 Good morning once again. Welcome to 3.03. We're making it towards the end, almost done, a few more to go. This morning we're continuing with the case of Japan. Last time we did state tradition, so we did cover Japanese state in historical perspective. So this morning the plan is that we continue with the Japanese case study focusing on political economy of economic and social policies, the role of the state in the economy and political economy in general. And then depending on our time, on our pace, we may be switching to our third topic, which is governance and policymaking in the second half of the lecture. Any questions from last time? Japanese state, or state tradition in Japan in comparative perspective, that we have seen that this was a large first agrarian empire then got industrialized back in the Meiji period. So 1860s, 1870s, 1880s, phenomenal expansion of Japanese industry, phenomenal growth, which brought some regime change under Taisho democracy, then another regime change in the 1920s, and then World War II. Right? World War II ends, you know, occupation under Allied dominance, then, then, structural change, as we shall be talking about. In the industry, in all sectors, democratization, it is this period where we see Japan emerging as a full-fledged western-style democracy, liberal democracy. Political stability under predominant party regime, under the liberal democratic party, LDP, going hand-in-hand with massive economic growth, the so-called Japanese miracle. So 50s, 60s, 70s, Japan becoming the star in the world economic scene. Okay, phenomenal growth, phenomenal expansion, the so-called Japanese miracle. So I'm planning to talk about all that this morning. So this basically laid the groundwork for this small chat, laid the groundwork for our discussion on political economy of economic and social policies. So let's see where we were. The role of the state in the economy, we have an interventionist state, and this interventionist state emerges or consolidates itself under Meiji rule. Meiji period, we remember that this was the second half of the 19th century, 1860s. So consolidation of state bureaucracy, you know, Japan becomes an imperial superpower, looks around itself, cannot find much, many colonies, starts to attack Japan, starts to attack, I'm sorry, starts to attack China, and then Russia. So the Sino-Japanese War, the First War, the Sino, I'm sorry, the Russo-Japanese War, early 1900s. So imperial ambitions. Okay, but in the meantime, industrializing. So massive industrialized industrial effort. So pre-World War II, political economy is dominated by a state-led industrialization process. Okay, so we have a state which is an extreme form of interventionism in history and with the Meiji Restoration, the motto of the state itself was rich nation with a strong army. Remember, I talked about the fact that the Japanese emulated German forms of industrial organization and military organization, and also some kind of political organization too. So the military was modeled after the most elaborate successful military of the time, the German military. And the industrialization process was emulating, again, that of Germany, because this was a case of late industrialization in Germany, and the Japanese were also late industrializing. But the Japanese case was way much more state-led than that in Germany, the industrialization process. So the motto of the Meiji period was rich nation through industrialization, through or with a strong army, so that it could, you know, bring about wealth and power and wealth and power to the country. We see continuous economic growth until late 1920s, early 1930s. In this period, you know, in the Meiji period, Japanese economy grew at around little bit higher than three percent. So every year, three percent, almost consecutive steady growth. So imagine 1860s until 1930s, growing at a three percent rate, which wasn't phenomenal, but which was still some hefty growth, which was sizable growth, and 1930s, after the Great Depression, the Japanese economy grew at a rate higher than five percent, which is, I mean, if you expand your economy at five percent every year, just imagine how much time it'll take to double your GDP. It's not that many years, okay? But the economy was devastated in or around the Great Depression. One reason was that Japan was an exporter of rice and also silk, and the Great Depression really hit the agricultural sector immensely. So everything starts in the in the commodity prices, in the agrarian commodity prices, agricultural commodity prices. So late 1920s, 1920s, 1929, 1930, prices of agricultural produce plummet, prices of agricultural produce plummet, and Japanese exports were badly hit during this this era, because it was producing rice and also silk. So these are, you know, primary commodities which saw their prices being hit, which led to poverty in many sectors, segments of society. But there was fast recovery in response to the Great Depression through first rising public expenditures. So the state intervened heavily by spending its way out, and it it expanded its spending in the military sector. So Japan was gearing towards World War II. So late 1930s, 39 actually. But before then, 1935, there was there was war efforts against China. So Sino-Japanese war, the Second War was was taking place. Then Japan attacks Pearl Harbor, then then everything is Pandora's Box. So military expansion, Japan invades China 1930s, early 1930s, 31, then war starts, 35 onwards. And this also, this fast recovery can also be accounted by rising exports. So it is this period, 1930s, that Japan consolidates its power in world markets, world commodity markets. What is it doing? It is tripling its exports in industrial goods. So the massive industrialization effort that it started back in the 1860s, 1870s, 1890s, 1900, 1910, 1920 produces its fruits. Industrial goods, metals, chemicals, machinery. And these also include military equipment too. So Japan becomes one of the fastest-growing economies in the world post 1930s. Okay, so it becomes a very competitive economy it is it is a hyper, it starts to hyper-export, exporting. So it's really exporting, it becomes an exporting nation. So rich nation with a strong army. The motto was there in pre-World War II era. And this is vindicated in the history. So World War II, Allied powers, occupation, a new constitution, which means some structural change. So World War II or post-World War II Japan has another motto. So they abandon the strong army but stick to the rich nation. So remember it was the rich nation with a strong army. Now it's the motto is rich nation. By about mid-1950s until about early 1970s we see the Japanese economic miracle. So this period, that 15 to 20 year period is when the Japanese economy saw a miracle. Okay, a long period of consecutive years of steady high levels of economic growth, more than 5% every year for about almost 20 years and this was also coupled with political stability. Oh, we'll talk about that. Yes, that also accounts. I mean that's one reason why the Japanese grew at phenomenal rates. Yes, I'll discuss that. I mean I'll try to look at the factors behind this expansion, what was behind the military expansion. There were domestic factors and there were international factors. But what I want to emphasize here is that the motto of rich nation with a strong army has been changing to a motto of rich nation only because the military is out in this ball game. With the intervention by the allied powers, with the new constitution, because the new state becomes a pacifist peaceful state. Okay, let's let's look at those factors or was was talking about what accounts for this this economic miracle. There are the literature tends to divide these factors into two, you know, domestic factors as well as international factors. When we look at the domestic factors, we see the emergence of a certain type of a specific type of state, a 20th century type of developmental state. The archetypical case of which was in Japan. So Japan becomes in the post-World War II era an archetypical example of what's called the developmental state in the literature. This was this model was later emulated, mimicked by many other countries in the region by South Korea, by Taiwan, by Hong Kong, Singapore and others too. What we later learned them as Asian Tigers. So under the developmental state these economies grew phenomenally by looking at the sun. James Fallows back in the 1980s had written a book on this. Looking at the sun. So emulating the sun, remember the Japanese flag is, you know, it's white with a red sun at the center. So looking at the Japanese model, learning from the Japanese model. That was James Fallows, Professor Fallows' work on this emulation process in the developmental states that were in the making, the East Asian Tigers so-called, that were really emulating, that were really mimicking what Japan was doing in the 50s, 60s and 70s. They did this in the 70s, 80s, and to a certain extent until about the mid-1990s. Anyway, so well, we will talk about the developmental state a little bit later, but keep this in mind that one of the domestic factors that account for this miracle was the presence of a specific type of state. And this state is referred to in the literature as the developmental state. There is also, you know, another factor is more cultural as opposed to or in addition to policy design factors. Entrepreneurial talent, that this has always been there. Japanese individuals, I mean individuals in Japan were, or had, or Japan had a pool of entrepreneurial talent and a culture of initiative. It's, it sounds more like their Western counterparts. So cultural explanations also have something to do with economic, the so-called economic miracle. What's also important is the presence of a skilled workforce. But how does, how do you get a skilled workforce? Does your labor force become skilled out of the blue? Or what, how do you, how, how does it emerge? Yes, you invest into it, right? You invest into human capital. I remember I asked you what you, about human capital, what was human capital? Once again, it's the investment into ones at the individual level, into ones. Yes, of course, but at the individual level, what do you invest in? If you want to come, accumulate human capital, if you want to acquire human capital as an individual, what do you do? You educate yourself, you train yourself, you retrain yourself, right? You get on-the-job experience, you accumulate experience, right? You do internships, you do apprenticeships, you start working, right? Mind you, ladies and gentlemen, the summer is waiting for you. I know it's, it's too early to think about the summer, but I want everyone in this class to remember this class and do a series of internships during the summer. Okay, well, well, we always talk about that in the break, but I wanted to be on tape so that you, I remind you the importance of internships in the summer, not just one or two, but more than that. Okay, so, so please keep that in mind. Anyway, so, so skilled workforce, which is made possible by a certain type of state investing into human capital of its workforce. Okay, so much so for the the domestic factors, what about international factors? Mostly about wars. 1890s, 1894, 1895, Sino-Japanese War, I mean, which was fought over Korea basically, the Korean peninsula, and then the Russo-Japanese War. That's 1904, 1905, that's the earlier war, which was again fought over lands, again, Korea, Korean peninsula, but also Manchuria. So, so these are imperial wars, imperial rivalry wars, you know, who says the last word in the region? These are all large agrarian imperial powers. Japan on the one side, Russia up north, China on in the west, on the on the on the west side of Japan. So, so, so all of these superpowers of the time, you know, they're fighting for imperial conquest, you know, who gets the most amount of resources? Who gets a hold of markets, who gets a hold of raw materials? Right? In the region. So, all of these wars helped the Japanese heavy industry. How does a war help heavy industry in a country? Okay. That's also right. So, so it becomes a chicken and an egg problem. But, you know, wars mean that there is higher demand for all these equipment, for all this machinery, for all these tools, right, which are produced by the heavy industry or heavy industrial sectors. Okay. So, and then in return, you know, once there is conquest, there's going to be raw materials coming into the economy. So wars helped immensely war effort and war outcomes, war results helped immensely to the industrialization drive in the, you know, early 1900s and by about the 30s and later on in the 19 early part of 1940s. World War I 1914-1918 helped the Japanese economy immensely too. But only indirectly in the sense that when the World War I started, the the commodity chains, trade chains stopped or came to a halt in the West. So advanced industrialized countries were making war. So because their economies were geared towards war making, they couldn't export what they used to export. So, but given demand for all kinds of goods, for all kinds of commodities, the Japanese started to sell because they weren't part of World War I. Okay. So, so World War I indirectly helped the Japanese economy. So, European dominated networks, trade networks had been disrupted. So it was time Japan starting or accelerating their exports, Japanese companies, accelerating their exports in textiles, in steel, in machine tools, in chemicals, in in also shipping. Okay. So all of these were high in demand and once the European networks had been disrupted, it was the Japanese who were able to sell to, you know, who were able to address world markets, supply world markets with all these goods, which helped Japan's trade balance immensely. So exports increase. What's trade balance, by the way? What's trade deficit or trade balance? Trade balance. What do we look at in the trade balance or trade deficit? What do we mean if there is trade deficit? If a country has trade deficit, that's trade surplus. Okay. But trade deficit is your your imports are larger than your exports, right? In this case, we had improving trade balances, meaning that we had trade surpluses back in the 1910s, 1914, 1918. Then other other wars helped too. All of these had also been supported by reforms. What kind of reforms? More like structural reforms that were engineered by the Japanese state in the post-World War II era. So what were these reforms like? They were about getting rid of what were seen as structural barriers or structural problems. One problem that was seen as a problem, it was framed as a problem was the so-called Zaibatsu. The Zaibatsu were I'll talk about this later on, but I was planning to. The Japanese Zaibatsu, these are large, generally family-owned holding companies, which have two major counterparts. One is an industrial conglomerate or a firm, a parent firm, and the other is financial counterpart. This sounds like which of the models we've seen that there is a bank-centric model of development. There is the the stakeholder model, which we had seen in the German case. Okay, very good. So we see large holding companies bringing together industrial production and a financial firm to support this production. Okay, so this industrial firm has some kind of a privileged access to financial assets of this financial firm. Say it, I mean, let's say it's the bank. It's one commercial bank. So so these were large conglomerates that were consolidated under Meiji rule. So 1870s, 1880s, 1860s, 1870s, 1880s. These are large firms, strongholds of industrial power in Japan. So after World War II, these large firms had been dissected into parts. Excuse me. They were divided up to smaller corporations. And, you know, in time, they, I mean, these divisions brought with them efficiency gains. So productivity increased. So this is seen as one reason why this restructuring process worked in the Japanese economy. This period, World War II and onwards, was also a period of increasing unionization. Trade unions, labor unions, which brought with it some efficiency gains, productivity gains too. This period also saw land redistribution. So redistribution of land and, you know, land was divided into smaller parts. So land holdings were smaller after World War II, which meant that there would also be efficiency gains and productivity gains. So all of these structural reforms brought some efficiency and productivity gains, which contributed to the Japanese economic miracle in the 50s, 60s, and early 1970s, which brought phenomenal industrial as well as agricultural growth, which meant the motto of the rich nation was being realized. On top of all this, we've got the Korean War 1950s and the Vietnam War, which went on forever until the early 1970s. Again, all of these wars meant that trade with the U.S. increased, meaning that the Americans saw Japan as an ally, which was, you know, logistically, which was geopolitically, it was situated in such a geographical location that the U.S. war effort made so much use of all the resources that the Japanese economy offered. So for all of these reasons, the Americans invested into Japan. They purchased so much equipment in supporting their war efforts. So the Japanese firms became as main suppliers to U.S. troops in that particular period. 50s and then later on, 60s and early 70s, which meant there was ever rising demand for Japanese products. And of course, Cold War meant that Japan was under the Western system, which meant that it received a lot of U.S. assistance, and it was, in a way, encouraged to develop, encouraged to industrialize, especially in the period after World War II, because it was seen in the world systems, or underworld systems theory, propagated or advocated by Emmanuel Wallerstein, Terence Hopkins and others. The Japanese industrial effort and the Japanese political economy, the state, was seen as a check on China. So that China, if China moves too much, the Japanese would keep it under check. So politically, it was supported to under Cold War conditions. China was on the other side of the fence. Japan was on the western side of the fence. So the system, the western system kept China under check through having a prosperous, wealthy, and powerful Japan. So all of these reasons helped produce this Japanese miracle. I promised to talk about the developmental state. So let me talk about this certain type of state. This is an archetypical kind of state. It's a case of state-led development, which was also typical of late development or late industrialization. So those cases that industrialized later than England, in all of those cases, we see the very visible hand of the state. With the standard story of British industrialization, British development or English industrialization, English development, we hear about smithy notions of the invisible hand. But here we see the very visible hand of the state in all those processes of late development. Early industrializing country was Britain, which was followed by Flanders, France, Switzerland, then came Germany, then came Japan, then came the rest in the post-World War II era. So all of these cases of late industrialization, we see the importance, the key ingredient as or of the state, state involvement, state intervention into the economy. So this was an archetypical case of state-led development. State itself led the process of industrialization. This was in a way like the French way of industrialization, which we refer to as very good derogism, which was later incorporating etatism, but also remember, especially after World War II, that the French model of development rested on a certain type of instrument, which was some kind of, unlike the Soviet type of command economy, the French built their model on the basis of, come on guys, I know you'll remember this, indicative planning. So there is indicative planning involved in this process. So we have more or less rigid guidance by the state, by a certain type of autonomous, efficient, rational, what's called Vibrarian bureaucracy. Max Weber wrote about bureaucratic types. And he associated capitalist economic development and state-led type of development to an autonomous, to the presence of an autonomous, rational bureaucracy in his work. So autonomous bureaucracy, which was doing the planning, doing policy design, setting the agenda, but also implementing all those policy decisions. So this process was like French-style derogism involving indicative planning, so identifying national champions through industrial policy. The state itself took on developmental functions. It developed certain functions. There is extensive regulation. There is extensive planning by the state through the hands of the state. And all of these are through what's called industrial policy, promoting new industries, efficient industries. And there does not have to be direct control of firms by the state. But the state is there, doesn't have to own the firms, but it relies on rigid guidance by the state, by bureaucratic elites who are much less subject to electoral cycles. What we mean by autonomous bureaucracy, ladies and gentlemen, is that those bureaucrats are less exposed to electoral cycles. So political factors are much less in influencing those decisions. So it's a rational bureaucracy, it's an independent bureaucracy, it's an efficient bureaucracy, it's an effective bureaucracy doing the planning, doing the formulation, taking the decisions, and implementing those decisions. One instrument was the Ministry of International Trade and Industry, which is represented by the acronym MITI. Please read your textbook with respect to how MITI emerged, how MITI helped industrialize the Japanese political economy. So MITI is very important as a super ministry, as coordinating all sectors, as identifying national champions, as producing regulation, as doing the planning, as implementing industrial policy tools. So all of these are coordinated by the Japanese state with the instrument of the Ministry of International Trade and Industry. So when we look at the origins of the developmental state, we see in the Meiji period the Meiji government, the empire, the emperor, found sponsors and fosters and operates industries. This is when we see the emergence or the consolidation of the Japanese Zaibatsu. Once again, the Zaibatsu are these large conglomerates, generally family owned, they are kind of monopolies in the sectors they are producing. They are chosen by the emperor or the bureaucratic apparatus under the empire or the emperor and these are founded and operated by the state. And then once they prosper, they're sold to private entrepreneurs. And so this was the period in which we see the emergence or the consolidation, so to speak, of the Zaibatsu conglomerates. So 1860s, 1870s, 1880s especially. By about 1890s, we had big Zaibatsu controlling much of the Japanese economy. So then World War II, this was by about World War II the big four Zaibatsu. One of them was Mitsubishi, there were other three which were really controlling much of the Japanese industrial production, commercial activity and also total GDP. One third of all industrial production was stemming from all these big four Zaibatsu. So World War II, the system collapses, restructuring after World War II and this period saw industrial policy which assisted targeted certain sectors, industrial sectors, so strategic industries, such as investment funds, so these targeted, these instruments of targeting were investment funds, channeling of investment funds to these strategic sectors, cheap credit, tax breaks, providing foreign exchange in a world of restricted, you know, currency flows and also bringing about foreign technology to these firms, so importing foreign technology, like imports of plant and equipment to be used in those sectors and administrative guidance by the state and also another set of tools which are collectively called NTBs, anybody who has an idea about what NTBs are, non-tariff barriers, those of you who take international trade will remember that term, so non-tariff barriers are barriers other than tariffs which have equivalent effect of a tariff. What's the aim of a tariff? What do tariffs do? Yeah, but they protect your domestic industries from external competition, right? With tariffs and quotas, you shut off that competition stemming from outsiders, so nobody is competing with your domestic industries, but in a world of increasing liberalization we all have to get rid of tariffs, 60s, 70s, 80s, 90s, in response the Japanese state invented a set of other tools known as non-tariff barriers, perhaps I should continue with that after the break, so what are non-tariff barriers, all right? So let's take a break and then we'll continue with the non-tariff barriers.