25
And this is the primary reservation that one must make about the unique-institutions explanation: it never goes far enough and therefore fails as anything more than a partial explanation.
Let us take one example. As a result of the recognition of the Japanese miracle around the world, some American professors of business administration have begun to recommend to American entrepreneurs that they experiment with one or all of the three sacred treasures. Sometimes Japanese practices, suitably modified, travel well.
26
However, an American businessman who really attempted to institute "lifetime" employment without the backing of the other institutions of the Japanese system would soon find himself bankrupt. Among other things, lifetime employment in Japan is not for life but until the middle or late fifties; and although wage raises are tied to seniority, job security is not: it is those with most seniority who are the first fired during business downturns because they are the most expensive. Lifetime employment also does not apply to the "temporaries," who may spend their entire working lives in that status, and temporaries constitute a much larger proportion of a firm's work force than any American union would tolerate (42 percent of the Toyota Motor Company's work force during the 1960's, for example).
27
Even if these problems could be taken care of, the American em-
Page 13
ployer still would not have below him the extensive enterprise sector of medium and smaller subcontractors that his Japanese counterpart can squeeze in difficult times. Tomioka calls the subcontractors the "shock absorbers" of the Japanese business cyclethe smaller firms on the receiving end when large firms find they can no longer carry the fixed costs of their labor force and must "shift the strain" (
shiwayose
).
28
On the other hand, the American employee would not have Japan's extensive if redundant distribution system to fall back on in case he did get laid off. The distribution system in Japan serves as a vast sponge for the unemployed or underemployed when economic conditions require it. As testimony to the layers of middlemen in Japan, the volume of transactions among Japanese wholesalers in 1968 exceeded the total of retail sales by a ratio of 4.8 to 1, whereas the United States figure was 1.3 to 1.
29
It is not surprising that many knowledgeable Japanese do not want to change the distribution system, despite protests from foreign salesmen who have trouble breaking into it, because it performs other functions for the society than distribution, not the least of which is reducing the tax burden necessary to provide adequate unemployment insurance.
Lifetime employment, Japanese style, offers many advantages from the point of view of economic growth: it provides a strong incentive to the employer to operate at full or close to full capacity; it inhibits a horizontally structured trade union movement; and, in the words of Ohkawa and Rosovsky, it gives the Japanese entrepreneur "a labor force without incentives to oppose technological and organizational progress even of the labor-saving type."
30
But it does not exist in isolation and would not work without the rest of the system of "unique institutions."
The second main point about these special institutions concerns the date of their origins and how they are maintained. It is here that this school of explanations of the miracle sometimes blends imperceptibly with the first school, which says that Japanese culture and the Japanese national character support the economy. Amaya, for example, traces the three sacred treasures to the traditional world of family (
ie
), village (
mura
), and province (
kuni
), which he believes have all been homogenized and reincarnated today within the industrial enterprise.
31
It has to be stated that assertions of this type are a form of propaganda to defend these special institutions from hostile (often foreign) critics. Extensive research by scholars in Japan and abroad has demonstrated that virtually all of the so-called special institutions date from the twentieth century and usually from no earlier than the World War I era.
Page 14
Lifetime employment, for example, has been traced to several influences, including the efforts during World War I to inhibit the growth of a left-wing social reform movement; the introduction of large numbers of Korean and Taiwanese laborers during the 1920's, which caused Japanese workers to seek job security at all costs; and the wartime munitions companies, which had to guarantee the jobs of their best employees in order to keep them. R. P. Dore, one of the leading authorities on Japanese industrialism, summarizes the state of research on this subject as follows: "Japan's employment system in 1900 was pretty much as market-oriented as Britain's. It was conscious institutional innovation which began to shape the Japanese system in the first two decades of this century, perfected the system of enterprise familism (or what one might call corporate paternalism) in the 1930s, and revamped the system to accommodate the new strength of unions in the late 1940s to produce what is called [by Dore] the 'welfare corporatism' of today."
32
Nakamura Takafusa finds the roots of a whole range of important institutions in the wartime control eraincluding the bank-centered keiretsu (industrial groups based on the Designated Financial Organs System of the time) and the subcontracting system, which though it existed before the war was greatly strengthened by the forced mergers of medium and small enterprises with big machinery manufacturers (the so-called
kigyo
*
seibi
, or "enterprise readjustment," movement discussed in Chapter 5).
33
There are several ways in which the government has influenced the structure of Japan's special institutions. Many of these institutions it created directly in the course of its "industrial rationalization" campaigns of the 1930's or in the prosecution of the Pacific War. When the government did not create them directly, it nonetheless recognized their usefulness for its own purposes and moved to reinforce them. The savings system is an example. It is possible, as many commentators have urged, that the savings of private Japanese householdsthe highest rate of savings as a share of GNP ever recorded by any market economy in peacetimeis due to the natural frugality of the Japanese. But there are some strong external pressures that encourage the Japanese to save: a comparatively poor social security system; a wage system that includes large lump-sum bonus payments twice a year; a retirement system that cuts a worker's income substantially before he reaches the age of 60; a shortage of new housing and housing land, as well as a premium on university education for one's children, both of which require large outlays; an underdeveloped consumer credit system; a government-run postal savings system with guaran-
Page 15
teed competitive interest rates; the lack of a well-developed capital market or other alternatives to personal saving; and a substantial exemption from income taxes for interest earned on savings accounts. The government is quite aware of these incentives to save and of the fact that money placed in the postal savings system goes directly into Ministry of Finance accounts, where it can be reinvested in accordance with government plans. Innate frugality may indeed play a role in this system, but the government has worked hard at engineering that frugality.
The theory of the "free ride," our fourth category of explanations, argues that Japan is the beneficiary of its postwar alliance with the United States, and that this alliance accounts at least for the miraculous part of Japan's rapid economic growth, if not for all of it. There are three ways in which Japan is said to have enjoyed a free ride: a lack of defense expenditures, ready access to its major export market, and relatively cheap transfers of technology.
Although it is true that Japan has not had to devote much of its national income to armaments, this factor cannot have influenced its growth rate significantly. If Japan's overall rate of investment had been very lowas low, for example, as i
t was in Chinathen the demands of defense could have had a retarding effect. But in Japan, where capital formation exceeded 30 percent of GNP during high-speed growth, the effect of low defense expenditures was negligible. The cases of South Korea and Taiwan, which have been pursuing the high investment strategy of the Japanese with equal or even more spectacular results, illustrate this point: their very high defense expenditures have had little or no impact on their economic performance.
The case of exports is more important. Japan profited enormously from the open trading system that developed throughout the world after World War II, and Japanese government leaders have repeatedly acknowledged the favorable effects for them of such institutions as the General Agreement on Tariffs and Trade, the International Monetary Fund, and, until 1971, stable exchange ratesall institutions that they had no role in creating. In fact, in their more pessimistic moods MITI leaders have speculated on the historical observation that Japan's great economic achievements came in the relatively open periods of world commercefrom the Meiji Restoration to World War I and from 1945 to 1970and they have expressed concern that the post-1970's era could look like 192045 when seen in historical perspective.
34
Nonetheless, the important point for our discussion is that Japan's growth did not depend nearly so much on exports as it did on the development of the domestic market (a market half the size of the
Page 16
United States' in terms of population). Eleanor Hadley notes that although Japan's economy in the early sixties was roughly three times the size of the 193436 economy, exports as a proportion of GNP were only about two-thirds what they had been in the mid-1930's.
35
By the late 1960's Japan's exports were only 9.6 percent of GNP, compared for example with Canada's 19.8 percent.
36
From 1953 to 1972 Japan had a consistently lower dependency on exports and imports as a percentage of GNP at constant prices than France, Germany, Italy, Britain, or OECD Europe as a whole. Japan's exports ran at about 11.3 percent of GNP, and its imports at 10.2 percent, whereas the OECD European figures were 21.2 percent and 20.9 percent respectively.
37
There is no question that Japan, as a heavily populated resource-deficient country, has to export in order to pay for its vital imports, but foreign sales were not the main factor driving its economic activity during high-speed growth.
Home demand led Japan's growth for the twenty years after 1955. The demand was there, of course, before 1955, but with the coming to power of the Ishibashi government in December 1956 and Ikeda Hayato's return to the post of minister of finance, Ishibashi and Ikeda launched the policy of "positive finance." Under the slogan "a hundred billion yen tax cut is a hundred billion yen of aid" as the basis for the fiscal 1957 budget, Ikeda opened up domestic demand as it had never been opened before.
38
Balance of payments problems slowed positive finance during the "bottom-of-the-pot" recession (with its trough in June 1958), but the economy responded quickly to government discipline and rebounded in the Iwato Boom (July 1958-December 1961), during which Ikeda became prime minister and launched the Income-doubling Plan. The propelling force of the economy in this and later periods was private corporate investment nurtured by favorable expectations for the longer term that were created by the government; it was not export sales.
Technology transfersthe third alleged "free ride"were not exactly free, but there can be no question that they were crucial to Japanese economic growth and that the prices paid were slight compared with what such technology would cost today, if it could be bought at any price. Japan imported virtually all of the technology for its basic and high-growth industries, and it imported the greater proportion of this technology from the United States. But it is trivial and misleading to refer to this movement of patent rights, technology, and know-how across the Pacific and from Europe as a "free ride." It was, in fact, the heart of the matter.
The importation of technology was one of the central components
Page 17
of postwar Japanese industrial policy, and to raise the subject is to turn the discussion to MITI and the Japanese government's role. Before the capital liberalization of the late 1960's and 1970's, no technology entered the country without MITI's approval; no joint venture was ever agreed to without MITI's scrutiny and frequent alteration of the terms; no patent rights were ever bought without MITI's pressuring the seller to lower the royalties or to make other changes advantageous to Japanese industry as a whole; and no program for the importation of foreign technology was ever approved until MITI and its various advisory committees had agreed that the time was right and that the industry involved was scheduled for "nurturing" (
ikusei
).
From the enactment of the Foreign Capital Law in 1950 (it remained on the books for the next thirty years), the government was in charge of technology transfers. What it did and how it did it was not a matter of a "free ride" but of an extremely complex process of public-private interaction that has come to be known as "industrial policy." MITI is the primary Japanese government agency charged with the formulation and execution of industrial policy.
Thus I come to the final school, in which I place myself, the school that stresses the role of the developmental state in the economic miracle. Although the rest of this book is devoted to this subjectand to some of the nonmiracles produced by the developmental state in its quest for the miracleseveral further points are needed by way of introduction. What do I mean by the developmental state? This is not really a hard question, but it always seems to raise difficulties in the Anglo-American countries, where the existence of the developmental state in any form other than the communist state has largely been forgotten or ignored as a result of the years of disputation with Marxist-Leninists. Japan's political economy can be located precisely in the line of descent from the German Historical Schoolsometimes labeled "economic nationalism,"
Handelspolitik
, or neomercantilism; but this school is not exactly in the mainstream of economic thought in the English-speaking countries. Japan is therefore always being studied as a "variant" of something other than what it is, and so a necessary prelude to any discussion of the developmental state must be the clarification of what it is not.
The issue is not one of state intervention in the economy. All states intervene in their economies for various reasons, among which are protecting national security (the "military-industrial complex"), insuring industrial safety, providing consumer protection, aiding the weak, promoting fairness in market transactions, preventing monopolization and private control in free enterprise systems, securing the
Page 18
public's interest in natural monopolies, achieving economies of scale, preventing excessive competition, protecting and rearing industries, distributing vital resources, protecting the environment, guaranteeing employment, and so forth. The question is how the government intervenes and for what purposes. This is one of the critical issues in twentieth-century politics, and one that has become more acute as the century has progressed. As Louis Mulkern, an old hand in the Japanese banking world, has said, "I would suggest that there could be no more devastating weakness for any major nation in the 1980s than the inability to define the role of government in the economy."
39
The particular Japanese definition of this role and the relationship between that role and the economic miracle are at once major components and primary causes of the resurgent interest in "political economy" in the late twentieth century.
Nowhere is the prevalent and peculiarly Western preference for binary modes of thought more apparent than in the field of political economy. In modern times Weber began the practice with his distinction between a "market economy" (
Verkehrwirtschaft
) and a "planned economy" (
Planwirtschaft
). Some recent analogues are Dahrendorf's distinction between "market rati
onality" and ''plan rationality," Dore's distinction between "market-oriented systems" and "organization-oriented systems," and Kelly's distinction between a "rule-governed state" (
nomocratic
) and a "purpose-governed state" (
telocratic
).
40
I shall make use of several of these distinctions later, but first I must stress that for purposes of the present discussion the right-hand component of these pairs is
not
the Soviet-type command economy. Economies of the Soviet type are not
plan rational
but
plan ideological
. In the Soviet Union and its dependencies and emulators, state ownership of the means of production, state planning, and bureaucratic goal-setting are not rational means to a developmental goal (even if they may once have been); they are fundamental values in themselves, not to be challenged by evidence of either inefficiency or ineffectiveness. In the sense I am using the term here, Japan is plan rational, and the command economies are not; in fact, the history of Japan since 1925 offers numerous illustrations of why the command economy is not plan rational, a lesson the Japanese learned well.
At the most basic level the distinction between market and plan refers to differing conceptions of the functions of the state in economic affairs. The state as an institution is as old as organized human society. Until approximately the nineteenth century, states everywhere performed more or less the same functions that make large-scale social organization possible but that individuals or families or villages
MITI and the Japanese miracle Page 4
