Informal market governance in Japan's basic materials industries

Abstract

Too much emphasis has been placed on formal state policies and on ties between individual firms to explain Japanese economic behavior and impediments to imports in Japanese markets. We need to look instead at informal governance by trade associations. In so doing, the concept of relational contracting should be applied not just to dyadic relationships between individual firms but also to relationships between entire industries. Whole industries engage in relational contracting to ensure the stability of both prices and supplies. These industry agreements stabilize Japanese markets but at the same time keep imports out of them. This informal governance complements state policies to support uncompetitive industries. These agreements are more likely to occur and succeed between selling and buying industries that each are relatively concentrated, when upstream products are standardized, when upstream goods constitute a smaller share of downstream production costs, when these sectors have not experienced previous conflicts that undermine cooperation, and when the Ministry of International Trade and Industry wants a domestic supply of its products.

Japan’s Reluctant Reformers and the Legacy of the Developmental State

“…The construction industry is perhaps the most notorious illustration of the way that vested interests have not only corrupted the process of awarding publicly funded infrastructure projects, but have also contributed to the development of a wider model of political and economic organization that has significant domestic and international costs. At one level, these relationships result in the -irrational at best, corrupt at worst -redistribution of public monies to favored building companies through the rigged dango system (McCormack 1996;Tilton 1994). 4 Politicians are complicit in this process as the favored companies then support their political aspirations.…”