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06.11.2013 г.

The role of State in the process of economic modernization of Japan

Irina Lebedeva

The way of modernization adopted by Japan since the beginning of Meiji era and continued till the end of 1980s was catch-up development.This type of modernization is marked with a high degree of government involvement in that process, especially in the sphere of economy. But the model of state's involvement in economic modernization after World War Two differs from the model of pre-war period.

From the earliest years of Meiji and till the end of World War Two the Statein Japan was a major property owner and entrepreneur, occupying key positions in several crucial sectors of national economy. Moreover, government exercised comprehensive control over all critical areas of economic life, directing, regulating and controlling, among other things, the development of sectors, where it had no property and was not doing business, but which were important for the purposes of catch-up development. For example, on the eve of World War One the share of State in National Wealth( including manufacturing, transportation, finance, infrastructure etc.) was about 50%. Later, as a result of the development of private enterprise, first of all the growth of the power of dzaibatsu, the share of state in National Wealth began to decline, but at the beginning of1930s it was still about 30 %[1]. The state continued to occupy the dominant positions in transportation, communication and infrastructure,strengthening its control and regulation over manufacturing, finance and power generation.

As a whole, we could say, that till the outbreak of War with China in summer 1937 Japan was rapidly moving on the way of economic modernization and had achieved a substantial progress on this way. But in war period the tasks of economic modernization were relegated to the background while all national resources were mobilized for military purposes. Moreover, as a result of war the achievements of previous economic modernization were swept away: about 30 % of production capacities of heavy industries were destroyed, and remained part - was played-out because of overload in war time, civil sectors, including agriculture, badly degraded, the structure of economy was deformed and so on. In other words, after the war, in different economic, political and social circumstances, Japan faced the task of economic modernization again and as acute as ever.

During first post-war decade the main task of the government was to restore as soon as possible the national economy, destroyed by the war. That task was largely completed by the middle of 1950s..By the same time as a result of a series of reforms (undertaken partly under the pressure of occupation authorities) all preconditions, necessary for rapid economic modernization, were created. The most important reforms were land reform, dismissal of dzaibatsu, tax reform, reform of public enterprise, stabilization of monetary system, adoption of laws, which made Japanese legal system adequate to the systems of developed countries.

Thus, in the middle of 1950s Japan entered a new stage of catch-up modernization, which was accomplished by the end of the 1980s. That period was marked by a giant leap forward and Japan became one of the most advanced countries in the world as regards quantitative as well as qualitative economic characteristics. Of course, the main part of the work on economic modernization was done by private enterprises, but the role of state was great too.

In post-war period the type of state involvement in economic modernization has changed. First of all, there was the substantial reduction of the extent of State's participation in that process as property owner and entrepreneur. As a result of a series of reforms the share of state in national wealth dropped to 11 % by the end of 1980s[2]. But this reduction was more than offset by the use of all other forms of regulation. As a whole these forms can be grouped as follows :

- defining long- and medium-term goals of economic developmentfor separate branches, sectors, regions and country as a whole;

- encouraging the private sector to develop in line with this goals;

- establishing frameworks, norms and standards for private business to improve resource efficiency, ensure environment protection, raise quality of goods and services, etc.;

- directly participating in R&D and supporting R&D in private sector.

The involvement of State in the process of modernization was so comprehensive and multilateral, that it seems that Japanese state had not overlooked any area or any sector of national economy. But special attention was paid to manufacturing as a base for modernization of all other branches and sectors of economy. On an example of manufacturing I shall try to show what and how Japanese government had made to modernize national economy.

But before it's necessary to say some worlds about the approach of Japanese bureaucracy to market regulation. The American japanologist Daniel Okimoto describes this approach as "preventive" unlike the mainly "reactive"approach, typical for other developed countries. That difference results from more "broad" interpretation by Japanese bureaucracyof the meaning of "market failures". While in Western countries "market failures" means the negative impacts (results) of economic development, which already took place,for Japanese bureaucrats they also mean possiblefuture impacts, which from the standpoint of government do no accord with national interests and have to be prevented. Daniel Okimoto, as well as other scholars, who study theJapanese model of state regulation of economic development, attribute this approach to a number of peculiarities of the country's economic, historical and cultural development[3].

This is a subject for a special discussion, but it's quite clear, that the broad interpretation of the meaning of "market failures" by Japanese bureaucrats provided the basis for more broad and intensive, than anywhere else in Western World, intervention of the State in economic development.

As to the participation of the state in modernization of the Japanese industry, if to be absolutely exact, it should be noted that intervention of the Japanese government in this process began since the end of the 1940s. In 1949 the Council for industrial rationalization was set up as an advisory body attached to the Ministry of International Trade and Industry. In 1951 it published "Guidelines of the Policy for Rationalization of Production in Japan". The main declared goal was to raise the efficiency and technical level of Japanese companies by focusing efforts on the following:

- standardization of production processes and equipment, improvement of quality of raw materials and semi-finished products;

- renovation of production through, among other things, imports of new equipment and know-how;

- modernization of the system of company's management, including accounting system, quality control, etc[4].

There was determined the list of priority industries and productions to be covered by measures of government support (about 50), and far from all enterprises of selectedindustries got access to the privileges, provided by government, but mainly large, technically advanced firms. As situation improved in regulatedbranches (by the middle of 1950s a majority of them could cut production costs), the focus of state regulation began to increasingly shift from rationalization of production to rationalization of industrial structure of manufacturing as a whole.The propagation and active support of the development of new industries were regarded as most important in this respect. For the first time this idea was officially announced in the Five-year Plan, passed in December 1955, that called for economic independence, and later was confirmed in a number of plans and programs.

It is clear, that the task of defining the purposes and the directions of development of manufacturingwas somewhat facilitated by the fact that Japan was passing a stage of catch-up development, that is to say, was going on the way, laid (or paved) before by thedeveloped countries.Nevertheless, it was not a simple task to select from all variety of industries and productions, "offered" by world scientific and technological progress, those, which would allow country to use its competitive advantages in the best way.

The policy of industrial structure rationalization (often called a structural policy) was based on the concept of dynamic comparative advantages. It means, that state hasto support not those industries that have comparative advantages and international competitiveness at the given moment, but those that would have such advantages and competitiveness in the future[5].In selecting such industries Japanese government, namely The Ministry of International trade and Industry, had two criteria in mind: income elasticity of demand(primarily, in different countries around the world) and rates of technological progress in different industries[6].

In second half of 1950s and till the end of 1960s state support and incentives were given toa number of productions of electronic machinery and general machinery, oil-refining, petrochemical industry, non-ferrous metallurgy and power generation.

As it's known, by the end of 1960s Japan became second in the world industrial power and one of the largest exporters of industrial products. At the same time the technological level of production also increased substantially. Japan possessed the youngest in the world machine park, and byequipment productivity ina number of leading industries (iron and still, shipbuilding, petrochemical industry) she surpassed not only the European countries, but also the USA.

At the end of 1960s it became clear, however, that the former type of industrial development should be changed substantially because of its negative effects, such as massive pollution of environment by industrial waste, the extremely uneven location of industry on the country's territory, insufficient development of infrastructure, the growing shortage of young labor force etc.

The Japanese government met this challenge rather quickly. In May 1971 The Council for Industrial Structure, attached to MITI, published a report "What Should be the Key Areas of Industrial and Foreign Trade Policy in the 1970s?"[7].

Taking into account the negative effects of previous development and having carefully analyzed achievements of world scientific and technological progress,the government offered business community the grandiose program of restructuring of industrial structure. This time the determination of industries,which were supposed to form the base of economic growth in 1970s and later, was based on four criteria: income elasticity of demand, rate of labor productivity growth,impacts on the environment, working conditions. As a result the priority was given to so called"intellect-intensive" industries, namely the industries, that requires heavy expenses on R&D and highly skilled labor, and the program of restructuring was called a program of "intellectualization" of production structure. The priority industries were: production of computers, aircrafts, industrial robots, integrated circuits, fine chemicals, sophisticated industrial equipment, communication and office equipment, high quality householdappliances and electronics and so on.

The discussion over the ways and methods of the restructuring of productionwas at its height when the first oil shock occurred. It put an end to the imports by Japan of fuel and raw materials at low prices and made the need for restructuring even more urgent, as revealed that the most weak spot of Japanese economy, and manufacturing in particular,was its very high energy- and material-intensity.

In the following reports of the Council for Industrial Structurethe course on priority development of intellect-intensive industries has been confirmed, but the main goal of restructuring became the building of an economy with low energy- and material- intensity.

Meanwhile,it took Japanese economy about three years to overcome the aftereffects of first oil shock, andin the phase of recovery (in 1976) it entered with heavy burden of so called structurally sick or depressed industries. This group was mainly made up of heavy industries with huge energy and material consumption - oil refining, production of chemical fertilizers, pulp and paper, ferrous and nonferrous metals and some others (including shipbuilding).

In order to avoid massive bankruptcies and social upheavals the Government (represented by MITI) joined hands with the business associations and began to draft a wide-scale program to improve the situation in depressed industries. Thus, in the second half of 1970s and through the 1980sthe main direction of the state efforts on the rationalization of industrial structure was thesettlement of situation in depressed branches.

Three special laws were passed (in 1978, 1983 and 1988), which formed the legislative base for state involvement in that process. The main objective of these laws was to "withdraw" the depressed industries from the sphere of market forces and to help them to cope with their problems through coordination of efforts to cut production and to scrap production capacities. The scales of scrapping,which has been carried out in Japan, have no analog in the modern history: between 20 % to 40% of the existedproduction capacities have been scrapped. If we recall, how greatwas the industrial power of Japan,and how high was the technological level of its industry, we can easily imagine, how large-scale and painful was this process. An extremely complicated and painful scrapping mechanism was designed in the following manner. First, representatives of companies, business associations and government officials held numerous consultations to determine the scales of scrapping for every company. Second, the mechanism of partial compensations for the losses to companies stated for scrapping was put into effect. Third, those companies were also guaranteed low- interest rate state credits for rationalization and restructuring[8].

Due to joined efforts of state and private business by the end of 1980s the structural problems of depressed industries were successfully resolved. Asto support and encouragement of the development of technologically advanced, science-intensiveindustries, of course, the Japanese government had not overlooked this task too, but this direction of its effortslooked rather modest in comparison with the efforts, undertaken in depressed industries.

How did Japanese government encourage private enterprises to develop in line with the goals of state policy?For these purposes Japanese government used, first of all, the different financial instruments of a stimulating nature.

 First, priority financing of the companies in selected industries by state financial institutions through providing them with low-interest credits of the Japan Development Bank and the Export-Import Bank, as well as with subsidies from the state budget (but the latter instrument applied to extremely limited number of industries and primarily in 1950s-1960s).

 Second, the creation of a special mechanism, that provided the inflow into the selected industries of financial resources of private banks. In Japanese this mechanism is called madoguchishidoо (the governance through the window). It was the mechanism of the rationing of creditsof the Bank of Japan to private banks. Namely, taking into account a shortage of financial resources in the country,the Bank of Japan gave loans to private banks on condition that they will credit first of all enterprises of the selected industries.

Third, the preferential taxation of the enterprises in selected industries, aimed at encouraging investments in equipment, growth of exports, strengthening of a financial state of the enterprises. Among tools of this block it should be noted the lowering of import duties and tax rateson fixed capital for the equipment, necessary for modernization, permission of creation of new types of reserve funds at enterprises, partial tax exemption of the incomes from export, introduction of the accelerated depreciation for certain types of equipment, etc.[9]

And last, but not least -to encourage private enterprises to develop in desired directions Japanese government used such tool as so-called administrative guidance, whereby a government official, not being officially authorized to intervene in the activities of private enterprise, could unofficially ask it to undertake certain steps or to refrain from them. It's well known,thatthis practice takes place in other countries too, but the extent of its use in Japan was far greater than in the rest developed world. Many Western and Japanese scholars see the roots of this phenomenon in the specific features ofJapanese culture, which assigns to Japanese bureaucracy a special role in the life of society, and in specific nature of relationships between government and business[10].

As tothe third direction of state participation in economic modernization - establishing frameworks, norms and standards for private business - all governments, in all countries are engaged in this work, but, as well as a in the case of administrative guidance, in Japan its scales were far greater than in other countries.On the basis of special laws and bylaws, governmental and ministerial instructions the government established standards and norms, aiming to lift a technological level of production, to increase efficiency of use of resources, to strengthen competitiveness of domestic production, to improve quality of goods and services and so on. For example, in 1950s- 1960sin a number of industries standards for industrial equipment were established (i.e. the companies were allowed to install machines and the equipment only approved by MITI categories). Till the end of 1960sgovernment used such tool, as control over purchases by private firms of patents and technologies abroad. In1978 the special law established the norms of heat and energy consumption in the process of production and assigned the state with the right of control over the observance of these norms by private enterprises. As a whole,by the end of 1980s about 1/3 of Japanese economy fell under different kinds of regulations, and a whole number of regulations exceeded 10000. How carefully this system waselaborated, we can judge by the number of terms, described different types of regulations - there were more than 20 (license, permission, approval, confirmation, instruction, notice, etc.)[11].

 As to the last direction of state participation in modernization - its role in R&D - it's well-known that till the middle of 1980s import of technologies was the main source of innovations for Japanese industry (in1950-1989 about 55 thousand licenses were bought). But expenses of Japan on R&D quickly increased and by the beginning the 1980s their volume was already 1/3 of the respective expenses of the USA, and by the end of 1980s - nearly 45%. The share of the state in these expenses was about 20-30%, and the share of private firms - about 70-80 % respectively[12]. While the state scientific research institutes and universities conducted mainly basic research,in area, which business found unappealing, the private companies specialized mainly in applied research.

At the same time the state played an important role in determination of the strategy of scientific and technological development of the country.The Japan strategyin this areacan be calledselective and pragmatic. State called to concentrate country's own efforts in certain priority areas, which were crucial for the development of economy and society and could bring particularly high and quick results. The work on determination of such areas was assigned to two governmental bodies - Science and Technology Agencyand Council for science and technology (an advisory body attached to the government). In particular, since 1971 one of the most important directions of the work of the Science and Technology Agency became the preparation and publication every five years of the Forecasts of world scientific and technological development.These forecasts included very important for private companies information: аlist of the most promising products and information about key technologies, necessary for their production, estimates of market size and time of appearance of these products at the market, etc.[13].

And, finally, as to supporting R&D in private sector, since the middle of 1970s the main objective of government's efforts in these sphere became to encourage private companies (by granting them tax cuts) to organize joint research in the area of advanced technologies. One of the most successful stories was joint project undertaken by several Japanese companies in the area oflarge integrated circuits, as a result of which Japanese companies could become No1 in the world in this sphere.

 As to evaluation of the state role in the process of modernization of Japanese industry, I side with the scholarswho think that its role in this process, resulted in Japan's becoming a great industrial power, was outstanding. It is owning to the state efforts that an extremely favorable environment for investments and renewal of equipment in Japanese industry was created, and it is owing to the sense of being protected that Japanese companies could undertake ambitious projects which brought out them to the most advanced positions in the world.

As to the other sectors of Japanese economy, the scales of government intervention in their development were much more modest. Moreover,in a lot of sectors (agriculture, finance and insurance, wholesale and retail trade, public caterings) the main goal of the government was to limit market forces, to protect the weak from destructive market competition through different kinds of regulations.It resulted in high costs and prices (first of all in agriculture), but allowed the weak to stay "afloat". Despite considerablescales of suchpracticeit did not suppress initiatives to entrepreneurship as a whole, and due to inherently egalitarian consciousness of Japanese people its social goals were close and clear to the majority of population.

In conclusion, I'd like to pay attention to the following point. Namely, that in Japan practically all citizens and strata of population could benefit from the fruits of country's rapid modernization . As a result, by the end of 1980s Japan became not only the second economic power, but one of the most prosperous countries from the viewpoint of standards of living of the most part of population.Through system of the progressive taxation of the incomes of individuals, establishment of high rates of taxes on inheritance, use of a system of discounts and deductions from taxable base for certain groups of the population the government purposefully carried out redistribution of the national income.

This is confirmed visually by dynamics of Gini coefficient, presented below.

  Current income
Financial assets
· Kokuminseikatsuhakushyo (White Paper on People life), T., 2006, p. 275; Tookei de miru Nihon (Japan through Statistics), T., 2008, p. 63.

[1]А.И. Кравцевич. Общественное предпринимательство в Японии (A.I.Kravtsevich.Public Enterprise in Japan). М., 1988, с. 61.

[2]Ibid., p. 275; D. Okimoto. Between MITI and the Market. Stanford, 1989, p.2.

[3]See: Okimoto D.I. Between MITI and the Market, p.11-12. The Political Economy of Japan.Vol .2.Stanford,1989.

[4] К вопросу об использовании опыта послевоенного восстановления экономики Японии для России (AboutapplicationofJapan'sExperienceofpost-warrestorationinRussia) . Отв. ред. А.И. Кравцевич. Токио, 1995, с. 77-79.

[5]Shinohara M. Japanese -Type Industrial Policy. Tokyo, 1980, p. 15.

[6]Ibid., p. 6-8.

[7]Nanajunendai-no tsushyoosangyooseisaku-no kihonhookoowaika-ninarubekika? Tokyo, 1971.

[8]R. Uriu. Troubled Industries.Confronting Economic Change in Japan. N.Y. 1996, p. 230; Daiichikangyoosookenrebyu. 2000, N 1, p.27; M. Uekusa . Industrial Organization: from 70-s to the Present. Tokyo, 1985, table 6.

[9]See:С.В. Брагинский. Кредитно-денежная политика в Японии.(S.V. Braginsky. MonetarypolicyinJapan). М., 1989, гл. 1: Квопросуобиспользованииопыта, с.87-107.

[10]The political Economy of Japan, p. 338-339.

[11]Kiseikanwahakushyo( White Paper on deregulation). Tokyo, 2000; Япония 90-х:кризис системы или временные сбои? (Japaninthe 90-s: SystemCrisisorTemporaryMalfunctions?). М., «Восточная Литература» РАН, 1998, с. 13.

[12] Япония 90-х:кризис системы или временные сбои, с. 182-183.

[13]Япония: полвекаправлениялиберал-демократов (Japan:HalfaCenturyoftheRule of Liberal Democrats).М., 2010, с. 150.
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