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Consider Japan

Chapter XI

Lessons for Developers?

In the first part of this book, Japan has been discussed as a model (well, more or less a model) of some aspects of economic policy which should be studied by Britain and other countries of the West. Obviously, however, it must also be regarded as a harbinger of future possibilities for the rest of Asia and Africa. We have here a practical case study in that most over documented but least satisfactorily solved of all economic problems – how a very poor country can at last start to shake grinding poverty off. For Japan has sprung from near-starvation and utter devastation seventeen years ago (in the month after the end of the war its industrial production was 8 per cent of the prewar average, and even by February, 1946, it was only 16 per cent of it) to a position where today in almost every finished modern product it is one of the half-dozen biggest industrial producers in the world. In shipbuilding and motor bicycles it is the world’s largest producer; in bearings, cameras, radio and television sets it ranks second; in machine tools, pharmaceuticals, and iron and steel it ranks fourth; even in motor cars it ranks fifth. Did it have any special advantages which enabled it to achieve this astonishing growth, or are most of the lessons of its development ones that other countries of Asia and Africa could and should now learn to imbibe and emulate?

THE INHERITED ADVANTAGES

One’s own judgment is that Japan inherited three great advantages from prewar days even into the bleakness of 1945. Two of these will be mentioned here only briefly, for it will be convenient to discuss them in more detail in later chapters. The first was that even in 1945 60 per cent of Japanese were literate and had been to school; the further massive extension of education since 1945 is discussed in Chapter XIV. The second inherited advantage from the 1930s – unmoral though this may appear – was that Japan’s efforts to build up a war production economy in its militarist days had enabled it to leap over one particular chasm in industrial development which orthodox economics find it very difficult to cross. The third inherited advantage, however, was that even before 1945 Japan’s topography had (perhaps accidentally) impelled it into what now seems to have been exactly the right transport system for the early stages of its development.

The main secret was that Japan’s long narrow coastal strips had made it natural that all the main industrial activity should cluster round a few main railway lines, which ran along the coast linking one inlet and natural harbour with the next one. Those main railway lines (although not those harbours) are in superb shape today. The branch lines and some of the commuter services – the sort of railway lines that lose money in Britain – are hived off in the hands of small private railway companies. This has proved to be an excellent system, because it has meant that any necessary (or unnecessary) subsidisation of them or their customers has been done fairly directly, instead of indirectly and by expensive stealth; the cossetings of the sort of people whom Dr Beeching in Britain wants to deprive of railways altogether have not tended, in Japan, to be paid for by holding back development of really profitable national investment in the main arteries of the prosperous and busy main railroads.

By contrast, Japan’s road network is in an appalling state; but in the early stage of development (as distinct from the stage it has reached now) this did not enormously matter. It is now fairly clear that coastal shipping, initially, and the railroads were a much more economic main form of transport for Japan to have concentrated upon first. They were much cheaper to build up and run in terms both of capital expenditure (even today surveys show that a new railroad line from Tokyo to Osaka would cost much less to build than a modern high-speed highway) and of foreign exchange (using first native coal and then hydro-electricity, instead of imported petrol). These latter advantages of railway communications over roads would not be repeated in every developing country; but the main lesson – that it is better in the early stages of industrialisation to concentrate on building up industrial complexes around one or two main arteries of communication, rather than trying to spread industrial prosperity “fairly” into every scattered region of the land – almost certainly is of universal application. The “railway basis” of Japan’s development was an important factor in bringing about the present regional location pattern of Japanese industry, which all the sociologists will say has led to an undesirable and ugly sprouting of’ huge conurbations, but which in terms of economic efficiency (in a country still poor enough for every penny’s worth of efficiency to matter) has during this development stage probably been very near to just right.

THE AMERICANS’ LEGACIES

Japan also gained at least three great, if sometimes cruel, advantages from the American occupation of 1945-52. One was the land reform, which amounted in the end to virtually full-scale expropriation of many of the old landlords; they were paid compensation in paper money during the immediate postwar inflation, and (as each pound in 1945 was worth about a penny by 1948) that paper money soon lost all of its value. The peasants were thereby relieved of the burden of debt, and given greater incentives to cultivate every square yard of their holdings, just when the postwar food shortage (and the postwar black market) made crops from these holdings very profitable indeed. It is often said that a developing country can progress only if a period of relatively greater prosperity for the peasants in some way marches on in advance of a period of greater prosperity for the industrial classes; in postwar Japan that is precisely what happened, although the period when peasants were leading the advance was very short indeed. The expropriation of the old landlords also had important social effects. No doubt in deeply rural Japan some appalling habits of feudalism still exist, but vis-à-vis industry at any rate, the power of the country gentlemen in the growth districts to hold up productive progress is now probably smaller than in Britain; if it was regarded as profitable to sink a chalkpit in Japan’s equivalent of Essex, this would not nowadays be so likely to be held up because it was deemed to spoil some local squire’s view. It has been said that the Japanese have a great sense of beauty but no awareness of ugliness, while the British are exactly the other way round; not to have an awareness of ugliness is a great economic advantage during a period of industrial advance.

But while Japan gained something, paradoxically, from the cruelties of the postwar inflation (by 1948 prices were 250 times higher than prewar) – because it broke up some part of the old restrictive social order – the country also gained immeasurably from the fact that in 1949 this inflation was brought suddenly to a stop. This was the Americans’ second boon to Japan, and great credit for it must go to the generally much-criticised Mr Dodge. By late 1949, thanks to the spasm of stern policies that he introduced, money had come to mean something again; the earning of it had become everybody’s aim. Moreover, an important part of Japan’s dynamic was provided by the fact that there were then entrepreneurs up and down the country who were left holding little bits of apparently meaningless paper shares and entitlements to urban land which were soon to become worth many times their real 1949 value – provided the land and other assets were productively used – as prosperity started to boom again. The entrepreneur class was jostling at the starting gate for the great advance.

What Mr Dodge and his fellow experts did not realise – and what indeed no other economists in the world would have realised at that time – was that the spasm of deflation in 1949 should be short-lived. It is now clear that almost immediately after hyper-inflation had been stopped, albeit at a relatively low level of output, it would have been the right policy to swing the tiller right over and start reflating demand again. Fortunately for Japan this swing of the tiller, which the economic experts would have resisted, was almost immediately provided by the outbreak of the Korean war in June, 1950 – and the huge orders for supply and behind-the-front soldiers’ requirements, all paid for in foreign exchange, which then flooded in upon Japan. This was the third great boon to the country from the period of American occupation. Later the Japanese were to have another stroke of luck from an international misfortune, at a critical time, when the Suez incident in late 1956 temporarily gave Japan a great advantage over the West in the markets of Asia.

It is awfully difficult to turn the experience recounted in these last few paragraphs into a moral for the development of other countries. One cannot very well say that developing countries would be wise to leap willingly into a 25,000 per cent inflation of prices, merely to reap peculiar sociological advantages – in the switch of power and incentive from old rentiers to new entrepreneurs – when the price inflation has been stopped and demand reflation has immediately thereafter been restarted. But the lesson of that part of the Japanese recovery which was sparked off by the Korean procurement boom is worth study. Anybody who examines the record in Japan from 1947-50 and then that after 1950 must have grave doubts about the efficacy of the sort of (admittedly very generous) aid policy carried out by the Americans in Japan just before the Korean war started. Instead of pumping in foreign-directed support funds, foreign directed technical aid, and foreign technicians to tell indigenous governments how they should spend it, the right policy seems to be to concentrate on spotting what in each developing country is the moment of burgeoning dynamic; and then to pump into that country large orders for that country’s goods. Preferably the orders should be for goods of a fairly advanced sort which can help to lay the foundations of the modern industries (including service industries) which the developing country will need later as its own people grows richer. This is what the Korean procurement boom did in Japan.

Goodness knows how such a policy could be implemented on a world-wide scale. It would be an immensely difficult diplomatic task to agree on exactly when the moment of burgeoning dynamic in any country had arrived; and the associated idea that the West should be quixotically free-trade-minded towards imports from cheap labour countries that are just on the point of becoming manufacturing competitors would give vested interests in each western country the screaming willies. But the need to move towards some such system of “aid through trade,” rather than concentrating solely on the less effective “development fund” sort of aid, may well be one of the most important emerging economic ideas during the second half of this twentieth century. Moreover, the point is that often the manufactured goods which new developing countries have available to sell will initially be uneconomically high cost ones; quite possibly, in a perfect world, developing countries should be allowed by Gatt to subsidise their manufactured exports at this early stage (although this certainly should not apply at the stage of development which Japan itself has reached now).

THE DISADVANTAGES THAT DISAPPEARED

Japan’s golden decade-and-a-half of development, therefore, has owed quite a lot to good luck as well as to good management. The surprising thing is that, only a short while ago, all the prophets were saying that Japan was almost bound to be one of the unluckiest countries in the world. Its traditional disadvantages – which at one time sad-faced economists (as well as hard-faced military imperialists) prophesied would condemn an island-bound Japan to perpetual poverty – were supposed to be that it was (a) grossly overpopulated, (b) desperately short of cultivable land, and (c) extremely poor in natural resources.

What has happened to these neo-Malthusian prophecies of doom? The answer is that each of them has proved to be based on completely mistaken premises; indeed in some ways these traditional disadvantages have been actual boons to Japan.

The argument that overpopulation would be Japan’s undoing rested partly on the belief that while the advance of medical science would enable infant mortality to be cut and old people to live longer (as it has done), the slightest rise in living standards would also simultaneously send the birth rate up. Unexpectedly, however, the birth rate in Japan has suddenly slowed down in these last few years to or below European levels (17 per 1,000 compared with over 34 per 1,000 in 1947). This has not been solely, or even mainly, due to the much publicised fact that any Japanese woman who can get a doctor to sign a certificate, grantable on very wide grounds, can have a legalised abortion. The major discovery seems to be that there may be a natural cut-off point for birth rate increases at a particularly important stage along the path where a developing country starts to grow richer: namely at the stage where ordinary people just become well enough off to buy contraceptives.

The result of this sudden change to a much lower birth rate has been very beneficial to Japan. It has meant that the country has had fewer babies to feed, but a bulge of young workers coming forward on to a labour market which is crying out for new labour to serve in Japan’s developing industries. This bulge of teenagers has helped to keep the supply price of labour lower, and thus the margin of profit higher, than it otherwise would have been. This may not seem socially desirable, but economically it has been an important factor in keeping up the huge proportion of gross national product which Japan has devoted to investment in the first stage of its development boom.

Japan’s shortage of land and raw material resources has meant that in agriculture’ and the extractive industries the country has been at a relative disadvantage compared with other countries. This has made it logical for it to concentrate on making and exporting the products of secondary industry, in order to be able to buy its raw materials and some of its food from abroad. This has been very fortunate for it because in the postwar years the terms of trade (i.e., the trend of relative prices) have moved in favour of exporters of manufactured goods and against agricultural and other primary producers.

The terms of trade have moved against agriculture because governments all over the world have kept too many farmers on the land by politically motivated policies of agricultural protection. Japan has itself made some errors in this respect. Some foreign observers in Tokyo told your correspondent that “Japan’s greatest achievement is that it has made itself self-sufficient in rice”; but in fact this has surely been one of its most obvious errors. Its policy of agricultural support has been concentrated on encouraging an expanded cultivation of rice and wheat, just when the Japanese public are starting to cat less of these old staples and move over towards eating more meat and dairy products instead. It would be logical for Japan to buy more of its rice from other Asian countries, particularly if it wants these countries to open their doors to more exports of Japanese manufactured goods. Possibly providentially, however, Japan’s upsurge of consumption of meat and dairy products is coming at a time when (because of its past rice-eating habits) it has not itself got an army of dairy farmers to overprotect – and also at a time when its neighbours of Australia and New Zealand (a mere 3,000 miles away) are anxiously looking for markets for their farmers because of Britain’s negotiations with Europe. Logically there should be scope for a major increase in trade here, provided the Australasians are wise enough to open their markets even wider to Japan’s industrial goods. It would be a great economic advantage for Japan if it could now take over some of Britain’s past role as the dumping ground of cheap food surpluses from the most efficient (or the most subsidised) agricultural producers from all over the world.

The turn of the terms of trade against raw material producers has been largely due to technological advance (the fact that raw materials make up a smaller part of the total cost of really modern manufactured products, and the spread of synthetic substitutes). In addition, shipping freight charges, which have always played a big part in the cost of importing raw materials in bulk, have gone down (once again partly because governments, for political reasons, have striven to keep too many shipping services in being). As in agriculture so also in raw materials Japan made some early postwar mistakes in attempted autarky; for some years after the war it spent vast sums inducing its industries to use Japanese coal, which is of very poor combustible quality and mined hideously and expensively far from the pitheads, instead of switching to more modern and efficient forms of energy (like imported oil). But the government has altered the emphasis of this policy in recent years, albeit at the cost of violent strife and strikes in the coal-mining areas; Japan’s planners now appear to recognise that coal mining is one of the primary industries that should be run down pretty ruthlessly as resources switch more and more into manufacturing industry.

The next question, however, which is vital for Asia, is: which manufacturing and other secondary industries does Japan’s experience suggest are the most profitable ones for a developing country to concentrate upon first? To this question the next chapter will turn.