Transformation of the Japanese Economy - Essay Example

Transformation of the Japanese Economy Introduction: The economic history of Japan is among the most remarkable of all countries and its quick risefrom a poor, undeveloped country to one of the financially strongest nations of the world is a constant source of wonder for researchers. Commander Perry’s visit in 1853 awakened Japan from an era of economic seclusion and on October 14, 1867 – fifteen years after Commander Perry’s visit, the Tokugawa regime came to an end, initiating a period of restoration of imperial rule.(Ono, 1992, p 3). After the collapse of the Tokugawa regime, the Meiji era began a period of infrastructure building based upon the Meiji policy of creating a wealthy country with a strong military to protect it. The industrial and manufacturing base was strengthened with electrification and military expansion contributing towards strengthening the country’s economy through the development of a strong domestic base. The strength of Japan’s institutions played a significant role in the strength of its economy, so that even after the Second World War and subordination to the Supreme Commander of the Allied Powers, Japan was able to re-emerge as one of the strongest economies of the world (Allen 1981). Japan’s economy has demonstrated a remarkable rise as compared to other countries, and the period of significant economic growth has been marked by three spurts in growth in the 1910s, the 1930s and 1960s. There have been several reasons that have been proffered for the meteoric economic rise of Japan. Perhaps this can best be summed up in the words of one Japanese economist, “Japan is an example of a fantastically creative response to defeat….[which] brought about….a far greater scale of devastation in the economy of Japan, necessitating a fresh renovating start in almost every aspect.” (Tsuru, 1993, p 67) Analysis: The long period of Tokugawa rule could be viewed as an isolationist state, or as some researchers have postulated a period of peace and stability that fostered initiatives by the State to improve economic conditions within the country (Ohkawa and Rosovsky, 1973). During the period of enforced isolation, the economy of Japan was inextricably linked with politics and the culture of the shogun and daimyo ensured that a strictly regulated internal system flourished within the country, which enabled sustained domestic growth. The role of the State in fostering economic growth has also been supported by Mosk(2001) and Minami (1994), who have highlighted the achievements of the Togukawa era , when there was a high level of urbanization and development that occurred within the country such as the development of infrastructure, agriculture and education. . Maddison (2000) provides estimates of real incomes that are based upon the purchasing power of the natural currency, from the period 1880 to 1970 and also appears to support the view that the State function contributed to Japan’s economic success. These researchers are all inclined to argue that external trade is not such an important factor in propelling Japan’s economic growth. Minami focuses upon the gross fixed capital formulation and investment within the country as the stimulating factor for growth during the peak periods.(Minami 1994). Maddison (2000) in his financial analysis of real income per capita has examined figures for several years from 1881 to 1970 and points out that during the 1910s, 1930s and 1960s when per capital incomes were the highest, manufacturing expansion within the country was more vigorous as opposed to the impact of trade, suggesting that increased capital investment within the country and the strong infrastructure were better contributing factors in economic growth. The strength of Japan’s establishment thus plays a vital role in the acceleration of economic growth. Teranishi and Kosai (1993) have contended that the contrast of isolationist policy coupled with expansion of trade has resulted in an advantage to Japan through the delays in accepting free trade. The inward domestic focus of the Tokugawa era has also continued into the present day, to reap more advantages for Japan. As Teranishi and Kosai have pointed out, when capital liberalization was one of the issues at the fore, Japan was reluctant to jump on the bandwagon and the consistent lack of strong leadership led to delays on grounds of such moves not being beneficial to Japan. This attitude also created an insular image of Japan abroad, but the delay in yielding to outside pressures produced a strengthening of the domestic base, which in turn has contributed to Japan’s economic strength. (Teranishi and Kosai, 1993, p 332) G.C. Allen however, offers a different view from those who contend that it is the strength of the State and Japan’s domestic establishments which are the reasons for her economic success. Allen contends that free trade was one of the most important factors that fuelled Japan’s economic growth, because by exposing the country to pressures from outside, there was a more efficient allocation of economic resources through the country. In this context, he provides the example of the silk trade which flourished due to the discovery of markets outside the country and in the absence of trade would not have enjoyed the significant input of income, being restricted by the tightly controlled internal markets.(Allen, 1981). Commander Perry’s visit first opened up the closed Japanese market, however post World War II, the direct controls exercised by the Supreme Commander of the Allied Forces functioned in much the same manner to force the country into trading and many of the deconcentration measures initiated by the SCAP helped to improve trading links between Japan and other countries which has proved vastly beneficial to her economic strength. The Meiji era that followed the Togukawa era has been heralded as the beginning of industrialization in Japan. There was a sudden jump in the living standards and this was directly caused by the growth in agriculture and trade . According to Hayami and Ruttan, there was an economic up turn which was the result of what they term “induced innovation”. A rise in population coupled with land restraints placed Japan in a position where the country was forced to innovate to adapt to the changed conditions and there was added stimulus to develop the kind of crops and land use patterns that would yield the highest returns.(Hayami and Ruttan, 1970). Okhawa and Rosovsky (1973) have also attributed the added value from agriculture to be an important factor contributing to balanced economic growth which is capable of withstanding shocks. These authors also argue that after the IInd world War, there was a sharp rise in imports, especially foreign technology from the United States, which was quickly adapted for domestic use. Moreover, this was coupled with a shift of labor from agriculture into manufacturing, resulting in a more efficient allocation of labor resources. Mosk (2001) has argued that corresponding investments in human capital and domestic infrastructure have helped Japan to maximize the benefit of foreign technology. Gershenkron has based his theory of development of the economies of developing countries on the premise that even backward countries can enjoy rapid economic development within a proper institutional framework(Gershenkron, 1962, p 5-30). This appears to corroborate the views of Mosk and Minawai who have highlighted the importance of Japan’s domestic establishments as a contributing factor to her economic success. Gerschenkron’s theory builds upon Vebler’s ideas about the industrial development of Germany and the United States, wherein Vebler has suggested that it was their very backwardness that enabled them to leapfrog Britain, “paying the penalty for having been thrown into the lead and so having shown the way”. (Vebler, 1915 p 132). Gershenkron has applied this principle in the case of backward Asian countries, especially Japan, that have benefited from the advantages of late development and the facility of being able to imitate the leaders and improve on them. Therefore, while Japan’s isolationist policy may have contributed to a strengthening of her domestic economy, it also rendered her ripe to benefit from the knowledge and experience gained by other countries and to build upon it by adapting it to suit the national framework. The period after the IInd World War was characterized by the influx of foreign technology and goods into Japan. The bilateral security treat with the United States created a new international economic order where there was increased interaction with other countries through trade. This period in Japan’s history has been referred to as the dramatic period of “miracle growth” that occurred between 1953 and the early 1970s. Denison and Chung (1976) have analyzed the reasons for this dramatic surge and have concluded that the increase in domestic fixed capital formation, was aided by Japan’s strong manufacturing and infrastructure base. These reasons, heralding the transformation of Japan from mid-nineteenth century isolation to developed industrial nation status are as follows: (Denison and Chung, 1976) (a) agricultural mechanization and the availability of new improved strains of crops and other technological advances (b) efforts to control population growth and investment in human resources (c ) availability of post war contracts and procurement orders for goods and supplies (d) Steady industrial growth that produced high annual growth rates and high domestic savings rates (e) The development of a consumer economy and increased trading, providing new markets for Japanese goods (f) New industrial policies introduced by the Ministry of Trade and Industry, that focused on use of technology and production of quality goods for the domestic and foreign markets (g) Improved transportation and cargo handling methods (h) The creation of a new industrial base, the focus on quality goods, aided by a young, well educated labor force (i) Support from the Government in the form of subsidies, guidance and support. Conclusion: From the above, it may be noted that there are different reasons offered for Japan’s economic growth. While some attribute it to the strength of establishments and the role of the State in strengthening the domestic economy, others have contended that it was not the State but free trade and the opening up of the Japanese economy that are the real reasons for such success. Others like Gerschenkron have offered the view that Japan, as a developing nation had the opportunity to leap frog upon the technological advances and economic lessons learnt by the more developing countries. While all these appear to be strong and valid reasons that have contributed to Japan’s growth, they are not features that are exclusive to Japan, because there are other countries that also have a strong domestic base and as developing countries have the opportunity to build their economic growth based upon the cumulative experience and knowledge of other countries. However, Japan stands out as a remarkable and unique example of unrivalled economic growth. It may therefore be concluded that Japan’s economic growth cannot be classed as a fiat, neither can any one reason be attributed to be the cause. Rather, the economic prosperity is the cumulative effect of the indomitable will and creativity of her people. Japan’s economic progress has been a long drawn out process, built upon a foundation that has been painstakingly set up during its occupation periods through a strengthening of its domestic infrastructure, so that when the opportunities have arisen for foreign trade, Japan has been able to effectively seize those opportunities, being empowered through its domestic economic standing to do so. Japan also demonstrates that unique capacity to rise up from the ashes of defeat, to emerge stronger than before. The dramatic economic miracle that is Japan, especially in the post IInd World War can thus be explained only as a “fantastically creative response to defeat.” (Tsuru, 1993). References: * Allen, G.C., 1981. A short economic history of modern Japan London: Macmillan Press * Denison, Edward and William Chung, 1976. "Economic Growth and Its Sources." In Asias Next Giant: How the Japanese Economy Works, edited by Hugh Patrick and Henry Rosovsky, 63-151. Washington, DC: Brookings Institution * Gerschenkron, A, 1962. Economic backwardness in historical perspective In Economic backwardness in historical perspective: A Book of Essays Cambridge, Harvard University Press, pp 5-30 * Hayami, Yujiro, and Vernon W. Ruttan, 1970. "Factor Prices and Technical Change in Agricultural Development: The United States and Japan, 1880-1860. "Journal of Political Economy 78 (September-October), pp1115-41. * Maddison, Angus, 2000. Monitoring the World Economy, 1820-1992. Paris: Organization for Economic Co-operation and Development, 2000 * Minami, Ryoshin, 1994.. Economic Development of Japan: A Quantitative Study. [Second edition]. Houndmills, Basingstoke, Hampshire: Macmillan Press * Mosk, Carl, 2001. Japanese Industrial History: Technology, Urbanization, and Economic Growth. Armonk, New York: M.E. Sharpe. * Ono, Giichi, 1992. War and armament expenditures of Japan. New York: Oxford University Press * Ohkawa, Kazushi and Henry Rosovsky, 1973. Japanese Economic Growth: Trend Acceleration in the Twentieth Century. Stanford, CA: Stanford University Press. * Teranishi, Juro and Kosai, Yutaka, 1993. The Japanese experience of economic reforms New York: St. Martins Press. * Tsuru, Shigeto, 1993. Japan’s capitalism: Creative defeat and beyond. Cambridge: Cambridge University Press * Veblen, Thornstein, 1915. Imperial Germany and the Industrial Revolution New York: Macmillan and Co. Read More