MITI and the Japanese miracle Read online

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  Such a foreign exchange budget came into being again in 1937 and lasted in one form or another until 1964, when trade liberalization was carried out. In the era of high-speed growth, control of the foreign exchange budget meant control of the entire economy. It was MITI that exercised this controlling power, and foreign currency allocations were to become its decisive tool for implementing industrial policy.

  The political nature of plan rationality can be highlighted in still other ways. MITI may be an economic bureaucracy, but it is not a bureaucracy of economists. Until the 1970's there were only two Ph.D.'s in economics among the higher career officials of the ministry; the rest had undergraduate degrees in economics or, much more commonly, in public and administrative law. Not until Ueno Koshichi* became vice-minister in June 1957 was modern economic theory even introduced into the ministry's planning processes (Ueno studied economics during a long convalescence from tuberculosis before assuming the vice-ministership). Amaya Naohiro reflects this orientation of

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  the ministry when he contrasts the views of the scholar and of the practitioner and notes that many things that are illogical to the theorist are vital to the practitionerfor instance, the reality of nationalism as an active element in economic affairs. Amaya calls for a "science of the Japanese economy," as distinct from "economics generally," and pleads that some things, perhaps not physics but certainly economics, have national grammars.

  54

  One further difference between the market-rational state and the plan-rational state is thus that economists dominate economic policy-making in the former while nationalistic political officials dominate it in the latter.

  Within the developmental state there is contention for power among many bureaucratic centers, including finance, economic planning, foreign affairs, and so forth. However, the center that exerts the greatest

  positive

  influence is the one that creates and executes industrial policy. MITI's dominance in this area has led one Japanese commentator to characterize it as the "pilot agency," and a journalist of the

  Asahi

  who has often been highly critical of MITI nonetheless concedes that MITI is "without doubt the greatest concentration of brain power in Japan."

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  MITI's jurisdiction ranges from the control of bicycle racing to the setting of electric power rates, but its true defining power is its control of industrial policy (

  sangyo

  *

  seisaku

  ). Although the making and executing of industrial policy is what the developmental state does, industrial policy itselfwhat it is and how it is doneremains highly controversial.

  Industrial policy, according to Robert Ozaki, "is an indigenous Japanese term not to be found in the lexicon of Western economic terminology. A reading through the literature suggests a definition, however: it refers to a complex of those policies concerning protection of domestic industries, development of strategic industries, and adjustment of the economic structure in response to or in anticipation of internal and external changes which are formulated and pursued by MITI in the cause of the national interest, as the term 'national interest' is understood by MITI officials."

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  Although this definition is somewhat circularindustrial policy is what MITI says it isOzaki makes one important point clear: industrial policy is a reflection of economic nationalism, with nationalism understood to mean giving priority to the interests of one's own nation but not necessarily involving protectionism, trade controls, or economic warfare. Nationalism

  may

  mean those things, but it is equally possible that free trade will be in the national economic interest during particular periods, as was true of Japan during the 1970's. Industrial policy is, however, a recognition that the global economic system is

  never

  to be understood in

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  terms of the free competitive model: labor never moves freely between countries, and technology is only slightly more free.

  There are two basic components to industrial policy, corresponding to the micro and macro aspects of the economy: the first the Japanese call "industrial rationalization policy" (

  sangyo

  *

  gorika

  *

  seisaku

  ), and the second, "industrial structure policy" (

  sangyo

  kozo

  *

  seisaku

  ). The first has a long history in Japan, starting from the late 1920's, when it was quite imperfectly understood, as we shall see later in this book. MITI's

  Industrial Rationalization Whitepaper

  (1957) says that industrial rationalization subsumes a theory of economic development in which Japan's "international backwardness" is recognized and in which "contradictions" in the areas of technology, facilities, management, industrial location, and industrial organization are confronted and resolved.

  Concretely, according to the

  Whitepaper

  , industrial rationalization means: (1) the rationalization of enterprises, that is, the adoption of new techniques of production, investment in new equipment and facilities, quality control, cost reduction, adoption of new management techniques, and the perfection of managerial control; (2) the rationalization of the environment of enterprises, including land and water transportation and industrial location; (3) the rationalization of whole industries, meaning the creation of a framework for all enterprises in an industry in which each can compete fairly or in which they can cooperate in a cartellike arrangement of mutual assistance; and (4) the rationalization of the industrial structure itself in order to meet international competitive standards.

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  (The last element of the definition was included before the concept of "industrial structure" had been invented by MITI. After about 1960 it was no longer included in the concept of industrial rationalization.)

  The short definition is that industrial rationalization means state policy at the micro level, state intrusion into the detailed operations of individual enterprises with measures intended to improve those operations (or, on occasion, to abolish the enterprise). Nawa Taro* says that in its simplest terms industrial rationalization is the attempt by the state to discover what it is individual enterprises are already doing to produce the greatest benefits for the least cost, and then, in the interest of the nation as a whole, to cause all the enterprises of an industry to adopt these preferred procedures and techniques.

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  Industrial rationalization in one form or another is an old and familiar movement going back to Frederick W. Taylor's system of "scientific management" of the progressive era in the United States (18901920); it exists or has appeared in every industrialized country, although it probably lasted longer and was carried further in Japan than in any

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  other country.

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  Industrial structure policy, on the other hand, is more radical and more controversial. It concerns the proportions of agriculture, mining, manufacturing, and services in the nation's total production; and within manufacturing it concerns the percentages of light and heavy and of labor-intensive and knowledge-intensive industries. The application of the policy comes in the government's attempts to change these proportions in ways it deems advantageous to the nation. Industrial structure policy is based on such standards as income elasticity of demand, comparative costs of production, labor absorptive power, environmental concerns, investment effects on related industries, and export prospects. The heart of the policy is the selection of the strategic industries to be developed or converted to other lines of work.

  Robert Gilpin offers a theoretical defense of industrial structure policy in terms of a posited common structural rigidity of the corporate form of organization:

  The propensity of corporations is to invest in particular industrial sectors or product lines even though the
se areas may be declining. That is to say, the sectors are declining as theaters of innovation; they are no longer the leading sectors of industrial society. In response to rising foreign competition and relative decline, the tendency of corporations is to seek protection of their home market or new markets abroad for old products. Behind this structural rigidity is the fact that for any firm, its experience, existing real assets, and know-how dictate a relatively limited range of investment opportunities. Its instinctive reaction, therefore, is to protect what it has. As a result, there may be no powerful interests in the economy favoring a major shift of energy and resources into new industries and economic activities.

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  Whether this is true or not, MITI certainly thinks it is true and considers that one of its primary duties is precisely the creation of those powerful interests in the economy that favor shifts of energy and resources into new industries and economic activities. Like Gilpin, MITI is convinced that market forces alone will never produce the desired shifts, and despite its undoubted commitment in the postwar era to free enterprise, private ownership of property, and the market, it has never been reticent about saying so publicly (sometimes much too publicly for its own good).

  Although some may question whether industrial policy should exist at all in an open capitalist system, the real controversy surrounding it concerns not whether it should exist but how it is applied. This book is in part devoted to studying the controversy over means that has gone on in Japan since industrial policy first appeared on the

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  scene. The tools of implementation themselves are quite familiar. In Japan during high-speed growth they included, on the protective side, discriminatory tariffs, preferential commodity taxes on national products, import restrictions based on foreign currency allocations, and foreign currency controls. On the developmental (or what the Japanese call the "nurturing") side, they included the supply of low-interest funds to targeted industries through governmental financial organs, subsidies, special amortization benefits, exclusion from import duties of designated critical equipment, licensing of imported foreign technology, providing industrial parks and transportation facilities for private businesses through public investments, and "administrative guidance" by MITI (this last and most famous of MITI's powers will be analyzed in Chapter 7).

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  These tools can be further categorized in terms of the types and forms of the government's authoritative intervention powers (its

  kyoninkaken

  , or licensing and approval authority) and in terms of its various indirect means of guidancefor example, its "coordination of plant and equipment investment" for each strategic industry, a critically important form of administrative guidance.

  The particular mix of tools changes from one era to the next because of changes in what the economy needs and because of shifts in MITI's power position in the government. The truly controversial aspect of these mixes of toolsone that greatly influences their effectivenessis the nature of the relationship between the government and the private sector. In one sense the history of MITI is the history of its search for (or of its being compelled to accept) what Assar Lindbeck has called "market-conforming methods of intervention."

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  MITI's record of success in finding such methodsfrom the founding of the Ministry of Commerce and Industry (MCI) in 1925 to the mid-1970'sis distinctly checkered, and everyone in Japan even remotely connected with the economy knows about this and worries about MITI's going too far. MITI took a long time to find a government-business relationship that both enabled the government to achieve genuine industrial policy and also preserved competition and private enterprise in the business world. However, from approximately 1935 to 1955 the hard hand of state control rested heavily on the Japanese economy. The fact that MITI refers to this period as its "golden era" is understandable, if deeply imprudent.

  Takashima Setsuo, writing as deputy director of MITI's Enterprises Bureau, the old control center of industrial policy, argues that there are three basic ways to implement industrial policy: bureaucratic con-

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  trol (

  kanryo

  *

  tosei

  *), civilian self-coordination (

  jishu

  chosei

  *), and administration through inducement (

  yudo

  *

  gyosei

  *).

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  Between 1925 and 1975 Japan tried all three, with spectacularly varied results. However, at no time did the Japanese cease arguing about which was preferable or about the proper mix of the three needed for particular national situations or particular industries. The history of this debate and its consequences for policy-making is the history of MITI, and tracing its course should give pause to those who think that Japanese industrial policy might be easily installed in a different society.

  What difference does industrial policy make? This, too, is part of the controversy surrounding MITI. Ueno Hiroya acknowledges that it is very difficult to do cost-benefit analyses of the effects of industrial policy, not least because some of the unintended effects may include bureaucratic red tape, oligopoly, a politically dangerous blurring of what is public and what is private, and corruption.

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  Professional quantitative economists seem to avoid the concept on grounds that they do not need it to explain economic events. For example, Ohkawa and Rosovsky cite as one of their "behavioral assumptions . . . based on standard economic theory and observed history . . . that the private investment decision is mainly determined by profit expectations, based among other things on the experience of the recent past as affected by the capital-output ratio and labor-cost conditions."

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  I cannot prove that a particular Japanese industry would not or could not have grown and developed at all without the government's industrial policy (although I can easily think of the likely candidates for this category). What I believe can be shown are the differences between the course of development of a particular industry without governmental policies (its imaginary or "policy-off" trajectory) and its course of development with the aid of governmental policies (its real or "policy-on" trajectory). It is possible to calculate quantitatively, if only retrospectively, how, for example, foreign currency quotas and controlled trade suppress potential domestic demand to the level of the supply capacity of an infant domestic industry; how high tariffs suppress the price competitiveness of a foreign industry to the level of a domestic industry; how low purchasing power of consumers is raised through targeted tax measures and consumer-credit schemes, thereby allowing them to buy the products of new industries; how an industry borrows capital in excess of its borrowing capacity from governmental and government-guaranteed banks in order to expand production and bring down unit costs; how efficiency is raised through the accelerated depreciation of specified new machinery investments;

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  and how tax incentives for exports function to enlarge external markets at the point of domestic sales saturation. Kodama Fumio has calculated mathematically the gaps between the real trajectory and the policy-off trajectory of the Japanese automobile industry during its infant, growing, and stable phases (the data are of course not yet available for a future declining phase).

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  His measures are also tools for analyzing the appropriateness and effectiveness of the various governmental policies for the automobile industry during these phases.

  The controversy over industrial policy will not soon end, nor is it my intention to resolve it here. The important point is that virtually all Japanese analysts, including those deeply hostile to MITI, believe that the government was the inspiration and the cause of the movement to heavy and chemical industries that took place during the 1950's, regardless of how one measures the costs and benefits of this movement. A measurement of what MITI believes and others consider to be its main achievement is provided by Ohkawa and Rosovsky
: ''In the first half of the 1950s, approximately 30 percent of exports still consisted of fibres and textiles, and another 20 percent was classified as sundries. Only 14 percent was in the category of machinery. By the first half of the 1960s, after the great investment spurt, major changes in composition had taken place. Fibres and textiles were down to 8 percent and sundries to 14 percent, and machinery with 39 percent had assumed its position of leading component, followed by metals and metal products (26 percent)."

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  This shift of "industrial structure" was the operative mechanism of the economic miracle. Did the government in general, or MITI in particular, cause it to occur? Or, to put it more carefully, did they accelerate it and give it the direction it took? Perhaps the best answer currently available is Boltho's comparative appraisal: "Three of the countries with which Japan can most profitably be compared (France, Germany, and Italy) shared some or all of Japan's initial advantagese.g., flexible labor supplies, a very favorable (in fact even more favorable) international environment, the possibility of rebuilding an industrial structure using the most advanced techniques. Yet other conditions were very dissimilar. The most crucial difference was perhaps in the field of economic policies. Japan's government exercised a much greater degree of both intervention and protection than did any of its Western European counterparts; and this brings Japan closer to the experience of another set of countriesthe centrally planned economies."