MITI and the Japanese miracle

by Chalmers Johnson

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  cannot perform for themselves. These functions included defense, road building, water conservancy, the minting of coins, and the administration of justice. Following the industrial revolution, the state began to take on new functions. In those states that were the first to industrialize, the state itself had little to do with the new forms of economic activity but towards the end of the nineteenth century the state took on

  regulatory

  functions in the interest of maintaining competition, consumer protection, and so forth. As Henry Jacoby puts it, "Once capitalism transformed the traditional way of life, factors such as the effectiveness of competition, freedom of movement, and the absence of any system of social security compelled the state to assume responsibility for the protection and welfare of the individual. Because each man was responsible for himself, and because that individualism became a social principle, the state remained as almost the only regulatory authority."

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  In states that were late to industrialize, the state itself led the industrialization drive, that is, it took on

  developmental

  functions. These two differing orientations toward private economic activities, the regulatory orientation and the developmental orientation, produced two different kinds of government-business relationships. The United States is a good example of a state in which the regulatory orientation predominates, whereas Japan is a good example of a state in which the developmental orientation predominates. A regulatory, or market-rational, state concerns itself with the forms and proceduresthe rules, if you willof economic competition, but it does not concern itself with substantive matters. For example, the United States government has many regulations concerning the antitrust implications of the size of firms, but it does not concern itself with what industries ought to exist and what industries are no longer needed. The developmental, or plan-rational, state, by contrast, has as its dominant feature precisely the setting of such substantive social and economic goals.

  Another way to make this distinction is to consider a state's priorities in economic policy. In the plan-rational state, the government will give greatest precedence to industrial policy, that is, to a concern with the structure of domestic industry and with promoting the structure that enhances the nation's international competitiveness. The very existence of an industrial policy implies a strategic, or goal-oriented, approach to the economy. On the other hand, the market-rational state usually will not even have an industrial policy (or, at any rate, will not recognize it as such). Instead, both its domestic and foreign economic policy, including its trade policy, will stress rules and

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  reciprocal concessions (although perhaps influenced by some goals that are not industrially specific, goals such as price stability or full employment). Its trade policy will normally be subordinate to general foreign policy, being used more often to cement political relationships than to obtain strictly economic advantages.

  These various distinctions are useful because they draw our attention to Japan's emergence, following the Meiji Restoration of 1868, as a developmental, plan-rational state whose economic orientation was keyed to industrial policy. By contrast, the United States from about the same period took the regulatory, market-rational path keyed to foreign policy. In modern times Japan has always put emphasis on an overarching, nationally supported goal for its economy rather than on the particular procedures that are to govern economic activity. The Meiji-era goal was the famous

  fukokukyohei

  * (rich country, strong military) of the late nineteenth and early twentieth centuries. This was followed during the 1930's and 1940's by the goals of depression recovery, war preparation, war production, and postwar recovery. From about 1955, and explicitly since the Income-doubling Plan of 1960, the goal has been high-speed growth, sometimes expressed as "overtake Europe and America" (

  Obei*

  ni oikose

  ). Amaya lists the goals of the past century in detail:

  shokusan

  kogyo

  * (increase industrial production),

  fukoku-kyohei

  (rich country, strong military),

  seisanryoku

  kakuju

  * (expand productive capacity),

  yushutsu

  shinko

  * (promote exports),

  kanzen

  koyo

  * (full employment), and

  kodo

  *

  seicho

  * (high-speed growth).

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  Only during the 1970's did Japan begin to shift to a somewhat regulatory, foreign-policy orientation, just as America began to show early signs of a new developmental, industrial-policy orientation. But the Japanese system remains plan rational, and the American system is still basically market rational.

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  This can be seen most clearly by looking at the differences between the two systems in terms of economic and political decision-making. In Japan the developmental, strategic quality of economic policy is reflected within the government in the high position of the so-called economic bureaucrats, that is, the officials of the ministries of Finance, International Trade and Industry, Agriculture and Forestry, Construction, and Transportation, plus the Economic Planning Agency. These official agencies attract the most talented graduates of the best universities in the country, and the positions of higher-level officials in these ministries have been and still are the most prestigious in the society. Although it is influenced by pressure groups and political claimants, the elite bureaucracy of Japan makes most major decisions, drafts virtually all legislation, controls the national budget, and is the source of

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  all major policy innovations in the system. Equally important, upon their retirement, which is usually between the ages of 50 and 55 in Japan, these bureaucrats move from government to powerful positions in private enterprise, banking, the political world, and the numerous public corporationsa direction of elite mobility that is directly opposite to that which prevails in the United States.

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  The existence of a powerful, talented, and prestige-laden economic bureaucracy is a natural corollary of plan rationality.

  In market-rational systems such as the United States, public service does not normally attract the most capable talent, and national decision-making is dominated by elected members of the professional class, who are usually lawyers, rather than by the bureaucracy. The movement of elites is not from government to the private sector but vice versa, usually through political appointment, which is much more extensive than in Japan. The real equivalent of the Japanese Ministry of International Trade and Industry in the United States is not the Department of Commerce but the Department of Defense, which by its very nature and functions shares MITI's strategic, goal-oriented outlook. In fact, the pejorative connotations in the United States of terms such as "Japan, Inc." are similar to those surrounding the domestic expression "military-industrial complex" referring to a close working relationship between government and business to solve problems of national defense. (Not to be outdone, some Japanese have taken to calling the Japanese government-business relationship a ''bureaucratic-industrial complex.")

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  American economic decisions are made most often in Congress, which also controls the budget, and these decisions reflect the market-rational emphasis on procedures rather than outcomes. During the 1970's Americans began to experiment with industrial policy bureaucracies such as the Department of Energy, but they are still rather wary of such organizations, whose prestige remains low.

  Another way to highlight the differences between plan rationality and market rationality is to look at some of the trade-offs involved in each approach. First, the most important evaluative standard in market rationality is "efficiency." But in plan rationality this takes lower precedence than "effectiveness." Both Americans and Japanese tend to get the meanings of efficiency and effective
ness mixed up. Americans often and understandably criticize their official bureaucracy for its inefficiency, failing to note that efficiency is not a good evaluative standard for bureaucracy. Effectiveness is the proper standard of evaluation of goal-oriented strategic activities.

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  On the other hand, Japanese continue to tolerate their wildly inefficient and even inap-

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  propriate agricultural structure at least in part because it is mildly effective: it provides food that does not have to be imported.

  Second, both types of systems are concerned with "externalities," or what Milton Friedman has called "neighborhood effects"an example would be the unpriced social costs of production such as pollution. In this instance, however, the plan-rational system has much greater difficulty than the market-rational system in identifying and shifting its sights to respond to effects external to the national goal. The position of the plan-rational system is like that of a military organization: a general is judged by whether he wins or loses. It would be good if he would also employ an economy of violence (be efficient), but that is not as important as results. Accordingly, Japan persisted with high-speed industrial growth long after the evidence of very serious environmental damage had become common knowledge. On the other hand, when the plan-rational system finally shifts its goals to give priority to a problem such as industrial pollution, it will commonly be more effective than the market-rational system, as can be seen in the comparison between the Japanese and American handling of pollution in the 1970's.

  Third, the plan-rational system depends upon the existence of a widely agreed upon set of overarching goals for the society, such as high-speed growth. When such a consensus exists, the plan-rational system will outperform the market-rational system on the same benchmark, such as growth of GNP, as long as growth of GNP is the goal of the plan-rational system. But when a consensus does not exist, when there is confusion or conflict over the overarching goal in a plan-rational economy, it will appear to be quite adrift, incapable of coming to grips with basic problems and unable to place responsibility for failures. Japan has experienced this kind of drift when unexpected developments suddenly upset its consensus, such as during the "Nixon shocks" of 1971, or after the oil shock of 1973. Generally speaking, the great strength of the plan-rational system lies in its effectiveness in dealing with routine problems, whereas the great strength of the market-rational system lies in its effectiveness in dealing with critical problems. In the latter case, the emphasis on rules, procedures, and executive responsibility helps to promote action when problems of an unfamiliar or unknown magnitude arise.

  Fourth, since decision-making is centered in different bodies in the two systemsin an elite bureaucracy in one and in a parliamentary assembly in the otherthe process of policy change will be manifested in quite different ways. In the plan-rational system, change will be marked by internal bureaucratic disputes, factional infighting,

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  and conflict among ministries. In the market-rational system, change will be marked by strenuous parliamentary contests over new legislation and by election battles. For example, the shift in Japan during the late 1960's and throughout the 1970's from protectionism to liberalization was most clearly signaled by factional infighting within MITI between the "domestic faction" and the "international faction." The surest sign that the Japanese government was moving in a more open, free-trade direction was precisely the fact that the key ministry in this sector came to be dominated by internationalistic bureaucrats. Americans are sometimes confused by Japanese economic policy because they pay too much attention to what politicians say and because they do not know much about the bureaucracy, whereas Japanese have on occasion given too much weight to the statements of American bureaucrats and have not paid enough attention to Congressmen and their extensive staffs.

  Looked at historically, modern Japan began in 1868 to be plan rational and developmental. After about a decade and a half of experimentation with direct state operation of economic enterprises, it discovered the most obvious pitfalls of plan rationality: corruption, bureaucratism, and ineffective monopolies. Japan was and remained plan rational, but it had no ideological commitment to state ownership of the economy. Its main criterion was the rational one of effectiveness in meeting the goals of development. Thus, Meiji Japan began to shift away from state entrepreneurship to collaboration with privately owned enterprises, favoring those enterprises that were capable of rapidly adopting new technologies and that were committed to the national goals of economic development and military strength. From this shift developed the collaborative relationship between the government and big business in Japan. In the prewar era this collaboration took the form of close governmental ties to the zaibatsu (privately owned industrial empires). The government induced the zaibatsu to go into areas where it felt development was needed. For their part the zaibatsu pioneered the commercialization of modern technologies in Japan, and they achieved economies of scale in manufacturing and banking that were on a par with those of the rest of the industrial world. There were many important results of this collaboration, including the development of a marked dualism between large advanced enterprises and small backward enterprises. But perhaps the most important result was the introduction of a needed measure of competition into the plan-rational system.

  In the postwar world, the reforms of the occupation era helped modernize the zaibatsu enterprises, freeing them of their earlier fam-

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  ily domination. The reforms also increased the number of enterprises, promoted the development of the labor movement, and rectified the grievances of the farmers under the old order, but the system remained plan rational: given the need for economic recovery from the war and independence from foreign aid, it could not very well have been otherwise. Most of the ideas for economic growth came from the bureaucracy, and the business community reacted with an attitude of what one scholar has called "responsive dependence."

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  The government did not normally give direct orders to businesses, but those businesses that listened to the signals coming from the government and then responded were favored with easy access to capital, tax breaks, and approval of their plans to import foreign technology or establish joint ventures. But a firm did not have to respond to the government. The business literature of Japan is filled with descriptions of the very interesting cases of big firms that succeeded without strong governmental ties (for example, Sony and Honda), but there are not many to describe.

  Observers coming from market-rational systems often misunderstand the plan-rational system because they fail to appreciate that it has a political and not an economic basis. During the 1960's, for example, when it became fashionable to call the Japanese "economic animals," the most knowledgeable foreign analysts avoided the term because, in Henderson's words, there was "no doubt that Japan's center of gravity is in the polity not the economya source of puzzlement for Japan's numerous economic determinists of various Marxist stripe in academia and opposition politics."

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  One did not have to be an economic determinist or a Marxist to make this error; it was ubiquitous in English-language writing on Japan.

  J. P. Nettl's comment on Marx is relevant to this point: "The notion that 'the modern state power is merely a committee which manages the common business of the bourgeoisie' is one of the historically least adequate generalizations that Marx ever made."

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  It is not merely historically inadequate; it obscures the fact that in the developmental state economic interests are explicitly subordinated to political objectives. The very idea of the developmental state originated in the situational nationalism of the late industrializers, and the goals of the developmental state were invariably derived from comparisons with external reference economies. The political motives of the developmental state are highlighted by Daniel Bell's observationbased on Adam Smiththat there would be little stimulus to increase production abo
ve necessities or needs if people were ruled by economic motives alone.

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  "The need for economic growth in a developing country

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  has few if any economic springs. It arises from a desire to assume full human status by taking part in an industrial civilization, participation in which

  alone

  enables a nation or an individual to compel others to treat it as an equal. Inability to take part in it makes a nation militarily powerless against its neighbors, administratively unable to control its own citizens, and culturally incapable of speaking the international language."

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  All of these motives influenced Meiji Japan, and there were others that were peculiar to Japan. Among these was one deriving from the treaties Japan was forced to conclude after its first contacts with Western imperialism in the nineteenth century: Japan did not obtain tariff autonomy until 1911. This meant that Japan was not able to aid its developing industries by the protective duties and other practices recommended by the market-oriented theories of the time, and the Meiji government consequently concluded that it had to take a direct hand in economic development if Japan was ever to achieve economic independence.

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  A second special problem for Japan lasted until the late 1960's, when it temporarily disappeared only to return after the oil crisis of the 1970's; this was a shortage in its international balance of payments and the resultant need for the government to manage this most implacable of ceilings in a country with extremely few natural resources. As early as the 1880's, Tiedemann writes that in order to keep foreign payments in balance with customs receipts, "all agencies were required to prepare a foreign exchange budget as well as their normal yen budget."