Yakuza Salivating Over New Construction Boom
By William Pesek - Mar 25, 2011
Yakuza Salivating Over New Construction Boom: William Pesek - Bloomberg
Here’s a number for economists mulling Japan’s post-earthquake trajectory: 17.
That’s Japan’s ranking out of 178 nations in Transparency International’s latest corruption perception index, putting it on a par with Barbados. The odds strongly favor Japan sliding down the list in the next few years. A sudden return to “concrete economics” in a nation that’s tried to shake the phenomenon virtually ensures the return of large-scale graft.
An estimated $309 billion in earthquake and tsunami damage may prompt formation of a reconstruction agency modeled after the Economic Stabilization Board created in the wake of the devastation of World War II.
That board helped power Japan’s postwar boom, one largely built on building. Massive public-works projects that transformed Japan also gave rise to a construction-industrial complex and some notable side effects: surging public debt, a heyday for mobsters and graft. These side effects are about to swell again.
To jolt gross domestic product properly, Japanese officials must not only spend wisely, but impose unprecedented levels of accountability in the process. Money is tight given Japan’s fiscal position. And if Stephen Roach, nonexecutive chairman of Morgan Stanley Asia, is right, any boost from rebuilding may just fade into another “lost decade.”
Graft Boom
The reason is the inefficiency inherent in Japan’s economic system. Spending public funds unwisely limits the multiplier effect, whereby stimulus trickles down and helps households. The nexus between politicians, contractors and yakuza also is where economic reforms go to die. Graft at the highest levels keeps Japan from raising its economic game.
The opportunity to line one’s pocket is a powerful force, and creates a kind of tunnel vision. As Japan plans the needed rebuilding, it must consider the wisdom of lavish spending to recreate communities that were losing relevance before March 11 and are directly in harm’s way for the next tsunami. Huge, costly seawalls proved little help.
These considerations require careful reflection, and they will get short shrift as money begins to flow freely. Japan has long needed to channel money away from construction into more productive pursuits that boost its competitiveness in the age of China. Those efforts, including joining U.S.-led trade talks and empowering entrepreneurs, are now on the backburner.
Yakuza Ban
Government and business leaders worked steadily in recent years to sever deep and shadowy ties between organized crime and corporate Japan. The construction industry has been a particular focus, as evidenced by a complete ban on yakuza involvement in one particularly high-profile project: the 2,080-foot (634-meter) Tokyo Sky Tree tower.
The campaign reflects public discontent with Japan’s estimated 80,000 yakuza, who control a critical mass of the underbelly of Japan Inc. There’s a growing realization that in a sluggish, deflationary economy, gangsters add costs. They also thrive in industries -- including sex, drugs and gambling --that the National Policy Agency would rather do without.
Japan’s ever-entrepreneurial crime syndicates diversified into real estate, technology companies and stock dealing. Still, construction holds a special place in the yakuza heart and that magnitude-9.0 quake will prove very good for business. Expect a building boom like few others in modern Japanese history, with gangsters lining up to get their share.
The Big Nexus
“The nexus of massive construction projects, bureaucrats, politicians, businessmen and yakuza are as revealing about Japan as they are about Italy and Russia,” Jeff Kingston wrote in his 2010 book “Contemporary Japan.” “In Japan, the yakuza cut on construction projects is estimated at 3 percent, a vast sum that keeps them afloat, given that during the 1990s the public-works budget was on par with the U.S. Pentagon’s budget and remains quite high despite huge cutbacks.”
Well, happy days are here again. The billions Japan plans to spend rebuilding is just the beginning. Disaster-damage estimates always start on the conservative side. And given how Japan’s Goodfellas are being squeezed from all angles, expect an all-guns-blazing effort to boost their 3 percent take.
Prime Minister Naoto Kan says he wants construction crews at work in quake-ravaged areas as soon as possible. The desire to get infrastructure projects underway will shorten and simplify the bidding process, probably concentrating projects among politically connected builders.
Concrete Economics
What worries me is the bull market in graft. True, the Liberal Democratic Party is no longer calling the shots. In 54 years of virtually uninterrupted rule that ended in August 2009, the LDP turned concrete economics into an art form.
It was financed by ever-rising public debt, which is now twice the size of the economy. Any growth jolt from public works is temporary. When the project ends, so do the jobs. That’s why Japan perpetually paves roads with no potholes, builds bridges to nowhere and litters shorelines with concrete. Pouring cement wins you votes.
Kan’s Democratic Party of Japan pledged to break Japan’s construction-industrial complex. It’s reviewing dam and other huge public works it deems wasteful. The quake reconstruction process will test that commitment. Transparency International’s perception, too.
Yakuza Salivating Over New Construction Boom
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