http://en.wikipedia.org/wiki/Japanese_post-war_economic_miracle
Japanese post-war economic miracle
Japanese Post-War Economic Miracle is the name given to the historical phenomenon of Japan's record period of economic growth following World War II, spurred both by US investment and Japanese government economic interventionism in particular through their Ministry of International Trade and Industry. The distinguishing characteristics of the Japanese economy during the 'economic miracle' years included: the cooperation of manufacturers, suppliers, distributors, and banks in closely knit groups called keiretsu; the powerful enterprise unions and shuntō; close relations with government bureaucrats, and the guarantee of lifetime employment (shushin koyo) in big corporations and highly unionized blue-collar factories. Since 1993, Japanese companies have begun to abandon some of these norms in an attempt to increase profitability.
Contribution of USA
In 1946, commercial burdens from wartime expenses threatened economic ruin. Post-war inflation, unemployment and shortages in all areas seemed overwhelming. Japan’s immediate economic improvement was not achieved on its own. The American government, under the auspices of the Supreme Commander of the Allied Powers (SCAP), played a crucial role in Japan’s initial economic recovery. SCAP officials believed economic development could not only democratize Japan but also prevent the reemergence of militarism, and forfend communism in the Land of the Rising Sun. Military hostilities in the Korean peninsula further boosted the economy in 1950 because the U.S. government paid the Japanese government large sums for "special military procurement." These payments ammounted to 27% of Japan’s total export trade. The United States also insisted that Japan be admitted to GATT as a "temporary member" – over British opposition. During the Korean War, SCAP departed and full sovereignty was returned to the government of Japan.
Government contribution
The Japanese financial recovery continued even after SCAP departed and the economic boom propelled by the Korean War abated. Japan’s economy survived the deep recession caused by a loss of the U.S. payments for military procurement and continued to make gains. By the late 1960s, Japan had risen from the ashes of World War II to achieve an astoundingly rapid and complete economic recovery. According to Mikiso Hane, the period leading up to the late 1960’s saw "the greatest years of prosperity Japan had seen since the Sun Goddess shut herself up behind a stone door to protest her brother Susano-o's misbehavior." The Japanese government contributed to the post-war Japanese economic miracle by stimulating private sector growth first instituting regulations and protectionism that effectively managed economic crises and later by concentrating on trade expansion. This was done through the guidance of the Ministry of International Trade and Industry (MITI).
According to some scholars, no other governmental regulation or organization had more economic impact than MITI. “The particular speed, form, and consequences of Japanese economic growth,” Chalmers Johnson writes, “are not intelligible without reference to the contributions of MITI” (Johnson, vii). Established in 1949, MITI’s role began with the "Policy Concerning Industrial Rationalization" (1950) that coordinated efforts by industries to counteract the effects of SCAP’s deflationary regulations. In this way, MITI formalized cooperation between the Japanese government and private industry. The extent of the policy was such that if MITI wished to “double steel production, the neo-zaibatsu already has the capital, the construction assets, the makers of production machinery, and most of the other necessary factors already available in-house”. The Ministry coordinated various industries, including the emerging keiretsu, toward a specific end, usually toward the intersection of national production goals and private economic interests.
MITI also boosted the industrial sector by untying the importation of technology from the importation of other goods. MITI's Foreign Capital Law (1950) granted the ministry power to negotiate the price and conditions of technology importation. This element of technological control allowed it to promote industries it deemed promising. The low cost of imported technology allowed for rapid industrial growth. Productivity was greatly improved through new equipment, management, and standardization.
MITI gained the ability to regulate all imports with the abolition of the Economic Stabilization Board and the Foreign Exchange Control Board in August 1952. Although the Economic Stabilization Board was already dominated by MITI, the Yoshida Governments transformed it into the Economic Deliberation Agency, a mere "think tank," in effect giving MITI full control over all Japanese imports. Power over the foreign exchange budget was also given directly to MITI.
MITI's establishment of the Japan Development Bank (1951) also provided the private sector with low-cost capital for long-term growth. The Japan Development Bank introduced access to the Fiscal Investment and Loan Plan (FILP), a massive pooling of individual and national savings. At the time FILP controlled four times the savings of the world's largest commercial bank. With this financial power, FILP was able to maintain an abnormally high number of Japanese construction firms (more than twice the number of construction firms of any other nation with a similar GDP).
In 1954, the economic system MITI had cultivated from 1949 to 1953 came into full effect. Prime Minister Ikeda Hayato, who Johnson calls "the single most important individual architect of the Japanese economic miracle," pursued a policy of heavy industrialization. This policy lead to the emergence of over-loaning (a practice that continues today) in which the Bank of Japan issues loans to city banks who in turn issue loans to industrial conglomerates. Because there was a shortage of capital in Japan at the time, industrial conglomerates borrowed beyond their capacity to repay, often beyond their net worth, causing city banks in turn to overborrow from the Bank of Japan. This gave the national Bank of Japan complete control over dependent local banks.
The system of over-loaning, combined with the government's relaxation of anti-monopoly laws (a remnant of SCAP control) also led to the reemergence of conglomerate groups called keiretsu that mirrored the wartime conglomerates, or zaibatsu. Keiretsu efficiently allocated resources and became competitive internationally.
At the heart of the keiretsu conglomerates' success lay city banks, which lent generously, formalizing cross-share holdings in diverse industries. The keiretsu spurred both horizontal and vertical integration, locking out foreign companies from Japanese industries. Keiretsu had close relations with MITI and each other through the cross-placement of shares, providing protection from foreign take-overs. For example, 83% of Japan’s Development Bank’s finances went toward strategic industries: shipbuilding, electric power, coal and steel production. Keiretsu proved crucial to protectionist measure that shielded Japan’s sapling economy.
Import substitution to export orientation
The period of rapid economic growth between 1955 and 1961 paved the way for the "Golden Sixties". The second decade that is generally associated with the Japanese economic miracle. In 1965, Japan's nominal GDP was estimated at just over $91 billion. Fifteen years later, the nominal GDP had soared to a record $1,065 billion by 1980.
Under the leadership of Prime Minister Ikeda, former minister of MITI, the Japanese government undertook an ambitious "income-doubling plan." Ikeda lowered interest rates and taxes to private players to motivate spending. In addition, due to the financial flexibility afforded by the FILP, Ikeda’s government rapidly expanded government investment in Japan’s infrastructure: building highways, high-speed railways, subways, airports, port facilities, and dams. Ikeda's government also expanded government investment in the communications sector of the Japanese economy previously neglected. Each of these act continued the Japanse trend towards managed economy the epitomizes the mixed economic model.
Besides Ikeda's adherence to government intervention and regulation of the economy his government pushed trade liberalization. By the April of 1960, trade imports had been 41 percent liberalized (compared to 22 percent in 1956). Ikeda planned to liberalize trade to 80 percent within three years. His plans however met severe opposition from within Japanese society.
However, governmental plans to liberalize trade faced fierce opposition from both industries who had thrived on over-loaning and the nationalist public who feared foreign enterprise takeovers. The Japanese press likened liberalization to "the second coming of the black ships," "the defenselessness of the Japanese islands in the face of attack from huge foreign capitalist powers," and "the readying of the Japanese economy for a bloodstained battle between national capital and foreign capital." Ikeda's income-doubling plan was largely a response to this growing opposition and widespread panic over liberalization, adopted to quell public protests. Ikeda's motivations were purely pragmatic and foreign policy based however. He moved toward liberalization of trade only after securing a protected market within through internal regulations that favored Japanese products and firms.
Ikeda also set up numerous allied foreign aid distribution agencies to demonstrate of Japan’s willingness to participate in the international order and to promote exports. The creation of these agencies not only acted as a small concession to international organizations, but also dissipated some public fears about liberalization of trade. Ikeda furthered Japan’s global economic integration by joining the GATT in 1963, the IMF, and the OECD in 1964. By the time Ikeda left office, the GNP was growing at a phenomenal rate of 13.9 percent due largely to a protected economy within together with exports to unprotected markets abroad.
In 1962 Kaname Akamatsu has published his famous article introducing the Flying Geese Paradigm. It postulated that Asian nations will catch up with the West as a part of a regional hierarchy where the production of commoditized goods would continuously move from the more advanced countries to the less advanced ones. The paradigm was named this way due to Akamatsu's envisioning this pattern as geese flying in unison with Japan being an obvious leader.
Background of the Flying Geese Paradigm
The image of geese flying in unison – Genko keitai in Japanese – has been used in both Chinese and Japanese classical literature as a symbol of heroism and collective action within a nation-state. These Confucian virtues and others could be deducted from various qualities of the flight such as the geometry of the formation or the desire to return home (Terry 2002, 54). Presumable because of the powerful symbolism the flying geese have come to serve Japanese economists and others as a metaphor for several different phenomena over the past century (Ozawa 2005, 9-10). The scholar most closely associated with “the flying geese” theory is Kaname Akamatsu. He has in fact developed three distinct models named after the migrating birds:
His first flying geese pattern concerns the process of moving from import, via production for domestic consumption, to production for export(Ozawa 2005, 9).
The second theory describes industry-cycle sequencing on the basis of shifting comparative advantages (Kasahara 2004, 8).
The third theory was published in 1961's ground-breaking 'A Theory of Unbalanced Growth in the World Economy' where he describes what he calls “the alignment of nations along the different stages of development”(Ozawa 2005, 10).
These three models can be seen as distinct entities or as mutually dependent parts of a larger framework dealing with industrial development over time in developing nations, especially East Asia; the first two taking place within a nation and the third theory dealing with the larger regional issue of industrial development.
The link between the theories and the name “Flying Geese” lies in the pattern of sequential curves that appear when making a graph of – for instance – import, production for internal consumption and production for export over time.
In the 1930’s and during World War II Akamatsu worked for the Japanese army with the task of planning the post-war (or to be more precise: post-Japanese victory) economic order in Asia. This work produced a part of the foundation for the theories he put forward in the 1960’s. The Flying Geese Paradigm has therefore not only the characteristics of a descriptive model but also of a normative design (Terry 2002, 63-67). The theory, its originator and those who developed it further must be seen in the context of their relationships with the state bureaucracy and its role as a tool to help Asia achieve its unprecedented levels of sustained growth in the second half of the 20th century. The conclusions drawn from the paradigm can also be said to be important for understanding Japanese post-war policies towards its neighboring states, especially Japanese aid policy and state-directed Foreign Direct Investment (Terry 2002, 67-85).
Akamatsu’s third Flying Geese Paradigm
Akamatsu’s third Flying Geese Paradigm is a model for international division of labor in East Asia based on dynamic comparative advantage. The paradigm postulated that Asian nations will catch up with the West as a part of a regional hierarchy where the production of commoditized goods would continuously move from the more advanced countries to the less advanced ones. The underdeveloped nations in the region could be considered to be “aligned successively behind the advanced industrial nations in the order of their different stages of growth in a wild-geese-flying pattern” (Ozawa 2005, 9). The lead goose in this pattern is Japan itself, the second-tier of nations consisted of the New Industrializing Economies (South Korea, The Republic of China (Taiwan), Singapore and Hong Kong). After these two groups come the main ASEAN countries: Indonesia, Thailand and Malaysia. Finally the least developed major nations in the region: China, Vietnam etc. make up the rear guard in the formation (Kasahara 2004, 2-13).
The main driver in the model is the “leader’s imperative for internal restructuring” (Kasahara 2004, 10) due to increasing labor costs. As the comparative advantages (on a global scale) of the ‘lead goose’ causes it to shift further and further away from labor-intensive production to more capital-intensive activities it sheds its low-productivity production to nations further down in the hierarchy in a pattern that then reproduces itself between the countries in the lower tiers. The impulse for development always comes from the top tier causing many to label the FGP a top-down model (Kasahara 2004, 9-10). The FGP has proved to be a useful tool when describing the regional production patterns in East Asia as industries such as the textile industry has left not only Japan – the most advanced East Asian nation – but also, at a later point, South Korea and, Taiwan etc. These second tier nations have now firmly established themselves in for instance the automotive industry and are now beginning to shift to the even more advanced production of microcomputers and the like.
The vehicle for technology transfer is where Akamatsu’s framework is least developed. He does however suggest that the demonstration effect of international trade plays an important part as well as the “animal spirit of the entrepreneurs” in developing countries. More recently, modified versions of the FGP – such as the one presented in Ozawa (1995) – stress the importance of transnational firms in this area (Kasahara 2004, 12).
Regarding the internal order of nations within the model, Akamatsu did not consider the relative positions to be permanently fixed but could rather be seen as inherently unstable. This idea is most likely connected to the memories of the Japanese development in the late 19th century when it catapulted itself from a technological backwater to a mature industrial powerhouse. Other scholars however, have emphasized the stability and harmony of the clustered growth envisaged in the FGP implying it would be for a nation difficult to shift from one tier to another (Kasahara 2004, 12-13).
Activites:
a) Which major problems did Japan face at the end of WWII.
b) Identify three major actors in the post-war Japanese recovery.
c) Identify potential difficulties in the keiretsu system.
d) Draw a graph to show Japan's increase in GDP, level of economic growth marking onto it key stages in the country's economic development.
e) Create a diagram to summarise the 3rd Flying Geese Paradigm indicating the relationship between Japan, the rest of South-east and Eastern Asia.
