Today's Disparities Echo Yesterday's 'Dual Structure'

Despite economic growth, source of societal gaps long masked but never solved; now politicians scramble for answers as it rears ugly head again

Masahiko ISHIZUKA (Councilor for the Foreign Press Center Japan and a Lecturer at Waseda University)

A central issue regarding the Japanese economy in the 1950s was the "dual structure," just as the nation was about to embark on spectacular postwar growth. This concerned, among other things, disparities in wages between big companies and smaller ones - pay checks at companies with employees numbering more than 500 were nearly double those at firms with fewer workers.

The situation improved as economic growth progressed, bringing salaries at smaller firms to about 70% of those at their bigger counterparts. But recent statistics show that the situation has reverted to the pattern that prevailed 50 years ago, mirroring the widening economic and social disparities that have emerged as key political issues in modern Japan.

Even though the dual structure diminished as a result of economic growth - which also brought about what has been viewed as the most egalitarian society in the developed world - it did persist, but only to a less visible and controversial extent. It was masked as the entire economy expanded robustly, while the government, rich with rising tax revenue, was able to provide weaker sectors with numerous kinds of assistance.

These two sources of generosity have ceased to exist, however, and the dual structure has reemerged as "disparity" in contemporary terminology. On top of this has come the globalization of the world economy, which has made the weaker part of the Japanese system ruthlessly exposed to unprecedented competitive forces from abroad.

An appropriate question to ask, then, is why the dual structure, the source of disparity, survived the golden age of the Japanese economy. Why was it not wiped out completely?

In connection with this, the issue over raising the national minimum wage is telling. The Japanese minimum wage, which varies from region to region, is not only low by international standards, but it has also been raised by only a paltry margin over the years. It is lower than the social security benefit, so strictly economically speaking, it actually makes more sense to be on welfare than to work. An advisory council recently recommended the government raise it from the current national average of ¥673 ($5.90) an hour by ¥17 for fiscal 2007. Since 2002, the yearly raise has been limited at zero to ¥5.

The reluctance to raise the minimum wage stems from the poor condition of many smaller firms, which constitute the vast majority of corporations. As their profit margins are so thin that they cannot afford to abide by a higher minimum wage, they have voiced strong resistance to any significant rise. By extension, this has lead to the fear that a higher minimum wage could increase unemployment because some firms may simply opt to hire fewer workers.

Tight spot

Why are these smaller firms placed in such a difficult position? One thing commonly cited is their low productivity, and how to improve this is a major point the government is considering as part of its policy to spur the nation's economic growth. Another problem smaller firms face is their weak position vis-a-vis larger companies that contract out business to them as subcontractors. Cost-cutting pressure from big companies is relentless, squeezing small firms' profitability and ability to pay higher wages. The pressure keeps mounting in the midst of the globalizing economy, which exposes Japanese firms to ever tougher international competition.

The crushing defeat of the governing Liberal Democratic Party in the July 29 upper house election is attributed, among other things, to a rebellion in rural areas - dependent on agriculture and public works investment - as well as other weaker sectors of the economy where people are resentful of having been victimized by reform policies and mercilessly left unattended.

Tales abound of the misery in depopulated and nearly deserted remote communities. Such communities have been traditional strongholds of the conservative LDP, and still enjoy disproportionate representations in parliament thanks to a skewed electoral system geared to conservative, rural interests.

That these former LDP territories are starting to desert the party reflects its transfiguration from the guardian of rural interests to a party that caters to sectors more in tune with globalization. The shift started under the government of former Prime Minister Junichiro Koizumi, and Prime Minister Shinzo Abe has declared himself to have inherited those policies, stressing his intention to pursue them.

But although Abe cried for "reform for growth" during the election campaign, he faces rebellion from within his own party ranks against such pursuits in the wake of the election. It is true that, backed by his immense popularity, Koizumi managed to push forth reforms and achieved results, but it is also true that he did nothing to look after those who were victimized or left out of the resultant prosperity.

All of this is putting the LDP in disarray. In a way, the party has always been a chimera containing these essentially conflicting interests, but it has somehow managed to juggle them in the past. Now the relentless advance of globalization - combined with the equally relentless deterioration of the government's fiscal situation - is making it difficult for the party to keep all of its batons in the air.

By contrast, the opposition Democratic Party of Japan is suddenly buoyed by its huge election victory, but this does not necessarily mean that the party is offering a really viable policy to resolve the knotty issue of pushing reform while rescuing people who are victimized by the very same reform.

Same tune, different key

What is the DPJ's answer? Income compensation to farmers was the centerpiece of its policy to correct widening income disparities between rural areas and big cities. This idea was engineered by party leader Ichiro Ozawa, who concentrated his election campaign on canvassing rural electoral districts throughout the nation.

His policy worked as far as the election results were concerned. But the electorate as a whole does not appear to be convinced that this can be the right answer to the fundamental problem the nation faces. To many, it looks little different from the LDP's past policy of doling out money to rural areas in the form of subsidies, public investments and other giveaways.

In truth, the nation has yet to be presented with a truly viable way to solve the dilemma of domestic interests vs. globalization, which lies in the background of the persistent dual structure in this country. Future political contests should center on finding solutions to this issue, and the considerable wrangling could augur major political realignment.

(Originally appeared in the August 27, 2007 issue of The Nikkei Weekly, reproduced here with permission.)