Consider Japan

Norman Macrae , The Economist, 1962

1 The Most Exciting Example

At the end of 1951 Mr Joseph M. Dodge, the Detroit banker who had tried (without consistent success) to impose stern policies of demand restraint upon the Japanese government during the dynasty of General MacArthur, shook the dust of a once more independent Tokyo off his feet. His parting message was not designed further to endear him to the Japanese people. “At present,” declared Mr Dodge severely, “Japan is suffering from a plague of false legends, which include some dangerous delusions.” He then listed fifteen of these delusions, in language which will strike familiar chords for connoisseurs of recent British cabinet ministers’ speeches. The delusions included:

That increased production without a parallel increase in exports represents sound progress.... That inflation can easily be offset by increased production. ... That a nation that must export to live can afford to price itself out of its export markets with a domestic inflation. ... That granting progressively larger amounts of commercial bank credit for capital purposes can be substituted for the normal processes of capital accumulation....

“The progress and present favourable status of Japan,” concluded Mr Dodge, “has been the result of extremely favourable external circumstances, which cannot be expected to be repeated and continued indefinitely.” He then returned to the United States (average growth rate since then about 2½ per cent per annum), and sat down in his Detroit bank awaiting Japan’s inevitable crash.

In the decade since then Japan, continuing and following almost precisely the policies which Mr Dodge had castigated and opposed, has seen its real national product increase at an average pace of over 9 per cent a year, its industrial production and rate of manufacturing exports more than quadruple, its urban population make the great breakthrough into the first modern consumer oriented economy in Asia. In the process it has seen the average Japanese’s expectation of life (now just over 65 for a man, just over 70 for a woman) rise to ages that are now actually ten years longer than they were only twelve years ago. There are some who will regard this last achievement alone as one of the most exciting and extraordinary sudden forward leaps in the entire economic history of the world.

Moreover, we are talking here not only of a trailblazing pioneer for Asia; we are dealing with a story that has by now deep implications and parallels for Europe as well. From the welter of remarkable sets of figures about modern Japan, British readers should perhaps first pick out two. First, of the babies who were born in the year after General Doolittle’s bombs first fell on Tokyo, so far as one can see from the available educational statistics, only just over 40 per cent left school at the minimum leaving age of 15 in 1958; another 45 per cent or so stayed on at high school until 18; and more than another 10 per cent are currently passing through college or university. The equivalent figures in Britain were over 60 per cent leaving school at 15, around 30 per cent at 16 to 18, and only about 7 per cent going on to college or university. Moreover, the bias of later education in Japan is much more heavily technical, and their big firms train skilled workers more assiduously and deliberately than most of their rivals in Britain. Those Englishmen who think of Japan as a backward country of adaptable but unskilled labour are talking nowadays through their hats as far as Japan’s new and younger workers are concerned; this is, in point of fact, a more lengthily educated and technologically skilled generation of young Japanese who are now moving into their modern factories than their contemporaries among young people in Britain.

Secondly, investment in productive capital equipment in Japanese industry in recent years, on a straight yen-sterling exchange rate basis, seems to have been about one-third larger than equivalent investment in industry in Britain. Admittedly, Japan has a labour force nearly twice as large as Britain; but in the competitive, non-agricultural, big-company, modern sector of industry – into which the majority of both the new Japanese investments and new young Japanese workers are moving – Japan’s total labour force is actually still rather smaller than ours. This new generation of more skilled Japanese is moving into factories where entrepreneurs are currently putting behind each one of them in the larger factories a greater force of new and modern capital equipment per head than is being put behind their rather less educated and less well trained contemporaries in Britain; in a few years’ time, on present trends, logic would suggest that they could beat us competitively in a much wider field of industry than most people in Britain at present begin to imagine – even if their wage rates in this modern section of industry do at last go up towards our standards too.

All this has been achieved in a country which seventeen years ago lay in ruins, which even ten years ago had only just re-attained its prewar level of production, and which has suffered far greater disabilities in its traditional export markets (because of the nature of its exports, and the closing of China) than postwar Britain has done. If all this is the result of internal policies which wise men thought would bring about a crash, then, in the name of simple economic common sense, government economists and apostles of conventional economic wisdom from the entire world should be coming to Japan to study just how to emulate it.

The trouble is that one is fearful that conventional wisdom may be going to stop the advance instead. One of the done things to say in Japan in early 1962 – it was said to your correspondent on more than one occasion was that the Japanese must now learn respectable economics from the British and slow down their rate of growth (perhaps permanently) in order to push the pressure on their resources down. This seems a very curious view. For consider the contrast between Japan and Britain, two countries with very similar import structures and an astonishingly similar tendency to run into import deficit at one particular stage of the internal trade cycle. Consider it even in terms of the export figures which British spokesmen themselves generally think should be the main criteria. Japan in the last eight years has marked up the biggest rate of growth in both production and exports in the world (217 per cent increase in industrial production from 1953 to 1961, 232 per cent increase in exports). Britain, by following an almost diametrically opposite policy, has marked up one of the slowest rates of increase in both (28 per cent increase in production, 42 per cent increase in exports). Obviously in these circumstances the British economy has lessons to learn from the Japanese, not the other way round. This will set out your correspondents’ view – both for western and eastern ears – on what those lessons are.

2 Not So Exceptional Case

Any transient foreign visitor writing about Japan is immediately faced by a major apparent difficulty. The psychological make-up of the ordinary Japanese, individually as well as en masse, is said to be very different from that of most westerners; all old Japan hands hasten to impress that on the visiting greenhorn, the older and wiser the hands the more forcibly they say it. And in at least one respect which impinges upon economics, the old hands seemed to this transient observer to be transparently and palpably right. Without paying any instinctive credence to Kipling’s hoary nonsense about east and west, it is worth devoting two paragraphs to discussing it.

For a variety of historical and sociological reasons there does seem to be a sort of inbred collectivism in the Japanese people, whose outward manifestations (this is a wild over-simplification) bear some caricature-like resemblance to the atmosphere in the heartier English public schools. This atmosphere, disconcertingly for the visiting analyst, can overlay the attitude of the Japanese worker (as well as the Japanese executive) in the more successful industries to his job: up the old firm; Mitshibushi Heavy Machinery Plant for ever; act as a fag in your first few years, expect to get greater privileges later; take your hands out of your pockets when passing the headmaster, and expect in return to be treated by him as one of “my people” to whom he has a special responsibility in times of trouble; feel a genuine personal involvement in the factory’s production record and other collective achievements; actively prefer to live together cheek by jowl and to spend a lot of your leisure time in group activities (often of a self-improving sort) sponsored by the firm. The song with which workers and executives of the giant and prosperous Matsushita Electrical plants willingly begin their day has already been widely publicised around a slightly incredulous world (see Time magazine, February 23rd, 1962):

One cannot quite see the Ford workers at Dagenham singing that.

On the other hand, one cannot see the workers of a declining industry in Japan singing it in willing unison either. On the contrary, Japanese coal miners – to cite the most obvious example of workers in a major but non-expanding industry – have fought some of the bitterest and most violent strikes against their employers in any country since the war; one postwar strike lasted through twenty-two months of the very reverse of peaceful picketing. The Japanese are not nowadays a people who are naturally servile to authority, or who are so silly as actively to enjoy hard work; they just enjoy the group aura arising from success. In consequence, many of them tend to go to extremes in both their group enthusiasms and their group apathies, in both their group likes and their group hates. So long as the policies of a business enterprise or of the government are breeding success, this collective enthusiasm helps to keep success rolling along; if the success story for some reason stuttered abruptly to a stop, nobody can easily tell what would happen, but conceivably the falterers might find that they were holding tigers by the tail.

But the main question to be probed in this survey is how and why Japan has achieved an almost consistent success story of economic expansion in the last decade. For that purpose the advantages and disadvantages (for there have been some real disadvantages) arising from Japan’s peculiar sociology and habits of group loyalty can justly be regarded as additional accelerators and brakes, rather than as the main motive power. The journalistic method used in this survey will therefore generally be to hive off discussion of these special Japanese sociological factors and employment customs into short and separate descriptive chapters – such as Chapters III and IV which follow – wherever such descriptions seem necessary. The main body of argumentative chapters such as this one will then be freer to push forward with analysis of what your correspondent believes are the lessons of Japan’s experience that are directly applicable for policy-makers in Britain; and, in reverse, of the lessons – all too often warning lessons – of Britain’s recent economic experience which could usefully be noted by today’s policy-makers in Japan. The only “exceptional” circumstances of Japan’s economy which will be noted in this chapter will be exceptional circumstances of what might be called a conventional economic sort. The main body of our text will be dressed in western clothes; only in those chapters that might be deliberately listed as descriptive (Chapters III, IV, VII and X) will we, so to speak, don Japanese factory uniforms and kimonos.

Sticking, therefore, strictly within these terms of reference, one had better admit straight away that Japan possesses one conventional economic “advantage” which explains why it should indeed be able to expect a faster rate of growth than would easily be possible in present-day Britain. This “advantage” is that Japan is still only part of the way forward to being a wealthy and fully developed industrial economy as yet. All statistics about social and industrial conditions in the Japanese economy must be treated nowadays as evanescent approximations, because the pace of progress is so great as to render them, with each half-year that passes, drastically out of date. But, making the best extrapolation one can from the last industrial censuses, the workers of Japan – whose per capita national income in 1961 still averaged only about two-fifths of Britain’s – can fairly reasonably be divided into three broad groups.

Perhaps more than a tenth of the total labour force of 45 million (about 27 million men, 18 million women) work in factories and other productive establishments that are as efficient as any of their kind in the world, and they are beginning to enjoy a standard of living which is therefore broadly (even if not yet quite) in line with that level of productivity, at any rate when the extensive fringe benefits offered by all the big Japanese firms are included. To this upper tenth will belong perhaps the upper one-fifth of Japan’s 21 million “regular workers” in non-agricultural industries.

Perhaps over another quarter of the 45 million work at jobs where their productivity and living standards, although below those in the most modern sector, are still definitely of western rather than Asian status. After all, we are talking here of a country where more than 45 per cent of households (over 60 per cent in the towns, over 25 per cent in the countryside) now possess a television set and where over 17 per cent of urban households possess a refrigerator.

But all this must still leave more than half of Japan’s 45 million workers in jobs where their level of productivity (and thus of earnings per hour) is less than half of that in the great modern combines. This depressed half must include the majority (though not nowadays all, see Chapter 1V below) of Japan’s huge army of 22 million small-scale self-employed men and “unpaid family workers.” Most of these “family workers” are the country’s 15 million farmers and fishermen, and its 1½ million small shopkeepers and petty traders; but other family workers still sweat their whole lives out in Japan’s 400,000 “very small” (under 10 workers each) industrial “workshops” which really consist of two or three lathes set up in some family’s living room. The depressed half of the labour force will also include Japan’s most miserable employed industrial class of a million or so ageing day labourers (average cash earnings in 1961, about 12s a day); and many even of the regular workers in Japan’s mass of small but genuine industrial establishments with between 10 and 100 workers each, in which labour productivity per worker – in sharp contradistinction to Britain (see the accompanying table and note) – is still generally less than half of that in the big factories with 1,000 workers or more.

The scope for expansion in an economy of this sort is therefore very large, merely by switching workers from the wildly unproductive sectors into the much more productive ones. The problem is notably different in degree from that in Britain. But it is not entirely different in kind. Even in Britain, as figures now published regularly by the Ministry of Labour make clear, average male workers’ earnings in new and modern British industries (ranging from motor-car manufacture through machine tools and most other forms of engineering to such things as detergents and synthetic resins) are regularly between 20 and 35 per cent higher than those in older-sounding industries like textiles (other than the new man-made fibres) or leather goods or footwear or brushes and brooms. These differences are by no means wholly due to differences in innate levels of skills. One of the advantages for a westerner of studying an economy like Japan’s is that it makes it abundantly clear how far modern economic progress depends on switching workers out of the second sort of job into the first.

It also suggests that the pace at which the advance can be effected depends mainly on the answers that can be given to three questions:

Whether the modern sector of industry has an incentive and a mood, and is backed by the kind of government economic policy, that encourage it to play an ever bigger and more expansive part in the national economic life;

Whether the purposeful expansion of marginal domestic demand – which is the only means by which these modern sectors of industry can be spurred on to grow – is then liable to run the country into intermittent balance of payments crises; and if so whether the government can find ways of countering those crises without cutting domestic demand back too grievously and for too long;

Whether the social and economic mechanism for encouraging switches of labour and other resources out of the old-fashioned sector into the modern sector works smoothly and well.

The answers to these questions in Japan are that the Japanese government, either by good fortune or good management, has so far solved the first two problems that of providing incentives for efficient growth industries to grow, and that of riding past its successive balance of payments crises (in 1953-54, 1957 and 1961.) without losing its dynamic of growth – with more brilliant success than in any other country in the world.

The answer to the third question is that Japan’s social structure and habits could not have been more appallingly devised to make a switch of resources out of the least productive sectors of the economy into the big growth industries more difficult. This is because of the system of lifetime employment and “no new regular jobs for old men” (old meaning anybody over 35) described in the next chapter. This strange employment system explains why Japanese industrialists genuinely claim that they too have been operating in conditions of labour shortage and “over-the-brim-full employment.” It makes Japan’s achievements in securing an average of over 9 per cent of expansion each year all the more remarkable – and its method of running its economy to achieve this all the more worth studying in the West.

We will be returning to our argument about the positive lessons of Japan’s economic experiment in Chapter V. Meanwhile, the next two chapters will describe the strange employment system which Japan has inherited, and. briefly assess the standard of living which its people have by now attained.

 

3 Jobs for a Lifetime

APART from Some 22 million self employed people and “unpaid family workers” on Japanese farms and in small family businesses, there are three main types of employee in Japanese industry.

At the end of 1961 there were 15 million male and 6.6 million female “regular employees”; these are the luckiest ones, and their system of employment is described below. There were also 860,000 male (and 660,000 female) “temporary employees”; about half of these are generally temporary workers who go back to the farms in summer, while others are on trial to become regular workers; but it is among these men that sackings occur when business conditions turn awry. Finally, there were three quarters of a million male (and half a million female) day labourers, who are employed only on days when work is available.

The ambition of every young Japanese is to be taken on as a “regular worker” in a reliable firm straight after leaving full time education. To become a regular worker in a big firm he is likely to have to pass a written examination and aptitude test set by the firm itself, even for an ordinary job as one of the firm’s factory hands. Once taken on, he is safe for life, because the firm will make every effort never to lay him off as redundant, will steadily raise his pay according to his age, will train him and will promote him up the hierarchic ladder of a Japanese factory (often with every minutely different grade even on the shop floor given a different title) according to his length of service. In return he is expected never to leave for a rival firm – at least not after he has reached maturity, although there has recently been some trek of men in their very early twenties from smaller firms to bigger ones. Because of this wage structure and training system, Japanese employers are extraordinarily unwilling to take on new workers over the age of 30. (“The unions would make us pay such workers according to their age,” said one industrialist to your correspondent, “but new older workers would not have had ten years’ training for the particular jobs we want.”) The following figures tell their own story:

(1) School leavers have never had it so good. The 15 and 18 year olds leaving school in 1961 were faced by between two and three times as many jobs (admittedly not all as “regular workers”) on offer as there were applicants. Big firms (those with more than 1,000 employees) managed to fill over 99 per cent of their vacancies for regular plant workers, but small firms (30 to 99 employees) could fill only 77 per cent. In interesting reaction to this, some of the smaller firms (whose total wage rates have hitherto been only about half to three quarters of those of big firms) have now actually started to pay bigger initial wages for school leavers than the big firms. But this is a relatively new development of the past few years.

(2) Despite this scramble for school leavers, in 1960 only about half of the (fortunately relatively few) Japanese who lost their jobs after the age. of 30 were reported to be able to find new wage earning employment at all (and even then, according to one official survey, “old people [over 35 years] ... are re employed mainly as watchmen, stockmen, etc.”); the rest reverted either to be family workers on the farms or in cottage industries, or to become day labourers. (In Tokyo by 1960, 94 per cent of the unhappy army of casual day labourers were over 30 and 51 per cent were over 50.)

A similar recognition that new jobs are likely to be offered to young people only is shown by the age structure of the half million or so Japanese who are leaving the farms each year for jobs in industry. of those who left in the first half of 1961, 58 per cent were under 19, and 92 per cent under 34; among the second and younger sons of farmers (but not necessarily among the elder sons and therefore heirs), the trek into a manufacturing job when one reaches one’s teens is now virtually complete.

4 Living Standards

For the foreign observer who wants to assess living standards in modern Japan there is a constant clash between two apparently contradictory pieces of evidence. On the one hand, the bare income statistics suggest that this is still a very low income and cheap labour country indeed. The average earnings of the 21 million “regular workers” in non-agricultural industry and commerce are only just over £6 a week (which is still less than half of the average for all workers, male and female, in manufacturing industry in Britain).

On the other hand, the standards of consumption are visibly European rather than Asian; the Japanese are now as well dressed as any people in the world (their figures of textile purchases per head confirm this); they have broken right through into the revolution of consumer durables; and each afternoon their wives throng the world’s biggest and most crowded department stores in the large cities, where prices are not all that far below European levels, but where business goes humming along. More surprisingly still to this observer, the farmers in the fields along the main railway tracks, who a few years ago would have manhandled their own barrows to market, can be seen using modern and shiny power-driven equipment. The average farm household’s income in 1961 was estimated at £450 a year, admittedly with an average of 5.6 family members per farm, and with nearly half the income coming from earnings of some family member who has taken a job (sometimes whole time. sometimes only at the farm’s slack period) outside farming. Only in two respects – its working hours and its housing standards – does Japan look Asian; the average Japanese works a 48-hour, five-and-a-half day, week even in big industry (in small industry and distribution, considerably longer) before going home to live with his wife and children and probably his parents in two or three rooms. Because of this habit of clustering together, the average household in Tokyo in 1961 had 4½ members (1½ of them earning), and an average cash income of £12 to £13 a week.

The explanations of the apparent paradox between income statistics and high consumption of luxury goods rest partly on the economics secured by this clustering together, and partly on the facts that:

(1) The bare figures of industrial wage and salary levels are misleading because Japan is the country par excellence of fringe benefits – and expense accounts. Apart from family allowances and the big cash bonuses at Christmas and midsummer (which are included in the household incomes and average wage figures mentioned above), these fringe benefits include, payment of the employees’ travel expenses to and from work, and (in the big firms) free accommodation for bachelor and spinster workers, subsidised houses for some married workers, and lavish sporting facilities and holiday rest homes. On average, these non-cash fringe benefits are said to cost employers more than £50 per worker per year; but one’s guess is that this is an underestimate, because both sides regard the granting of certain fringe benefits as a matter of course.

(2) The statistics for average wages are depressed by the fact that the average woman’s wage is only between a third and a half of a man’s, and that the average youngster in his early twenties – unless he draws family allowances from a big firm – is entitled to get less than half of the income of a man in his forties or fifties. (Usually his pay will go up by about 5 per cent a year.) This last point is a very important factor in keeping average wages low at the moment, because the average age of the workers in the big and new and highest paying plants is at present very young indeed (about 25 in some cases). But even on the basis of present wage rates, it is clear that Japanese employers’ wage bills are gradually going to be inflated quite considerably as (a) the average age of the working force grows older; as (b) women leave earlier to get married; and as (c) the retirement age for men is pushed beyond the present figure of 55 (which is a hangover from the days, only twelve years ago, when that was also the average age at death; it looks cruelly low, and is bitterly resented, now).

The system of pay rising by seniority has some appalling effects on Japan’s employment structure (the way in which it makes Japanese employers eager to recruit their new labour from school leavers only was discussed in the last chapter). But it also means that the worker’s pay reaches its height just when what ought to be his family responsibilities reach their height too. The relatively low wages for teenagers and high wages for teenagers’ fathers, combined with the great importance attached to educational attainments in getting one’s first foot on the ladder of what is to be one’s lifetime job, help to explain the fact that 60 per cent of Japanese children now stay on at school past the permissible leaving age of 15.

5 Easy Budgets . . .

Japan’s system of managing its economy has been to run what would be regarded in Britain as very expansionary budget policies, with large planned inc, creases in government expenditure and sizeable reductions in personal taxation a regular feature of most recent years (see table overleaf); and to use monetary policy a and rises in interest rates as the main restraining weapons, when and if any restraints are needed. This pattern has been widely misunderstood abroad, because of the barriers which economists (particularly government economists) raise in the way of understanding each others’ language.

Most Japanese economists will worthily insist – and American economic commentators will generally approvingly report – that Japan has constantly balanced its a annual estimates of budget expenditure and revenue ever since Mr Dodge laid down that balanced budget estimates were the right thing to have. But the balancing act is done in a very peculiar way.

Around the turn of every calendar year (and thus three or four months before the fiscal year begins on April 1st) everybody in Japan seems to enter into an annual guessing game to recommend what the target rate for growth in next year’s gross national product be. The ruling Liberal Democratic party, in solemn convention assembled, recommends that gross national product should grow at one rate; the Ministry of Finance recommends that it would be safer to aim to grow at a slightly lower rate; the Economic Planning Agency makes a final calculation, and the Cabinet splits the differences. Thus one reads in the newspapers that the Cabinet after a long session decided that the rate of growth should be 9.2 per cent in fiscal 1961 or 5.4 per cent in fiscal 1962.

JAPAN'S DECADE OF TAX RELIEFS
(Billions of Yen, which virtually equal millions of pounds.)
Fiscal Year	Current Balance of Payments Defecit (-) or Surplus (+)*	Value of Tax Relief in That Year's Budget		Growth in Real GNP %
		On Personal Income-Tax	On all Taxes
1951	+118	6 1	113	+13.5
1952	+112	113	90	+10.5
1953	69	77	124	+ 6.7
1954	+ 36	31	17	+ 3.9
1955	+177	53	66	+10.1
1956	+104	23	2	+ 8.2
1957	137	110	62	+ 7.1
1958	+183	6	37	+ 3.7
1959	+121	23	10	+17.7
1960	+ 39	Nil	7	+13.2
1961	388	56	75	+15.2*
1962		47	116
* Calendar Year

 

This apparently absurd guessing game, expressed to a precise point of decimals, has a genuine economic importance. For every 0.1 per cent of the agreed target rate for growth in national income the Japanese reckon that they can expect a stated amount of extra tax revenue on the basis of existing tax rates. Thus with a target growth rate of 5.4 per cent in the fiscal year 1962, they reckoned on nearly £500 million of extra revenue; and by the rules of the budget balancing act precisely that sum – together with the surplus of tax revenue carried over from the previous year – is then assumed to be available for deliberate increases in government expenditure or for new tax reliefs. The remarkable feature of the game, from the reflationist’s point of view, is that the larger the target figure for growth which the planners-cum-bargainers eventually decide upon – and the bigger the growth in production in the preceding year (i.e., the nearer the economy has been running to capacity) –the bigger the tax reliefs and deliberate increases in government expenditure which this system tells them it is orthodox for them to give away.

These reliefs, be it noted, are regarded as “orthodox” even in years when the balance of payments has run into large deficit. Indeed, if the gross national product has been rising particularly swiftly during a year of balance-of-payments crisis – which will usually be the case since Japanese balance of payments troubles are generally of the import boomu (Japanese English for boom) type – it is practically certain that the uncovenanted surplus of tax revenue to be carried over into the next year, and probable that the rise in national income to be counted on for the next year as a whole, will be correspondingly high also. Under the rules of the game, this makes it “orthodox” to make the new year’s tax relief or deliberate increase in government expenditure particularly large. Thus in the middle of the balance of payments crisis of 1957 (while Japan’s international exchange reserves were dropping sharply) the income-tax levied on the average lower middle class and upper working class salary was literally cut in half. During the 1961-62 balance of payments crisis, Japanese taxes were reduced by about £116 million (at a time when Mr Selwyn Lloyd, in his July and April budgets combined, was raising British taxes by over £200 million); and this Japanese cut of £116 million, reported the Oriental Economist truthfully, aroused “general public complaint of a conservative tax relief.”

In these circumstances it may seem a bit odd that the Japanese economy ever slows down at all, at any point short of raging inflation. But – at least until 1961-62, when living costs in the big cities suddenly bounded by 10 per cent – the policy has not in fact proved very inflationary (the urban consumer price index rose by some 20 per cent in Japan between 1953 and 1961, against a rise of just over 25 per cent in Britain, while Japan’s export price index has actually fallen in this period). Moreover Japan has consistently managed to escape out of its balance of payments crises and periods of “overheating,” back on to expansion again, much more quickly than Britain. The weapon used to counter periods of overheating has never been fiscal, but always monetary, policy.

The way in which a restrictive monetary policy is worked in Japan at times of balance of payments difficulty – once again, to the foreigner it seems a very peculiar way – will be discussed in the next chapter. But it is worth pausing here to consider the rationale of their system. It is customary in Britain to say that monetary policy cannot work as a restrictive device in times of balance of payments crisis if budgetary policy is pulling the opposite way. Experience in Japan goes a long way towards casting doubt on this belief – because their experience is that the two weapons work with quite different time intervals of effectiveness. Monetary policy works much the more quickly and much the more directly upon the balance of payments, both on capital account (by drawing in loanable funds, such as Eurodollars, from abroad) and on current account (by cutting down imports). By contrast, restriction of demand by higher tax rates works on the balance of payments only after a time lag; and the Japanese say that at times of balance of payments trouble the restriction of demand and imports after a time lag is likely to be the precise reverse of what they want.

Japan’s main imports are (like Britain’s) raw materials and (less like Britain’s) machinery. Both of these forms of imports tend to be highly cyclical (the Japanese recognise, which the British do not always do, that a rush of imports during the period of a restocking or investment boom is likely to be followed by a period of natural slowing down on the reverse arm of the cycle); and both are bought almost wholly on business account. The Japanese reckon that a change in interest rates can alter business spending very quickly. No doubt this swift effect is partly due to the peculiar capital composition of Japanese business enterprises (whose loan capital, on which interest has to be paid, constitutes about 70 per cent of aggregate capital). But one suspects that even in countries like Britain a sharp rise in Bank rate can begin to affect businesses’ inventory policies within a fairly short period, while changes in tax rates work much more slowly than Bank rate, at least as a restraining device; when a British Chancellor imposes a fuel oil tax, for example, there may be some small initial effect on total spending, but a main effect will be to reduce the number of people who would otherwise be using oil for energy purposes anything from six months to three years hence.

Most British policy-makers would presumably agree that usually they do not really know what they will want demand to be doing more than six months or so ahead. The best Japanese planners, by contrast, will say that they do know what they want demand to be doing in the long term; they want it, and production, to be rising by 7 or 8 per cent a year (or whatever is the figure consistent with furtherance of their current long-term plan). It therefore seems logical to them to use fiscal policy as an instrument for steadily increasing long-term demand by something approaching the long-term target figure, while using monetary policy as the weapon to control cyclical fluctuations in the balance of payments during that forward march.

Because the system on which the Japanese budget is drawn up seems so very peculiar – because it appears to encourage inflationary budgets when inflation is already in progress, and could theoretically signal that Japan should introduce a deflationary budget when a recession has cut down tax receipts – it takes some time for the visitor to Tokyo to recognise that the Japanese method of organising economic policy is as sophisticated as it is. But by the end of his stay your correspondent was convinced that the degree of sophistication on these matters in Japan – albeit often behind a screen of flummery words designed to show that they were all very simple and conventional chaps with a lot to learn from the West – is really very high indeed. It also happens to have been a sophistication that works

 6 But Tight Money

The monetary policy of the Bank of Japan provides a fascinating study for the visiting foreign economist, like almost everything else in this land. It is very difficult to decide whether the policy’s undoubted effectiveness has been the result of the Bank’s extraordinary success in making the brilliant best of a bad job, or whether the bad job itself (as represented by the highly unorthodox nature of the Japanese commercial banking system) has paradoxically made monetary control very much easier. For various historical reasons (of which the failure of the cheque system to develop quickly under Japanese conditions is one) commercial banking business in Japan is profitable only if the big city banks operate at levels of illiquidity that would drive an English or American banker into a state of permanent neurosis. When window dressing (which is considerable) is removed, the city banks’ real cash ratio against deposits is only about 2 or 3 per cent, and they hold virtually no other genuinely liquid assets at all (compare the British commercial banks’ conventional liquidity ratio of 30 per cent). The other 97 or 98 per cent of their deposited money is out on loan, without many of the usual conventional bankers’ distinctions about lending only for short-term requirements; a very large part of Japan’s massive investment boom in fixed capital equipment has been financed by commercial bank loans.

The result of this “overloan position” is that the city banks periodically find themselves in a desperate need to raise liquid funds from somewhere, either in order to meet emergencies or else simply in order to increase their lending further. They can do this in two ways. They can borrow some emergency funds from each other (or from rural and other savings institutions) on the so-called call loan market, interest rates on which can sometimes reach fantastic heights; at one stage during the last balance of payments crisis and credit squeeze call money was being borrowed by the big city banks at over 20 per cent. The other source, nominally as a lender of last resort but really as the main engine of capital creation during a boom, is the Bank of Japan. The Bank’s process of credit creation went forward particularly heavily during the early years of Japanese recovery, so that Japanese bankers themselves admitted – and visiting American bankers reported back with horror – that “the commercial banks in the early nineteen-fifties became merely a channel through which the central bank fed industry with investment funds.” It was this “overloan” position that Mr Dodge referred to with indignation when he castigated (as mentioned in Chapter 1) the illusion “that granting progressively larger amounts of commercial bank credit for capital purposes can be substituted for the normal processes of capital accumulation.”

Nevertheless, the fact remains that it was substituted and that it has worked. Looking round the shining new factories of Japan – a country that actually had the greater part of its previous industrial capacity destroyed in the war of only seventeen years ago – nobody can doubt that. Moreover, paradoxical though this may seem, the consequence of the central Bank’s unorthodoxy during this period has been its rebirth as one of the most powerful central banking organisations in the world. Because the commercial bankers have to come begging to it when they want new funds to increase their lending further, the entire credit structure of Japan now seems to the visiting foreigner to lie snugly under the Bank of Japan’s control.

The Bank itself would deny this; its position of absolute power, as lender of last resort, over the credit situation does sometimes mean that it cannot use that power to quite the extent that its exasperation with some aspects of the boomu might make it wish to do. It cannot very well turn away big banks who ask it for funds if the result would be to cause a massive financial crash of Overend Gurney proportions. But in banking, as in international diplomacy, an authority that possesses an unusable thermonuclear deterrent does not necessarily thereby become less able than an unarmed country to make its wishes felt.

The control by the Bank of Japan is exercised in various ways. The one “orthodox” weapon is Bank rate, this summer at 7.3 per cent, which it is certainly able to make effective; most of Japan’s other (very high.) interest rates are tied to it, and Japanese businesses’ heavy dependence on borrowing means that they are very susceptible to changes in borrowing rates. A second and more controversial weapon is the so-called “window operation.” The Bank of Japan holds regular consultations with the commercial banks, reviews the likely trend of advances of each bank for perhaps a month ahead, and warns individual banks (or, at times of balance of payments crises, warns all big city banks) that they should please start to restrain their advances; if necessary it will even suggest an “overall loan level” for the big banks as a whole. Finally, although the Bank will not generally in the last resort refuse to lend to any big bank, it does levy penalty rates on what it regards as its ultimate margin of less desirable loans to the commercial banks. As part of the same process the Bank of Japan will offer favourable discount rates on particular types of lending paper – especially, to the annoyance of competing British exporters, it will help indirectly to subsidise Japanese exports in this way.

The commercial banks in turn also have a schedule of penalty rates which they levy on those who borrow from them, according to the status of the borrower concerned. And when they have to cut back lending, they have no hesitation about putting pressure on borrowers whose position they regard as unsound. The small local banks, who lend mostly to smaller local firms, will do the same thing when a credit squeeze makes it more profitable for them to use some of their funds in other ways (perhaps, for example, to lend call money to the big city banks at very high interest rates). The consequence is that tight money during credit squeezes can lead to bankruptcies of small firms in Japan. The figures for dishonoured bills (52,470 in January of 1962) are one economic indicator that is regularly watched. So is the number of bankruptcies (firms with debts exceeding £10,000) – which was 202 in January of 1962, close to the last peak of July, 1957. But at the same time as reporting this, the Japanese press also reported that the Government seemed to be more intent than in previous crises to temper the wind to the smaller shorn lambs.

The more closely one studies the history of the Japanese economy in the last decade, the more one becomes convinced that success in economic policy nowadays springs from a policy of favouring the forward – looking and most prospering and efficient firms, and beating the less efficient ones into the ground. The fact that control through monetary policy in Japan has – until this last year (1962) – generally worked in this direction may not be a sign of great social and humanitarian virtue (see the following chapter on “After the Zaibatsu”); but it has been of enormous economic utility. Your correspondent became convinced that there are two important lessons for Britain here.

First, the general British method, during the crises of the last decade, of restraining demand by tough budgets and tax regulators has automatically laid its main restraining power on the growth industries, while the opposite Japanese method has worked the other way round. Growth industries, by definition, are those that will be given the biggest impetus to expand their production when the next few hundred million pounds’ worth of marginal demand is pumped into the economy; so, of course, they are also those that suffer most severely when the next few hundred million pounds’ worth of marginal demand is siphoned out of the economy by means of a restrictive budget. By contrast, the Japanese method of pumping in extra demand through stimulatory budgets, and then using monetary policy and high interest rates as a rationing device, has caused restriction to impinge mainly on those whom the banks regard as the worst business risks. The rationed capital has become available only to those who can use it most profitably – except when political considerations intervene and gum the process up.

Secondly, the British have got used to saying that a policy of expansionary budgets and high interest rates will penalise investment at the expense of stimulating consumption. Japanese experience surely proves this to be nonsense. Japan (where industrial borrowing in recent years has cost about 10 per cent) has recently been devoting nearly 40 per cent of its gross national product to total investment. Britain, on the same basis of comparison, has devoted less than 20 per cent. The truth is that it is a spirit of dynamism among thrusting growth industries that nowadays serves to impel an economy along the high road of expanding investment. A policy of stimulatory budgets provides the oats that beckon the horse forward, while a policy of high interest rates provides the reins to guide the horse and also (at least in Japan) helps to provide the high savings (and, sometimes, at appropriate moments of the trade cycle, also the temporary increase of borrowing from abroad) which make the continuance of heavy investment possible. A policy of low interest rates relaxes the reins so that the horse will find it easier to rush forward faster if it wishes, but this is not much use when, because of a lack of expansion of marginal demand, the horse itself is standing still.


 

7 After the Zaibatsu

THE Zaibatsu were the rich families of prewar Japan (Mitsui, Mitsubishi, Sumitomo, etc.) who owned the great industrial empires, sometimes delegating the job of management to hired managers, but sometimes, actively controlling the boards of directors themselves. After the war the Americans, with reforming zeal, split up the firms in these mass empires into individual entities; but this was like grappling with a jellyfish, for the habit, of cohesion has remained. It is secured now by interlocking directorships and high-level executive consultation among the firms that used to belong to the old groups; by inter-company shareholdings among group members; and by the fact that one of the big city banks – several of which are successors of the old Zaibatsu banks – is likely to hold a central position in each group. This last point is important because of the major role’ which the banks still play in financing new fixed investment in Japan – even though direct sales of shares to the public are growing fast (and are helped on their way by security selling departments in the main ordinary shopping streets, which operate in the way that betting shops are not allowed to operate in England, with the latest stock prices shown on television screens, and a commentator jabbering away excitedly as prices change).

When some new sort of industry (say, petrochemicals), becomes the rage in Japan, the group around one bank will set up a firm to take part in it; then the group around another big bank will seek to set up a rival company, almost as a matter of face. This has provided the country with a real, if peculiar, kind of competition in constant modernisation. The big firms will often tell you that this is “excessive competition” and that “the government ought to do something about it” (meaning that the government ought to step in and stop other groups setting up rival firms to themselves). But one suspects that it is, in fact, a kind of competition from which Japan has made great net gains in recent years.

Inevitably, the system means that the big firms which have close connections with the banking groups generally have an advantage in raising funds. The rates which the smaller firms have to pay are often considerably higher even than the 10 per cent or so nominally charged; for example, a bank may say that the borrower must redeposit with it (at an interest rate well below the lending rate) part of the money nominally loaned, thus greatly increasing the effective interest rate really charged. Most of the small firms work mainly as sub-contractors to the big ones. One might therefore suppose that the big firms would hand on considerable credit to them. But surprisingly often things work in the reverse direction. During a credit squeeze the big firms may pass on the effects of a capital shortage by paying their sub-contractors in, say, three-months promissory notes, which then have to be privately discounted (at rates, when your correspondent was in Japan in 1962, of up to 25 per cent per annum) by the small firm in the market.

No doubt the big firms are unlikely to allow bankruptcy to overtake any sub-contractor who is really efficient and useful to them. They are more likely to want to see bankruptcy overtake the less efficient sub-contractors, or (this, of course, is the unhealthy part of the system) small firms which compete with them by putting products directly on the market at a cut price. This last sort of squelching of competition, however, is probably more usual in the older trades like textiles than in the newer trades like engineering; in the latter, the small firms cannot generally make completed products anyway, but act as sub-contractors for the big ones.

As has been argued above, your correspondent came to the unorthodox view that this system – by which credit squeezes have tended to fall more harshly on the less efficient firms – has probably been of real if cruel advantage to the Japanese economy as a whole. But it is natural that many ordinary people – and even more small businessmen and politicians who depend on their votes – do not see things that way. In the latest (1962) credit squeeze, there were signs that the authorities might be trying to put more of the strain of the squeeze on the big fellows, and less on the small, compared with what happened in the squeezes of 1954 and 1957; in the summer of 1962, for example, when the period of tax collections fell due, the government was deliberately pumping out fairly large special loans through the various special institutions which lend directly to smaller businesses. Socially, this is understandable; economically, it might be a mistake.

 

8 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 hi

9 Can it Last?

THE question to ask now is whether, after Japan’s last golden decade, the dynamic is going to last. There are four reasons for fearing that it might not do so. Three of them will be all too familiar to people with experience of Britain’s economy in the last fifteen years; the other will be very unfamiliar indeed. The unfamiliar one, which we will deal with first, is that Japan has in the recent past probably been devoting too much of its gross national product to investment instead of consumption.

Fixed investment in private industry has been very much the main growth element in Japan in recent years; in 1961 it was actually four times as large as it had been even in 1955. There have been several instabilities in this situation, not the least of which is that the investment boom has been feeding very largely upon itself; something like half of the investment that was going on in 1961 seemed itself to be investment in the investment goods industries. One cannot really believe that this will last. Some of the equipment installed in 1961 was beginning to look a bit unprofitable by the time your correspondent was in Tokyo in mid 1962, especially since total demand and production had begun to sag in the spring of 1962 following measures taken to deal with the temporary balance of payments deficit. One’s own guess would be that, even after the tight money squeeze is relaxed, the new “natural” rate for total investment (including stocks) might prove to be, say, between 25 and 30 per cent of gross national product (which would still be a very high rate compared with most other countries) rather than the extraordinary 35 to 40 per cent that was being achieved in 1961.

If so the questions will be: what is to take up the other 5 to 10 per cent of GNP, and what is to take over as the main dynamic element to lead the next stage of the advance? There are two main possibilities: an increase in public investment in amenities as private investment in industrial equipment falls off and an increase in consumption. There should be plenty of scope for increases in both. In the field of public investment, Japan’s roads, harbours, housing, and, for example, sewage system (this is still most definitely an effluent as well as an affluent society) cry out for very large new expenditure indeed. Although real spending by the average worker’s household in Tokyo has more than doubled since 1951, consumption still takes a ridiculously low proportion of gross national product (only 52 per cent in 1960-61). But there are going to be problems in the way. One rather charming conversation which your correspondent had with a Japanese (not in an official position) is worth quoting. “To change from investment to consumption as you say,” said the Japanese, “would mean switching from profits to wages. Politically very difficult.” “Not in Britain,” said your correspondent. “Ha! We swop governments, eh?” Alternatively, a deliberate attempt to take up slack by a still bigger programme of public works, or by introducing more of a welfare state, would mean running the budget into deliberate deficit. And although Japan’s peculiar budgetary system has served it well by allowing the Ministry of Finance to introduce expansionary budgets during a period of continuing expansion, it would theoretically not make it easy to use the budget as a re-stimulatory force after a period of slow-down.

Moreover, there are some conservative people in Japan who are now advocating a policy of deliberate slow-down in the rate of expansion for other reasons. It will already have become apparent, from the whole tone of this survey, that your correspondent would regard such a policy of a deliberate slow-down as a bitterly disappointing mistake. Before going on to discuss the conservatives’ counter arguments, one had better define what one means in saying this. One is not suggesting that Japan should or could aim to keep up annually the extraordinary rate of increase of over 15 per cent in real national product which it achieved in 1961; that rate obviously did bring with it some element of undesirable inflation, both in prices and imports. One is not even suggesting that Japan can expect for very long to stick to the average rate of more than 9 per cent of annual growth which it has achieved since 1951; if private investment in fixed capital equipment is to account for a rather smaller proportion of GNP in future, productive capacity will no longer go on growing by its recent massive amount. But one is suggesting that Japan should deliberately aim to keep demand rising at the rate which will allow its expanded (and expanding) capacity to be fully used.

The conservative Japanese who deny this put forward three reasons for objection. First, they say that Japan has now run into a shortage of labour “just like England,” and they cite the figures for job openings and job applications by school leavers to prove this. The answer to this is that Japan cannot really be called short of labour so long as some even of its new young entrants into industry have to take jobs in firms where their productivity and eventual lifetime wages will still be only between 50 and 60 per cent of those that they would earn if expanding employment opportunities were continuously and progressively made available for them in the larger firms, and especially not so long as the retirement age for older men is at the ludicrously low level of 55. Even in Britain, it has been argued earlier in this survey, the right way to meet the so-called shortage of labour is not to keep on holding back the growth industries by restricting marginal demand, but to shake resources free from the less efficient industries and firms by introducing more competition and by using policies that are more deliberately designed to drive the weakest entities to the wall. In Japan it seems even more obviously desirable that the so-called “excess demand” for young labour should continue up to the point where (a) it gives more young men the chance to take up jobs in the modern and efficient industries, even if this means that they will go on bidding even more labour away from the much lower paying and less efficient ones; where (b) it makes more of the established firms feel that they will have to keep existing employees on past the age of 55; and where (c) it forces all employers in general to adopt a less restrictive attitude to the new employment of all “old men” over the age of 30.

The conservatives’ second objection is that some element of price inflation will be inevitable so long as policies of “encouraging excess demand for labour” continue. Probably, it will be. Indeed in this respect Japan may well have a heavier cross to bear than Britain. The reason is that prices of some things in Japan (especially services and some things produced by the older and labour-intensive industries) have hitherto been kept very cheap because they have been produced by workers whose wages have been unduly low, and this “advantage” is now about to disappear. The price inflation in Japan in 1960-62 has been largely due to a rise in labour costs in branches of industry where labour has hitherto been exploited; part (though admittedly not all) of the loud complaints in Tokyo in 1962 that “prices of services have been rising too steeply” turned out to mean that “messenger boys” and other personal servants are more expensive than they used to be (a not unusual phenomenon in an enrichening society) and that those who worked even in the smaller shops were now taking more than one free day off a month. To say this is not to pretend that there have been no evils (particularly for retired people) in the sudden 10 per cent rise in prices which occurred in Tokyo during 1961-62; certainly it would be an excellent thing if the big Japanese companies engaged in more of the competitive price cutting which is also badly needed in Britain. But on balance especially if there were now to be a growth in social services, including pension schemes, for the less well off some rise in the domestic price of things hitherto turned out by low-wage establishments should not be regarded as an unmitigated misfortune. It would seem to be worth while if it is the requirement for keeping expansion and modernisation of Japan’s industrial structure pressing forward at the full stretch of advance.

The third objection to continuing demand reflation is that it might result in a continuing balance of payments crisis for Japan. Once again, one must define what one means here. If the argument is that the importing structure of Japan cannot easily afford each year the sort of 15 per cent real increase in domestic demand that was experienced in 1961, there may well be some sense in such talk. But if one is calling for a permanent slow-down in Japan’s whole recent regular tempo of advance because of balance-of-payments difficulties, then-here the argument must turn back to be addressed again mainly to western, rather than Japanese, ears – one should sit down and think carefully where such an argument leads.

If conventional economics calls for such a slow-down there can surely be no sense left in conventional world economics at all. For everybody knows that Japan’s export problems do not arise from the fact that as it has giddily expanded its production of new style goods, those goods have progressively proved to be too uncompetitive and too dear; on the contrary, Japanese products are now being kept out of all manner of western markets by special restrictions, precisely because they have proved so good and so cheap.

It is easy – and justifiable – to reply that Japan does not throw its frontiers open to foreign goods either. Its attitude to imports will be discussed in a later chapter, and the conclusion will be that (despite high-flown phrases about its present advance to so-called – misleadingly called – 90 per cent import liberalisation) its record is still more than deplorable in one respect: it should do much more to implement the precept spelled out in its present long-range economic plan that while it is reasonable for its tariff and other policy “to give protection to incipient industries which have potentialities for development ... the government should refrain from giving (similar) relief to declining ones.” But really in this it is in the West’s own interests – and also should be frankly its responsibility – to set an example. For consider the prospect now before us.

All the goods that Japan could produce more cheaply than the West yesterday and today – including especially the sensitive goods like textiles against which Britain wants to maintain the power to impose sudden import restrictions – are likely to be the goods that other developing countries will be able to produce more cheaply than the West tomorrow or the day after tomorrow. It is most emphatically not in the West’s interests to try to keep alive its own doomed industries making these goods; even if Japanese industries are repulsed by special restrictions today, the West will only be left with a mass of declining industries that will have to fight overwhelming competition from a dozen or more new Japans, from Africa, Asia and even southern Europe tomorrow. By contrast the more “modern” goods that Japan itself is now newly becoming able to produce as efficiently as the West cover a much wider range. Probably indeed they will soon be conterminous with nearly the whole field of manufacture. There may be loud protests as this happens. But if the West follows a policy of reasonable liberalism, this does not mean that Japan will capture all our markets.

No country can capture all the world’s markets and thus run an export surplus for ever. The most that might happen would be a fairly shortlived yen problem, like the D-mark problem of the last decade and the dollar problem of the decade before that, which would eventually be solved (as the D-mark and dollar problems have been) by the rise of living standards and of import freedom in the export surplus country, or (less probably) by an up-valuation of the yen. The problem would in short be solved as, among the comity of rich Western countries, this first standard bearer of Asia at last arrived as an equally rich-living partner.

But in recent years the West has not been following a policy that will encourage this. On the contrary, in answer to pleas for protection from some of Britain’s own lowest wage industries and (to cite one actual example while your correspondent was in Japan) from American producers of zip fasteners, imports from Japan have been held down by intermittent special restrictions. And now, in consequence of this, the idea is gaining ground that Japan will have to slow down her exciting rate of advance; that she will have to delay her dramatic surge into tomorrow; that she may have to remain more static in her industrial structure of yesterday and today, a structure into which other developing countries should soon be advancing (although they too will be likely to be slowed, if Japan is left marking time across their route of advance).

And thus a whole absurd cycle of mutual misery could be brought into being. Thus the whole process of advance in Asia and Africa could be blocked, just after one Asian country has shown how breakthrough could be achieved; and the West, sadly pumping out aid funds to spur on the sort of economic development which it will have blocked by the export of its own economic stupidity, will be left wondering why the political consequences of this well intentioned bungling are so dire. And nobody who has seen the political forces operating among Asian students today – or sensed what will happen if an economic slowdown prevents these young men from getting quite as good jobs as they at present expect – will underestimate for a moment just how dire they could be.

ghbrow 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. 

10 Savers like the Swiss?

It is often said that one of Japan’s greatest advantages has been that its people are almost unnaturally heavy savers, and there have been many expressions of admiration and wonder that a people with an average personal income of nominally only about two-fifths of Britain’s per head apparently voluntarily saves up to 20 per cent of it. But some of the statistics often quoted are rather misleading, or are very heavily affected by circumstances very peculiar to Japan. For example:

(1) The huge number of small businesses in Japan means that the figures for personal savings will include all capital newly invested in those businesses in any one year: sometimes this new “capital” has been most involuntarily invested, as when, during a credit squeeze, the small man has had an even higher proportion than usual of his initial bills paid by bigger firms only in promissory notes.

(2) The fact that the average wage earner gets so large a part (sometimes a third) of his annual wage paid as a Christmas bonus means that he holds that bonus for spending spread over the year; it is largely for this reason that so many even of the poorer households open savings accounts at the banks. No doubt this banking habit in itself leads to an increased habit of genuine saving, but when the bonuses given each Christmas are much bigger than those given the Christmas before – as has happened in every recent year of expansion – it is automatic that the total of savings deposits as recorded on each December 31st should be much bigger too.

(3) While employers’ fringe benefits in the West often take a form (e.g., pensions schemes) which do some of the worker’s saving for him, fringe benefits in Japan often consist of doing or subsidising some of the worker’s spending for him (paying his railway fares, cheap company shops) and leaving him to save for his old age himself, Such pensions as the worker gets often consist of terminal pay of his salary in a block sum for a certain period ahead, leaving him to save and spread this block sum over what he guesses will be the remainder of his life. Once again, this increases the nominal figure for “personal savings” in the national income accounts.

(4) A large number of the women in the labour force get most of their board and lodging paid for them by their employers and are saving the greater part of their wages as a dowry for when they get married. (Very few married women, incidentally, go out to work.)

(5) Hire purchase has been relatively slow to get moving in Japan (partly because of high interest rates, partly because of social problems connected with organising it), so that over 50 per cent of consumer durables are bought with money which has first been saved up and is then paid cash down; in future the proportion financed by h.p. is certain to grow.

When allowance is made for all this, a certain haze of healthy cynicism is perhaps thrown over the theory that Japan has prospered because of “the great natural thriftiness shown by its people.” The huge proportion of between 35 and 40 per cent of its gross national product which has been taken up in recent years by total investment (which necessarily equals total savings) is largely explained by another factor: namely the fact that (although, once again, properly comparative figures are desperately difficult to work out) about a tenth of the national income which in Britain would have gone to wages or other personal incomes has in Japan recently been going to company profits instead. To the doctrinaire left-winger, this will seem a shocking proof that the capitalists are too greedy, and the trade unions insufficiently powerful, in Japan. To the more pragmatic economist, the proper observations seem to be:

(1) Because companies have been ploughing back these high profits during a golden age of high investment, the Japanese worker has gained more in this last decade from this greater growth in the national cake than he would have done if he had got a larger share of the national cake immediately.

(2) As a matter of fact, the slower relative growth of wage bills than of profits has not been primarily due to the weakness of trade unions. It has been much more greatly due to the facts that the new and most profitable industries have mostly been built up with new and young labour forces; and it is a custom of the country (which the trade unions themselves appear to support) that young regular employees expect to get a much lower wage than older regular employees in Japan.

As the average age of the labour force in these new industries grows older, more of the national income should go to wages and less to profits; because a smaller proportion of wages than profits is saved, this should mean that consumption will gain somewhat at the expense of investment. We have already suggested that, after its age of high investment, Japan is one of the few countries in the world where such a switch from investment to consumption would now probably be a switch in the right economic direction. 

11 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.

12 The Front Runners

Japan’s industries today can be divided into four groups. First, there are those in which its own planners recognise that Japan is not internationally competitive, and presumably never will be. Among these industries where Japan is “uncompetitive by reason of unfavourable natural resources and social conditions,” Japan’s Economic Survey for 1959-60 specifically mentioned coal, nonferrous metals, paper pulp, soda and most agricultural products; in other words most of its primary industries now belong to this “throwaway” group. It is now fairly generally recognised in Japan that the more swiftly resources move out of these industries into other fields the better.

The second group comprises what may be called Japan’s “early stage industrialisation” industries. These. too, are industries which should now gradually declinealthough naturally not all the industrialists concerned recognise this. The most obvious items in this “early” list are cotton textiles, the manufacture of sewing machines, bicycles, leather goods, pottery, rubber goods, and (admittedly in a different category as regards potential domestic growth) cement. Many of these goods – to which may be added the special but structurally not dissimilar industries of silk and cultured pearls – formed the main staples of Japan’s competitive export trade in the 1930s. In all of them Japan’s competitive position is still high; in nearly all, including textiles and cement, its productivity per man month (let alone per wage unit paid) is today higher than most other countries, including Britain’s. But nearly all are also industries in which Japan does not expect its productivity per man month to increase very much in future. In most it feels that its limits of technical innovation may pretty well have been reached; in many it feels that its competitive position may in future decline, for two reasons.

One of these reasons is that other underdeveloped countries seem likely to enter many of these fields. Most of the products mentioned above are labour-intensive rather than capital-intensive; many are manufacturable in, or partly in, pretty small-scale workshops; many are therefore on the list of industries which other Afro-Asian (and West Indian and South American) countries are already setting up. The second reason why Japan might not be sorry to see some of its own productive resources move out of these “early stage industrialisation” industries, however, is that, quite apart from the threat of international overcrowding, the prospects for a voracious increase in world demand for most of these products frankly do not seem very glowing.

Nearly all of them have new competitors appearing over the horizon. Natural textiles are losing some of their markets to synthetic textiles; pedal bicycles lose ground to motor (or motor-assisted) transport; sewing machines suffer from the world-wide switch (which Japan itself is now experiencing in full flood) from the small village dressmaker to ready-made clothing; plastics bite into some of the markets for rubber goods, leather goods and pottery. This is very awkward for the newly developing countries. The list of labour-intensive “early stage industrialisation” goods is narrow enough in all conscience. But if, in addition to being limited in number, the “early stage industrialisation” industries look like losing ground before new style competitors that require heavier capital investment, the problem becomes knottier still.

That is why special interest must be attached to Japan’s most astonishing achievement in the decade of the 1950s: the fact that it has broken through into ultramodern levels of labour productivity no longer just in labour-intensive “early stage industrialisation” industries, but in a whole range of what might be called “second stage industrialisation” or capital-intensive industries as well. The list of capital-intensive industries in which it has made this breakthrough is wide, although also specific. By 1959-60 Japan’s statisticians could justly claim that Japan’s productivity per man month broadly equalled (and indeed sometimes exceeded) west European averages in the manufacture of iron and steel (other than special steels, like those for high-grade tools); in building ships, in making lorries and buses (but not yet in making passenger cars); in making television sets and radios (especially, of course, what might be called consumer-style transistors, but interestingly not yet in high-grade transistors or other electronic parts for computers); in railway rolling stock and tractors; cameras and optical instruments; in small-scale construction machinery (but not yet large-scale construction machinery). What is the distinguishing factor between the industries in which this “second stage breakthrough” has been made, and those (like passenger cars and some high-grade precision tools) where Japan still lags relatively behind?

The answer is pretty clear when one thinks about it; unfortunately it is also, at first sight, more than a little unmoral. The common base for most of these “second stage” breakthrough industries was laid in the long period in the 1930s and early 1940S when virtually the whole of Japan’s industrial effort (and thus a very large part of its very low national income) was devoted to building up or serving its capacity for war. That is when Japan laid its foundation of technical know-how, of rough (but initially pretty costly) experience, of trial and initially considerable error, in the making of lorries (but not passenger cars), of ships, tractors, rolling stock, small-scale construction machinery (i.e., portable engineering corps stuff), and behind them mass production of iron and steel. Many of the small firms who are engaged today in making parts for transistor radios were originally engaged in making parts for range finders and other optical instruments demanded by the military authorities. The same is true of parts of the camera industry. Indeed it is interesting, looking through the list of these ploughshares made by yesterday’s sword manufacturers, to note the similarities of parts of the industrial structure of modern Germany and modern Japan.

This moral story does not mean that war per me is an excellent forcing ground for all the most economic and profitable sorts of industrial development. But two of the commonest features of a war-orientated economy probably are a great help in fostering a breakthrough into what we have called “second stage industrialisation.”

The first of these is the ruthless drive made in a war economy to get production moving ahead in a number of industries which usually belong to the more modern part of a developing nation’s industrial structure.

The second is that a drive for war production tends to concentrate more on volume of output than on fussing about achievement of very high grades of quality of craftsmanship; certainly if a firm makes a botch of one pioneering line of output it does not go bankrupt as a result, but is enabled to push on instead with a Mark 2 model. In the initial stages, at least, the war industries’ sole and voracious customer does not worry overmuch if costs per unit of output are considerably higher than equivalent costs abroad. Although there were inevitable exceptions, a lot of Japan’s equipment during the Pacific war was frankly well below western standards in terms of both quality and man-hour production costs; but instead of being beaten on the open market-places of the world (in which case the firms making it would have had to draw in their horns much earlier), it was beaten in much lengthier and bitterer competition in Leyte Gulf, on the jungle trails of New Guinea, and along the Tiddim road. By that time, deep below the surface, the economic infrastructure for new industries had been laid. And the fact that, in these postwar years, Japan has devoted only 2 or 3 per cent of its national income to defence – compared with 10 per cent or so in other big industrial countries has enabled it to direct the energies of these industries into booming production for the domestic and export markets.

Clearly, this analysis has now reached a very awkward point indeed. One’s guess is that the other underdeveloped countries may move fairly quickly into the stage where they can efficiently operate “early stage industrialisation” industries – where they can become economic and capable manufacturers of textiles, sports goods and so on. But, once there, they are unlikely to find a rapidly expanding market for their products; and the narrow range of these industries may present some very awkward problems. If nearly the whole initial weight of poor countries’ industrialisation is to fall on a limited number of relatively hard-up industries of this sort established interests in these industries in western countries are going to object to being “utterly swamped”; and, foolish though this may be, are going to persuade western governments to close their markets by import restrictions.

Higher up the scale, one’s guess is that Japan itself should find it relatively easy to move from its present “second stage” industries into the “third stage” advanced industries in which it is still a rather high cost producer. One cannot be sure of this. It is a bit surprising that a country, which can already produce lorries so efficiently, is still finding it so difficult to bring its costs of motor car production down; that, although it can now build factories and office blocks more quickly and probably more cheaply than the West, tenders for building new western style houses (e.g., for foreign residents in Japan) still tend to be three or four times as high as they would be in England; and that Japan’s few new and modern motor roads look like being so expensive to build. The arguments put forward by Japanese contractors are that “in these things we find ourselves working in media which are foreign to us.”

This comes back to the problem of the country’s industrial foundations again. One phrase sometimes used in Japan is that while most of Japan’s new and successful industries of the last decade were “built from the lower echelons upward” (i.e., the small sub-contracting firms making parts for transistor radios had some background of know-how from making radio or other components in the war), the automobile and other less successful industries have had to build “from the higher echelons down” (i.e., the manufacturers of passenger motor cars had to put out orders for components which the small subcontracting firms were quite unused to making). Clearly, there is a real gap to be bridged here. But your correspondent’s own guess is that in the next few years one or more of Japan’s manufacturers of automobiles will break through, perhaps after amalgamations between the different producers, into successfully starting mass production of some standard small size passenger cars with Volkswagen-like efficiency.

Certainly, the stride into this “third stage” industrialisation looks like being much easier and shorter than the leap which Japan has already taken into “second stage” industrialisation, apparently during the last decade but in reality (probably) as a post-dated result of its course during past and painful years. The real question therefore remains: how can other developing countries start to prepare themselves for that leap? Apart from Britain, which had the advantage of being first in the field and so had no real competitors, it is arguable that virtually every other country in fact crossed this particular chasm in the first place thanks partly to the accident of running or preparing for a war economy. Even in America, the early industrial structure of the northern United States owed at least some of its initial impetus to the drive for equipping the Union armies in the civil war; in Canada some of the main seeds of industrialisation were planted during the second world war; in western Europe and Russia the part played by war economics has been obvious; nobody else apart from these has really crossed the chasm as yet.

One of the needs in the next few decades will be to consider how international trading policies, international development policies, international aid policies and international subsidy policies can be worked out so as to provide a better godfather than Mars to the infant of development. Not nearly enough thought has been devoted to this subject as yet.

 

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

13 Unions, Management, Competition

So far these surveys have seemed to be quite largely concerned with eulogies of the efficiency of Japan’s economy. What of the criticisms to be made? As so often with Japan, one finds oneself at this stage plunged into a discussion of paradoxes. The usual left wing critic’s picture of Japan is that of a country where feudal employers beat trade unions into the ground in a ruthless search for labour economics and productive efficiency; but in point of fact an extreme wastefulness in the use of labour, both on the factory floor and at the junior executive desk, is one of Japanese industry’s most glaring failings. The usual right wing picture of Japan is as a nation bent on cut-throat competition (particularly, say its rivals crossly and as if this were an unfair action, in matters of price”); but in fact a social atmosphere which frowns on price competition is one of Japan’s worst international handicaps.

The story of the foundation of postwar trade unionism in Japan is one that would be best fitted for a novel by Mr Evelyn Tough. Between the end of the war and the end of 1946 the number of Japanese trade unionists rose from nought to five million, because the American occupation authorities (this branch of the occupation administration was very largely filled with reforming New Dealers) had proclaimed that voluntary joining of a trade union was the good democratic thing for everybody to do. In some cases, it is said, even the manager joined the union and was respectfully elected to head the shop floor organisation which was supposed to bargain with himself. But in many more cases, as Professor G. C. Allen pointed out in his excellent book on Japan’s Economic Recovery (Oxford University Press, 1958.), the right man to put in charge of a trade union organisation was deemed to be somebody who had been imprisoned by the Tojo and earlier regimes. This was often an ex-student zealot with pronounced syndicalist views, and with ideas on organisation which he had read up almost solely out of books. The temporary and meteoric rise of these men – who were often near-communists of a lustily disorganised kind – went much further than most people in the West realise. In the first two years of utter demoralisation of Japanese industry after the war the left-wing trade unions actually seized control over several plants, and quite often became responsible for the employment, dismissal and discipline of the workers. By early 1947 the trade unions were reading up in foreign textbooks how to call a general strike; and the American occupation authorities, horrified at the rather dreamy monster which they had conjured up, began to clamp down.

This has set the pattern for one part of the trade union movement ever since. Even today the main national trade union organisation Sohyo (1960 slogan: “To hell with the US Security Pact and Fatter Share of Improved Productivity for Labour”) is decidedly to the left of, say, Mr Cousins in its political views. It has learned from, and formalised, British practice in trying to secure an annual wage rise for its members; each spring it marches into battle against the Japanese employers’ federation by proclaiming an annual offensive of strikes. Unfortunately for Sohyo, although there is a real degree of trade union militancy in some branches of government service and in a few industries such as coal mining, workers in the big and prosperous manufacturing industries are singularly unwilling to follow its lead. In these industries the so called “company unions” are the main forms of organisation; the national bodies that exist are loose federations of unions which are themselves limited to workers in particular firms.

Western trade unionists tend to regard these company unions as the managements’ tame poodles. This is an underestimate of at least many of them. They play a real (and sometimes damaging) part in seeing that firms engage most of their workers as “regular” workers (i.e., workers they can practically never sack) instead of as “temporary” employees; and many of them negotiate seriously and hard about the size of the Christmas bonus and family allowances and other fringe benefits. A typical tactic of these enterprise unions, indeed, is to move on from one fringe benefit to another in a constant stream of negotiations that lasts the whole year round. What they do not do, however, is to impose any restrictive or demarcation rules about who will do what job; by British standards they seem virtually to delegate to the management the sole responsibility for deciding upon manning schedules for different types of new machines and for deciding in which types of job women can be employed instead of men.

Yet the impression remains that most Japanese firms carry many more workers than the simplest system of time and motion study would suggest they can really need. In the longer-established firms this may be largely the result of the “lifetime” system of employment, and of the fact that pay and promotion are supposed to be determined almost wholly by seniority, with a factory worker in his forties being entitled to get twice as much as a factory worker aged about 21. Many firms are paying older workers more than they are relatively worth (which provides another reason why, as soon as they reach the painfully early retirement age of 55, they so incontinently retire them). In the very large number of new factories which have been opened only in the last ten years this burden from the “pay by seniority” system is lighter; but it will grow as the average age of the workers in the factories grows. Many cost comparisons of the difference between Japanese and British wage levels tend to ignore this point.

Moreover, wasteful overpadding of junior executive posts seems to be almost universal. In some aspects of management – such as the pre-planning of new operations and meticulous attention to the paper work required for each operation – Japanese industry is first class, largely because so many jobs that in Britain would be done by clerks are done in Japan by university graduates. But whenever any small hitch occurs, the whole machine is apt to catch up in a bureaucratic seizure of immobility. This is partly because under the system of promotion-by-seniority no junior executive has any incentive to show any capacity for making snap decisions on his own; partly because in Japan procrastination in the face of difficult problems is sometimes regarded as a national virtue rather than a maddening vice (after all, it was the hero Abe Masahiro who laid down the line for dealing with Commodore Perry: “Our policy shall be to evade any definite answer to their request, while at the same time maintaining a peaceful demeanour”); but largely because it seems to be a tradition in Japan that if any changes in any plans are to be made they must be agreed to by everybody. Even at boardroom level decisions are not taken by majority vote but theoretically only by unanimous agreement.

To prevent this tradition of unanimity from being eternally stultifying many Japanese organisations seem to have a man whom the outside observer finds himself disrespectfully calling the Emperor-figure. Conversation with and even between different executive grades in Japanese industry can go forward most interestingly and pointedly until this Emperor-figure arrives; then, your correspondent found, everybody falls into a deep and respectful hush. As the Emperor figure (who may belong to the family owning the firm) does not seem always to be the man best fitted to make big decisions, the system is puzzling at first; but in fact his function is probably often to work merely as a constitutional monarch. When there is a controversy about some line of action to be taken, he lays down what has already emerged as the majority opinion as his own decided view; everybody then agrees that he must be right and so the tradition of unanimity is maintained. The system does not make for speed in operation, but it has some achievements to credit. After all, it was by this method, with the Emperor, that Japan called off the war in 1945.

This tradition of always seeking agreement can have enervating results within industries as well as within individual companies. Because the Japanese in their recent great economic success story have followed some fiscal and economic policies in line with precepts that The Economist has long preached, it would be nice to be able to say that they are also keen believers in competing between themselves in a free market. Unfortunately, this would be quite flamboyantly untrue. The American Occupation left behind it an Anti-Monopoly Act and a Fair Trade Commission, on orthodox American trust-busting lines. The commission still exists, but the Japanese will explain that its main bias now is towards regulation of “unfair and unethical trade practices” (which means towards stamping out competition).

This is not to say that some forms of Japanese competition – vis-à-vis customers, if not vis-à-vis competitors – do not deserve to be stamped on. In 1960 the Fair Trade Commission set what the Japanese press called a “historical precedent” by threatening to act to stop the “selling of canned whale or horsemeat under labels designed to give the impression that beef was the content.” (The phrase “give the impression” is a fine understatement.) However, this matter was all settled very chummily, in a typically Japanese way. In co-operation with the Fair Trade Commission, the designated packers of whale and horsemeat “launched corrective action by setting up committees on specifications and betterment of trade practices”; once set up, these committees promptly devoted themselves to stopping “excessive price competition” in their industries as well. This sort of thing is very common in Japan; it is constantly a surprise to find how far industries composed even of minuscule firms can continue to keep up prices, often with some form of official support. This applies even – indeed perhaps especially – to goods destined to be sold on export markets. The orthodox British idea, that by toning down demand on the home market one can encourage enterprising small firms to cut their prices and speed up their delivery dates and thus boost exports, is the precise opposite of the policy followed by Japan’s Ministry of Trade and Industry. Under the Law on Export Goods Inspection, 1957, many manufacturers have to submit their goods to compulsory pre-export inspections; in mid-1962, despite the balance of payments crisis, some inspection organisations were grossly understaffed, which resulted in lengthy and officially created delays in some shipments. Moreover, when the Ministry imposes export quotas and official check prices, its object is to keep prices to particular markets up, not down.

What will be interesting, however, will be to see how far import liberalisation serves to introduce some much needed degree of competition into Japan. When your correspondent was in Tokyo in the summer of 1962, Japan was preparing, with a fanfare of trumpets, to march forward in the following autumn into what it hoped it would be able to call go per cent liberalisation of imports. It had better be said straight away that this most certainly does not mean that it envisaged that 90 per cent of all that might be imported into Japan would be free of restrictions. In the first place, the figure refers only to go per cent by value of Japan’s spending on imports in 1959; if imports of anything were nought in 1959 (and imports of very many things were) 90 per cent of nought is still nought. Again, imports were still to be authorised only within the limitations set by an overall foreign exchange budget; it was pretty clear that liberalisation was being steered into fields where the government hoped that domestic producers would be least hardly hit; and some tariffs had already gone up to counter the effect of the quota restrictions coming down. Nevertheless the “Long-range Economic Plan of Japan” was specific about the principles that should be followed:

While it is advisable to give protection to incipient industries which have potentialities for development . . . the government should refrain from giving relief to declining ones.... Such a government attitude ... would be felt as rather severe on industries and enterprises. But only by going through such a phase will Japan be strong enough to compete in the world market and gain a solid basis for economic growth.

 

It will be of enormous advantage to the next step forward in Japan if, as a gradual consequence of the removal of the most onerous part of the import controls, this precept begins at last to be put into effect. Japan has advanced massively in the last decade, largely because it has had a steady stream of technologically educated school-leavers coming on to its labour market to take up their first jobs. The government has followed exactly the right budgetary, economic and planning policies to attract these youngsters into modern, expanding and high productivity industries, instead of following the stagnationist policies which could have left them to sink into the traditional and lower productivity industries of a past age. But now Japan has reached the stage where its objects should also be to draw existing and older workers out of inefficient firms into the new industrial structure; its sociological set-up, its industrial customs, and its innate habits of mind will not make that switch an easy objective at all.