Japanese Model Of Economic Development example essay topic

Was the crisis in Japan during the 1990's due to its model for economic development? Content: 1. Introduction 2. Japan, a late developer 2.1.

The origins of economic inequality 2.2. A model for economic growth 2.3. A model of state-led development 3. The Japanese model of development 3.1. A social model of development 3.2. Japan's model of capitalism 3.3.

Managerial advantages 4. The crisis of the Japanese model of development 4.1. High non-performing loans 4.2. High-technology 4.3. The bubble burst in 1991 4.4.

Financial institutions exposed to global financial markets 5. Conclusion Introduction Until the end of the 1980's, Japan was considered, rightly, to be the world's success story of economic development and technological modernisation of the past half-century. After its defeat in World War II, Japan achieved an extraordinary hyper economic growth and a technological transformation that enabled the country to succeed in the process of catching up with the Western European states and North America. This "Japanese economic miracle" was, initially, based on the so-called Kaldorian strategy that allowed the states, which had started to industrialize after Britain, to develop successfully.

But most importantly, the Japanese success was due to its model of state-led economic development, which not only induced its own revival after World War II, but also provided a role-model that has been admired by many other countries. By the 1980's, the major state's interest in Japan had intensified considerably. It seemed, Japan had redefined the notion of competition, the organisation of production, and economic progress and development ("Explaining the Japanese economic miracle", Japan and the World Economy, 2001, Vol. 13, Issue 3). Then suddenly, in 1991, the speculative bubble in Japanese land and stock prices burst, and the Japanese economy began its long slide through lower growth rates into recession. While in 1999 the Japan's economy seemed to be on its way to recovery, most of the problems underlying the financial crisis were unsolved, so that the restructuring of the country was still unfolding at the turn of the century (Castells, 2000: 233). If we are to expect a successful restructuring of Japan, we should determine the factors that caused the decline of the Japanese economy.

I suggest that the state guidance that had been seen, before the bubble burst, as one of the main engines driving Japanese economic success and was now regarded as inept and rudderless, could be the main problem underlying the Japanese crisis. In doing that, my purpose here would be to examine whether the crisis in Japan during the 1990's was due to its model for economic development. In order to do that, I will first look at Japan, as a late developer. Secondly, I will outline the Japanese model for development. And finally, I will explain the factors that were crucial in the Japanese financial crisis.

Japan, a late developer The origins of economic inequality The industrial revolution in Britain at the end of the 18th century posed a great challenge for the rest of the world. However, it did not change the inner working of the world economy so much as it accelerated a process that was already underway. A process of economic inequality, explained by the 19th century economist, Johann von Thunen, that emerged after 1400 and that originated from the global economy. Von Thunen created a town that produced manufactures and exported them to the farms around it, while these supplied the town with agricultural products and raw materials. Referring to this distinction, I will also use the terms core and periphery. Von Thunen argued that it would generate a spatial division of labour with sharp disparities in incomes between the core and the periphery.

The outermost rings would have much lower incomes than the town. Consequently, the cause for this economic inequality would be the periphery's engagement in commerce with the core. The economic growth generated by the industrial revolution underpinned Britain's rise to global hegemony after 1814 (Schwartz, 2000: 77). Similar to Von Thunen's town, Britain's exploding demand for raw materials and rising industrial population pushed agricultural production out of Europe, generating a global set of agricultural production rings. But Von Thunen argued that although the urban industrial core exerted pressure into the peripheral zones, this did not necessarily mean underdevelopment or lower living standards. The industrial revolution in Britain drove the states in the periphery to an industrial backwardness, but in the same time forced them into more intensive development.

Japan was one of the many states that was driven to the periphery and that started to industrialize four generations after Britain. A model for economic growth As a late developer, Japan succeeded in catching up with the Western world. It applied, initially, a model for industrial growth, called a Kaldorian strategy. This strategy relied mainly on the so-called verdoorn effects or increasing returns to scale. This meant that if a firm increased its output, the productivity of the same firm would increase also. Another element of the Kaldorian strategy was learning by doing.

If a given firm increased its production, it would have enough experience in its production process to become more efficient at producing its goods. Ignoring Ricardo's comparative advantage, a state, which initially was not competitive in the production of a good, could become competitive through a process of learning by doing. A state that applied the Kaldorian strategy would be oriented towards the production of manufactures and their export. Most importantly, the Kaldorian strategy for economic growth attempted to construct a new town somewhere in the agricultural or low value industrial supply zones surrounding a larger town (Schwartz, 2000: 62). The British demand for raw materials forced the Asian states to become exporters of primary products to Britain.

This, in turn, created demand for manufactured goods inside East Asia and the returns derived from the exports to Europe allowed the East Asian states to pay for the industrial products. Japan was the state that started to satisfy the intra-Asia's demand for manufactures, creating an industrial town there, reorienting production around itself and therewith stimulated growing demand that, finally, displaced the pressure emanating from the larger town, Europe. Japan took advantage of the East Asian textile market, which had remained untouched by the European producers. The country used the agricultural surplus to fund its initial investment in the local textile production.

By applying the verdoorn effects and by concentrating capital for investment in its nascent industry, Japan increased its textile productivity to the point where it could compete with Europe. The transition from low-quality to high-quality textile manufactures allowed Japan to become the industrial core within East Asia. The country exported finished textiles to India and China while it imported raw cotton from India and rice from Taiwan (Schwartz, 2000: 99). A model of state-led development As we have seen, Japan became the new core or town within East Asia, replacing the larger one, namely Europe. Japan provided both the principal engine of economic integration and the influential model of economic development for East Asia. Although Japan had an initial success in development, the country could not have succeeded in its definitive process of catching up with the Western world by only using the above mentioned Kaldorian strategy for economic growth.

Japan pioneered a model of state-led economic development that not only underpinned its own remarkable resurrection in the aftermath of World War II, but also provided a role-model for a number of other countries within the East Asian region (Stubbs and Underhill, 2000: 353). Gerschenkron argued that the later any given country's industrialisation started after Britain's, the greater the degree of state intervention needed to make industrialization successful (Schwartz, 2000: 86). Thus, according to him, late development could succeed only in economies where the state intervened to protect local industries and where the banks, guided by the state, provided capital for investment by squeezing agriculture that otherwise would not have occurred. Gerschenkron asserted that the economic development of a state could be determined by its internal politics and institutions, and that the position of a state on the world economy depended on the role of the state. The Japanese model of development A social model of development During the past half-century, we have witnessed the hyper economic growth and technological innovation of Japan, which could be explained by the internal dynamics of its society. These achievements required a strenuous effort from the entire Japanese society.

After its defeat in World War II, the Japanese people mobilised collectively first to survive and then to reach the Western level of economic development by peaceful means. Initially, labour policy and capital markets were designed to achieve a cohesive national policy and to overcome the wounds of the war, rather than as a means to create an efficient economy (Stubbs and Underhill, 2000: 135). At the heart of the Japanese process of development was, thus, the nationalist project of the developmental state, enacted by the state bureaucracy. The state government imposed regulations on business through the Ministry of Finance, which controlled the budget, and had the material power of decision-making. Its two main instruments were the Ministry of International Trade and Industry (MITI), and the Bank of Japan (Castells, 2000: 226), since credit, import and export allocations, and support for technological innovation were the tools through which state bureaucracy was able to co-ordinate and organize competition.

The Japanese development relied also on the social stability that came from the people's commitment to rebuild the nation, the patriarchal family, and the substantial improvement of living standards. The social mobilisation was, namely, the factor that enabled the Japanese state to intervene and guide the economic life of its society. The patriarchal family survived the accelerated industrialisation and modernisation as a stable unit. It reproduced traditional values and induced work ethics, unfortunately at the cost of submitting women. Japan's model of capitalism Japan was the only one that had successfully challenged the economic dominance of North America and Europe. By the end of the 20th century, its economy had become the second most powerful in the world.

And this was accomplished in spite of the vast devastation that the country suffered as a consequence of its defeat in World War II. By 1952, when the occupation of Japan came to an end, the country had regained its pre-war level of production ("From fast to last: the Japanese economy in the 1990s", Journal of Asian Economics, online 2 march 2002). In the period between 1955 and 1973, the average annual growth rate of the Japanese economy measured in terms of real GNP rose to almost 10% ("Explaining the Japanese economic miracle", Japan and the World Economy, 2001, Vol. 13, Issue 3). The economic growth and structural transformation in Japan were embedded in institutions and guided by policy.

During the period of 'miracle' economy, Japan developed a corporate model of capitalism, imposing capital control and having a highly regulated economy. As Gerschenkron required, the state bureaucracy guided and protected the Japanese corporations with the aim to enable them to compete successfully in the world market. The state made this possible through its trade and technology policy, and through extending credits to the Japanese corporations. Trade surplus was recycled as financial surplus and there was a high rate of domestic savings. The government promoted the establishment of banks that provided short-term lending at a low interest rate. The banks were taking deposits and investing shares in order to accelerate industrial growth.

This example of state intervention fostered the development of large corporate conglomerates in private hands and sought to reduce trade and financial dependency on foreign sources. Managers were placed in the driving seats of corporate Japan, along with bureaucracies and political parties (Stubbs and Underhill, 2000: 135). The financial market was highly regulated to ensure monetary stability and to protect depositors from bank failure. In order to protect the internal market or the large corporations against external pressure, Japan developed a mutual or cross-shareholding system, a practice whereby firms held stocks in one another. This system functioned as a hedge against hostile takeover, curtailing foreign market access and ownership. At the same time, the system required open markets for exports and for corporate assets in other countries.

The home market was the launch pad for the conquest of foreign markets, and the domestic market was protected by all manner of corporate practices (Stubbs and Underhill, 2000: 135). Much of the rapid growth between 1955 and 1973, derived from Japan's export orientation. The exports exceeded the imports and this differential increased the growth rate. In 1987, Japan's trade surplus reached a whopping $96 billion (Woronoff, 1996: 55). Managerial innovations during the 1950's allowed Japanese firms, particularly electronic and automobile firms, to become internationally competitive. Their exports into the US and European markets, swept aside other small-car producers.

By 1980 Japan had about 20 percent of the US market and just over 10 percent of the entire European car market (Schwartz, 2000: 233). Managerial advantages Managerial innovations in Japan undercut the US dominance in manufacturing and eroded, consequently, the US hegemony in the 1970's and 1980's. Japan became a highly competitive exporter of, particularly, electronics and car manufactures, able to out compete producers in all of the world's major markets. The managerial innovations were at the level of firm organization, the keiretsu; at the level of production processes, kanban; and at the level of the worker, via kaizen (Schwartz, 2000: 281). In post-war Japan, capital was extremely scarce. Therefore, firms could not afford to tie up capital in inventory simply to buffer against defects.

Instead, they looked for ways to produce only what was needed. From this situation emerged the kanban, also called 'just-in-time-inventory'. It referred to a zero-parts buffering of inventory, whereby the firms saved money on inventory holdings. This system was combined with a zero defects policy, putting pressure on producers to deliver defect-free parts. Kaizen referred to continuous improvement of production, products, and producers. This system provided multi-skilled, efficient producers and a high quality of management.

Japan developed a new entrepreneurial system of partially disintegrated firms, called keiretsu, building on the ruins of their pre-war bank-based business manner of organisation. The Japanese elites spun a web of connective networks (Stubbs and Underhill, 2000: 384). This relationalism was characterized by co-operative bonds between state and industry, between firms, and between management and labour. Keiretsu or inter-firm groups permitted coordination between the large manufacturers and the small suppliers. The inter-firm ties allowed producers to reduce risk and to finance expensive development projects like new car models.

The relationalism permitted companies to allocate capital into new areas related to its original business. Due to these innovations, Japan's own automobile production doubled with over 11 millions units between 1970 and 1980, making it the world's largest car producer and exporter (Schwartz, 2000: 292). The crisis of the Japanese model of development High non-performing loans In the 1980's, Japan showed a structural weakness that manifested itself in a financial crisis. What could have caused the demise of the Japanese financial system?

The main problem was the huge amount of non-performing loans accumulated by Japanese banks, estimated in 1989 at about 80 trillion yen, equivalent to 12 percent of Japan's GDP (Castells, 2000: 233). The Japanese banks were in a desperate situation, considering that only two of the top 19 banks had an adequate capitalisation to cover their potential losses. But why were there so many bad loans, and why was their potential default ignored for such a long period? The answer lies in the contradictions built into the Japanese model of economic development, aggravated by the growing exposure of Japan's financial institutions to global markets. As explained above, the rapid growth relied on a government-backed financial system that protected both savers and banks, while providing low-interest, easy credits for firms. Savings and investments were channelled into deposits in banks.

For example, one-third of all household savings went into bank deposits (" Introduction to the symposium on the Japanese economic slump of the 1990s", Journal of International Economics, 2001, Vol. 57, Issue 1). At the end of the 1980's, the end aka - strong yen shock- caused a massive overcapacity in basic goods and an increase of export prices that reduced the competitiveness of Japanese exports across the borders. Despite the sharp appreciation of the currency and its consequences, the companies had managed to adjust rapidly and could sell again. Japanese exports flooded foreign markets and profits rose again. At this point, Japan could have opened its economy, and used the purchasing power liberated by falling import prices to generate consumer-based, domestic-oriented growth (Schwartz, 2000: 307). But this would have hampered the domestic political and economic interests.

Instead the Bank of Japan, as we have seen, tried to promote domestic growth by lowering interest rates to 2 percent and the Ministry of Finance pursued an expansionary policy (Woronoff, 1996: 244). Companies could thus borrow at very low bank rates or, even more advantageously, they could issue shares on domestic and foreign markets. For a long time, Japanese financial institutions functioned in relative isolation from international capital flows, and under regulations set by the Ministry of Finance. In 1986, Japanese government agencies enforced a total of 10,054 regulations, from licensing and permitting requirements to quality standards. A decade later, in 1996, that number had increased by almost 10 percent to 10,983 (Stubbs and Underhill, 2000: 385). This large number of guidelines occurred during a period when Japanese financial markets were being exposed to heavier and heavier doses of globalisation.

The banks were linked to a keiretsu, and were therefore obliged to lend to preferred customers. In return, they were covered by keiretsu or the inter-firm ties structure. The government took care that no bank would go bankrupt. Unfortunately, banks were deprived of autonomy by being an instrument for capturing savings and allocating them to targets decided by the state bureaucracy. The bad loans were directly collateralized by property and shares. In this way, with low risk and low interest rates, the Japanese banks had an interest in high-volume lending.

As a consequence, the real-estate and stock prices began to rise, tentatively at first, and than vigorously. As an illustration, between 1983 and 1988 average prices of residential and commercial land rose, respectively, by 119 percent and 203 percent in the Tokyo area (Castells, 2000: 235). Thus, land and stock prices zoomed up 300 to 400 percent in response to falling interest rates. High technology The world economy during the 1980's and 1980's was characterised by the quick development of the information processing industries and their associated transportation and communication revolution.

The key technology in this cluster was the integrated circuit (IC) in its various forms, like memory chips (DRAMs), application-specific chips (ASICs), and microprocessor units (MP Us) (Schwartz, 2000: 294). Japan combined the strengths of its kaizen, kanban, and keiretsu with the state-guided industrial policy. And this allowed them to catch up with the US producers. Already in the 1960's, the Ministry for International Trade and Industry (MITI) wanted IC production and it had targeted information industries. MITI encouraged and finally consolidated state and private R&D (research and development) programs in ICs. Roughly one-third of the program's funds were spent buying the most advanced US IC manufacturing and quality-testing equipment.

Through a reverse engineering, Japan's firms learned how to make their own equipment, whereby they surprised the US producers by capturing about two-fifths of the IC market. Unfortunately, during the late 1980's, this Japanese ability to compete with the US production declined significantly. Japanese weaknesses apparently stemmed from some of the very factors that gave them their competitive edge when they engaged in catch-up activities (Schwartz, 2000: 295). And indeed, while kaizen permitted the constant increasing improvements needed for catching up, it hindered the kind of radical breakthroughs on which technological leadership rested. Instead of encouraging the development of new technologies, R&D centres engaged in buying US IC products, proceeding to reverse engineering, and thereby reproducing the models. The 'bubble burst' in 1991 In 1991 the so-called Heise i recession started.

The real-estate and stock-market bubble burst was critical in the demise of the Japanese financial crises. As mentioned above, the overheated economy pushed the yen's exchange rate upwards, undermining Japanese trade competitiveness. But a strong yen, and a buoyant stock market, induced corporations to enter financial investments and lent large sums, both internationally and domestically. Real-estate prices finally came down because of the structural incapacity of housing demand to absorb price increases and because of overcapacity in the office-building market (Castells, 2000: 236). Stock markets followed the drop, de stabilising Japan's financial system. Fearful of inflation, the government put the brakes on the economy, inducing a recession in the early 1990's.

For the first time in four decades, the Japanese economy became stagnant. In 1990, the Bank of Japan significantly tightened monetary policy to deflate the speculative bubble, dropping money supply growth to zero in 1992 (Schwartz, 2000: 308). Japan's central bank succeeded in deflating the boom. When the stock prices finally stopped falling, they had lost 60 percent of their value at the top (Woronoff, 1996: 247). After 1992 the Nikkei stock index oscillated at between 35 and 50 percent of its 1089 peak (Schwartz, 2000: 308). Land and property prices fell less, roughly 15-50 percent, depending on place and type.

Thus, the losses were not as great as that of stack market. However, unlike stock, property could not just be sold at a reasonable price into such a market, so investors were stuck with their losses much longer. But because about 40 percent of lending was directly collateralized by property whose value had plummeted, the banks were left with huge unrealised losses whose dimensions could not even be determined. In June 1995, the Ministry of finance calculated that Japan's 150 banks and credit associations were stuck with some yen 40 trillion in bad loans while private analysts hinted the figure might be closer to yen 80 trillion (Woronoff, 1996: 247). In this situation, banks had to curtail lending drastically, and to raise interest rates substantially. Financial institutions exposed to global financial markets As mentioned above, the speculative bubble that had driven Japan's economy for four years finally popped, prompting cost-conscious Japanese manufacturers to run for cover (Stubbs and Underhill, 2000: 386) and many of then ended up in the booming Asian Pacific market.

East Asia turned out to be a safe haven for the Japanese producers at least until 1997. On the one hand, they earned twice as much profit, than they earned in the United States or Europe. On the other hand, they used their new Asian production bases to continue supplying US and European export markets. In some industries, such as electronics, they managed to produce their manufactures at an extremely low price.

Furthermore, the Japanese manufacturers succeeded in reviving on a regional level the inter-firm networks that had afforded them the driving seats of their own country. Within a few years, they acquired positional power in the region as a whole, dominating fey manufacturing industries particularly in Southeast Asia (Stubbs and Underhill, 2000: 387). Similarly, Japanese 'elites, in place to restructure the system of relationalism, chose to export this system to developing East Asia simply because they did not want to abandon the relationships that have afforded them such a high degree of positional power in Japan's political economy. But most importantly, the Japanese banks started to lend heavily in the Asian Pacific market.

The banks reproduced the same lending practices that they used at home. They lent short term, in large volume, to preferred customers, under the guarantee of major local corporations and governments. The Japanese banks accepted overvalued real-estate property as collateral for many of their loans. In doing so, they exposed their Asian lending to the same risks as their Japanese loans. Consequently, when the Asian real-estate bubble burst, many loans lost their collateral, inducing their default. When the stock market collapsed in Thailand, Indonesia, Malaysia, the Philippines, South Korea, and Hong Kong, domestic firm that guaranteed the loans became unable to repay those (Castells, 2000: 238).

When local currencies plunged, Japanese banks were unable to recover their yen denominated loans. And when they turned to Asian government, asking them to meet their commitments, governments simply could not do it. East Asian states were, namely, faced with a huge amount of financial debts. In this way, looking for salvation in the Asian markets, Japan exported their manner of economic development, contributing to the crisis in the Asian region. In sum, the growing exposure of Japanese financial institutions to the global financial markets made it increasingly difficult to follow Japanese customary financial practices. But, as explained above, Japanese relationalism underwent distributional, instead of structural changes.

Conclusion By the end of the 20th century, the Japanese economy had become one of the most powerful economies in the world, challenging the dominance of North America and West Europe. It had developed a corporate model of capitalism, characterised by a highly regulated economy. As we have seen, the state bureaucracy intervened in the economic life by guiding and protecting the Japanese corporations, whereby it enabled them to become sufficiently competitive with the world market. Furthermore, the Japanese 'elites constructed a system of relationalism or a web of connective networks not only between the state and the industry, but also between the corporations. Then, in 1991, the real-estate and stock-market bubble burst, causing stagnation in the Japanese economy. After this event, the regulatory structures that earlier were given credit for fostering industrial growth, such as the protection of domestic industries from foreign competition and the provision of low cost loans and foreign exchange to certain favored companies, became a barrier to competition and the main reason for Japan's economic troubles.

The banks were in a desperate situation, aggravated by the huge amount of bad loans. At this point, the government had lost its capacity to cover the debts and potential defaults of the banks. Although facing the economic crisis, the Japanese political 'elites did not dismantle the system of relationalism. They chose to export the system that afforded them positional power in Japan to still developing countries. In doing this, the political 'elites actually weakened the Japanese economy and thus jeopardized their long-run interests.

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