Gems from Japan’s economic history

After the 2007-08 financial melt-down which nearly turned into a depression, economists in the UK and the US began to regret that for too long, they had been concentrating on mathematical economics to the complete neglect of economic history.

Economic history enlightens us as to how economic theories work in the real world. If you were a visitor to the planet Earth from Mars and you were told Christians and Jews conduct themselves according to the teachings of the Bible as summarised in the Decalogue or Ten Commandments, and you went about without observing how they actually conduct themselves, you will be fooled.

Similarly, if a visitor from another planet was told that government and business are strictly separated in capitalist countries, he too would be fooled. As Robert Gilpin has been quoted “politics determines the framework of economic activity and channels it in directions which tend to serve the political objectives of dominant groups and organisations throughout history, each successive hegemonic power has organised economic space in terms of its own interests and purposes.”

Recent economic history of Japan can be divided into the objective of catching up with the west and the objective of recovery for centuries. Japan has been trying to restrict contact with Western nations to protect itself from the imperialists who had annexed India and were trying to occupy China.

After a visit by an American naval fleet and the change of the ruling family from the Shegunate to the Meiji in 1867, Japan adopted the policy of imitating the West’s superior technology and civilisation as one strategy of safeguarding its independence.

The Emperor Mutsuhito (1852-1902) took the name Meiji which means enlightened government to emphasise that the days of feudalism were gone. Japan has to be a modern industrialised country.

At that time, mid 19th century, Japan did not have a corps of entrepreneurs as the other countries of the West. The State has to play a leading role in introducing what later were called light industries such as textiles. It built factories, hired managers and later sold its firms to private entrepreneurs. We can see in this that the policy of privatisation of government business did not begin with Thatcherism in the United Kingdom (UK), Japan had been practising it at least a century earlier.

During World War II, Japan’s industrial infrastructure had been devastated. Now for the Japanese Government, the policy was not catching up with the west, but economic recovery. By the outbreak of World War II, Japan had successfully established industries that constituted the Western economies though most Japan’s manufactures were of inferior quality compared with those of the west.

Throughout its recent economic history, Japan has never been enamoured of the west’s laissez faire doctrine or hatred of big government, meaning a government gets too involved in economic activities. In 1950, the government issued its first economic plan which aimed at modernising industrial plants, the promotion of foreign trade and the reduction of dependency on foreign consumer imports. One year later, the government set about reorganising key industries aided with a large infusion of public capital.

How much foreign investment and how much foreign technology do we need? We are mostly advised that we should provide incentives to foreign multinationals to come here and build factories with their funds and technology. This is seen as the cheapest method of acquiring foreign capital and technology.

The Japanese authorities were wary of this approach in case they lost control of their economy. Foreign capital was acquired through government to government borrowing or portfolio investment, foreign direct investment in major industries was restricted. Management of Japanese industries was restricted to Japanese nationals. This was possible because by this time, Japan had built up its own entrepreneurial class unlike most African countries.

Japan could prosper only by having free access to foreign markets. But this policy was subject to checks and balances, Japan was poor in natural resources. Its main asset was human capital or the genius ingenuity and energy of its people. Businesspeople and public servants collected information on sources of raw materials which Japan industries needed. The two groups exchanged notes.

The Japanese currency was deliberately undervalued to make Japanese exports more competitive in foreign markets, but imports of foreign consumer goods were discouraged. How they did this without provoking retaliations from foreign markets is one of the riddles of those countries which succeed in international trade.

To modernise industry, Japan needs the technologies of the West. The Japanese Government regarded acquisition of foreign technology as one of its primary duties. Between 1950 and 1974, 15 000 types of technological agreements were signed.