Manual Japanese Economic Development: Markets, Norms, Structures

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Take India and South Korea. Life expectancy was about forty years and fifty years respectively. In both countries roughly 70 percent of the people worked on the land, and farming accounted for 40 percent of national income. The two countries were so far behind the industrial world that it seemed nearly inconceivable that either could ever attain reasonable standards of living, let alone catch up. If anything, India had the edge. Its savings rate was 12 percent of GNP while Korea's was only 8 percent. India had natural resources. Its size gave its industries a huge domestic market as a platform for growth.

Its former colonial masters, the British, left behind railways and other infrastructure that were good by Third World standards. The country had a competent judiciary and civil service, manned by a highly educated elite. Korea lacked all that. In the fifties the U. Less than forty years later—a short time in economic history—South Korea's extraordinary success is taken for granted. None of today's rich countries, not even Japan, saw such a rapid transformation in the deep structure of their economies.

India is widely regarded as a development failure. Yet over the past few decades even India has achieved more progress than today's rich countries did over similar periods and at comparable stages in their development. This shows, first, that the setbacks the developing countries encountered in the eighties—high interest rates, debt-servicing difficulties, falling export prices—were an aberration, and that the currently fashionable pessimism about their future is greatly overdone. The superachievers of East Asia South Korea and its fellow "dragons," Singapore, Taiwan, and Hong Kong are by no means the only developing countries that are actually developing.

Many others have also grown at historically unprecedented rates over the past few decades. As a group, the developing countries— of them, as conventionally defined, accounting for roughly three-quarters of the world's population—have indeed been catching up with the developed countries. The comparison between India and South Korea shows something else. It no longer makes sense to talk of the developing countries as a homogeneous group. The East Asian dragons now have more in common with the industrial economies than with the poorest economies in South Asia and sub-Saharan Africa.

Indeed, these subgroups of developing countries have become so distinct that one might think they have nothing to teach each other, that because South Korea is so different from India, its experience can hardly be relevant. That is a mistake. The diversity of experience among today's poor and not-so-poor countries does not defeat the task of analyzing what works and what doesn't. In fact, it is what makes the task possible.

Lessons of Experience The hallmark of economic policy in most of the Third World since the fifties has been the rejection of orthodox free-market economics. The countries that failed most spectacularly India, nearly all of sub-Saharan Africa, much of Latin America, the Soviet Union and its satellites were the ones that rejected the orthodoxy most fervently. Their governments claimed that for one reason or another, free-market economics would not work for them. In contrast, the four dragons and, more recently, countries such as Chile, Colombia, Costa Rica, Ivory Coast, Malaysia, and Thailand have achieved growth ranging from good to remarkable by following policies based largely on market economics.

Among the most important ideas in orthodox economics is that countries prosper through trade. In the sixties and seventies the dragons participated in a boom in world trade. Because the dragons succeeded as exporters, they had abundant foreign exchange with which to buy investment goods from abroad.

Unlike most other developing countries, the dragons had price systems that worked fairly well. So they invested in the right things, in ways that reflected their comparative advantage in cheap, unskilled labor. Some economists still dismiss the dragons as special cases, but for reasons I find specious. They argue that Hong Kong and Singapore are small hitherto smallness had been regarded as a disadvantage in development ; that they are former colonies with traditions of excellence in public administration like India and many others ; that they have been generously provided with foreign capital like Latin America.

These economists also argue that Taiwan and South Korea received generous foreign aid like many other developing countries , and have even argued that their lack of natural resources was an advantage. What was most unusual about these countries, in fact, was a relatively market-friendly approach to economic policy.

The countries that failed, often guided by "experts" in the industrialized world, are the ones that gave only a small role, if any, to private enterprise and to prices that are unregulated by government. Government planners concentrated on broad aggregates such as investment, consumption, and savings.

Their priority was investment—the more, the better, regardless of its quality. Most governments also thought that their economies were inflexible and could not adjust to changing conditions. The export earnings of developing countries were regarded as fixed, for instance, and so was the import requirement for any given level of domestic production. The possibilities for substituting one good for another in response to a change in price were denied or ignored. The idea that workers respond to changes in incentives was likewise dismissed.

This assumed lack of responsiveness led the planners to believe that prices, rather than providing signals for the allocation of resources, could serve other purposes instead. For instance, with direct controls they could be kept low to reduce inflation, or raised here and there to gather revenue for the government. Taken to the limit, this "fixed-price" approach leads to regulation by input-output analysis. The idea is to tabulate the flow of primary, intermediate, and finished goods throughout the economy, on the assumption that each good requires inputs of other specific goods in fixed proportions.

When all the cells in the table have been filled in, a government needs only to decide what it wants the economy to produce in order to know exactly what the country needs to import, good by good. India went in for this sort of planning in a big way. More than a few of today's leading free-market economists have worked within India's planning system or have studied it in detail, and intimate contact with it leads them to one inescapable conclusion: government planning of the economy does not work.

Professor Deepak Lal of London University, a leading proponent of market economics for the Third World, mentions his experience with India's planning commission in his book The Poverty of Development Economics. He calls the antimarket approach favored in so many countries the "dirigiste dogma. When Alan Garcia's government came to power in the summer of , Peru was already in a bad way, thanks largely to high tariffs and other import barriers, restrictive labor-protection laws, extensive credit rationing, high taxes, powerful trade unions, and an extraordinarily elaborate system of regulations to control the private sector.

One result was Peru's justly celebrated black market, or "informal economy," described by Hernando de Soto in his modern classic, The Other Path. The other result was great vulnerability to adverse economic events. The early eighties delivered several, including a world recession, high interest rates, a drying up of external finance, and declining commodity prices. Garcia's policy was based, he said, on two words: control and spend. After imposing price controls, he sharply increased public spending.

The program succeeded at first. Gross domestic product GDP grew 9. But by the spring of inflation was running at 1, percent a year; by the end of the year it was 6, percent. After that, output and living standards collapsed. In , the economy a wreck, Garcia was voted out of office. The dirigiste dogma has proved equally damaging in Africa. Take Ghana. When it became independent in , it was the richest country in the region, with the best-educated population. It was the world's leading exporter of cocoa; it produced 10 percent of the world's gold; it had diamonds, bauxite, and manganese, and a flourishing trade in mahogany.

Investment slumped from 20 percent of GDP in the fifties to 2 percent by , and exports dropped from more than 30 percent of GDP to 4 percent. The country's leader at independence, Kwame Nkrumah, was a spokesman for the newly independent Africa. He said the region needed to develop its own style of government, suited to its special circumstances. He spent vast sums on megaprojects. As economic troubles mounted, he nationalized companies and followed with capital repression. Under his regime capital flew abroad, and people with skills and money did the same.

The kleptocrats government officials who steal large amounts ran the country into the ground. In the early eighties a new government came to power and at last began to steer the economy along orthodox lines. Until then, Ghana had been to Africa what Peru is to Latin America: a distillation of everything that has gone wrong with the continent's economies. In the Third World, where so many people live off the land, agricultural development is crucial. Ghana provides a startling case study in how to wreck the farm sector. The means was the agricultural marketing board—a statutory monopoly that bought farmers' crops at controlled prices and resold them either at home or abroad.

The prices paid to farmers were kept artificially low, on the assumption that farmers ignored price signals. Between and the price of consumer goods went up by a factor of twenty-two in Ghana. The price of cocoa in neighboring countries went up by a factor of thirty-six. But the price paid by the cocoa marketing board to Ghana's farmers went up just sixfold. In real terms, therefore, the returns to cocoa farmers vanished. The country's supposedly price-insensitive farmers responded by switching to production of other crops for subsistence, and exports of cocoa collapsed.

Peru and Ghana are extreme cases, but they show in the starkest way that prices do matter in the the Third World and that rejecting market economics carries extremely high costs. The essential elements of a development strategy based on orthodox economics are macroeconomic stability, foreign trade, and strictly limited intervention in the economy.

With policies under these three headings, governments can foster enterprise and entrepreneurship, the irreplaceable engines of capitalist growth. The Macroeconomic Foundation Experience shows that high and unstable inflation can harm growth. A noninflationary macroeconomic policy is, therefore, a prerequisite for rapid development.

Control of government borrowing is the crucial element in such a policy. When public borrowing is excessive, governments are soon obliged to finance it by printing money, and rising inflation then follows. The International Monetary Fund has long made programs of this sort a precondition for financial assistance to countries in distress.

For the Japanese series see figure 1. A divergence of real wages only occurred from the s onwards, when real wage growth in Tokyo started to accelerate, while real wages in Accra collapsed, falling back to early twentieth century levels.

Japanese Economic Development: Markets, Norms, Structures

Despite a notable recovery from the disastrous low during the mids, the purchasing power of Ghanaian unskilled urban wages had not recovered to the peak levels of the s by Table 1 illustrates an important driving factor of the different paces at which welfare gains trickled down in Britain, Japan and Ghana. In , the population estimate for Ghana was about 3.

In Japan, the total population in was estimated at about 50 million, resulting in average densities of people per km 2. Given the mountainous geography of the island only about 19 percent of the Japanese land surface was suitable for agriculture, implying more than people per km 2 of agricultural land. In Britain too, the pressure on agricultural land was much higher, almost a tenfold of the Ghanaian figure.

Lessons of Experience

The dramatic contrast in land-labour ratios is important to understand the different modes of labour market organization as well as the observed trends in real wages. Table 1 Comparative population densities in Ghana and Japan, Where Ghanaian farmers had virtually free access to forest land in the early twentieth century, Japanese farmers could only augment their incomes by raising the productivity of their fixed small plots of land or engaging in non-agricultural activities.

Cocoa farmers in southern Ghana used the open land frontier to expand their productive activities in the wake of new profit-horizons. Since labour was the scarce production factor, real wages were under upward pressure and the surpluses of the cocoa boom thus became relatively evenly distributed. Japan, by contrast, was approaching the limits of its environmental carrying capacity, and deforestation had already led to environmental catastrophes.

As a result, the rising demand for labour from the emerging manufacturing industries could be accommodated at comparatively low labour costs. What matters for development efforts today is that current population growth in Ghana, and in other African countries, is closing the door to a path of land-extensive agricultural growth that was pursued for the last two centuries. Arable land is increasingly becoming a scarce production factor, while unskilled labour is now abundantly available and can no longer be absorbed in agriculture. As Figure 3 illustrates, Africa will be the only world region to witness significant demographic growth beyond Its relative share in the total world population is estimated to climb from about 11 percent in , to about 40 percent at the end of this century.

In short, exactly those conditions that helped facilitate relatively high and rapidly increasing albeit volatile real wages for lower income groups in the past are now irreversibly disappearing. With the long history of land-extensive growth now closing, an alternative development path is thus needed to reduce poverty in the twenty-first century.

Can labour-intensive export-led industrialization be the new route? Ittman, D.

The Presentation of Economic Growth of Japan

Cordell, and G. All figures for — were based on the medium-fertility scenarios of the United Nations, Department of Economic and Social Affairs, Population Division, revision. The conditions for an African path of labour-intensive industrialization are certainly better today than they were a century ago. Large concentrations of excess urban labour ready to take on factory wage jobs are now widely available. Increasing investments in health and education have led to a more diverse supply of labour skills.

Cheap labour, however, may be a necessary condition, but it is certainly not a sufficient condition to kick-start labour-intensive industrialization. There are at least four contextual factors that make the initial conditions for Africa today very different than they were for Japan in the late nineteenth century, or the Asian geese that followed Japan later in the twentieth century.

First, Gareth Austin, Kaoru Sugihara and others have argued that Asian economies were able to make inroads into expanding global export markets precisely because of the great surge in global income inequality in the past two centuries. Figure 1 p.


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With this vast labour cost advantage, small and medium sized Japanese firms could compensate for lower productivity levels and other comparative inefficiencies. Figure 4 gives a sense of comparative wage differentials today, showing the average official minimum wages in Asian and African countries in the last year available.


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Although there are issues of comparability and different applications of minimum wage legislation in wage setting practices that require a cautious interpretation of this graph, the general picture is unambiguous: the current nominal wage gap between emerging Asian economies such as Bangladesh or Vietnam, and even India, and the majority of African countries is not nearly as large as the one that had existed in real and nominal terms between Britain and Japan in the late nineteenth century.

And despite increasing wages in China, minimum wages still only exceed the unweighted African average by a factor of 3 to 1 at this moment. A recent survey of wages paid in African and Chinese manufacturing firms reveals that the labour costs per unit of output remain far too high to be competitive. This of course does not mean that there are no possibilities to reap wage costs advantages for investors in Africa. It just means that investments will only pay off if specific locational cost advantages are present too: strategic input monopolies, low transportation costs, culture specific branding, and marketing advantages.

Nor are comparative wage costs prohibitively high everywhere in Africa, as there are exceptions to the rule. In Ethiopia, for example, where signs of a burgeoning manufacturing sector are by now indisputable, the wage differential with China approaches a factor of 1 to 8, while labour productivity seems to reach comparable levels.

The point, however, is that the wage cost advantage itself is too small to turn Africa into an awakening manufacturing giant. Rural markets had been stimulated for centuries by dense settlements of rural populations that created a high concentration of consumer demand. The development of markets entailed networks for credit provision, value chain management, standards for assessing product quality and changing consumer tastes, and an on-going diversification of wholesale and retail services. Proto-industrial activities have deep roots in sub-Saharan Africa as well, as testified by indigenous markets for textiles, ironware, ceramics, furniture, weapons, mats, baskets, soap, washing and cooking gear.

Industrial modernization is not new to Africa either. During the late colonial period and early independence era, manufacturing output per capita was not impressive, but close to what it is today. First, significantly lower population densities and much sparser concentrations of human settlement in cities limited conditions for labour specialization. Second, Africa has experienced large-scale erosion of these proto-industrial roots. While the scale of imports was probably too low to do great damage before the colonial era, British, Indian, Japanese and Chinese textile imports in the twentieth century have effectively curtailed the evolution of an indigenous textile industry that could supply growing consumer markets.

The period of industrial expansion under import-substitution industrialization was short-lived and the gains, with the notable exception of South Africa, evaporated in the crisis of the late twentieth century. Even in periods of structurally declining terms of trade e. Weak proto-industrial foundations are not an impossible barrier to overcome, but it does mean that both the technology and skill gap have grown wider.

Whether African states have sufficient capacity to implement rigorous industrial policies is a question we leave open here, but we do note that very few African regimes can set their development goals independent from foreign interests. Donor countries and international organizations have a serious handle on African domestic economic policies.

It remains therefore questionable whether African countries can pursue powerful industrialization policies that are both effective and inclusive, and at the same time congruent with the interests of foreign donors and investors. Finally, we need to return to the question of African demography. Both Britain and Japan benefitted from what may be called a natural population valve in their expanding empires. In present-day systems of tightly controlled national borders these population valves are no longer present, and it is mainly through risky illegal migration that Africans search for a better life.

Nor do African governments seem to have the capacity or political willingness to implement stringent family planning programs in order to reduce fertility rates more quickly. It is highly likely that the so-called demographic dividend that comes with an expansion of the economically active share of the population occurs in a phase of development preceding the creation of new jobs in high productivity industrial and service sectors, rather than coinciding with it.

And it is precisely in such a context when poverty reduction is likely to be slowed down instead of gaining pace. Our assessment of historical development analogies has left us with a rather pessimistic perspective: expectations of accelerated poverty reduction in Africa through labour-intensive export-led growth have little historical foundation. What does this leave us with?

6 Key Economic Trends for

Are large parts of Africa doomed to experience a Malthusian disaster driven by rapid population growth in a context of sluggish agrarian development, adverse shocks from climate change, too weak productivity growth in non-agricultural sectors, and slum-formation driven by pools of unemployed youth flocking to overcrowded cities? The demographic boom is also stimulating another more promising transformation process: a rapid concentration of human settlement and increasing human interconnectedness. The intensification and diversification of rural—urban exchange networks are fuelling a process of domestic market integration and provide an alternative development path.

Domestic market integration is important for the functioning of factor markets land, labour, capital and creates opportunities for scale economies in tradable commodities and services that enjoy a natural degree of protection against foreign imports e. Domestic market integration tends to come with labour productivity gains, with public demand for institutional reforms, and with the adoption and dissemination of new knowledge and technologies.

In theory, market integration is at the heart of Smithian growth , where scale economies allow for labour specialization and competition enhances efficiency gains. Whether this type of growth will also reduce poverty depends in part on how the process is coordinated and facilitated by governing bodies. Yet, strong domestic economic linkages are a necessary condition for industrial modernization in the longer run and deserve closer attention by the development community.

Until very recently, human settlement patterns in most parts of Africa had remained comparatively thin, rural, and dispersed. Output per capita is higher in urban centres than in the countryside. While poverty rates are declining in both rural and urban areas in the majority of African countries, urban poverty rates remain consistently lower.

Third World Economic Development

It remains an open question in the history of pre-industrial Europe whether urbanization drove agricultural commercialization or vice versa, but regardless of the direction of causation much of it was a two-way process , the links between town and countryside were key for long-term growth in an era where technological innovations were more of a consequence than a driver of growth. Agricultural intensification occurred in the proximity of urban centres, where consumer demand was concentrated. Expanding handicraft manufacturing required impetus from both the countryside e. Market integration fostered improvements in the development of transport and communication infrastructures.

It is this basic, but deeply transformative process of economic change — the scope of which is virtually impossible to quantify — that is now in full swing in Africa. The drivers of this process differ in kind and in degree. For one, African demographic growth is occurring at a much faster pace.

Additionally, favourable demand conditions in global export markets have greatly augmented the possibilities to import capital-embedded technologies, such as ICT devices and solar panels. The rapidly declining costs of domestic transportation and communication have stimulated market access for producers, traders and consumers alike in a much more dramatic manner than ever seen in the pre-industrial era. Especially as a result of the ICT revolution, millions of Africans have been digitally connected to expanding local, regional and national trade networks over the last two decades.

The development of these domestic networks affect the daily livelihoods of the rural and urban masses, if not more so than the global markets that feature so prominently in present-day development discourses. The evolution of rural—urban exchange networks is not a linear historical development, and its intensity varies from one region to the next. Three generalizations seem valid though. First, the current process of urbanization in Africa is stimulating economic growth via enhanced consumer demand, not primarily via supply-side changes in production.

Third, this process of domestic market integration strengthens the linkages between the agricultural, industrial and services sectors, without having one sector i. Japanese Economic Development presents three distinct approaches to understanding how and why Japan made the transition from a relatively low-income country mainly focused on agriculture to a high-income nation centered on manufacturing and services. In offering an eclectic account of Japan's economic development, this book appeals to students in a broad group of disciplines including economics, political science, sociology, geography and history.

The book makes a case for 'over determination' in economic behavior. Because individual, firm level, and governmental behavior is simultaneously determined by the interaction of markets, norms, and structures, change over time is rarely if ever limited to the economy operating in isolation from social norms and structures. Help Centre. My Wishlist Sign In Join.

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