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Consider Japan

Chapter VIII

The Planning of Exports

It would be absurd to pretend that the success of Japanese governments’ economic policies has been due to the formula discussed in the last three chapters – easy budgets, but tight money – alone. But that almost accidental formula has provided the right elbow room for a part of Japan’s dynamic that really has been fundamental: namely, the nation’s economic tendency to look constantly ahead in emulation.

In part, of course, this springs from Japan’s advantage in not having been historically the front runner in the technological race; in part, it springs from the very useful national urge to be always gaining face. If “advanced countries” abroad have a competitive petrochemical industry – and Japan has not – then everybody in the Japanese government, and everybody in each big business group around each of the big banks, wants Japan (and for that matter his own banking group) to have a successful petrochemical industry too. Every big firm has a planning division which assiduously studies the filing of new patents and the introduction of new industrial techniques abroad; when successful ones appear, Japanese industrialists will immediately enter into negotiations to be allowed to operate the same techniques, under licence and nowadays often with considerable locally-added improvements in Japan. This technological élan seems to be far more energetic than in British industry, which has too often seemed to regard the “copying” under licence of American or other foreign techniques as rather infra dig.

The same tendency for the Japanese to be constantly looking ahead in emulation permeates their government machine. The Japanese will always tell you, especially if they assume you to be an American, that theirs is not a planned economy. In the socialist sense of the term it is not. But Japan, even more than France, is the land of indicative economic planning à outrance. One has only to read the annual economic survey published by its Economic Planning Agency – a colossal tome of 500 magazine-size pages – to appreciate that. One has also only to look into the economics and statistics departments of any of its government departments or agencies: huge factory like rooms, with economic graduates sitting row upon row, all hammering out on their adding machines the indicative economic statistics of the new Japan. Sometimes this estimating goes to what, to a Briton, seems more than slightly comical extremes: it is a bit odd to read in the press that the Economic Planning Agency has set a “target figure” for a rise of 2.8 per cent in the cost of living, or 14.6 per cent in exports, for the year ahead. But the attitude engendered by all this is important, because it is often precisely the opposite of that which rules in Britain. Nowhere can this be seen more startlingly than in Japan’s mode of planning its exports, a field in which the Japanese will at first tell one most insistently that they do not do any positive planning at all.

Japan knows exactly where it wants to go in its future export drive. It wants to go into what it calls “heavy and chemical industries products (totals of machinery, metals, metal products and chemical goods)”– hereafter called heavy goods for short. In 1953, when Japan started its present export advance, it had 50.2 per cent of its exports in light industrial goods (of which three-quarters were textiles) and 35.7 per cent in heavy goods; by 1959 it had switched to 47 per cent light (going down) and 42 per cent heavy (going up). Its export structure, Japanese planners will point out, has therefore in this decade been broadly similar to the stage that had been reached by most West European countries in about 1928. Since 1928, every West European country has gradually switched into the more “modern structure” of putting much less emphasis on “light industrial” exports (of which textiles have almost always been the main element) and much greater emphasis on exporting of heavy industrial goods. As witness the table below:

PERCENTAGE OF TOTAL EXPORTS

Light Industrial

Heavy Industrial

1928

1959

1928

1959

Britain

50.7

18.3

30.5

66.1

Switzerland

54.3

25.1

27.6

66.7

Belgium

42.9

26.9

33.2

55.9

France

44.1

21.9

22.6

52.5

Italy

37.5

26.5

165

43.0


Most successfully of all Germany had reached 41.6 per cent light and 26.2 per cent heavy even by 1900; by 1959 it had reached 14.7 per cent light and 73.8 per cent heavy, a slightly “more modern proportion” (in terms of industrial exports only) even than the United States.

Japan’s official Foreign Trade White Paper for 1961 was quite brutal in drawing attention to the way in which Germany made a quicker and earlier switch into heavy industrial exports than Britain:

The (different) speed of adjustment of the export structure of these two countries greatly affected later developments ... in particular it is well known that this became an important factor in leading the British economy into a long-term stagnation. Special attention must be given to this point on the part of Japan, which still depends greatly on textile products.


And one can be quite sure that special attention will be paid to it, for the Japanese are convinced that in the second half of this century the underdeveloped countries will sweep into the export markets for light industrial products, and not only for natural textiles. When your correspondent asked one Japanese which newly developing country he most feared, the answer was unexpected: “In thirty years perhaps all of them, with China of course hanging over all; but in the next few years I think one main challenger may be Spain.” Others that were mentioned were Formosa and Hong Kong.

This idea of encouraging development of tomorrow’s export industries, rather than concentrating entirely on today’s possibly evanescent ones, is a deliberate feature of Japan’s short-term policies, and not just one of its vague long-term aspirations. As one example of the statistical and planning techniques employed: income elasticities of demand for various items in the main markets of the world are studied with loving care, and this trend of world demand is then checked against what is called Japan’s “specialisation index.” (This term can best be explained by an example: if 5 per cent of total world trade is in chemical goods and 5 per cent of Japan’s exports are chemicals too, then Japan’s specialisation index for chemical goods would be one.) When world demand is rising especially heavily for some particular item, Japan’s industrial planners get very worried if Japan’s “specialisation index” – and thus share of world exports – for that item is not concurrently going up too. On the other hand, if Japan’s specialisation index is already high for something for which world demand is not rising, the planners are not at all sorry to see that industry – even if it is currently a good exporter, such as, e.g., tractors are for Britain – gradually dwindle.

Thus Japan’s Economic Survey for 1959-60 noted with satisfaction that in a wide range of articles for which world demand was then rising, Japan’s specialisation index had increased also. These booming exports included most forms of machinery, other metal goods (as distinct from metals themselves), made-up clothing (as distinct from textile piece goods), vessels, automobiles (where admittedly Japan’s specialisation index is still well below unity), and some forms of plywood and wooden products. On the other hand, the survey noted with almost equal satisfaction:

Among the items on which Japan is beating a retreat with regard to specialisation are those goods which are manufactured through comparatively simple processes and are in poor demand like yarn and cotton fabrics hitherto exported mainly to underdeveloped countries. They also include chemical fertiliser, pottery, glass products and bicycles

But it added as a warning note:

Declines in specialisation indices are also registered for many chemical products and metals. This is quite noteworthy, for the world’s demands for chemical products and metals are on the upgrade.

Following upon this sort of remark, government measures for encouraging greater output of the chemical products indicated as desirable will be stepped up.

In part, these government measures may take the form of winks and nods passed along Japan’s extensive “old boy” network. (As Sir Norman Kipping and Mr J. R. M. Whitehorn put it, perhaps with rather polite understatement, in their excellent report on Japan to the Federation of British Industries in 1961: “The very intimate and manifold connections at all levels between government and industry are a most important factor in the attitudes and policies of both.”) But the government also has some powerful positive strings to its bow. They can include the exemption from corporation tax on profits from a new product for an initial period, extraordinary depreciation allowances (which can sometimes be very extraordinary indeed), readier permission to firms in a growth industry to import technological know-how, as well as very tight protection against foreign imports while the infant industry is being built up. And, as a most important point: if domestic demand for these industries’ products grows in the meanwhile, thus giving them further encouragement to expand, that will be regarded as the happiest development of all.

This last remark leads into another vital difference between official attitudes in Britain and Japan. In Britain the government almost automatically assumes that any “excessive” increase in domestic demand necessarily causes exports to shrink, because the extra demand sucks goods into the home market; British officialdom discounts the argument of some industrialists that increases in home demand help exports by enabling manufacturers to utilise to the full the economics of modern mass production techniques. In Japan – instead of assuming that the industrialists’ argument is either always wrong or always right – they set their adding machines to work to find when and whether it has proved true in each particular case. And from this springs calculation of what Japanese planners have called “the export and industrial estrangement coefficient” in various parts of their economy – another term that economists in Britain have never learned to use.

In 1950, for example, machinery accounted for 16.2 per cent of Japan’s industrial output but only 10.5 per cent of its industrial exports; so machinery was calculated to have an export estrangement coefficient of 10.5 divided by 16.2, which equals 0.65. By 1959, by contrast, output and exports of machinery happened to have risen to a level where they accounted (coincidentally) for exactly 28.9 per cent of both Japan’s industrial output and its industrial exports, so by then machinery had an estrangement coefficient of one. This, in other words, was one group in which exports had proved to go up more than proportionately as domestic demand had expanded. And the blunt fact is that the same trend has been observed in Japan in most of the “modern” industries on which increases in domestic demand within an expanding economy have recently been most heavily concentrated.

This would not be true in all countries with different schedules of marginal domestic demand; for example, in America marginal demand in an expanding society might well be mainly concentrated on services, which would often use up labour in forms of employment where they could not add to exports at all. But the situation is different when marginal domestic demand is concentrated on industries with a high rate of capital intensiveness, in which productivity therefore increases sharply with mass production and in which it has been proved (by those adding machines again) that qualitative improvements and investments in modernisation go forward most swiftly in time of high prosperity for the industries concerned (so that a country must be considered to be particularly well placed to follow expansionary policies when marginal domestic demand falls heavily upon industries with great scope for complicated technological advance).

One suspects that Britain, like Japan, has in recent years been in this potentially happy position where re-expansionary policies would have paid off in aiding the export industries of the future to grow to a more efficient size; at any rate it would be nice if the National Economic Development Council or somebody would use its adding machines to try to find out.

It is easy to dismiss all this talk of estrangement coefficients and specialisation indices as highbrow stuff which only the academic planners (and perhaps even only a small minority of them) understand and make up for the purposes of their absurdly-detailed forward-looking “plans.” But the fact is that this sort of economic temperature-testing has insensibly created an attitude towards problems of growth in Japan wholly different from that in Britain.

Your correspondent felt this most keenly at two types of interview during his tour of Japan. The first was when he checked up on the spot what has happened to British exports as a result of British governments’ consistent policies of holding down British domestic consumers’ (and investors’) demand for new things, in order not to draw away resources from traditional export industries. The result has been that, as seen from a market like Japan, Britain’s main exports now look very traditional indeed. The main things in which Britain ranked as the principal supplier to the Japanese market in 1961 were whisky, sweets and other confectionery, and woollen fabrics (plus some other textiles). In machinery and other “modern” exports, America and Germany beat us right across the board. As the recent FBI report pointed out this “has perhaps contributed to a quite false picture that we are strong only in consumer goods.” To put the matter much more bluntly, the vision of the average Japanese – and of other distant export customers – is that Britain today has become a non-developing country; filled no doubt with whisky stills, children’s bon-bons, skilled at making up material from old sheep, and fabricating other quaintly old-fashioned things which the average Japanese probably regard as the products of our cottage industries; but not a dynamic country that is capable of producing anything expansive and new.

The second sort of shock came when one talked to Japanese economists themselves. It was terribly difficult to explain to intelligent Japanese that in Britain the industries for whose products demand rises most swiftly, during hire purchase or other booms, are often precisely the ones that the Government seeks discriminately to hold down; that British Chancellors do not seem to believe in the concept of domestic growth industries, but resolutely maintain that the only sound type of growth is that “based on and led by exports.” The answer was apt to be something like:

That is most interesting. In an early stage of our development we too led our industrialisation by export industries such as textiles. But in the present stage of modernisation of our industrial structure I think the only industries in which we have seen export increases induce a production increment – instead of the other way round – are transistor radios and perhaps cameras. We do not all regard these industries as very soundly based because demand for them, especially transistors, may be saturated too soon. Export increases of all our other products have been induced mainly by expansion for the domestic market. But perhaps in your mature country the indices…

One had then to explain that British policy was not based on such complicated ideas as studies of the likely trends in specialisation indices and estrangement coefficients, but on what British ministers regard as the “commonsense” view that exports can go forward fast only if the domestic market is not too ravenous. The response one elicited by this sort of explanation was apt to be that peculiar Japanese ejaculation which sounds like the word “Ha” emitted from the top of the forehead. It is the world’s politest – and in this case just possibly most deserved? – form of snort.