In Defense of Japanese Bureaucracy

Peter F Drucker. Foreign Affairs. Volume 77, Issue 5, September/October 1998.

A Heretics View

American policy on Japan, especially during Asia’s economic crisis, is based on five assumptions that have become articles of faith for most American policymakers, Japan scholars, and even a good many business executives. But all of them are either plain wrong or, at best, highly dubious:

  1. The government bureaucracy’s dominance is assumed to be unique to Japan, like its near-monopoly on policymaking and its control of business and the economy through “administrative guidance.”
  2. Reducing the bureaucracy’s role to what it should be-“the experts on tap but not on top”-would not be that difficult. All that is needed is political will.
  3. A ruling elite like the Japanese bureaucracy is both unnecessary in a modern developed society and undesirable in a democracy.
  4. The Japanese bureaucracy’s resistance to “deregulation,” especially now in the financial sector, is nothing but a selfish clinging to power that will do severe damage. By delaying the inevitable, it can only make things worse.
  5. Finally, the Japanese-they are intelligent people, after all-put the economy first, as we do.

The right assumptions about Japan, however, are:

  1. Bureaucracies dominate almost all developed countries. The United States and a few less populous English-speaking countries such as Australia, New Zealand, and Canada are the exceptions rather than the rule. Indeed, the Japanese bureaucracy is a good deal less overbearing than that of some other developed countries, particularly France.
  2. Bureaucratic elites have far greater staying power than we are willing to concede. They manage to keep power for decades despite scandals and proven incompetence.
  3. This is because developed countries-with the sole exception of the United States-are convinced that they need a ruling elite, without which they fear social disintegration. As such, they cling to the old elite unless there is a universally accepted replacement, and no such replacement is in sight in Japan.
  4. Their experience has proven to the Japanese that procrastination works. Twice during the last 4o years, Japan has overcome major and apparently insoluble social problems not by “solving” them but by delaying until, in the end, the problems evaporated. The procrastination strategy will probably fail this time, considering the shaky structure and solvency of Japan’s financial system. Given Japan’s earlier experiences, however, procrastination is not an irrational strategy.
  5. In fact, it is the logical strategy since for the Japanese policymaker whether politician, civil servant, or leading business executive-society comes first, not the economy.

Descending from Heaven

“Descent from heaven”—the Japanese term for the practice whereby senior civil servants, having reached their terminal government position around age 45 to 55, become “counselors” to big companies-is seen in the United States as uniquely Japanese. The shift is considered the most visible manifestation of the dominance, power, and privilege of the Japanese bureaucracy. But it is actually a universal custom in all developed countries, including the United States.

To use a personal example, my father was the civil service head of the Austrian Ministry of Commerce just after World War I. When he retired in 1923, not yet 50, he was promptly appointed chairman and CEO of a big bank, as were his predecessor and his successor. So were their counterparts in the Ministry of Finance. Senior Austrian civil servants in key ministries “descend from heaven” to this day.

Japanese counselors who descend from heaven are well paid, but the job is a sinecure. They are usually not even expected to show up at the company’s office except to collect their paychecks once a month. By contrast, in most European countries these “retiring” civil servants move into real jobs, as did the Austrian civil servants who became bank CEOs.

Whether this is wise or foolish is beside the point. Such practices are universal. In Germany the second-tier civil servant who will not make it into a top position in a ministry becomes secretary-general of an industry association, a job that not only pays well but has real power. Membership in such associations is compulsory in Germany, and all but the very largest companies must conduct their relations with both government and labor unions through them. If the civil servant is a Social Democrat he gets a similar job-equally well paid and powerful-as chief economist or secretary-general of a labor union. In France, the civil servant who has reached the exalted position of inspecteur de finance, usually around age 40 or 45, moves into a top position in industry or finance. Almost every power position in the French economy and society is filled by a former inspecteur de finance. Even in the United Kingdom, it remains customary for the top civil servant in a major ministry to chair a big bank or insurance company after his retirement.

In the United States, too, “descending from heaven” is anything but unknown. Scores of generals and admirals have, upon retirement, taken senior executive positions in defense and aerospace companies. An even larger number of congressional staffers and political appointees in the upper and middle levels of executive agencies-together, Washington’s ruling elite-routinely come from on high to become well-paid lobbyists or partners in Washington law firms.

Even at the peak of its power circa 1970, the Japanese bureaucracy still had less control of business and the economy than its European counterparts. In both France and Germany, the government directly owns large chunks of the economy. A fifth of Europe’s largest automobile producer, Volkswagen, is owned by the state of Saxony, giving it absolute veto power. Until quite recently, the French government owned most of the country’s major banks and insurance companies. The same is true in Italy, the third-largest economy on the continent. Japan, by contrast, owns almost nothing of the economy besides the Postal Savings Bank. Where the Japanese make do with “administrative guidance,” or control through persuasion, the Europeans rely on dirigisme, direct decision-making power as owners and managers, for good or ill.

Elites Rule

How difficult could it be to curtail the Japanese bureaucrats’ power? After all, the bureaucracy’s record is dismal. It reeled from one failure after another for the past 25 years. It failed miserably to pick the winners in the late 1960s and early 1970s, choosing instead such losers as the mainframe supercomputer. As a result, Japan today lags far behind in the information industry and in high-tech altogether.

The bureaucracy failed again in the 1980s. Panicked by a mild recession, it plunged Japan into the wild excess of the speculative fiscal bubble and with it into the present financial crisis. “Administrative guidance” pushed banks, insurance companies, and businesses into stock and real estate investments at insanely inflated prices and into the worst kind of problem loans. When the bubble burst in the early 1990s, the bureaucracy could not get Japan’s economy going again. It poured unprecedented amounts of money-far beyond anything the U.S. government tried during the New Deal-into attempts to raise stock prices, real estate prices, consumption, and capital investment, all without any effect. In 1997, the bureaucracy followed that up by totally failing to anticipate the financial crisis in mainland Asia. It still urged Japanese banks and industry to invest more money in Asia even after mainland economies began to totter.

Since then, the bureaucracy has been revealed to be riddled with corruption, even prestigious agencies such as the Bank of Japan or the Ministry of Finance. This cost the bureaucrats their claim to moral leadership. Even the bureaucracy’s staunchest supporters, the big companies, have turned against it. Big business’ organization, the Keidanren, is now calling for deregulation and clipping the bureaucracy’s wings.

Yet nothing happens. Worse, even the tiny, timid, token gestures by politicians to assert control over the bureaucracy, like kicking a powerful bureaucrat upstairs, are quietly reversed a few weeks later. There is, Americans argue, something unusual going on, something “exceptionally Japanese.”

But ruling elites especially those which, like Japan’s, are based not on birth or wealth but on function-have remarkable staying power. They remain in power long after they have lost credibility and public respect. Consider the French military. This ruling elite’s pretensions were shattered when the Dreyfus scandal of the 1890s showed it to be corrupt, dishonorable, dishonest, and bereft of the “military virtues” that underlie an army’s claim to social leadership. Yet it held onto power, even after its abysmal incompetence in World War I proved it capable only of senseless mass slaughter. Totally discredited, especially in the years of widespread West European pacifism after the Great War, it had enough strength in 1936 to defeat an attempt by Leon Blum’s government to shift power to a civil service elite. Teaming up with the French communists, the military forced Blum from power. And in 1940, even after it had again proven its utter incompetence by inflicting on France the most humiliating defeat the country had ever suffered, the French military still had enough power to make the Vichy collaborators choose the least discredited of France’s military leaders, the nearly senile Marshal Petain, to win legitimacy and widespread popular support for their puppet regime.

The extraordinary ability of a ruling elite to stalemate any attempt to unhorse it is by no means a Japanese phenomenon. Developed countries, especially developed democracies, are convinced that they need a ruling elite. Without it, society and politics disintegrate-as, in turn, does democracy. Only the United States and the few smaller Englishspeaking countries are immune to this certainty. American society has not had a ruling elite since the early years of the nineteenth century. Indeed, as almost every foreign observer of America since Tocqueville has remarked, the truly unique feature of U.S. society is that every group feels itself unappreciated, disrespected, if not discriminated against-a feature many consider the country’s greatest strength. But America is the exception. Japan is the rule. In all major developed countries other than the United States, it is considered self-evident that without a ruling elite there can be neither political stability nor social order.

Consider Charles de Gaulle and Konrad Adenauer. Both had been outsiders rejected by the ruling elites of their societies-the French military and German governmental service, respectively. Despite their talents, they were denied preferment and power. De Gaulle did not make general until World War II broke out and even then got only the command of a small brigade. Adenauer was generally recognized as the country’s most adroit politician and as an exceptionally able administrator, but he was never offered a cabinet appointment, let alone the chancellorship, for which he was clearly vastly more qualified than Weimar’s mediocrifles. Both men were bitter about their rejection by the elite, of which both were openly contemptuous. Yet both, upon winning power after the war, immediately set about creating a new ruling elite.

One of de Gaulle’s first acts upon becoming president in 1945 was to make a new French civil service the elite it is today by melding a fractured mess of competing bureaucracies into one centrally controlled body, giving the civil servants control of all major positions in government and the economy, making the inspecteurs de finance all-powerful, and, finally, creating a new credential, graduation from a new elite school, the Ecole Nationale d’Administration. Out of it, for the last 40 years, has come almost every social, political, or business leader in France, including, of course, practically all inspecteurs de finance.

When Adenauer became Germany’s chancellor in 1949, he inherited a discredited, demoralized civil service deeply tainted by its subservience to the Nazis. Adenauer immediately set out to restore its elite status. He had himself been twice imprisoned by the Nazis, but despite heavy pressure, especially from the British and Americans, he shielded the civil service from de-Nazification. He restored its job security and the privileges the Nazis had abolished and gave it unprecedented freedom from interference by local politicians. Adenauer thereby gave the German civil service elite greater status than it ever had before, and this time it was not outranked by the military, as it had been under the kaiser and even in the Weimar Republic.

Both de Gaulle and Adenauer were denounced as undemocratic, and both responded by asserting that a modern society-and especially a modern democracy-disintegrates without a ruling elite. They had a point. In Weimar Germany, for one, the military was discredited by the defeat in World War I, although it did retain a veto. The civil service, which before 1918 had run a weak second to the army, was bitterly divided over whether to accept the republic. The new groups on the public stage, such as business leaders and professionals, were still seen as upstarts. The resulting absence of an accepted ruling group proved critical to the disintegration of Weimar. To take another example, the absence of a ruling elite surely has had something to do with Italy’s political paralysis and social anomie.

The ruling elites that developed countries need to survive do, of course, cling to power. All rulers do. But elites can maintain themselves in power only because no replacement is in sight. Until such an alternative is provided-and it apparently takes a de Gaulle or an Adenauer to do so-the ruling elite will stay on, even if it is totally discredited and dysfunctional.

No replacement is in sight in Japan. The military, historically the ruling elite (indeed, the militarist regime of the 1930s was largely a replay of the shogunates, the military dictatorships that ruled Japan for most of its history), enjoys no public support whatsoever. Big business now commands unprecedented public respect, but it would not be accepted as society’s ruling elite. Nor would the professoriate or professionals. So far the bureaucracy, no matter how discredited, is the only group that fits the bill. Whether America’s policymakers like or dislike these facts is irrelevant. They are facts. American policy toward Japan must be based on the assumption that the bureaucracy will remain for the foreseeable future Japan’s ruling elite, or at least its most powerful one “deregulation” or not.

A Policy About Nothing

Japan’s Ruling elite does not behave like its rough equivalents in America. American elite groups are political: executive branch appointees and congressional staffers (both, incidentally, uniquely American phenomena alien to the rest of the developed world). But the ruling group in Japan is a bureaucracy, and it acts like one.

Max Weber, the great German sociologist who identified bureaucracy as a universal phenomenon, defined its function as codifying its experiences and converting them into rules of behavior. Three formative experiences in the collective memory of today’s Japanese bureaucracy, two successes and one failure, provide the basis for its actions, especially in a major crisis.

The first success was not intervening in the most serious social malady of post-1945 Japan: the problem of an unemployed and unemployable rural majority. Today working farmers in both the United States and Japan make up no more than 2 or 3 percent of the work force. In 1950, more than 20 percent of U.S. workers were farmers, but in Japan some 60 percent of the population was still living on the land, earning at best a bare subsistence. Most Japanese farmers in the early 1950s were utterly unproductive. Yet the bureaucracy successfully resisted all pressures to have government do anything about the farm problem. “Yes,” it in effect admitted, “this enormous and totally unproductive overpopulation on the farms is a tremendous obstacle to economic development. Yes,” it conceded, “subsidizing these farmers for producing nothing heavily penalizes the Japanese consumer at a time when most Japanese city dwellers are barely earning enough to pay for necessities.” But doing anything to encourage farmers to move off the land or become more productive (which, in many cases, would have meant growing new crops like sorghum or soybeans, or moving out of growing rice and into breeding chicken and livestock) might cause serious social disruption. The only sensible thing to do, the bureaucracy argued, is absolutely nothing-and that is what it did.

Economically, Japan’s farm policy has been a disaster. Agriculturally, Japan is worse off than any other developed country. It pays its remaining farmers as much in subsidies as do other developed countries, including the United States, but unlike the others, Japan now needs to import more of its food than ever before-more than any other major developed country. But socially, doing nothing has been a huge success. Japan has proportionately absorbed more former farmers into the urban population than any other developed country without the slightest social disruption.

The second great success of the Japanese bureaucracy was also a case of studied inaction: not tackling the problem of retail distribution. In the late 1950s and early 1960s, Japan had the most antiquated, expensive, and inefficient distribution system in the developed world-more eighteenth-century than nineteenth-century. It consisted of thousands of “mom-and-pop” shops-tiny holes in the wall with such enormous costs and outrageously high margins that each sold barely enough to let the owners scrape by. Economists and business leaders warned that Japan could not have a healthy modern economy until it had an efficient distribution system. The bureaucracy, however, refused to help. On the contrary, it passed regulation after regulation to slow the growth of modern retailers like supermarkets and discounters. “Economically,” the bureaucrats agreed, “the existing retail system is an enormous drag. But it is Japan’s social safety net. A person who loses his job or is retired at age 55 with just a few months’ severance pay can always get a job at subsistence pay in his cousin’s mom-and-pop shop.” After all, Japan at that time still had no unemployment insurance or pensions.

Forty years later, the problem of retail distribution has disappeared, both socially and economically. The mom-and-pop shops are still there, but most, especially in the larger cities, have become franchisees of big new retail chains. The dank old stores are gone. Today’s small shops are clean, well-lit, centrally managed, and computerized. Japan may well now have the world’s most efficient and cheapest distribution system, and mom and pop now earn good money.

The third formative experience of the Japanese bureaucracy-unlike the first two, a gross failure-also taught it not to act. Indeed, this failure resulted from violating the above lessons and disregarding the wisdom of procrastination and delay. In the early 1980s, Japan had what in most parts of the world would not even be considered a recession but a mild slowdown in economic and employment growth. But this slowdown coincided with the uncoupling of the fixed dollar-yen exchange rate and a rapid fall in the exchange value of the U.S. dollar that panicked export-dependent Japan. The bureaucrats caved in under the resulting public pressure and became Western-style activists. They poured huge sums into attempts to stimulate the economy. Disaster ensued. The government began to run up larger budget deficits than most developed countries; the stock market boomed crazily, driving prices up to price-to-earning ratios of 50 to 1 or higher; there was an even wilder boom in urban real estate prices; and banks, swamped by money for which there were no solid borrowers, lent frenetically to speculators. The bubble burst, of course-the present financial crisis is its legacy-with banks, insurance companies, and thrifts drowning in stock market and real estate losses and uncollectable problem loans.

Subsequent events only confirmed the bureaucracy’s conviction that procrastination is wiser than action. For again, in the last two years, due in some measure to pressure from Washington, Japanese politicians and public opinion have pushed the government to pour larger amounts of money into the economy than any other Western country, to absolutely no avail.

The Social Contract

The way the Japanese bureaucracy is now tackling-or, rather, not tackling-the Japanese banking system’s crisis is commonly seen by Westerners as mere political cowardice, especially by official Washington: the U.S. Treasury, the World Bank, and the International Monetary Fund. But to Tokyo’s ruling coterie, procrastination and delay appear the only rational policies.

No one knows yet how much Japanese financial institutions have suffered from the bursting of the bubble. On top of their domestic losses now loom huge additional losses inflicted by the economic crisis in other Asian countries-South Korea, Thailand, Indonesia, and Malaysia-where Japan’s banks were by far the heaviest lenders, as they have also been to China.

Japan faces the largest financial crisis of any developed country since World War II. According to an estimate last May in Business Week, the Japanese banking system will eventually have to write off domestic losses of about $1 trillion, not including losses on loans and investment elsewhere in Asia. This sum handily tops even the highest estimate of the losses incurred in the U.S. savings and loan debacle 15 years ago, and this in an economy barely half the size of America’s. It amounts to a stunning la percent or so of the funds of all Japanese financial institutions.

Even more serious-and much harder to handle-are the banking crisis’ social threats. The entire Japanese financial system is already being radically downsized. Japan is grossly overbanked, not so much in the number of institutions as in the number of bank branches, which are both ubiquitous and heavily overstaffed. Japanese and American financial experts estimate that Japan’s commercial banks employ three to five times as many people per thousand transactions as do American or European banks. This has made the banking system one of Japan’s largest employers, as well as its highest-paying. Most of the redundant though well-paid employees are middle-aged people with limited skills who would find it hard to get other jobs if laid of. Unemployment in Japan has already risen to the highest levels in 40 years-above 4 percent by the official count, and if Japan used American or European definitions of unemployment, it would be 7 or 8 percent. Only 2 years ago the official unemployment rate was still below 3 percent.

Even graver than the threat of unemployment is the threat to the country’s social contract, especially the job security of lifetime employment. If the banks laid off large numbers of people, the social contract would shatter. The seriousness with which the Japanese view the social aspects of the crisis is shown by the lengths to which they will go to preserve a few jobs. They took the virtually unthinkable step of allowing (indeed, probably inviting) an American financial firm, Merrill Lynch, to take over the main branches of Yamaichi, Japan’s fourth-largest brokerage house, when it failed in 1997 simply because Merrill Lynch promised to keep on about a sixth of Yamaichi’s employees few thousand people. Only six weeks earlier senior officials in the Ministry of Finance, which oversees brokerage firms, had still loudly insisted that they would never let a foreigner do domestic Japanese securities business.

The bank crisis undermines the structure of Japanese business and society. It may dissolve Japan’s most distinctive economic organization: the keiretsu, the cluster of businesses around a major bank. Contrary to common belief in the West, the keiretsu does not primarily serve business purposes. Its first function is to act as the real board of directors for the member companies, since the official board of each individual company is just an internal management committee. The keiretsu quietly removes incompetent top management and checks out proposed promotions into the top echelons of member companies. But, above all, the keiretsu is a mutual support association. The members of a component company collectively hold enough of each other’s shares to give the keiretsu effective ownership control. It thus protects each member against outsiders and hostile takeover bids. Moreover, it is the ultimate guarantor of lifetime employment. If a keiretsu member gets into such serious trouble that it has to lay off people, the other keiretsu companies will provide jobs for them. This lets the fellow keiretsu member cut costs and still fulfill its commitment to permanent job security.

Can the keiretsu survive the financial crisis? The banks at the core of the typical keiretsu have begun to sell off their holdings in the group in order to offset their losses. More keiretsu members are, in turn, selling off their shares in other keiretsu members to get cash to shore up their balance sheets. But, quite apart from the threat to lifetime employment and job security, what will replace the keiretsu as the organizing principle of the Japanese economy?

There are no answers to these questions. Thus, the only rational course for the Japanese bureaucracy may indeed be to have no policy. That delay will whittle the banking problem down to a manageable size is probably wishful thinking. But surely the West, especially the United States, can only hope that the procrastination strategy will work again. Social unrest in Japan would be a far more serious threat to U.S. political, strategic, and economic interests than anything that U.S. businesses or the U.S. economy could possibly gain through the actions, such as rapid deregulation of the financial sector, which Washington is now pressing on Tokyo.

It’s Not the Economy, Stupid

IN the end, the most important key to understanding how the Japanese bureaucracy thinks, works, and behaves is understanding Japan’s priorities. Americans assume that the economy takes primacy in political decisions, unless national security is seriously threatened. The Japanese-and by no means the bureaucracy alone-accord primacy to society.

Again the United States is the exception and Japan more nearly the rule. In most developed countries other than the United States, the economy is considered a restraint on policies rather than their major, let alone sole, determinant. Ideology and, above all, the impact on society come first.

Even in the United States, the primacy of economics in public life and policy is fairly recent, dating no further back than World War II. Until then, the United States, too, tended to consider society first. Despite the Great Depression, the New Deal put social reform well ahead of economic recovery. America’s voters overwhelmingly approved.

But while hardly uniquely Japanese, giving pride of place to society is more important to the Japanese than to most other developed countries, save perhaps France. To the outsider, Japan appears to have extraordinary social strength and cohesion. No other society in history has successfully met such extreme challenges and dislocations: say, the 180-degree turn forced on Japan by Commodore Perry’s black ships in the 1860s, as a result of which the world’s most isolated country, hermetically sealed for more than two centuries, opened itself to modernity overnight and became Westernized, or, equally traumatic, the radical social turnaround after its defeat in 1945 and the long years of foreign occupation thereafter. The Japanese, however, see their society as fragile. They know how close to collapse and civil war their country came both times; hence the extreme importance, for instance, of lifetime employment as Japan’s social glue.

Whether Japanese society is hardy or delicate is beside the point. What matters is that the Japanese take its primacy for granted. If Americans understood this, especially in dealing with a Japan in trouble, they might cling less to myths about the uselessness of the Japanese bureaucracy. Defending the bureaucrats is still heresy, of course, but heresy is often closer to the truth than conventional wisdom.