In today’s crisis-prone world of globalization, social contracts are coming under stress, exacerbated by ageing populations, thereby threatening the prospects for prosperity, peace, stability and security.  Nowhere is the more the case than in Japan.

Although we are individuals, we all live in societies that are ruled by governments.  By living in a society, we surrender certain "freedoms" from our “state of nature”, like the freedom to do things that might disturb social order and peace.  We subject ourselves to civil law and to political authority, but we gain civil rights and protections in return.  It is a deal, a "social contract".  All societies have some sort of social contract, even dictators face the risk of rebellion by unhappy citizens.  In ancient China, even the emperor could lose the mandate from heaven if he mismanaged the country.      

Feudalism, which was widespread in medieval Europe and Japan, is an example of a social contract between lord and serf.  Even in the modern world, all countries and societies have social contracts.  In the wake of World War 2, the world's leading countries, the US, Europe and Japan established social contracts for the management of their economies.  They opened markets, and established systems of social protection.

Let’s take the case of the US where the social contract is the least obvious.  Americans enjoy about the lowest level of social protection of all advanced economies.  They also enjoy the greatest level of individual freedom, even the freedom to carry a gun.  But the American economy has been the most dynamic of all advanced countries, thereby offering immense opportunities to its citizens.  And civil society, especially charities, is very active in the US filling in social welfare gaps left by government.

In the US, this post-World War 2 contract is now coming under stress.  The combination of globalization and technological progress has vastly widened the gap between rich and poor.  The demand for skilled workers has risen dramatically relative to unskilled workers.  Some are even talking about the elimination of the middle class.  America no longer seems to be the land of opportunity.  And what’s more, through the global financial crisis, the financial elite has undermined the credibility of the system even further.  The election of President Obama, especially with his program for health reform, provides an opportunity to put the social contract back on track.

In the case of Europe, its citizens benefit from much greater social safety nets.  At the same time, they have much less freedoms, as the government regulates wide aspects of their economic and personal life.  Again, this system is under great stress.  These social protections create many economic disincentives.  The average standard of living in Europe is now 30 per cent lower than in the US.  And what’s more, these systems of social protection are now financially unsustainable, that is, bankrupt.

What about Japan?  This country has had perhaps the most complex social contract of all.  Japanese citizens have surrendered their individual freedoms to a much greater extent than most countries.  But for several decades after the second world war, high economic growth was delivered by a joint effort of government, officials and business.  Large enterprises had easy access to cheap finance.  But they had to pay high prices for electricity, construction, transportation and retailing, as these sectors were subject to high regulations.  And they kept their SME suppliers, which employ one-quarter of the workforce, afloat when times got tough.

Loyal, hard-working and obedient workers were rewarded with job security (lifetime employment in large companies) and seniority-based wages.  Worker training was offered by companies which turned these workers into “company men”, rather than knowledge workers.  Job security meant that the government did not need to have an elaborate social safety net.  Non-working women were a key element here as they provided care for children and the elderly.  Japan’s society was basically egalitarian.  Almost all considered that they were part of the middle class.

This system was underpinned by a political security contract with the US which provided Japan's defense and open markets for its exports, but tolerated for many years Japan’s highly regulated, mercantile policies.  And the final part of the deal was that the Liberal Democratic Party was kept in power by a compliant electorate.

But the Japanese social contract, which was based on continued economic expansion, started cracking with the onset of a financial crisis almost twenty years ago.  Many banks and enterprises became dysfunctional zombies.  Attempts to revive the economy sunk the economy into massive debt.  Unemployment has started rising.  Fired employees are ill equipped to find new jobs, and suffer psychologically.  ‘Non-regular’, precarious employment has now risen to one-third of the work force.  And the gap between rich and poor has risen astronomically. 

One consequence of the social contract is that Japan remains dependent on export-led growth because it has failed to develop a competitive and innovative post-industrial economy and society.  And on top of that, the US is plainly losing interest in Japan, now that the US/China relationship has become the most important.

The question is what to do with Japan's social contract.  The upcoming election should be an opportunity to lay out a new vision for Japan, but that is not happening.  The iron triangle of business, bureaucrats and politicians prevents any leadership initiative.  The conservative Japanese people just dream of going back to the good old days (rather than going for a brave new world), especially now that their economy has been shaken so much by the global financial crisis.  Koizumi, the reformist Prime Minister of a few years back, is now looked upon as a bad experiment. 

In his book, “Race for the Exits”, Leonard Schoppa uses Albert Hirschman’s concept of exit and voice to explain why reform is not happening.  When members of a social organization are dissatisfied with that organization, they can either leave (“exit”) or make their grievances felt (“voice”) and work to solve the problem.  Thus he argues, two losers of Japan’s social contract, enterprises and women are exiting.  Enterprises are investing overseas, and women are refraining from having babies.  He could add a third group which is youth.  Too many young boys are choosing to withdraw from social life, often seeking extreme degrees of isolation and confinement because of various personal and social factors in their lives (“hikikomori” in Japanese). 

While in the past gaiatsu (or foreign pressure) has been effective in pushing Japan to reform, with the US model of capitalism crumbling before our eyes, it is not a convincing alternative.


Reference:

“Social Contracts under Stress : The Middle Classes of America, Europe, and Japan at the Turn of the Century” by Zunz, Olivier (EDT)/ Schoppa, Leonard J. (EDT)/ Hiwatari, Nobuhiro (ED). Russell Sage Foundation.

http://www.amazon.com/Social-Contracts-Under-Stress-Classes/dp/0871549972

"Race for the Exits: The Unraveling of Japan's System of Social Protection", by Leonard J. Schoppa. Cornell University Press.  2006.

http://www.amazon.com/Race-Exits-Unraveling-Japans-Protection/dp/0801474450