Japanese Industrial Governance

Protectionism and the Licensing State

Yul Sohn

• Publisher: Taylor & Francis
• Year: 2004
• Print ISBN: 9780415334778
• eBook ISBN: 9781134312658
• Edition: 1
• Topic: Política y relaciones internacionales
• Subtopic: Política

This book uses a wide range of original Japanese sources to trace important aspects of the history of Japanese economic ideas, in particular, the development of Japan's industrial policy. In contrast to most others who begin their story within the 1930s or after 1945, Sohn goes back to the Meiji era to trace the evolution of Japanese developmental debates, state policies and market strategies involving cartels and small enterprises, city and countryside, and approaches that variously emphasize the market and the role of the state as Japan seeks to position itself in the world and regional economies.

1

Introduction

During the past twenty years, deregulation has been one of the central policy agendas in Japanese politics. Domestic big business complains that regulatory arrangements undercut the vitality of the private sector, while foreign governments and traders cite them as the primary source of informal trade barriers.¹ Government agencies respond to these calls with a series of seemingly ambitious plans and programs that would ostensibly reduce market regulations and encourage imports.

Here, government licensing (Kyoninka) represents the core of Japan’s regulatory system. It means that the government authority imposes prior prohibition from which it grants exceptions. Under a licensing regime, firms are prohibited from starting up operations in an industry prior to receiving a license from the government.² But in Japan, licensing covers a wide range of forms of intervention that extend far beyond the question of entry. The licensing authority governs not only a firm’s entry and exit, but also specific investment decisions.³ Firms complain of the commonly noted bureaucratic practice of discouraging or refusing submissions for licenses.

While there exist more than 10,000 kinds of licenses now, more than 30 percent of these were concentrated in two key economic agencies—the Ministry of International Trade and Industry (MITI) and the Ministry of Finance (MOF).⁴ This striking number draws our attention to the unique feature of Japan’s industrial policy, one that uses licensing extensively for development and control purposes. While it is well documented that the Japanese state targets industries and strategically alters resource allocation by granting subsidies, credit allocation, tax breaks, and relevant information,⁵ what is often overlooked is that these measures are combined with licensing that creates entry barriers in order to organize industries for strategic objectives. The state channels various forms of financial incentives and information to preferred firms that are licensed. By serving as the gatekeeper to entry into industry, licensing gives the state leverage over firms.⁶ In this sense, it should be understood as a means of regulating market competition and shaping industry structure.

While there is a large body of literature on Japan’s industrial governance and policy, few have dealt closely with the use of licensing as an important policy tool. At the same time, most scholars in the field looked primarily at the contemporary period.⁷ I explore the origins and development of a distinctive Japanese approach to industrial governance that centered on the practice of licensing. I show that this approach has long aimed at protecting and nurturing key industries from foreign competition, especially penetration by Anglo-American multinational corporations during the interwar years: that is, it was the challenge of foreign direct investment (FDI) that crucially constrained and shaped the course of constructing industrial governance institutions in Japan.

The narrative of this book is summarized as the following: bereft of the ability to use tariff protection due to the West-imposed free trade regime (i.e., unequal treaties), the Meiji (1868–1912) leaders began to establish non-tariff barriers by adopting industrial restructuring policies such as promoting cartels and mergers in order to nurture key domestic industries. The key aspect of enforcement, preventing excessive entry by foreign and domestic firms, had to be better handled when Japan faced rapid investment penetration by foreign multinationals in key industries during the 1920s. The licensing institution was designed to tackle this problem by erecting entry barriers to targeted industries. Combined with industrial policy tools such as subsidies and other financial incentives, this institution helped to establish regulated markets based on cartel-like practices while constraining the activities of foreign multinationals. It was constructed as an outcome of the historical conjuncture of two forces: the need to stabilize the rapidly transnationalizing market driven by Japan’s full-fledged integration into the global system during the 1920s, and the need to establish a national autarky based on total war thinking.

In telling this substantive story, the argument presented here departs from the standard accounts of Japan’s political economy in three ways. First, this analysis takes an “outside-in approach.” In general, the standard works in the field have overly focused on internal interactions among the bureaucracy, politicians, and the industry while treating external factors merely as an environment. These may be described as an “inside-out approach.”⁸ For example, a combination of domestic variables (i.e., social structure, ultranationalist movements, the rise of the military and reform bureaucrats) in Japan led to imperialist expansion in the first half of the twentieth century. Trade disputes involving Japan for the past two decades, many believe, were caused primarily by Japan’s peculiar internal structures that were shaped either by its putative cultural peculiarity or by endogenous rational political processes.

By contrast, this book stresses the role of international pressures in shaping internal politics and hence policy institutions.⁹ Specifically, it focuses on the embeddedness of the state’s action and the firm’s action in the global system. It systematically contextualizes public-private interactions as a contingent form of relationship situated in the global system.

Second, ideas and ideologies are incorporated importantly in narrating the story of institution building. Since a specific institutional form is understood to be a historically specific solution to political and economic problems relating to global competition, the task here is to find historically rooted ideas of what was desirable and possible as well as those contextually induced problems that state and firms sharing those ideas attempted to solve.

My analysis brings in the role of state-centered ideology in the making of industrial policy institutions. Assuming a plural ideological space rather than a monolithic national ideology, it demonstrates the complexity of Japanese mercantilism, divided as it has been between trade-oriented and autarky-oriented variants.¹⁰ This work shows that changes in policy governing the economy involved corresponding changes in key state actors’ conception and articulation with the changing political and economic worlds of which they were part. We then examine the processes by which those armed with specific ideas and ideologies competed for primacy in decision making.

Third, the narrative in this book begins with the Meiji period. The existing literature on the origins of Japanese industrial policy has focused heavily on the war years (1931– 1945). As seen in the term “economic general staff to which Chalmers Johnson refers as the central agency of the Japanese state in his classic, MITI and the Japanese Miracle, security was a powerful impetus to the developmental state in Japan. Bai Gao similarly combines security concerns with worsening economic conditions (caused by the Great Depression) in accounting for the rise of developmentalism.

Earlier works treat the pre-1931 period (that is, Meiji and Taisho eras) merely as background. For Johnson, Gao and many Japanese scholars, the 1920s was an ancien régime with which to break. The 1920s system is given historical and theoretical significance only as antithesis to the 1930s system. This work, however, finds the roots of industrial policy that preceded the developments of the 1930s going back to early Meiji. Many of the changes had been evolutionary, with new (i.e., total war ideas) and old (i.e., Meiji policy tradition) blended together.¹¹

In addition, this analysis rejects two widely held views of Japan’s state-firm relationship (one that depicts strong control over the Japanese economy by the state and the other arguing that the private sector is the dominant force in shaping the economy) in favor of the institutionalized “power-sharing” relationship between the state and firms in protecting and nurturing domestic industries from global competition. Here, the operation of the licensing system reveals the political process by which the state set agendas (i.e., shaping market preferences) using licensing powers while control over the detailed procedural and administrative decision making was given to licensed firms.¹²

In making these arguments, it should be noted that I do not claim that dealing with foreign economic pressure was the overriding factor in explaining the rise of Japan’s industrial governance institution centered around the use of licensing prior to the 1930s. Nor am I suggesting that institution building should be understood through the lens of ideas and ideologies that evolved from the early Meiji period. What I am proposing is that a better understanding of Japan’s industrial governance system can be reached by aligning it with self-consciously held political economic ideas responding to the changing international environments since Japan entered the modern world. My argument suggests that the shaping of industrial policy and its institutional contexts have to be seen as much in terms of the mix of domestic and external economic conflicts (i.e., protection with regard to the challenges of the global market) as in terms of interstate competition (i.e., late developer problems).¹³

This introductory chapter first reviews the prevailing accounts of the institutional development of the Japanese political economy and then finds the biases and gaps they cause. The following section presents the theoretical presuppositions required to shape the alternative perspective, and subsequent sections present case selection and outline the organization of the argument.

Problems with the Japan Model: Gerschenkronian Time and Space

It seems fair to say that many of the standard accounts of Japan’s political economy have been strongly influenced by the writings of Alexander Gerschenkron and his so-called late development thesis.¹⁴ The central claim of this thesis is that nations can improve their position in the international division of labor through political adjustments, especially the political creation of institutions adaptable to new situational conditions. Time is an extremely important constraint, but at the same time it becomes an advantage if politics is played out properly.

In the field of Japanese political economy, the Gerschenkronian notion of time was first presented in E.H.Norman’s seminal work, Japan’s Emergence as a Modern State, a book that pre-dates Gerschenkron’s.¹⁵ Norman presented an excellent mix of the late development thesis and a Japanese Marxist tradition.¹⁶ Under Western imperialist threat, he argued, imperial absolutism arose in a Bonapartist way out of the pre-existing class structure where a “nice equilibrium” of class balance existed between feudal aristocrats, bourgeoisie, and peasants.¹⁷ And the new absolutist Meiji state played a crucial role in achieving political independence and economic development.¹⁸ It successfully created institutions to adapt itself to the changing international standards of efficiency. The state acquired the most advanced technologies then available on the world market and made use of Japan’s own backwardness to create modern large-scale firms. It created financial institutions subsidizing long-term investments in strategic industries where private leaders earnestly followed the directions set by the state.

William Lockwood, whose influence has been pervasive in postwar English-language scholarship in Japanese political economy, followed this line, but from a slightly different angle (i.e., a non-Marxist institutional explanation).¹⁹ Lockwood argued that successful economic development requires certain political and institutional arrangements no less than the revolutionary development of production technology, particularly in a society that is faced with interstate competition and thereby needs “speed” and looks for “short cuts” to emerge as a modern industrial state from feudal backwardness.²⁰ The Japanese case, he continues, illustrates this extremely well. Pre-modern Japan exhibited the familiar features of Asian agrarian economies: general poverty, intense stress on the land, no firms to organize production, feudalistic social and economic relationships, which checked entrepreneurial activities, and so on. But in Lockwood’s account, the rise of powerful political institutions in the Meiji state, coupled with the heritage of feudalism, the ambitions of putative leaders, and the “historical time” it now entered, all combined to endow the state with broad responsibilities for creating an institutional framework for rapid economic growth. What followed was a close-knit relationship between state and society, a “typical Japanese web of influences and pressures interweaving through government and business, rather than a streamlined pyramid of authoritarian control…a web it may be, but a web with no spider”²¹—a cornerstone metaphor in the standard explanation of the state-firm relationship and economic miracle in modern Japan.

In accounting for how institutional innovations emerged in Japan, Lockwood and Norman diverge. Norman argued that the key to success lies in “the ablest, most self-sacrificing” Japanese leadership who “utilized to the full and with remarkable dexterity those autocratic powers.”²² The exceptional quality of a handful of Japanese leaders, men of “patience, good judgment, and the will to strike fast and hard,” enabled Japan to seize an advantage.²³ Exogenous crises produced systemic disequilibrium in which men of special abilities (i.e., some samurai) arrived to displace their reckless peers at just the moment when special abilities seemed to be what were needed.²⁴

On the other hand, Lockwood pointed to the uniqueness of Japanese human resources, aptitudes, and values:

Industrial revolution [and its] tempo reflected the release of indigenous forces long latent in Japan. Similarly, its progress continued to be shaped by national characteristics deeply rooted in Japan’s ancient culture. It found cohesive strength in the amenability of the Japanese [culture] to disciplined organization under acknowledged leaders beyond the family.²⁵

Here, the web is a reflection of a strong esprit de corps among the elite, who shared a common social and cultural background.²⁶

Arguments that combine late development and indigenous cultural values— Lockwood’s story—have constituted an influential tradition shared by many scholars, including Ronald Dore and Murakami Yasusuke.²⁷ A familiar story follows: a particular latent cultural tradition such as groupism (or an IE society) functioned positively to meet the situational imperatives that required late development, and the outcome was a close-knit state-society relationship that continuously and successfully coordinated the flow of resources to meet the changing standards of international efficiency.

The locus classicus of the Gerschenkronian account remains MITI and the Japanese Miracle by Chalmers Johnson. This book provides a brilliant account of the rise of the unique institutions of the Japanese political economy without recourse to indigenous cultures.²⁸ Johnson’s account is primarily historical: (1) situational imperatives (depression and geopolitical strain since the late 1920s) created a contingent power equilibrium that required the state to play a crucial role in overcoming the depression and war; (2) under subsequent quasi-revolutionary situations (including immediate postwar chaos), the state ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright
• Contents
• List of tables
• Acknowledgments
• 1. Introduction
• 2. Constructing a national economy
• 3. Confronting a globalizing economy
• 4. Politics for protection: petroleum
• 5. Politics for protection: automobiles
• 6. Industry governing Japanese style
• 7. Conclusion: theoretical and present-day implications
• Notes
• Bibliography
• Index