Circles of Compensation: Economic Growth and the Globalization of Japan by Kent E. Calder (review)

The central issue for Japan that is addressed in this book is why, up to the early 1990s, the Japanese economy was forging ahead in so many sectors as to attract the word "miracle," and yet from then on the economy has seemed unable to escape from a cycle of stagnation. Calder finds wanting—or at least inadequate—almost all previous attempts in English to explain this sudden and unexpected transition from economic "miracle" to relative economic stagnation. Few observers would have predicted, from the vantage point of 1990, that the dynamism and inventiveness that were so exciting from the 1950s to the 1980s would be replaced by the "lost decade" of the 1990s and sputtering attempts at recovery thereafter. One indicator of an apparent loss of dynamism, pointed out by Calder, is the current reluctance of young Japanese to travel or study outside Japan. In the city of Oxford and its university, for instance, the presence of Chinese tourists and students is ubiquitous. Thirty years ago East Asian tourists and students would have been largely Japanese.

Calder's own focus is upon subnational institutions that he identifies as "circles of compensation." He argues that such circles operate in many parts of Japanese society, as well as in the politico-economic system, in such a way as to internalize benefits and externalize costs. They are not just interest groups, and many of them are vitally important for the functioning of the system. They have defined sets of members, which may be expanded to others: they persist over long periods; they allocate resources internally in a routine, nonconflictual fashion; they are based on both relationships and rules; and they externalize costs to nonmembers. Writing from a broadly neoliberal perspective, Calder emphasizes their negative aspects, in that they create a comfortable and economically stable environment for their members, thus reducing incentives for entrepreneurship and risk taking. They are parochial, therefore, rather than outward looking and, by shifting costs onto the backs of those outside the charmed circle, tend to raise costs to outsiders above competitive levels. At the same time, he admits that the circles can operate efficiently. One might add that in the Japanese social context a group of people working closely together over an extended period often produces dynamic outcomes based on "in-group" commitment. Nevertheless, it is certainly true that parochialism, resistance to innovation, and externalizing of costs are endemic to such circles. Calder is also right in arguing that they do not sit well with globalizing trends in the outside world. He is not arguing, however, that they are entirely peculiar to Japan.

Why then does the concept of "circles of compensation" explain the sudden transition from "economic miracle" to "lost decade(s)"? His answer to this question needs to be teased out from his arguments in various parts of the book. He convincingly argues that such circles emerged in the Meiji period when the number-one priority of the regime was to avoid having Japan succumb to colonial-style control by any of the colonial powers that were circling Japan in the late nineteenth century. They were, in other words, a form of national mobilization. They performed similar functions in the 1930s when the nation was preparing for war, and in the postwar period when economic recovery was the principal aim. The immediate cause of economic collapse around 1990 was the collapse of an asset "bubble" (principally land), but the really interesting question is why a convincing recovery did not follow. Calder, after examining several other writers who have addressed this question, argues that accounting for Japan's "transition … from growth to stagnation is a complex, multivariate analytical process" (p. 16). He also complains that nearly all previous authors tackling this subject (with the partial exception of Ulrike Schaede and William Grimes) have concentrated on the national level of analysis, whereas...