The dango determines which construction firm will win, making Japan's bidding system a façade. Corruption is essential to the dango's success, so the dango's pervasiveness and persistence proves that corruption is endemic and intractable. Although the dango was always deeply inefficient, it became pernicious during the fifteen-year stagnation that followed the end of the “twin bubbles” (stock and real estate) in 1990.
In theory, the bidding system has a secret reservation price to limit abuses by putting a ceiling on the acceptable bid price. Two facts stand out about the reservation price. First, it is set very high, allowing excessive charges to the public. Second, the winning bids come in extraordinarily close to the reservation price; one survey found that the average winning bid was 99.2 percent of the cap. One can infer that the dango consistently knows the “secret” cap and had no concern about making this obvious through their bids. How does the dango learn what the reservation price is? Senior bureaucrats in Japan generally take early retirement and are provided with a sinecure in private industry or Japan's large quasi-nongovernmental organization (QUANGO) sector. This is known as amakudari (“descent from heaven”)-a revealing phrase that shows the great respect once felt for the bureaucrats. Their primary responsibility once they “descend” is to maintain close ties with their successors. A bureaucrat who refused to leak the reservation price would put his career in jeopardy. Bureaucrats are, effectively, immune from prosecution for leaking the reservation price. The “systems capacity” limitations are not resources, but the unwillingness to prosecute senior bureaucrats (who are far more powerful than their American counterparts). The dango is a cartel, and although the conventional economic wisdom is that cartels cannot exercise effective discipline, the dango has been able to maintain nearly complete discipline for over a half century. Corruption is part of the explanation. Japan's dominant party, the Liberal Democratic Party (LDP), comprises factions are known as zoku (“tribes”). The “construction tribe” is composed of LDP leaders who get a percentage kickback from the winning construction bidders. Faction leaders gain followers by providing campaign funds. The dango kickback ensures that the government does not interfere with the cartel. The faction leaders provide the “voice of heaven” (tan no koe) when necessary to resolve disputes that might threaten the dango's discipline. In addition to entrenching the LDP in power, the dango has major indirect effects. It serves as an informal trade barrier. Foreign construction firms cannot join the dango-and if they did, they could be prosecuted in their home nations for bribery. The dango directly makes construction far more expensive and indirectly creates an inefficient and bloated industry. The kickback creates strong incentives to spend far too much in public works construction. This, in turn, has done great damage to Japan's environment.
While the dango raises prices, it does not necessarily produce excessive industry profits. Domestic entry into construction is fairly easy. Easy entry and bid rigging have led to an industry that is at least twice as large as it needs to be. Many construction firms are insolvent because of their imprudent investments during the twin bubbles.
Japan's overall economic development has been harmed by the indirect consequences of the dango in three major ways. Productivity fell for many years in the construction industry, which is so large that it, in turn, materially lowered the nation's overall productivity. Japan's “main” banks are vital to growth because of the dominant role they play in capital allocation. The collapse of the twin bubbles left the main banks crippled, and Japan covered up their condition rather than “bailing them out.” This means that the banks generally do not collect loans from financially troubled borrowers, for if they demanded payment and were not repaid, they would have to recognize the losses. But Japanese banks cannot fund growth unless their loans are repaid. Many of their worst loans are to construction firms. The political support that the dango enjoys makes it extremely difficult for the banks to demand repayment from troubled construction firms.
Finally, the dango encouraged public works that would make no sense even if the bids were not rigged. As this is written, Americans are deriding the “bridge to nowhere” in Alaska that a Senator was able to demand as part of “pork barrel” politics. Japan is the champion of high-speed rail lines to nowhere and many other “white elephants.” The public works budget became so extreme that Japan's deficit became a barrier to growth. The dango allocates capital to the least productive uses.
