Academic journal article Independent Review

Is China the Next Japan?

Academic journal article Independent Review

Is China the Next Japan?

Article excerpt

Twenty-five years after a major financial crisis, Japan's powerful export-based economy has become a mere shadow of its earlier status as a financial superpower. Though different in many ways, China has followed Japan's economic development model and may now too be facing a financial crisis like Japan's that it may not be able to control and that could diminish its ability to become the next Asian superpower.

In 1970, American futurologist Herman Kahn published The Emerging Japanese Superstate, which summed up informed opinion on Japan twenty-five years after World War II. The war had been a disaster for Japan, but it purified the country of all of its bushido-ámcn prewar notions to allow a new Japan to emerge. The seven-year U.S. occupation forced a constitution and other democratic institutions on the new government that were accepted with little understanding or complaint. But beyond the American influence, the struggling new Japanese government understood that it had to create an economy that could grow the country out of the extreme poverty and hardship into which it had been plunged. After a relatively slow initial recovery, Japan's economy picked up during the Korean War (1950-53) when United Nations military forces were supplied from Japan (Dower 1999, 536-40).

After the war, Japan would create a protected market economy dominated by a collective triumvirate of industry, banks, and powerful government ministries, soon called "Japan Inc." by foreign observers. The mission of Japan Inc. was to create the maximum amount of growth the economy could achieve by manufacturing for export. The exports were initially low-technology goods manufactured in great quantity at low cost. The system worked extremely well. The Ministry of International Trade and Industry (MITI, reorganized as the Ministry of Economy, Trade, and Industry in 2001) would determine what the industrial focus would be. The Keidanren (Federation of Economic Organizations, or council of big business organizations) would cooperate to carry out MITI's guidelines. Labor unions would agree to accept an annual Shunto, or Spring Offensive, to set wages for all. The Ministry of Finance would ensure that banks, closely supervised but highly leveraged, made funds available to the large manufacturers, which were reconstituted from the powerful prewar zaibatsus into mutually supportive keiretsus (successor affinity groups, such as Mitsubishi or Sumitomo), to expand production capacity. "Trading companies" within keiretsus would acquire the goods and sell them aggressively in overseas markets.

All of this was intended to maximize employment and create cash flow sufficient to restore a normal society in Japan. Though the system Japan installed was essentially a capitalist one, not unlike its prewar industrialized predecessor, there was very little private capital left after the war, profits were modest, and social claims on them were considerable. Capital for investment had to be generated from a high householdsavings rate.

The new economic and financial system, launched under close American supervision, had some socialist characteristics, but only some. There was concern about Communist ideology spreading to Japan, as it had in the immediate postwar years in Europe, and the concern resulted in land reforms and other measures to provide government support for the common man, but the emphasis was always on creating a highly functional, democratic, free-market system that lifted everyone up.

A key condition of the Japan Inc. arrangement was that fair wages had to flow to workers and corporate distributions had to take a backseat to reinvestment for growth. The bureaucrats were smart and efficient, but they were also part of a new democratic political system that needed and received unquestioned public support.

A Miracle Economy

By 1970, Japan Inc. was an unqualified success. Japan's economic growth rate averaged 9.6 percent from 1946 to 1970 (Maddison 2003), and a stable middle class had emerged. …

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