Sorry for the length.
In reply to Mike Smitka, I agree that Japan might have achieved faster progress on autos via foreign direct investment, but since the whole political purpose of the industrial policy was to secure economic autonomy, there was a drive to have Japanese firms, not foreign ones, play the leading role. In that way, Japan’s development was very different much of the rest of Asia.
My concern here is not to argue whether industrial policy helped or hurt growth, but simply to make it clear that it had a great impact on what companies got to do what, and that the decision-making process was highly political. Industrial policy does not imply the caricature of a unitary, omniscient state, nor unidirectional influence from state to business. The following is excerpted from my 1998 book.
By the 1950s and early 1960s, imported oil had become much cheaper than domestic coal. The heavy industries being promoted by MITI had a great desire to make the switch. And yet, this would mean severe dislocation for several hundred thousand coal miners. In 1959–61, a long and violent strike by a Socialist-led coal miners union coincided with riots over renewal of Japan’s security treaty with the U.S. As a result, for a while, MITI had to reverse its program to promote oil use. In 1955, MITI pushed through a law that restricted the number of oil-fired plants the utilities could build. And this occurred at a time when other branches of MITI were trying to promote a domestic petroleum refinery industry!
MITI’s strongest leverage in forcing the two sides to negotiate was the 1949 Foreign Exchange Law, under which, until as late as 1964, all imports needed MITI approval. At various points, MITI’s price for granting foreign exchange to steelmakers and utilities was their purchase of domestic coal at high prices. Richard Samuels reports: “[In 1961] the electric power industry used [a recent agreement with the Coal Association] to gain additional exemptions from the  Boiler Law so as to build new oil-fired thermal plants.”
In the 1970s and 1980s, while one division of MITI was protecting Japan’s inefficient oil refiners, the petrochemical industry had to lobby another division of MITI for either the right to buy cheaper foreign feedstock or else lower prices for the domestic product.
Sometimes, negotiations and lobbying even determined whether companies could enter a business in the first place. One of the most famous cases was the attempt in 1950 by then-tiny Kawasaki Steel to build Japan’s first modern integrated steel facility. It would produce the kind of steel sheet needed by the emerging auto and consumer electronics industries rather than the heavy plate still produced by Japan’s Big Three: Yawata and Fuji (later to be merged into Nippon Steel) and Nippon Kokkan.
Kawasaki needed huge loans, and at that time, the allocation of credit was not just a market issue but a highly charged matter of policy and politics. Capital was so scarce that the government provided a third of all loans to the steel industry. Even private loans were influenced by politics. Until 1963, the Bank of Japan officially listed industries in order of priority for receiving, or not receiving, funds and exercised unofficial “window guidance” thereafter. MITI had its own priority list for credit allocation. And to complicate matters, so did the Bankers Capital Adjustment Committee of the Federation of Bankers Associations, whose representative sat on MITI’s Industrial Structure Deliberation Council. Kent Calder reports:
[Until 1968] this committee made regular judgments on the major lending decisions of its members—declaring in 1965, for example, that both steel and automobile industry capital investment needed to be stretched out to avoid the emerging dangers of excess capacity [the same recommendation MITI was making at the time —rk].
These different bodies did not always agree. While MITI was partial to the emerging capital-intensive heavy industries, like auto and steel, which would be future earners of valuable foreign exchange, the more cautious BOJ preferred that scarce credit be reserved to light labor-intensive industries like textiles that were current exporters. And sometimes, who received credit had less to do with grand policy than with connections to the right people.
It was in this charged atmosphere that Kawasaki sought the huge funding its plans required. Over at the BOJ, Governor Naoto Ichimada was outraged that upstart Kawasaki wanted to “waste” Japan’s scarce capital. The banks, dependent on BOJ money, were not inclined to defy the powerful Ichimada—not even Kawasaki’s main bank, Dai-Ichi. Moreover, over at MITI, officials close to the entrenched Big Three steelmakers had no desire to see them undercut by new competition from Kawasaki.
Yet, another group at MITI welcomed Kawasaki’s plans, because it would modernize the steel industry as well as promote the emerging auto industry. Another key Kawasaki ally was Finance Minister—and future Prime Minister—Hayato Ikeda, who helped Kawasaki get funding from the securities industry.
Kawasaki Steel eventually gained enough financing from the JDB, the World Bank, and some securities firms to build its plant. It became a huge success. But, given the BOJ’s opposition, only a few private banks participated.
Not all industries functioned in this manner, of course. But enough did to shape the character of the economy throughout the high-growth era, and sometimes beyond. John Haley aptly described this process in an essay aptly entitled “Governance by Negotiation.”
The Oriental Economist Report
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