Of MITI and Men: Japan's Industrial Policy Sets the Standard, but Can the United States Do Better?

By Luttwak, Edward N. | The Washington Monthly, December 1992 | Go to article overview

Of MITI and Men: Japan's Industrial Policy Sets the Standard, but Can the United States Do Better?


Luttwak, Edward N., The Washington Monthly


For several years now, industrial policy has been hotly debated among experts in and out of Washington while attracting little attention from the mass media. Its proponents argue that government could and should assist the progress of American industry, now facing foreign competitors greatly helped by their own governments. Opponents insist that any government interference with the free workings of market forces can only be wasteful and counterproductive. Now that we are done with the presidential election, the time has come to raise this subterranean debate to the surface.

The case for industrial policy can be summarized in one word: Japan. Or, more fully, the success of the Japanese bureaucracy lies in its nurturing of highly successful new industries by funding research and development of innovative products and production techniques; by inducing banks to lend them long-term investment capital at low interest, allowing them to acquire efficient large-scale plants early on; making tax concessions in favored sectors, as long as they use the extra money for investment rather than high executive salaries or dividends; and by restricting or prohibiting imports to assure high profit margins on domestic sales, thereby enabling companies to subsidize their own exports (this is Japan's product-improved alternative to "dumping," i.e., selling abroad below cost, which is not a violation of international trading norms).

Further measures on behalf of particular industries have included government purchasing regardless of price or performance (critical to the growth of Japan's mainframe computer industry), manipulation of import restrictions to force foreign (mostly U.S.) companies to hand over technology to Japanese companies in exchange for access to the Japanese market (much used to nurture the petrochemical industry), and the behind-the-scenes organization of "voluntary" mergers to consolidate industries that bureaucrats considered too fragmented to compete effectively in world markets. But consolidation never reaches the point of monopoly. In fact, it is one of the basic principles of Japan's industrial policy that precisely because they are collectively protected, the different enterprises within each industry must remain fiercely competitive with each other, lest they become sluggish and self-indulgent.

From the introduction of government-sponsored iron mills, foundries, textile mills, and shipyards at the start of Japan's modernization in the 1870s, to the creation of the computer industry out of nothing in the 1960s, to the present encouragement of software, nanotechnology, and advanced materials, Japan's entire development has owed much to its highly original industrial policy. The Japanese did not invent government support of industry (it was already old hat in 18th-century France), but Japan has led the way in systematically promoting new industries while phasing out decaying ones. American proponents of industrial policy see no reason why the United States should not adopt Japan's winning formula, which is now widely imitated in both Asia and Europe.

The case against industrial policy can also be summarized in one word: bureaucracy. This view holds that government officials cannot outperform the free market in shaping the development of industry and would probably damage it instead with waste, fraud, and mismanagement. It is certainly true that the largely corrupt and inefficient bureaucracies of most countries are not to be trusted with anything so delicate as industrial policy. Even in ordinary state functions, from the issue of obligatory documents to the operation of schools, hospitals, prisons, or the armed forces, plain incompetence is almost a norm, and so is corruption. It follows that virtually any form of industrial policy is bound to be turned into a further way of looting the public treasury or exploiting hapless consumers or both.

Thus state funding for industrial investment would mostly go to sham enterprises providing false or inflated plant and equipment invoices, rather than pay for any actual plant or actual equipment. …

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