Go Shimada Senior Research Fellow, JICA Research Institute Visiting Scholar, Columbia University

1. INSIDE THE BLACKBOX OF INSTITUTION – AN INSTITUTIONAL ANALYSIS OF JAPAN’S DEVELOPMENT BANK, PRIVATE SECTOR AND LABOR Go Shimada Senior Research Fellow, JICA Research Institute Visiting Scholar, Columbia University Adjunct Researcher, Waseda University

2. INSTITUTION – WHY? • Even though development banks have received a negative assessment, this is contradicted by what we know of successful cases,such as Japan, South Korea, Chinaand Brazil, among others. • A significant portion of past literature has singled out the importance of institution (e.g., World Bank 1993; Vittas and Cho 1996).

3. THE WORLD BANK (1993:358) “[Rapid grow economies such as Japan, Korea, Taiwan and China] had competent and insulated bureaucracies and banks to select and monitor projects, and each applied export performance as the main yardstick for credit allocation … Few developing economies today have the institutional resources to consistently impose performance based criteria for credit allocation.”

4. WHAT IS INSTITUTION? • Institutions include a variety of actors that form a society by interacting with each other through formal (e.g., legal) and informal (e.g., traditional rules and social norms) structures (North 1990; Olson 1982). • Ostrom (2005) defines institutions as rule-structured situations, which assist individuals to act collectively as communities or networks to tackle the problems they face. The rule of law and court systems reduce uncertainty and transaction costs, such in the case of a contract.

5. INSTITUTION FOR INDUSTRIAL POLICY - IN THE CASE OF JAPAN Network, Long-term transaction and Trust • Market Failures • Reduce transaction cost • risk co-sharing • Division of roles • Positiveexternalities

6. STAKEHOLDERS

7. PATH DEPENDENCE Formation Period (1952-1970s) Lock-in Phase (Since 1980s) Pre-formation Period 1945–1951 (post-WWII to establishment of the Japan Development Bank (Source: Modified by the author based on Sydow and Koch 2009: 692)

8. Five KEY CONCEPTS • Autonomy of the JDB • High appraisal capacity of the JDB • Complementarity among sectors (Horizontal and Vertical) • Inclusive and Decentralized PPP • Labor-Management relationship

9. THE GENESIS • RECONSTRUCTION FINANCE BANK (RFB) • PRIORITY PRODUCTION SYSTEM • There was no coal available for industrial production. • Allocate necessary resources to produce coal (70% of the RFB finances went to this sector alone). • With increased production of coal, basic goods, fertilizer and electricity were produced. • Further enhance the production of coal. • 1947 RFB is established • Hyper-inflation due to short supply of goods • Policy priority: Production increase

10. 1. CRITICAL JUNCTURE TO AUTONOMY - SHOWA DENKO SCANDAL • Bribery Scandal in 1948 (Showa Denko Scandal) • Politicians and Senior Bureaucrats were arrested. • The RFB was abolished in 1949. • The RFB had weak autonomy. Outside organizations could intervene in the decision-making process of loan appraisal. • The REB (1950) also looked back: “RFB was a policy implementation organization rather than a financial institution.” • In 1951, the Japan Development Bank (JDB) was established with strong autonomy from political forces. • Self finance principle

11. 2. HIGH APPRAISAL CAPACITY - SELF-FINANCE PRINCIPLE • Low default record (0.01%) = considered to have high appraisal capacity. • JDB’s loan decision was considered to be non-biased (reliable). • Became “Signal” for Private banks and companies (lower the risk of providing loan). • High appraisal capacity • The JDB retained all the staff members who wished to stay (utilized knowledge and experiences of the RFB). • All senior management (above the level of division director (Kacho)) was newly installed from outside (Bank of Japan, Hypothec Bank (Kangyo Ginko), Industrial Bank of Japan).

12. 3. COMPLEMENTARITY (1/2)- JDB AS A PART OF INDUSTRIAL POLICY • The JDB loan is provided as a part of industrial policy • Complementarity: Horizontal and Vertical Spillover Mutual benefits and Crowding-in effects among sectors (Iron, Coal, Ship building, Electricity, Infrastructure) Industrial Policy Spillover to supporting industries industries (SMEs) (Source: Author)

13. 3. COMPLEMENTARITY (2/2)- JDB AS A PART OF INDUSTRIAL POLICY • Transition to Private Banks (Exit Policy) • One lesson from the failure of the RFB • Crowding-in effect to private banks • The JDB steps aside once private funds are ready to finance them

14. 4. INCLUSIVE AND DECENTRALIZED PPP • Changing the nature of the PPP After (Inclusive) Before (exclusive) 25,000 tons of steel • Infrastructure • Coordination between steel industry and shipping industry • Steel became competitive • Machine industry also became competitive

15. 5. LABOR AND MANAGEMENT RELATIONSHIP • The GHQ policy: Japan transitions to a non-autocratic and non-military country • Dissolution of conglomerate (believed to support Japan’s militarism) • Promote SMEs • 1947 SME agency • 1947 Antimonopoly law • 1949 National Finance Corporation • 1953 Japan Finance Corporation for Small and Medium Enterprises • Support Labor movement

16. LABOR AND MANAGEMENT RELATIONSHIP • Soon after the war, the GHQ released Communist leaders from prison to liberate Japan. • However, the labor movement became too active and combative, and spread all over Japan. • In 1946, more than 300,000workers joined a strike. • International relations: Cold War and establishment of China (1949) • Marshall Plan and Point Four Program: US assisted productivity movements in Europe and then Japan.

17. LABOR AND MANAGEMENT RELATIONSHIP • Aid from the US: 1955–1961(3,986 people were invited to visit US factories) • After 1961, Japan continued to send missions to the US, reaching 6,072 people in 1965. • In 1955, the Japan Productivity Center (JPC) was established to receive aid from the US; however, labor union was against the movement. • The JPC issued three guiding principles: • Expansion of employment • Cooperation between labor and management • Fair distribution of the fruits of productivity • Gini: 0.31 in 1963 to 0.25 in 1971

18. INSTITUTIONAL CHANGE (Source: Amended based on Kitayama (2011: 54) by author)

19. DOS AND DON’TS Key concepts Fundamental factors • Autonomy of the JDB • High appraisal capacity of the JDB • Complementarity among sectors (Horizontal and Vertical) • Inclusive and Decentralized PPP • Long-term transaction among stakeholders • Labor-Management relationship • Autonomy • Network inside the institution • Reduce transaction cost • Risk co-sharing • Clear division of labor (exit policy) • Shared prosperity

20. LOCK-IN AND UNIQUE ASPECT • Lock-in (after 1980s) • The same institution could not respond to the changing economic environment. • Needs structural change to revive the institution’s dynamic nature. • Unique aspect • Some aspects of institution are too specific to Japan • Low human mobility = High loyalty to organization • Too decentralized decision-making process (bureau pluralism, QC circle, etc.) • The way to strengthen the institution is to utilize the context of the country and the Institution.

21. Thank you for attention!