The Stakeholders' Agenda for the Coming Century
The following is a Paper presented at the third International Progressive Policy Conference(IPPC3, in Brussels, March 2-5, 1997), written by Sadahiko Inoue, Deputy Director General, and Fujikazu Suzuki, Senior Researcher, RIALS.
0. Introduction
A number of interpretations are possible on the concept of 'high road' approach as a tool of understanding the process of socio-economic development. One popular if somewhat simplistic interpretation would be to take it to mean the growth path of high productivity and high wage.
The concept can be crystallized by contrasting it with the opposite and extreme view of development, i.e., the low road approach, which is gaining strength in some quarters as applied to managerial strategy and the conduct of industrial relations. Some corporations in some industrialized countries single-mindedly try to make most use of low-cost and dispensable workforce on short-term basis, transferring their site of operation from one to another in search of low wages. They do this not just among countries but also within their own country. Theirs is the low road approach. They thus try to reduce the trade union strength, or even deny the unions, and limit the arena of public policy. They emphasize stockholders' sovereignty, and take the Return On Equity(ROE) as the sole indicator of management success, belittling the employment security of their workers or the social consequences of their actions. We might call this low road approach 'competitiveness at shareholders' value.'
The high road approach in contrast emphasizes long-term employment, adaptability of workers by developing their inherent human capabilities, and the industrial democracy inclusive of labor-management consultation as beneficial to management and to technological progress. Their activities are based on the concept of 'competitiveness at stakeholders' value,' which could also be termed 'competitiveness s at high standards of living' or a 'socially acceptable' model of competitiveness in John Evans' report("Welfare, Security and Economic Performance - Public Policy Overview").
The "solidaristic wage policy" of LO, Sweden, can be understood as one of the approaches to the high road., although we hear that it is now facing severe challenges caused by the recent difficulties of the Swedish economy to adapt itself to the European economic integration and a new phase of the world market.
1. The high road approach - the importance of public policy
In order to secure sustainability of the high road approach on the micro level it is necessary to enjoy a favorable macro economic performance. In fact, the micro high road approach could well result in better macro performances than the low road approach. Jeff Faux(1994) points out that the low road and low wage approach fairly extensively adopted by the United States in the 1980s produced a lower per capital productivity gains on the average in comparison with the other nine industrialized countries. When it comes to the sources of economic growth, he notes that most of them can be attributed to productivity gains in the same nine countries, while the contribution of the productivity gains was less than half in the case of the United States (See Jeff Faux, 'Is the American Economic Model the Answer?' The American prospect, Fall 1994).
If we apply the high road approach to the managerial strategy and industrial relations policy, it would be one of the main foci of management concerns to enhance industrial democracy and worker participation. The human resource management in this approach would make it easier for them to share knowledge and wisdom, on the basis of which technological progress can be envisaged and staggered investment in plant and equipment can be planned. This is therefore a more appropriate approach to today's highly industrialized and knowledge-based economies. The high road approach would raise the labor productivity in a steady manner, help attain a desirable growth rate, and promote more sophisticated industrial and technological structures. In other words, it would work in the direction of elimination g the sectors of low wage and low productivity.
The high road approach in order to be effective would require not only the efforts by labour and management for stable employment, industrial democracy, and participation, but also the strong public policy which is expected to create the basic conditions for the sustainability of this approach.
First, no expansion of the poverty groups within the country should be allowed, and various categories of socially protective policies are essential, including a social security system to guarantee stable living throughout the life of individual citizens.
Secondly, some facilities to allow life-long education, learning and training must be there for every member of the society so that he or she can better adjust himself or herself to the violent changes in the society and in technologies.
Thirdly, the social infrastructure both in cities and villages must be improved, and environment protected, so that there would be sufficient amenities of pleasant and convenient life. It is also important to maintain social cohesion in a solidarity-based society with freedom and equality. The very basis of high productivity of the high road approach is better social cohesion, and a high level of communication and social trust.
In the high road approach, welfare and security contributes to a better economic performance.
Keynesian macro economic policy is also important in the high road approach in order to ameliorate the violent business cycles that are unavoidable in market economies. In this context, it is rather questionable that major economies of the world continue to pursue excessively tight and repressive economic policies in the 1990s even when the fear of resurgent inflation hardly exists. International policy coordination for expanding equilibrium thus is an important task facing the international community.
These are the conceptual features of the high road approach. Hopefully these will serve as a reference point for more progressive economic policies.
2. The Japanese economy in the 1990s
Let us try to apply the concept of high road approach to the Japanese economy of the recent decades. Up until the 1980s Japan had achieved an exceptionally high growth among industrialized countries. But in the 1990s it stagnated almost a t a zero growth for three consecutive years: 0.4 percent in fiscal 1992, 0.5 percent in fiscal 1993, and 0.7 percent in fiscal 1994. OECD called these years a period of 'strikingly exceptional low growth.' It was only in 1995 that it recovered to the above-two percent level of growth. In the context of the prolonged recession there arose a strong neo-market economic view, calling for an over all industrial restructuring. Japan was no exception in this. They argued that the specifically Japanese type of employment and wage determination system was crumbling down or has rashly concluded that it has already died. Such a view was rather popular in the international media. However, we wish to state categorically that such a line of reporting is either the result of thoroughly mistaken perception of the reality or a gross exaggeration.
The Japanese recession in the early 1990s should be characterized as a reaction to the preceding bubble-like boom of the latter half of the 1980s, with the economy growing at four to five percent per annum, and with the soaring land and stock prices looking very much like those of the pre-1929 United States. The stagnating economy, however, did not register negative growths even in the early 1990 s, and this was thanks to the aggressive macro economic policies applied, including the large-scale fiscal measures involving the total of 75 trillion yen (or 15 percent of Japan's then GDP; although its net effect is estimated to be around 25 trillion yen, or 5 percent of GDP), and the major expansionary financial policy including lower official discount rates and other easy money policies. This resulted, however, in its budget deficit swelling to the level above that of many European countries, amounting to seven percent of the GDP.
Here we must note that in the midst of the three-year stagnation there were many economists who anticipated a soaring unemployment rate for Japan due to the dwindling demand for labor, not unlike the German case, and growing income disparities in the country after a period of relatively equitable income distribution. Many economists of neo-classical school maintained that it be impossible for Japan to maintain the Japanese employment system, forecasting an ever worsening labor market situation.
Contrary to these views, however, the reality proceeded somewhat differently. On the basis of available data, we can make the following comparison between the year 1991, when the stagnation started, and the year 1996, when it hit the bottom (See S. Inoue, "The Change of Employment in Japan," IIRA Asian Regional Congress, 1996).
First, the unemployment rate showed only a slight worsening of a little above one percent from over two percent to over three percent. This indicated that there were no major changes in the way employment had been adjusted to the business conditions for the preceding 20 years, i.e., firms tried to maintain the long-term employment for their employees as much as possible. Secondly, income distribution did not worse. In fact, it even improved slightly as far as the wage differentials between industries, firms, and job categories were concerned.
3. The recent development of the Japanese economy and society as seen from the view point of the highroad approach
These phenomena probably would be incomprehensible unless one took into account the functioning of the Japanese internal labour market especially in its flexible adaptability to the economic slump.
Our interpretation of the favorable performance of the Japanese economy is as follows.
First, the macro economic policies were effective in avoiding the worst, i.e., negative growths.
Second, there was a drop in the working hours from about 2,050 hours a year to a bout 1,900 hours a year. Shorter working hours during this period probably resulted in some form of work-sharing.
Third, the specifically Japanese pattern of employment practice with emphasis on long-term employment was maintained. This micro factor probably served as the most important factor in the favorable performance of the economy during this period. Long-term employment and seniority-based wage determination became part o f the Japanese employment practices on the compound basis of a number of element s, specifically including the strenuous struggles against redundancy waged by the trade union movement in the postwar period, trade unions' demand for wages on the formula of subsistence wage for the whole family of the workers involved, an d the rational organization of business firms. The internal labor market within individual business firms or of semi-internal labor market within groups of firms has been pointed out to be as effective as the external labor market in avoiding redundancy or unemployment (See R. Dore, K. Tapiora, & J. Cabale, "Japan at Work", OECD, 1989).
The flexibility of the internal labor market, however, can be secured only when the prevailing conditions give rise to and further enhance some specific adaptability on the part of both the workers and the firms: While the firms try to a void worsening working conditions and guarantee long-term employment, workers try to improve themselves and accept transfers in jobs or work location. Although we ourselves are not completely satisfied with what we have achieved in Japan in the above context, we do feel that the prevailing employment system work more favorably than the external labor market for both management and labor.
There is one institution that helped Japanese firms maintain their size of workforce. It is the employment adjustment subsidy firms receive on the basis of the Employment Insurance Act when they keep the redundant workers on their payroll for specific periods of time.
Fourthly, there were on-going changes in the industrial structure of the economy for the better and dynamic generational shifts in principal product lines, partly supported by the flexible internal labor market. Japan's imports have increased and are increasing rapidly, including manufactured imports from other parts of Asia. This resulted in the loss of over one million jobs in manufacturing at one time. Fortunately, however, we see some indications of the situation improving since the latter half of fiscal 1996, mainly thanks to a successful shift of the principal product lines to sophisticated capital goods like robots, and among consumer durables, from color TV sets and VTRs (more of which were imported)to electronic parts and liquid crystal devices with high technology inputs.
Fifthly, we have a rather unique method of national wage determination in the name of "Shunto", or annual spring wage offensive, which makes a good use of specific information collection networks. Wage negotiations in Japan take place on the individual enterprise basis, formerly highly fragmented. In functional terms, however, they are not at all fragmented or decentralized but quite uniform and national in nature. Let us explain. At one time during the spring every year, the national center and industrial unions mutually exchange information and formulate a consensus. They present their almost identical demands for wage raises a t about the same time. National wage guidelines are arrived at one after another within roughly a week's time. The rates of pay increase are not very divergent from industry to industry, and this rate is applied to public employees and workers in non-unionized sectors. Some small- and medium-sized firms put on a small extra on the national average in order to draw better talents. Without this form of national wage determination and its prerequisite, i.e., specific network s of information and communications system, the shrinking income differentials among various worker groups in the 1990s would have been impossible.
These are thanks to such a total mechanism that contributed to Japan's successful avoidance of either the high unemployment of Europe or a growing income discrepancy in the United States.
4. Social Security and the Budget Reform
By the early 1970s the social security system in Japan had developed to the level of developed world in the areas of national pension, medical insurance, unemployment insurance and occupational hazards insurance. The steady institutional improvement stopped during the 1970s due to the two oil crises, but started to pick up again in the early 1990s despite the prolonged recession, now aiming at arriving the German or Scandinavian standards from the hitherto American standard.
In July 1995 the prestigious Council on Social Security came up with the third epoch-making recommendation to specifically promote the adoption of the German and Scandinavian type of social security rather than the American one. On the basis of this recommendation, relevant laws will be passed sometime during this year to deal with the social care for the aged. In the background of such a development lies a common perception in Japan that the Japanese society is very rap idly aging with falling number of the young, eventually becoming even a more age d society than the Scandinavian countries. In terms of the real content of these institutional development, we come to a somewhat surprising conclusion that Japan is now becoming the first non-Western welfare state in the world.
At the moment, however, Japan is suffering from a big fiscal deficit, beyond the level of European countries in terms of the annual level of general account deficit and the accumulated deficits vis-a-vis its GNP. This is mainly a result of the large scale fiscal policies mobilized to counter the recession in the first half of the 1990s. Furthermore, there are observers who call for a total review of the welfare system and various public institutions in order to regain fiscal health in the face of the impending social transformation into an aged society.
We feel it to be the task of utmost urgency for us to refute such neo-market ideologues and to pursue a policy of solidly establishing a stable and sustainable welfare system in the country.
In spite of these progresses, we are beset with a number of challenges facing Japan's economy and society. Gradual improvements in income distribution still al low substantial discrepancies in wages among firms of different sizes, as well a s between men and women. There still are some industrial sectors of low productivity, like agriculture, as the remnant of the once famous dual structure of the Japanese economy. We probably are justified in applying the high road approach to the case of Japan if we look at its performance in functional terms. Bu t did we purposefully pursue that road of development? The answer is not so straight-forward. A major challenge for the Japanese society in these days of globalization would be the deliberate and intentional adoption of the high road approach in the coming century.