After the Second World War, however, Japan’s growth record was unrivalled, particularly until the 1970s. Between 1950 and 1973, per capita GDP in Japan grew at a staggering 8 per cent per annum, more than double the 3.8 per cent average achieved by the 16 NDCs mentioned above (the 3.8 per cent average includes Japan). The next best performers among the NDCs were Germany and Austria (both at 4.9 per cent), and Italy (4.8 per cent); even the East Asian ‘miracle’ developing countries like Taiwan (6.2 per cent) or Korea (5.2 per cent) came nowhere near Japan, despite the bigger ‘convergence’ effect that they could expect given their greater backwardness.[192]
There has long been an ideologically-charged debate about the causes of the economic ‘miracle’ in postwar Japan and East Asian NICs over the last two to three decades. Despite some lingering disagreements, there is now a broad consensus that the spectacular growth of these countries, with the exception of Hong Kong, is fundamentally due to activist industrial, trade and technology (ITT) policies by the state.[193]
Surveying the postwar experiences of the East Asian countries, we are once again struck by the similarities between their ITT policies and those used by other NDCs before them, starting from eighteenth-century Britain, through to nineteenth-century USA, and late nineteenth and early twentieth-century Germany and Sweden. However, it is also important to note that the East Asian countries have not exactly copied the policies that the more advanced countries had used earlier. The ITT policies that they, and some other NDCs like France, used during the postwar period were far more sophisticated and fine-tuned than their historical equivalents. The East Asian countries used more substantial and better-designed export subsidies (both direct and indirect) and in fact imposed very few export taxes in comparison to the earlier cases.[194] As I have repeatedly pointed out, tariff rebates for imported raw materials and machinery for export industries were widely employed – a method that many NDCs, notably Britain, had themselves used to encourage exports.[195]
Coordination of complementary investments, which had previously been done in a rather haphazard way, if ever, was systematized through indicative planning and government investment programmes.[196] Regulations of firm entry, exit, investments and pricing were implemented in order to ‘manage competition’ in such a way as to reduce ‘wasteful competition’.[197] Once again, these regulations in part reflected the late nineteenth and early twentieth-century cartel policies, but displayed far more awareness than their historic counterparts of the dangers of monopolistic abuse, and more sensitivity to its impact on export market performance. There were also subsidies and restrictions on competition intended to help technology upgrading and a smooth winding down of declining industries.[198]
The East Asian governments also integrated human-capital-related and learning-related policies into their industrial policy framework far more tightly than their predecessors had done, through ‘manpower planning’.[199] Technology licencing and foreign direct investments were regulated in an attempt to maximize technology spillover in a more systematic way.[200] There were serious attempts to upgrade the country’s skill base and technological capabilities through subsidies to (and public provision of) education, training and R&D.[201]
With the recent crisis in Korea and the prolonged recession in Japan, it has become popular to argue that activist ITT policies have been proved to be mistaken. While this is not the place to enter this debate, a few points may be made.[202] First of all, whether or not we believe that the recent troubles in Japan and Korea are due to activist ITT policies, we cannot deny that these policies were behind their ‘miracle’. Second, Taiwan, despite having used activist ITT policies, did not experience any financial or macroeconomic crisis. Third, all informed observers of Japan, regardless of their views, agree that the country’s current recession cannot be attributed to government industrial policy- it has more to do with factors like structural savings surplus, ill-timed financial liberalization (which led to the bubble economy) and macroeconomic mismanagement. Fourth, in the case of Korea, industrial policy had been largely dismantled by the mid-1990s, when the debt build-up that led to the recent crisis started, so it cannot be blamed for the crisis. Indeed, it could be argued that, if anything, the demise of industrial policy contributed to the making of the crisis by making ‘duplicative investments’ easier.[203]
2.3. The Pulling-Ahead Strategy by
the Leader and the Responses of the
Catching-up Countries – Britain and
its Followers
Once a country gets ahead of other countries, it has a natural incentive to use its economic and political powers to pull ahead even further. Britain’s policies, especially those of the eighteenth and nineteenth centuries, are the best examples of this. What is disconcerting is that these policies have so many parallels with those pursued in our time by developed countries in relation to their developing counterparts.
2.3.1. The Colonies
Britain instituted a strong set of policies intended to prevent the development of manufacturing in the colonies, especially America. List reports that in 1770, William Pitt the Elder (then the Earl of Chatham), ‘made uneasy by the first manufacturing attempts of the New Englanders, declared that the colonies should not be permitted to manufacture so much as a horseshoe nail’ .[204] Brisco’s characterization of the colonial policy under Walpole describes the gist of this strategy:
By commercial and industrial regulations attempts were made to restrict the colonies to the production of raw materials which England was to work up, to discourage any manufactures that would any way compete with the mother country, and to confine their markets to the English trader and manufacturer.[205]
The policies deployed by Britain included the following. First, policies were deployed to encourage primary production in the colonies. For example, in the 1720s, Walpole provided export subsidies (‘bounties’) to and abolished British import duties on raw materials produced in the American colonies (such as hemp, wood and timber). This was done in the belief that encouraging the production of raw material would ‘divert them from carrying on manufactures which interfered with those of England’.[206] Note that this is exactly the same logic that Cobden used in justifying the repeal of the Corn Law, which he thought was unwittingly helping continental Europe and the USA to industrialize by making their agricultural exports more difficult (see section 2.2.1 above).
Second, some manufacturing activities were outlawed. For example, the construction of new rolling and slitting steel mills in America was outlawed, which forced the Americans to specialize in the low-value-added pig and bar iron, rather than high-value-added steel products.[207] Some historians argue that this kind of policy did not actually damage the US economy significantly at the time, as the country did not have comparative advantage in manufacturing.[208] It seems reasonable to argue, however, that such policy would have become a major obstacle, if not an insurmountable barrier, to US industrial development if the country had remained a British colony beyond the early (mainly agrarian and commercial) stages of development.[209]
193
For the earlier phase of this debate, see Johnson 1982, id. 1984; pore 1986; Thompson 1989; Amsden 1989; Westphal 1930; Wade 1990; and Chang 1993. For the more recent phase, see World Bank 1993; Singh 1994; La1l1994; Stiglitz 1996; Wade 1996; and Chang 2001b.
209
Even after the USA had become independent, Britain still wanted to keep it as a supplier of raw materials (especially cotton), which is why it supported the South in the Civil War.