5 17.1 3.0 2.4 2.2 21.6 20.9 19.3 _________________________________________________________ *includes public corporations Source: OECD (1989; 1996) Table 2: Types of Local Government Expenditure as a Percent of GDP, Japan and selected OECD countries, 1975, 1987, 1993

(1) (2) (1) + (2) Government Final Government Fixed Government Resource Consumption Expenditure Capital Formation* Expenditure 1975 1987 1993 1975 1987 1993 1975 1987 1993 _________________________________________________________ Japan............. 7.8% 7.0% 7.1% 4.5% 4.3% 5.4% 12.3% 11.3% 12.5% Denmark....... 17.5 17.3 18.0 3.4 1.5 1.4 20.9 18.8 19.4 Canada......... 8.9 8.6 9.8 1.6 1.2 1.3 10.5 9.8 11.1 U.K................ 9.1 7.9 7.8 3.5 1.0 0.8 12.6 8.9 8.6 France........... 3.0 4.4 5.0 2.5 2.2 2.5 5.5 6.6 7.5 W. Germany.. 3.5 3.6 3.6 2.3 1.5 1.4 5.8 5.1 5.0 USA .............. 10.5 9.8 9.6 1.8 1.4 1.3 12.3 11.2 10.9 _________________________________________________________ Source: OECD (1989; 1996) Table 3: Fiscal Equalization through the Local Allocation Tax Among Tax Rich and Tax Poor Prefectures in Japan, Per Capita, 1990

_________________________________________________________ Prefectural Local allocation After tax taxes taxes equalization

_________________________________________________________ National Average 127,044 (1.00)* 64,061 191,105 (1.00)* Tax Rich Prefectures

Tokyo..........258,729 (2.04) - 258,729 (1.35) Aichi............176,519 (1.39) - 176,519 (0.92)

Osaka.........172,334 (1.36) - 172,334 (0.90) Kanagawa...137,604 (1.08) - 137,604 (0.72)

Tax Poor Prefectures

Okinawa....... 56,202 (0.44) 135,075 191,277 (1.00) Aomori......... 63,163 (0.50) 171,321 234,484 (1.23) Kagoshima.... 65,163 (0.52) 149,936 215,697 (1.13) Miyazaki…… 66,917 (0.53) 164,314 231,231 (1.21)

_________________________________________________________ *Figures in parentheses are proportions of the national average. Source: Ishi (1993: 268). Table 4: Fiscal Equalization through the Local Allocation Tax Among Municipalities in Osaka Prefecture, Per Capita, 1990

_________________________________________________________ Municipal Local Allocation After Tax Taxes Taxes Equalization

_________________________________________________________ National Average........

127,044 (1.00)* 64,061 191,105 (1.00)* Municipalities Osaka City......... 293,060 (2.31) 562 293,622 (1.54) Takaishi.........….210,109 (1.65) 778 210,887 (1.10) Settsu………..…185,599 (1.46) 3,121 188,720 (0.99) Minoh…………...183,801 (1.45) 724 184,525 (0.97) Suita..................183,069 (1.44) 709 183,778 (0.97) Ibaraki................173,303 (1.36) 905 174,208 (0.91) Toyonaka……….172,593 (1.34) 584 173,177 (0.91) Kadoma…………171,419 (1.34) 1,016 172,435 (0.90) Ikeda…………….168,584 (1.33) 2,551 171,135 (0.90) Higashi-Osaka….165,519 (1.30) 1,649 167,168 (0.87) Moriguchi……….162,629 (1.28) 7,797 170,426 (0.89) Sakai……………157,274 (1.24) 631 157,905 (0.83) Yao....................149,319 (1.18) 2,993 152,312 (0.80) Hirakata.............146,308 (1.15) 986 147,294 (0.77) Takatsuki……….142,846 (1.12) 926 143,772 (0.75) Izumiotsu... …… 140,352 (1.11) 21,438 161,790 (0.85) Daito..................139,129 (1.10) 12,081 151,210 (0.79) Izumisano………135,760 (1.07) 14,359 150,119 (0.79) Osaka Sayama…135,066 (1.06) 24,560 159,626 (0.84) Fujiidera... …......129,482 (1.02) 23,729 153,211 (0.76) Kishiwada.......... 128,304 (1.01) 17,814 146,118 (0.77) Kawachinagano..127,391 (1.00) 13,672 141,153 (0.74) Kashiwara..........126,502 (0.99) 28,959 155,461 (0.81) Tondabayashi….116,978 (0.92) 21,439 138,417 (0.72) Katano………….116,566 (0.92) 29,211 145,777 (0.76) Neyagawa..........114,484 (0.90) 21,814 135,789 (0.71) Kaizuka..............109,048 (0.86) 32,207 141,255 (0.74) Habikino.............108,505 (0.85) 25,968 134,473 (0.70) Izumi.......... ……107,595 (0.80) 42,542 147,329 (0.77) Towns & Villages Shimamoto......159,664 (1.25) 29,680 164,344 (0.86) Tadaoka..........137,657 (1.08) 64,616 202,273 (1.06) Misaki……….. 124,847(0.98) 32,549 157,396 (0.82) Kumatori....... .109,351 (0.86) 34,536 143,887 (0.75) Hannan........ ..108,836 (0.86) 38,068 146,904 (0.77) Toyonoh.........107,847 (0.85) 52,777 160,624 (0.84) Kanan........... .103,220 (0.81) 82,018 185,238 (0.97)

Tajiri...............101,283 (0.80) 117,101 218,384 (1.14) Chihayakasaka.

………..…90,876 (0.72) 129,449 220,325 (1.15) Taishi............. .90,876 (0.72) 104,665 195,526 (1.02) Nose............... 76,681 (0.60) 134,896 211,577 (1.11) _________________________________________________________ *Figures in parentheses are proportions of the national average. Source: Adapted from Osaka Prefectural Government (1992: 141).