Japan's Dual Industrial Structure as a Welfare System: "The Lexus and the Olive Tree"-And "The Vulture"

By Ozawa, Seiji | Journal of Economic Issues, June 2003 | Go to article overview

Japan's Dual Industrial Structure as a Welfare System: "The Lexus and the Olive Tree"-And "The Vulture"


Ozawa, Seiji, Journal of Economic Issues


During the high-growth period of 1950-1973 (Golden Age of Capitalism) and its subsequent two decades, Japan came to be known for efficiency and perfectionism in manufacturing as exemplified by the low production costs and high quality of automobiles and electronics it produced. Japan's renowned manufacturing technology, flexible production with "just-in-time" parts delivery, is now in use throughout the advanced world. Yet, now that the Japanese economy has been mired in a prolonged slump over more than a decade since the bursting of the asset bubble in 1990, the world's perception of the Japanese economy has drastically changed from admiration to indifference even to pity.

What has brought Japan's juggernaut to its knees? Why can its government, once so much touted for effective industrial policies and administrative guidance, no longer cope with the current economic problems, especially bad bank loans, which stand at anywhere between $430 billion (official estimate) and $1.9 trillion (private estimate)? A litany of reform proposals have been put up in the recent past, but so far no decisive and effective implementation has taken place.

In order to explain the leitmotiv of this paper, I draw upon the title of a book, The Lexus and the Olive Tree, a recent best-seller written by Thomas Friedman (1999) of the New York Times, a twice-winner of the Pulitzer Prize. 'He used "the Lexus" as a symbol of an age-old human drive for material betterment and higher standards of living and "the olive tree" as a symbol of an equally age-old human quest for communal identity, stable sustenance, and social cohesion. The former represents technological efficiency and the latter the human attachment to, and concern of, livelihood security and cultural identity. And Friedman argued that a healthy balance between the Lexus and the olive tree, namely between efficiency and security, needs to be maintained, particularly in this age of globalization and a fast-changing world.

As will be explored below, Japan's current predicament stems essentially from the difficulty of keeping this socioeconomic balance. And what makes the Japanese quandary even more intractable is the existence of another age-old human trait, cupidity for power. Since Friedman did not mention this third, equally persistent and powerful, human drive, a drive for political/ideological dominance and greed, I am adding a third symbol, "the vulture."

Against this background, the themes of this paper can be summarized as follows:

1. In the course of Japan's rapid growth it has ended up creating a new industrial dualism consisting of a super-efficient "outer-focused (OF)" sector (symbolized by the Lexus) and an inefficient, but unemployment-alleviating and job-coddling, "inner-focused (IF)" sector (represented by the olive tree).

2. The real cause of Japan's economic imbroglio is the entrenchment of parochial political interests (vultures) in the zombie-haunted industries in the IF sector (in other words, the olive grove was taken over by vultures).

3. The current predicament is a path-dependent outcome of the immediate postwar policies of the Occupation authorities and Japan's subsequent catch-up growth and income distribution measures, an outcome that is much more strongly molded institutionally than anything else.

Dual industrial Structure

Japan was once successful in nurturing dynamic comparative advantages and climbing up the ladder of industrial upgrading, rung by rung from low-value-added to higher-value-added industries, under the Japanese-style infant-industry strategy in the post-World War II period (Ozawa 200la). Initially, all industries were heavily regulated and shielded from competition. Early postwar Japan started out as an exporter of labor-intensive goods (such as textiles and sundries) to earn precious foreign exchange, essentially repeating its prewar experience. In order for Japan not to remain for long an exporter of low-wage-based goods, however, selective industrial policies were then actively pursued to create comparative advantages. …

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