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Varieties of Advanced Market Capitalism. Chapter VI Japan: A Planned Market Economy with Traditional Elements. Japan As a New Traditional Economy?. Experienced the most rapid rate of sustained economic growth in the world
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Varieties of Advanced Market Capitalism Chapter VI Japan: A Planned Market Economy with Traditional Elements
Japan As a New Traditional Economy? • Experienced the most rapid rate of sustained economic growth in the world • Maintained low unemployment and inflation rates and a greater degree of income equality • Leading many areas of technology
Japan As a New Traditional Economy? • Have large trade surpluses resulting in the largest accumulation of foreign reserves • Number One? → stagflation in 1990s • Its conflicts with other nations on trade issues threatened to push the world economy into a trade war and depression
Japan As a New Traditional Economy? • Debates about the basis of Japanese success • Advocates of government economic intervention argue that bureaucratic guidance through indicative planning and industrial policy has been key to its success • Advocates of laissez-faire argue that these have been more a hindrance than a help, with the most dynamic sectors ignoring the government bureaucrats
Japan As a New Traditional Economy? • A mixture of structures and systems unique in the world • A market capitalist economy • The government engages in indicative planning and exerts significant influence • The first society of non-European origin to carry out industrialization and modern economic growth
Japan As a New Traditional Economy? • Succeeded in adopting foreign technologies and practices without giving up its indigenous culture • Late 19th century slogan “Japanese spirit and Western ability” • Familistic groupism of Japanese society → a feudalistic holdover • Harmonious labor-management relations and government-business relations Planned market capitalism with strong traditional elements
Historical and Cultural Background of the Japanese Economy The Absorption of Chinese Culture • A strong sense of identity • High degree of homogeneity arising from their long isolation • The model for integration of foreign influences into its society was its absorption of Chinese culture in the 6th and 7th centuries
Historical and Cultural Background of the Japanese Economy • Buddhism and Confucianism introduced but modified without displacing native Shintonism (original religion) • Multiple realities • Buddhism → funerals • Shintonism → marriages • Confucianism → civil and political behavior
Historical and Cultural Background of the Japanese Economy • Confucianism • Influence on economic thought • Emphasized loyalty to one’s superiors and respect for state authority (after 1600) • After 1868 → the transfer of the bushido code of the samurai warriors to business management practices • The most important wa (harmony) together with loyalty cements the familistic groupism that dominates the Japanese economy
Historical and Cultural Background of the Japanese Economy The Tokugawa Shogunate • Shoguns → military commanders after 1185 • During the 1500s, Portuguese traders penetrated and dominated Japan but expelled in 1603 • The period of isolation under Tokugawa shogunate • Experienced development of business, transportation infrastructure and literacy laying the foundation for economic takeoff
Historical and Cultural Background of the Japanese Economy The Meiji Restoration • Tokugawa society fell into crisis after being opened to outsiders in 1853 • Overthrew of the Tokugawa shogun in 1868 by samurai → The Meiji Restoration • The country opened to foreign influences and technologies • All rights and powers of the samurai removed, ending feudalism • The samurai were paid off with bonds in 1873, that later started businesses
Historical and Cultural Background of the Japanese Economy Industrial Development • State started many industrial enterprises, pushing industrial development • Cotton spinning → the first internationally competitive industry by 1900 • Support from infant industry tariffs • Iron and steel, railroads, mining and machinery
Historical and Cultural Background of the Japanese Economy Imperializing Neighbors • Argued that “fighting against the racist imperialism of Europe and the United States” • In 1895, Taiwan conquered • Leading to the 1905 Russo-Japanese War first victory of an Asian power over a European one • A major trigger of the 1905 revolution in Russia • Ongoing dispute over islands taken by the Soviet Union at the end of WW II • Control of Korea in 1910
Historical and Cultural Background of the Japanese Economy Political democratization and liberalization of 1920s • Economic domination of four leading conglomerates, zaibatsus • Mitsui, Mitsubishi, Sumitomo, Yasuda • During WW II, each associated with a bank that would be the key entity in the postwar keiretsus
Historical and Cultural Background of the Japanese Economy New Economic System • The province of Manchuria seized in 1931 • Elements of economic central planning tested • Invasion of China in 1937 • Allying with Germany and Italy • Bombing of Pearl Harbor in 1941 → US in WW II • Surrendered in 1945 after US atomic bombs on Hiroshima and Nagasaki
Historical and Cultural Background of the Japanese Economy The American Occupation and its Aftermath • General Douglas MacArthur → The Supreme Commander of the Allied Powers until the American Occupation ended in 1952 • First time that it was ruled by a foreign power • After 1947 → continuity of rule by traditional elites • Japan as a Cold War ally
Historical and Cultural Background of the Japanese Economy • US imposing a constitution that demilitarized Japan • Labor unions legalized • Zaibatsus broken up • Land redistributed • Integration of foreign influences into Japanese culture
Historical and Cultural Background of the Japanese Economy • Until 1960 considerable labor militancy • 1955 Liberal Democratic Party formed • From mid-1950s to the 1970s, the old zaibatsus re-formed as loosely organized keiretsus, each centered on a bank and a trading company • By 1955, highest real per capita income level • Mid 1970s, per capita income equaled those in many advanced countries • Continued to grow more rapidly than any of them • In 1975, one of the G7 (now G8), the leading economic countries
The Microeconomic Foundations of The Japanese Economy • The “Three Sacred Treasures” of Labor-Management Relations • The Japanese Firm and the Keiretsu System • Managerial Decision Making • Industrial Policy by Government
The “Three Sacred Treasures” of Labor-Management Relations • Highly educated and well-motivated labor force • Many quality-and productivity-improving innovations suggested by workers on site • Three sacred treasures: • Lifetime employment • Seniority-based wages • Enterprise unions
The “Three Sacred Treasures” of Labor-Management Relations • Japanese labor • Intra-enterprise job rotation by multifunctional workers • On-the-job firm-specific training • Bonus payments • Compensation flexible • Contracts negotiated annually • Employment stable • Large severance payments at retirement but few pensions • Dualism
The “Three Sacred Treasures” of Labor-Management Relations: Lifetime Employment • The key to stimulating loyalty and drawing forth innovative, productivity-improving suggestions • Limited to about 30 % of the labor force, mostly educated men in large firms that must retire at age 55 with large severance payments and assisted in getting other jobs in smaller firms • Japanese workers more likely to stay with a single firm for a longer period of time, even in small firms
The “Three Sacred Treasures” of Labor-Management Relations: Lifetime Employment • Depending on • Stability of employment • Rapid growth of the economy between 1945 and 1990 • Synchronized annual negotiating system • Bonus system → a form of profit sharing
The “Three Sacred Treasures” of Labor-Management Relations: Lifetime Employment • Development of firm-specific human capital by rotating workers from job to job within the firm • Workers know all about the firm but lack skills that are transferable to other firms • On-the-job training of blue-collar workers → but white collarization in larger firms • Greater loyalty to firm → Confucian code • Firms more willing to engage in firm-specific training if they believe workers will remain for a long time
The “Three Sacred Treasures” of Labor-Management Relations: Seniority Wages • Confucian view of respect for elders • Steeper age-wage profile for blue-collar • Seniority wages reinforcing loyalty to the firm among lifetime employees • Expectations of performance-based pay
The “Three Sacred Treasures” of Labor-Management Relations: Enterprise Unions • If one is committed for life to a specific company • One has been working at several different jobs with the company, thus not being tied to a particular skill or craft, → it is logical to belong to a union that negotiates directly with that company and only that company • Stability of labor-management relations • “Happy family of the firm” • Critics “Inefficiency”
The Japanese Firm and the Keiretsu System • The existence of interlocked associations of firms → keiretsu • Horizontal keiretsu • Revivals of the prewar zaibatsus (single holding companies) • Firms in different industries all linked to a common bank and trading company maintaining their formal independence • Vertical keiretsu • A set of suppliers and distributors linked to a major industrial producer by long-term contracts
The Japanese Firm and the Keiretsu System • Toshiba Corporation • At the center of a vertical keiretsu including distributors, suppliers and suppliers of direct suppliers • A member in Mitsui horizontal keiretsu
The Japanese Firm and the Keiretsu System • Horizontal keiretsus practice three sacred treasures of labor-management relations • Peripheral firms in vertical keiretsus tend not to do so • Keiretsus → cross-holding of stocks • In horizontal form → much stock ownership by the bank and a large proportion of loans from the bank
The Japanese Firm and the Keiretsu System • Network externalities • Group membership may have a negative impact on profitability relative to independents run by founder-entrepreneurs • Vertical keiretsus may achieve efficiencies because their stable long-term contracts allow for just-in-time delivery, kanban systemthat minimize inventory costs and encourage superior quality control
Managerial Decision Making • J-mode type of organization in contrast to H-mode • H-mode includes both the U-form and M-form • J-mode characterized by “horizontal coordination among operating units based on sharing of ex-post on-site information” • H-mode characterized by “hierarchical separation between planning and implemental operation and the emphasis on the economies of specialization”
Managerial Decision Making • J-mode depends on both long-term relationships between workers and firms and long-term relationships between banks and firms which tend to hold for keiretsu members with lifetime employment systems • Top managers risen from within the firm increase the loyalty • Management as the representative of the employees • Labor-managed firms
Managerial Decision Making • Horizontal coordination through processes of consensual decision making • Dependence upon workers for suggestions for improving the firm’s performance • Seniority-based rank hierarchies • Given long-term nature of employee-firm relations and of bank-firm relations, managers use longer time horizon for strategic planning • Emphasis upon maximizing market share subject to minimum profit constraint, rather than maximizing short-run profits
Industrial Policy by Government • Government-business relations labeled industrial policy • Ministry of International Trade and Industry (MITI) • The state being the driving force of the Japanese economy → supremacy of government bureaucrats • High-level bureaucrats to high-level employment in top firms
Industrial Policy by Government • MITI intervention in markets → product cycles • Beginning stage of an industry • Infant industry tariffs • Subsidies for special capital investments • Rationalization cartels that carry out MITI-financed R&D • At the end of product cycle • To reduce closeout using depression cartels
Industrial Policy by Government • Overall rapid growth • Export success of targeted industries • Shipbuilding, steel and computers • MITI failed in the late 1950s to cartelize the automobile industry down to two firms • Honda → the most technically innovative of the automobile companies and a great export success • Sony → rejected to produce transistor radios • Both founded and led by strong-willed entrepreneurs operating outside of the planning and keiretsu system
Why Japan Failed to Become Number One Macroeconomic Performance • High rate of growth • High capital investment rate backed by a high savings rate • After bursting of the Japanese stock market bubble in 1990 • Growth rate fell below those of other leading market capitalist economies with unemployment rate increasing
Why Japan Failed to Become Number One • High savings rate • Confucian ideals • High growth rates as consumption increases lag behind income increases • Individuals save to make down payments on homes • Workers save for old age because of the combination of early retirement with low pensions and low social security payments • The lumpiness of large bonuses • No capital gains tax except on land • Most of the postwar period, a relatively young population • But rapidly aging population
Why Japan Failed to Become Number One Macroeconomic Planning Policy • Market capitalist economy with elements of a traditional economy and indicative planning • Sectoral and technological planning → MITI • Macroeconomic plans → Economic Planning Agency (EPA) • Relatively low levels of government spending and taxation • Low level of social transfer payments • Low defense spending, due to US demilitarization
Why Japan Failed to Become Number One Quality of Life • The highest quality of life • Top in life expectancy • Gender empowerment, (31st) • High per capita income and consumption • Low crime rate
Why Japan Failed to Become Number One • One of the more equal income distributions in the world • Egalitarian wage structure arising from the labor-management system • Workaholics in rabbit hutches • Environmental pollution • Problems of discrimination (against women and foreigners)
Why Japan Failed to Become Number One The End of the “Economic Miracle” • Rising dependency ratios that reduce savings • Opening of financial markets caused by deregulation, leading to outflows of capital • Technological stagnation • Weakness of the non-tradeable goods sector • The failure of government spending to stimulate the economy
Why Japan Failed to Become Number One • Hollowing out of the industrial base as large corporations invest in other countries • The emergence of a liquidity trap in financial markets • A decline in the rate of return to capital investment owing to overinvestment in the past • A credit crunch caused by the accumulation of bad loans in the banking sector
Why Japan Failed to Become Number One • A general disruption of the financial sector in the aftermath of the collapse of the stock market • Deeper cultural arguments involving a breakdown of Confucian values • Saving-investment nexus • Rapidly aging society, experience rising dependency ratios that tend to depress the savings rate • A victim of its own success as a society able to support long life
Why Japan Failed to Become Number One • In early 1990s, a low rate of return for large corporations resulting from overinvestment • After 1997 Asian financial crisis, credit problem • The collapse of the bubble economy • Technological leadership?