How the state’s role in Japan’s development is overstated

Abstract

While the role of state intervention and planning in post-WW2 Japan’s economy was influential, the successful development of the country cannot wholly be attributed to the state. Japan’s developmental success is rather due to a dynamic and effective private sector, the historical culture of Japanese labour and the context of the time. The state, in fact, was rather a hindrance in some instances. Overall, while the state was influential, it was not the prime cause of Japanese economic development.

Introduction

Japan has often been cited as an exceptional case in economic history.[1] Within the neoliberal conception which came to dominate the closing decades of the 20th century, state intervention in the economy came to be seen as almost always disastrous. Between the 1950s and 1970s, however, Japan appeared to be doing well under a system of what Chalmers Johnson describes as ‘soft authoritarianism’.[2] Between the mid-50s and early 70s, real growth of the economy was at 10%, with many Japanese brands dominating the world market.[3] It is undeniable that Japan experienced a high-rate of growth in this era, but the role of the state in achieving this is up for debate.

This essay will be arguing that the role of the state in mid-20th century Japanese development has been overstated. While it was present, and influential, the success of Japanese development is due more to a dynamic and effective private sector, the historical culture of Japanese labour and the context of the time. This essay will also be examining state intrusion in practice and will determine that, while there were some successful interventions, many others were unnecessary and even resulted in failure.

Ultimately, this essay will determine that while the state had an influential role in Japan, the main cause of the industrial take-off is the private sector and the innate nature of Japan.

The Essay

The state did have an influence on the Japanese economy and, for the importance of context, this essay will be expanding upon them in this section. The Japanese state used a combination of guidance, persuasion and control in the market in order to promote international competitiveness of Japanese firms.[4] The nucleus of Japanese development was the Ministry of International Trade and Industry (MITI), which was founded in 1949.[5] While a semi-democracy, the Japanese state relied more on a meritocratic bureaucracy than the Diet (parliament).[6] The bureaucracy determined almost all national policies and budget decisions.[7] The Japanese democracy was dominated by a single-party system. Chalmers Johnson argues that this was advantageous, as it allowed the state to focus on economic development rather than pleasing constituents.[8] This was needed for a country that had only recently recovered from the destruction of World War 2, and was seeking to claim a spot in the world market. Japan’s priority at this time was developmental, meaning the goal of the state was purely to secure Japan’s economic livelihood through achieving comparative and competitive advantage.[9] The government was to act as a think-tank and supervisor in order to achieve this goal.

The state intervened in the economy, through the use of policies and prescriptions along the lines of tax incentives, loans, benefits and information sharing.[10] While intrusive, the Japanese state always used market-conforming methods, unlike other notable planned economies.[11] MITI would target industries in order to develop what they perceived to be necessary for the overall benefit of the economy. Policy packages, such as those mentioned, and forms of protectionism were used to aid these industries.[12] MITI would make long-term forecasts in order to prescribe goals for the private sector. Targeted industries, needed to fulfil these goals, would receive preferential funding from state and semi-state banks.[13] Credit was under strong control by state institutions such as the Japanese Development Bank, Export-Import Bank and Trust Fund Bureau.[14] This allowed the state to influence the development of particular industries and goals in terms of what MITI identified as a priority.

MITI also played an important role in the attainment of technology for Japanese firms, allowing firms access to technology through state-led diffusion.[15]

What this essay perceives to be the most important aspect of state intervention, however, was more a sense of cooperation between the state and business. Rather than acting as a restraining regulator, the state would consult with business, sharing information in order to maximise business potential and the state’s ability to plan.[16] This trust and openness between private and public facilitated an atmosphere conducive to a united economic vision.

Many factors contributed to Japan’s success in this era, all culminating over a long period of historical developments. These factors are the presence of a united vision, great human capital, high savings, previous industrial infrastructure and other international factors.

While a united vision of economic development was integral to Japan’s success, this may not have been due to state involvement. The private sector simultaneously competed and cooperated much of their own accord, forming into ‘enterprise groups’ known as Keiretsu.[17] The private sector was already willing to work together. State intervention was not damaging, due to the trusting relationship between big business and state, but was not necessary. Japan, since before the role of a centralised government, had developed a style of industrialisation which resulted in a collective sense of accomplishment.[18] This perception of united destiny resulted in businesses, in the mid-20th century, simultaneously competing and cooperating in order to achieve a sense of long term productive growth.[19]

In order for the Japanese to attain their comparative advantage during early industrialisation, they utilised a large and skilled labour force.[20] During the post-WW2 era, this human capital was once again used to expand. Takatoshi Ito and David E. Weinstein (1996) argue that great job security is one of the primary reasons for rapid growth in this era.[21] Workers were skilled and expected to be flexible.[22] Takatoshi and Weinstein contend that expansion was only possible due to a flexible work force, as workers would be expected to change their roles – this allowed innovation and production changes as the company and industry needed.[23] Japanese exports came to dominate global markets due to this flexible work force.[24] Industry developed a manufacturing process designed to easily change the production queue at any time and diversify products as needed.[25] This adaptable work force developed as a result of historical practices and persisted in order to achieve an effective export strategy.

Jeffrey M. Herbener (1999) maintains that real economic growth is only developed through capital accumulation.[26] This was the case in Japan, which had a high amount of private savings, allowing banks to easily invest in business.[27] Prudent financial practices by Japanese households led to businesses having easy access to capital from banks. This source of funding was needed, as stocks and corporate bonds were restrained by regulations.[28] The stable nature of these banks and their investment in business has been cited as an additional reason for the strength of the Japanese economy.[29]

Japan, pre-WW2, had established a strong industrial society. Post-WW2, all they needed to do was rebuild it using the surviving infrastructure and building upon the previous plans, with new innovations in mind.[30] United States aid, amounting to $1.6 billion, may have inflated the money supply, but was also used to repair damages from the war.[31] A Big Push strategy did not require that much state planning, as there were already the vestiges of an industrial plan from before the war. Help from the United States in terms of monetary aid, and most importantly, very favourable technology deals, also facilitated the modernisation and rebuilding of Japan’s industry.[32] The Cold War benefited Japan, as the United States wanted to strengthen the Japanese economy in accordance with the Policy of Containment, and the Korean War helped Japan’s manufacturing take off due to demand from US troops.[33] American consumerism also made global trade highly conducive to Japan’s export strategy.

As a minor, but no less important, point, pre-1973 Oil Crisis saw a worldwide case of cheap energy for all industrialising nations, allowing Japan to cheaply rebuild and expand their industry.[34]

While the state was present in many of these factors, they were not the cause or the primary facilitator. Many of the influences leading to Japan’s industrial success were caused by historical factors, developing over the course of centuries in order to culminate in the “Miracle Growth era” of Japanese development.[35]

Public and private interactions were beneficial in some senses, such as the aforementioned information sharing and diffusion of technology, but were not always so successful.

MITI’s strategy of targeting industries for preferential treatment has been cited as an exception to the usual rule, as other nations typically failed to accomplish this.[36] The World Bank, in 1993, released a report titled ‘East Asian Miracle’, using Japan, Taiwan and South Korea as examples of selective industrialisation working in practice.[37] Even with this commendation, however, selective industrialisation and targeting were not completely successful. Some industries, such as steel, coal and nuclear fusion, failed despite aid from MITI.[38] Other industries, which did not receive help from MITI, actually became integral to the Japanese export market, such as consumer electronics. Where state intrusion is most pertinent is in examining the automobile industry in hindsight. MITI attempted to merge many automobile manufacturers, which would have, in all likelihood, eliminated the healthy competition that led to the growth of the Japanese automobile industry domestically and then globally.[39]

Where private and public interaction was beneficial was in sharing information and consulting with each other rather than working against one another. This is seen in the end of protectionist policies, where MITI warned private firms and suggested methods to cope with the end of protectionism. Businesses, instead of lobbying for increased protection, used the information provided to prepare their firms for foreign competition.[40] This information sharing may have been possible without state intrusion, however, as the presence of Keiretsu and the relationship between businesses and banks already allowed a good diffusion of information.[41]

It is understood, without a doubt, that the private sector in Japan was dynamic and effective. They needed to be so in order to compete with each other and foreign firms.[42] In this way, the private sector may have benefitted from MITI prescriptions, but accomplished strategies such as ‘Goriko’ (rationalisation) of their own accord.[43] The private sector became more productive, not because MITI ordered them to do so, but because it was a logical step to succeed.

Counterfactual scenarios are hard to formulate. The success of MITI is disagreed upon by many economic historians.[44] What is agreed upon is that the private sector was dynamic, prudent, innovative and productive. Historical factors, such as Japan’s skilled labour force, and the state of the global economy are aspects that did contribute to the success of Japan’s export strategy. Both the labour force and the global economy were factors out of state control. While it can be argued that MITI helped the private sector realise the means to succeed internationally, this relies on the presumption that the private sector wouldn’t have established this conclusion by themselves. Cooperation between private firms is not unheard of, and was deeply established in the Japanese Keiretsu. MITI planning and information sharing was undoubtedly useful, but the state’s access to this information came from a close relationship with the private sector.[45] MITI only succeeded in diffusing that information to prop up industries that it perceived to be important for national success. Without the decentralised nature of private firms, MITI wouldn’t have gained the necessary information to formulate any form of strategy.

Private dynamism and state intervention are not mutually exclusive means to achieving successful development. What is clear is that the Japanese state, through MITI, did have a major influence on development through a myriad of policy tools. What is also clear is that the private sector was effective and self-innovating. MITI and US foreign aid did help in diffusing technological innovation in Japan, but the system of manufacture that private firms developed of their own accord utilised this technology to not only equalise with foreign competitors, but to overtake them, rising to the 3rd most productive industrial nation in 1968.[46] The success of Japanese development is not then as a result of government intervention. While it may have helped, one could say that the Miracle era was not so much a miracle but an inevitable culmination of a society with great human capital and a wilful private sector aimed at maximising potential rather than short-term profit.[47]

In conclusion, Japanese development was overseen by MITI, a state body, but was fulfilled through historical and external contributing factors, such as historically skilled labour and a conducive foreign market. Many state successes may have been accomplished without state interference, and often were, as seen in the phenomenon of Keiretsu. Ultimately, the Japanese people were inevitably going to have a Miracle era, as historical factors led up to an effective private sector, which was predictably going to rise to become a sector internationally acclaimed for its quality, innovation and productivity.

References

  • Akgün, Birol, and Şaban H. Çalış. “Reluctant Giant: The Rise of Japan and its role in the Post-Cold War era.” Center for Strategic Research, 2003, 1-13.
  • Herbener, Jeffrey M. “The Rise and Fall of the Japanese Miracle,” Mises Institute (1999), https://mises.org/library/rise-and-fall-japanese-miracle.
  • Japanese Industrialization and Economic EH.net. Accessed March 15, 2016. https://eh.net/encyclopedia/japanese-industrialization-and-economic-growth.
  • Johnson, Chalmers. “The Institutional Foundations of Japanese Industrial Policy.” California Management Review 27, no. 4 (1985): 59-69.
  • Ohno, Kenichi “The High Growth Era.” in The Economic Development of Japan, 161-183. Tokyo: Yuhikaku Publishing Co. Ltd., 2005.
  • Ran, Uma. “Economic Growth, Labour Markets and Gender in Japan.” Economics and Political Weekly 41, no. 41 (2006): 4369-4377.
  • Sugihara, Kaoru “Labour intensive industrialisation in global history: an interpretation of East Asian experiences.” In Labour Intensive Industrialisation in Global History, edited by Gareth Austin and Kaoru Sugihara, 20-27; 33-43. London, NY: Routledge, 2013.
  • Takatoshi, Ito and David E. Weinstein. “Japan and the Asian Economies: A “Miracle” in Transition.” Brookings Paper on Economic Activity 1996, no. 2 (1996): 205-272.

Footnotes

[1] Takatoshi Ito and David E. Weinstein, “Japan and the Asian Economies: A “Miracle” in Transition,” Brookings Paper on Economic Activity 1996, no. 2 (1996): 205.

[2] Birol Akgün and Şaban H. Çalış, “Reluctant Giant: The Rise of Japan and its role in the Post-Cold War era,” Center for Strategic Research (2003), 5.

[3] Kenichi Ohno, “The High Growth Era,” in The Economic Development of Japan (Tokyo: Yuhikaku Publishing Co. Ltd., 2005), 162.

[4] Akgün and Çalış, “Reluctant Giant: The Rise of Japan and its role in the Post-Cold War era,” 4.

[5] Ohno, “The High Growth Era,” 170.

[6] Chalmers Johnson, “The Institutional Foundations of Japanese Industrial Policy,” California Management Review 27, no. 4 (1985):  59-60.

[7] Ibid., 59.

[8] Ibid., 61.

[9] Ibid., 62.

[10]Ibid., 62.

[11] Ibid., 61. Many planned economies of the day, and even mixed economies, were using price controls and market manipulations, such as Brazil, Soviet Russia and even many Western nations.

[12] Ibid., 67.

[13] Ibid., 66.

[14] Jeffrey M. Herbener, “The Rise and Fall of the Japanese Miracle,” Mises Institute (1999), https://mises.org/library/rise-and-fall-japanese-miracle.

[15] Japanese Industrialization and Economic Growth, EH.net, accessed March 15, 2016, https://eh.net/encyclopedia/japanese-industrialization-and-economic-growth.

[16] Ohno, “The High Growth Era,” 172.

[17] Ito and Weinstein, “Japan and the Asian Economies: A “Miracle” in Transition,” 224.

[18] Kaoru Sugihara, “Labour intensive industrialisation in global history: an interpretation of East Asian experiences” in Labour Intensive Industrialisation in Global History, ed. Gareth Austin and Kaoru Sugihara (London, NY: Routledge, 2013). This theme runs through the entire section.

[19] Ohno, “The High Growth Era,” 176.

[20] Sugihara, “Labour Intensive Industrialisation in Global history,” 33.

[21] Ito and Weinstein, “Japan and the Asian Economies: A “Miracle” in Transition,” 221.

[22] Uma Rani, “Economic Growth, Labour Markets and Gender in Japan,” Economics and Political Weekly 41, no. 41 (2006). This article argues that a flexible labour force, backed up by a large population of active female workers, was one of the reasons for rapid growth.

[23] Ito and Weinstein, “Japan and the Asian Economies: A “Miracle” in Transition,” 221-222.

[24] Rani, “Economic Growth, Labour Markets and Gender in Japan,” 4369.

[25] Japanese Industrialization and Economic Growth.

[26] Jeffrey M. Herbener, “The Rise and Fall of the Japanese Miracle.” For clarification, capital accumulation refers not only to finance, but to human capital, machinery and other assets. Japan had been accumulating all of these since their proto-Industrialisation.

[27] Ito and Weinstein, “Japan and the Asian Economies: A “Miracle” in Transition,” 227.

[28] Ibid., 222.

[29] Ibid., 222. The relationship with banks allowed businesses to focus on long-term growth while not having to fear hostile takeovers or disinvestment due to cash flow problems. Banks were prudent and tolerated minor problems, not wanting to shut down a business just because of temporary problems.

[30] Akgün and Çalış, “Reluctant Giant: The Rise of Japan and its role in the Post-Cold War era,” 4.

[31] Jeffrey M. Herbener, “The Rise and Fall of the Japanese Miracle.”

[32] Akgün and Çalış, “Reluctant Giant: The Rise of Japan and its role in the Post-Cold War era,” 4.

[33] Jeffrey M. Herbener, “The Rise and Fall of the Japanese Miracle.”

[34] Akgün and Çalış, “Reluctant Giant: The Rise of Japan and its role in the Post-Cold War era,” 4.

[35] Japanese Industrialization and Economic Growth.

[36] Ohno, “The High Growth Era,” 173. This is most probably due to the Information Problem. A centralised state struggles to determine how to direct an economy as they cannot truly know all aspects of the market.

[37] Ibid., 172.

[38] Ibid., 171.

[39] Ibid., 171. The automobile companies refused and prospered individually.

[40] Ibid., 175.

[41] Ito and Weinstein, “Japan and the Asian Economies: A “Miracle” in Transition,” 223-225.

[42] Ohno, “The High Growth Era,” 163.

[43] More information on Goriko can be found on page 164 of Ohno, “The High Growth Era.” It is basically a call to improve production and management.

[44] Ohno, “The High Growth Era,” 171.

[45] Ibid., 173.

[46] Akgün and Çalış, “Reluctant Giant: The Rise of Japan and its role in the Post-Cold War era,” 4.

[47] Johnson, “The Institutional Foundations of Japanese Industrial Policy,” 62. Johnson discusses the prudent nature of Japanese companies here.