Factors that Contributed to the Growth of the Japanese Economy - Case Study Example

Factors that contributed to the growth of the Japanese economy Introduction Japan is one of the nations that experienced high economic growth after the Second World War. This paper presents an analysis of the factors that can be attributed to the Japanese economy’s rapid growth. The paper evaluates the role played by the Japanese government in ensuring economic growth and also analyses the role played by the private enterprise. It is notable that while the government was active in providing a favourable environment for economic growth, the private sector was also active through investments that enabled quick economic growth. Specifically, the role of the government was instrumental in the years immediately after the Second World War, but later, market mechanisms become more important in policy decisions and therefore contributed to phenomenal industrial growth. The paper also seeks to determine whether the model of growth of the Japanese economy can be reproduced, as well as some of its constraints. A comparison of the Japanese model of development with the economic growth model of South Korea is also made. Developments in Japanese economic growth The Japanese economy witnessed considerable growth over the four decades since the late 1940s. The growth can be classified into four periods: the recovery period (1946-1950), the rapid growth period between 1950 and 1973, the moderate growth period (which includes the bubble age) between 1976 and 1991) and the stagnation period (1992-2003) (Iyoda, 2010, p. 7). However, for the interest of this paper, the periods covered are those in which much economic recovery and growth was witnessed; that is, the recovery period to the rapid growth period between – a period between the late 1940s and the 1970s. Role of government After the Second World War in 1945, the Japanese government started an economic democratisation process with major reforms that were imposed by the General Head Quarter (GHQ). These are Antitrust measures between 1946 and 1947, dissolution of the Zaibatsu (financial business conglomerates in the Japanese empire), land reforms that took place between 1946 and 1950, and labour reforms from 1946 to 1947 (Iyoda, 2010, p. 6). These measures were the cornerstone of the economic growth that started in the 1950s. As Nakamura, Nakamura and Vertinsky (1994) posit, the period from 1950 to the late 1960s was typified by active government involvement to develop a number of crucial industries and to augment the spread of technology among Japanese firms (p. 3). Notably, active government guidelines and regulations were significant for the institutional setting of up Japanese firms between from the 1950s. It was particularly important to promote exports because the growth of the Japanese economy was often hindered by deficiencies of foreign exchange. Therefore, government industrial and technology guidelines were meant to direct resources towards targeted industries through government control over limited foreign exchange resources (Nakamura, Nakamura & Vertinsky, 1994, p. 3). The measures implemented by the government to enhance economic recovery can generally be grouped under five categories as discussed next according to Allen (1979, p. 24-34): i) Direct control over foreign exchange and foreign trade: Between the 1950s and early 1960s, the weakness of Japan’s international monetary position and the recurrent crises in the country’s balance of payments persuaded the government to maintain strict regulations over foreign transactions. These were mainly meant to encourage exports as indicated above. ii) Controls over, or requirements imposed on private firms with respect to matters such as market behaviour Although the zaibatsu had been partially dissolved, the Occupation Authority did not deem that economic liberalisation had been achieved. Thus, the government was required to act by passing an Anti-Monopoly Law to set up a Fair Trade Commission whose role was to curb the operations of cartels and to counter any future attempts to create monopolies such as zaibatsu. iii) Formal and informal relationship created between various ministries and industries in order to determine or influence the strategy of those industries: During the 1960s, government through ministries such as the Ministry of International Trade and Industry (MITI) were very assertive and influential in decisions regarding the policy-making of private firms. iv) Indicative economic planning Soon after World War II, the Japanese government started to systematise its general development policy by issuing medium-term and long-term plans for the economy. An official body called Economic Planning Agency was created and was responsible for designing plans for the ensuing decade or so. The plans contained forecasts of the gross national products for a series of years ahead, investment, savings, the output of different sectors of the economy, imports and exports as well as other items relating to balance of payments. v) Setting up of public corporations Like many other countries, Japan had public corporations to offer critical services to the public and provide employment. These organisations were in the form of kosha such the Japan National Railways Corporation and the Japan Atomic Energy Corporation, and kodan, a public organisation involved in construction work. Role of the market (private investors) As firms became more competitive on the international market, the foreign exchange restriction became less significant. For this reason, the period between the late 1960s and 1970s was characterised by the Japanese government industrial policies becoming more consistent with market mechanisms. During this period, many restrictive laws relating to foreign exchange, capital markets and foreign ownership were liberalised. Hence, in spite of the downturns experienced due to oil price shocks in the 1970s, the Japanese economy remained vibrant due to increasing exports (Nakamura, Nakamura & Vertinsky, 1994, p. 3). Although it is obvious that the government played a major role in the growth of the Japanese economy, there are analysts who attribute the growth to the private sector and thus the condition of the free market. Henkel (2006, p. 4) argues that Japan’s economic growth was largely as a result of a democratisation of the economy especially through the reforms mentioned previously in this paper. Masaaki Shirakawa, the current governor of the Bank of Japan, in his remarks at the Bank of Finland 200th Anniversary Conference, noted that three factors enabled the rapid growth of the Japanese economy: favourable demographics, competitive market forces, and the benefits of free trade (Shirakawa, 2011, p. 2). According to Shirakawa (2011), the total population of Japan increased at a yearly rate of 1 percent during the period between the 1950s and 1970s. A significant portion of the population was of the working age and this increased both production and consumption. Further, at the beginning of the period of economic boom, the farming population grew to about 40 percent of the population. The migration of surplus labour from rural areas to urban areas of cities facilitated a rapid increase of the manufacturing sector’s productivity (Shirakawa, 2011, p. 2). In regard to competitive forces, Shirakawa (2011) notes that the thought that government’s industrial policy – or what is often referred to as “Japan incorporated” was the key to Japan’s economic growth is an overstatement. Shirakawa points out to some leading firms in Japan’s history, which ventured in new areas that were not recommended by the government; and others which did not receive favourable treatment from the government – yet these firms flourished. But there are other examples where firms and industries were well protected by the Japanese government but eventually lost their vibrancy. Thus, according to Shirakawa, strong competition augmented Japans’ high-growth era by fuelling entrepreneurship and enhancing technological innovation which permitted Japanese firms to be at par with those in advanced economies (such as the United States) (p. 2). On global free trade, Shirakawa (2011) suggests that Japan produced huge amounts of consumer and producer goods for the growing global market, such as electronic appliances, steel and automobiles. The foreign exchange acquired through exports was then used to import raw materials required to support the development of the domestic market. This was made possible by the continued growth of the global economy and the maintenance of an international free trade system (Shirakawa, 2011, p. 2). Of the three forces mentioned above, there is evidence that competitive forces enabled entrepreneurs to invest in areas that were vital for the Japanese economy’s growth. According to (Sakoh, 1984, p. 522-523), the government’s tax policies during the 1950s and 1960s helped to reduce government expenditure and in turn, Japan was able to restrain the rate of spending growth vis-à-vis the rate of overall economic growth. Given that the government was spending less than it took, there was a deflationary impact on Japan’s economy. Consequently, this enabled capital investment. There are several pieces of evidence to show that the Japanese government intervened less in firms’ operations in the period between the late 1960s and 1970s. For instance, the private sector accounts for the larger share of total capital formation in the country. Between 1961 and 1970, the share of private outlay in equipment and machinery amounted to approximately 75 percent of the total capital formation. In terms of research and development, funding from the government has been very restricted in the Japan compared to the level of investment by governments of the western economies. Further, ownership of enterprises by the states is very limited in Japan in comparison to countries from Europe. For instance, the Japanese government does not possess any manufacturing firms with the exception of cigarettes. In comparison, almost all European state governments own and operate key manufacturing industries such as steel and iron, aircraft and even high-tech products in countries such as France (Sakoh, 1984, p. 522-524). The points above clearly indicate that the Japanese government greatly reduced its involvement in the business of firms starting from the 1960s. This is lucidly reflected in Sakoh’s (1984) point that during the 1970s the general policy of creating a friendly environment for the Japanese private sector was significantly altered by government policies (p. 524). Evidently, a number of factors contributed to Japan’s economic growth – including international factors such as global trade as earlier mentioned – but tribute must go those who capitalised on the favourable environment to spur the country’s economic growth to higher levels. Japanese entrepreneurs took advantage of the situation in the country to develop “efficient, productive, and competitive manufacturing industries” (Sakoh, 1984, p. 541). As Allen (1981) (cited in Sakoh, 1984) pointed out, “the chief function of the bureaucrats and politicians (in reference to the government) was to provide a congenial environment for the enterprise of private firms” (p. 541). Thus, the state may have created the necessary conditions, but private entrepreneurs supplied what was required for economic growth. These entrepreneurs got the prices right and supplied what was required at the right time. In deed as Sakoh (1984) puts it, “It was the entrepreneurs that, in large measure, determined Japan’s economic future” (p. 541). To better understand the role played by private entrepreneurs in the growth of the Japanese economy, it is important to look at two of Japan’s critical industries: automobile and electronics manufacturing. In response to Sakoh’s (1984) paper, Trezise (1984) notes that the Japanese automobile industry’s successes (in terms of companies such as Toyota, Nissan and Isuzu) are wrongly attributed to industrial policy. The truth is that many of the vehicle manufacturers are privately owned and have been instrumental in facilitating economic growth. Further, there was a remarkable occurrence as the production of video tape recorders increased from 119,000 units to 13 million units between 1975 and 1982. Credit here goes to Japanese private investors and not the MITI, which was previously active in making industrial decisions the 1950s (Trezise, 1984, p. 548). Comparison with South Korea’s economic growth There are many similarities and differences between the economies of Japan and South Korea. For similarities, both economies needed rebuilding after severe wars devastated them (World War II for Japan and the Korean War for South Korea). The South Korean economy also had features similar to the pre-World War II Japan. While South Korea was characterised by business conglomerates called chaebol, Japan had zaibatsu as earlier mentioned. Like zaibatsu, chaebol were large family-owned businesses dealing in various areas of manufacturing (Kim, 1997, p. 77; Delios & Singh, 2012, p. 54). Another similarity between the growth of the Japanese and South Korean economies is that South Korea’s development process was strategically planned as did Japan’s in the 1950s and 1960s. The government of South Korea set up development goals and set out various policy tools to achieve them (Sŏ & Chen, 2007, p. 18). Thus, the economic blueprint for South Korea’s economic growth took shape through a series of economic development plans just as it initially happed in Japan. Similarly, South Korea also focused on increasing its export capacity (Sŏ & Chen, 2007, p. 20). There are a number of differences between the Japanese and South Korean economic growth models. First is that the South Korean government continued to be actively involved in business even after the 1970s; in fact democratisation started only in the 1990s. Economic development has largely been pegged on strategic action by the state (Haggard & Moon, 1993, p. 52). Another aspect is that unlike Japan which dissolved zaibatsu, South Korea has continued to subsist with chaebol. Unfortunately, the chaebol has often been criticised for being too corrupt or antiquated for the welfare of South Korea’s economy. Many chaebol executives have abused the authority of their positions at the expense of the Korean economy. Chaebol were instrumental during the period of industrialisation in Korea but their abuse over the years has resulted to their condemnation (Powers, 2010, p. 105). Is the Japanese model of economic growth reproducible? The Japanese model of economic growth is reproducible because the factors involved are well understood. The success of the economy has derived primarily from long term-strategies that that involved government planning and involvement in business. In Japan, the factors that hindered even growth such as zaibatsu and poor land regulations were identified and removed. This was the starting point and can be done to any other economy that has barriers. Eventually, the government pulled off its intervention to allow the operation of a free market. The free market environment attracts entrepreneurs and is therefore critical to economic growth. According to Smith and Nishijima (2003) the plans and policies used in high-growth economies such as Japan have established some standards that are reproducible elsewhere (Woo, 2004, p. 127). All that is required is to create an environment that is conducive to the operations of the government and private investors to do business and get the prices right. Constraints likely to be faced in reproducing the model It is not easy for a government to adopt a free market overnight. Such a decision means that the government would have to lose grip of some of the incomes it was obtaining from various investments or direct involvements in business. It also means that a government has to abolish monopolies just as Japan abolished the zaibatsu in the 1940s to encourage uniform growth. Yet, in an era when economic crises are rife, leaving critical sectors of a state to private investors may be a gamble that could lead to disastrous outcomes in case markets collapse (Martinez, 2009, p. 172). Notably, reproducing the Japanese model of growth needs meticulous planning and time to achieve successful growth. Conclusion In summary, although the Japanese government played a fundamental role in building the economy by creating a favourable environment, it is the private sector that got the prices right and used the opportunity to grow the economy. Unlike South Korea where chaebol are still influential, Japan abolished zaibatsu to create a free market and also reformed other laws to augment this. As pointed out, most industries in Japan are owned by the private sector and this is attributable to the free market. Reproducing Japan’s economic growth model is possible but can be hindered by the forces that obstruct the creation of a free market. References Iyoda, M. (2010). Postwar Japanese economy: Lessons of economic growth and the bubble economy. New York: Springer. Nakamura, M., Nakamura, M. & Vertinsky, I. (1994). Japanese economic policies and growth: Implications for businesses in Canada and North America. Edmonton: University of Alberta. Allen, G. C. (1979). ‘Government intervention in the economy of Japan’ in Maunder, P. A. (ed). Government Intervention in the developed economy. New York: Taylor & Francis. Shirakawa, M. (2011). ‘The transition from high growth to stable growth: Japan’s experience and implications for emerging economies’. Remarks at the Bank of Finland 200th Anniversary Conference, May 5 2011. Bank of Japan. Retrieved 7 August 2012, from http://www.boj.or.jp/en/announcements/press/koen_2011/data/ko110506a.pdf Henkel, J. (2006). International trade strategies - Conceptually discuss and empirically explain Japan's ability to persistently huge trade surpluses. Munich: GRIN Verlag. Sakoh, K. (1984). ‘Japanese economic success: industrial policy or free market?’ Cato Journal, 4(2): 521-543. Retrieved 7 August 2012, from http://www.cato.org/pubs/journal/cj4n2/cj4n2-8.pdf Trezise, P. H. (1984). ‘“Japanese economic success”: A comment’. Cato Journal, 4(2): 545-548. 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New York: University Press of America. Delios, A. & Singh K. (2012). Strategy for success in Asia: Mastering business in Asia. New York: John Wiley & Sons. Martinez, M. A. (2009). The myth of the free market: The role of the state in a capitalist economy. West Hartford, CT: Kumarian Press. Read More