Notes on Japanese Political Economy and Industrial Policy
"MITI and the Japanese Miracle"
As industrial policy gains attention at the federal level, it is worth learning from those who have been pursuing it for a long time and identifying what are the characteristics of systems that enable (or hinder) industrial policy. Japan in particular has pursued a particular kind of economic development strategy that is markedly different from the US’s and Chalmer Johnson’s “MITI and the Japanese Miracle”, originally published in 1982, provides a useful overview of Japan’s long history of industrial policy, with a focus on Japan’s Ministry of International Trade and Industry (MITI). I found this book instructive regarding the particular social-political-culture that contributed to Japan’s industrial strategy and wanted to share some useful contextual excerpts from the book.
Empowering the bureaucracy through talent and agency:
“In Japan, the developmental, strategic quality of economic policy is reflected within the government in the high position of the so-called economic bureaucrats….These official agencies attract the most talented graduates of the best universities in the country, and the positions of higher-level officials in these ministries have been and still are the most prestigious in the society. Although it is influenced by pressure groups and political claimants, the elite bureaucracy of Japan makes most major decisions, drafts virtually all legislation, controls the national budget, and is the source of all major policy innovations in the system. Equally important, upon their retirement, which is usually between the ages of 50 and 55 in Japan, these bureaucrats move from government to powerful positions in private enterprise, banking, the political world, and the numerous public corporations — a direction of elite mobility that is directly opposite to that which prevails in the United States….[where] public service does not normally attract the most capable talent, and national decision-making is dominated by elected members of the professional class, who are usually lawyers, rather than by the bureaucracy. The movement of elites is not from government to the private sector but vice versa, usually through political appointment…the real equivalent of the Japanese MITI in the US is not the Department of Commerce but the Department of Defense, which by its very nature and functions shares MITI’s strategic, goal-oriented outlook.”
Ben Rich’s memoir “Skunk Works” contains multiple anecdotes that show how the DoD socialized their procurement process not just for quality or price but to ensure the solvency multiple competitors and suppliers, a kind of proto-american form of industrial policy. [page 119][page 156]
One of the most interesting cultural artifacts of Japanese bureaucrats and elite leaders is the gakubatsu or “cliques of university classmates”, which are the strongest social cohort in the ministries and in Japanese public elite (pages 55-82):
The civil service exam is the gatekeeper to government life, with a punishing 2.5% pass rate and is usually taken immediately upon graduation from university. The vas majority of those who pass are from Tokyo University (which I suppose makes it like Japan’s Oxford). “This identification with an entering cohort becomes the bureaucrat’s most important attribute during his entire bureaucratic life, and it follows him long after he leaves government service” (pages 57-58).
“For example, as an aged man and a former prime minister, Kishi Nobusuke still habitually referred to Yoshino Shinji as his sempai (senior, those of earlier class). More poignantly, when Oba Tetsuo, a former official of the Transportation Ministry…was hauled into the Diet to testify as a witness in the investigation of the Lockheed corruption case (1976), the press wrote that he shook with barely controlled anger under questioning…the Diet member interrogating him was his former junior at the Transportation Ministry and he was overcome by the impudence of a junior questioning a senior” (page 59)
Promotions and retirement is also strictly in accordance with class cohort: “The final weeding out comes at the vice-ministerial level, when one man from one class is chosen by the outgoing vice-minister as his own replacement and when all the new vice-minister’s classmates must resign to insure that he has absolute seniority in the ministry. Competition in the maneuvering for high positions in a ministry normally occurs among classes and not individuals…Even if not formally organized as a club, a class will sometimes meet and caucus as a body during periods of stress within a ministry in order to agree on common policies” (page 65). The corollary to this is that because not every class can have a vice-minister (one of the top positions within a ministry department), there is intense competition and political maneuvering between classes to place someone in their cohort at the top.
Not only is there intense camaraderie and competition between cohorts, there is also intense political maneuvering between ministries (“sectionalism”):
The bureaucrat’s mindset within a ministry is variously described by other sources as “officials of the various ministries first and only second are they servants of the nation…territorial consciousness…gangster-like struggles over jurisdiction throughout the state bureaucracy” (page 74)
“Because of ministerial rivalry, in foreign affairs Japan can never create a monolithic negotiation position - which is not necessarily a bad thing. [Foreign Affairs, Finance, and MITI] maintain its own overseas communication network…Japan actually has three foreign services, each of them with different policies and each represented overseas.” (page 75)
“The old-line ministries engage in a relentless contest to capture and control the more vulnerable agencies of the government through the sending of detaches…
The case of the Economic Planning Agency (EPA) has been the most widely studied… it has come to be known as a ‘colony agency’ or a ‘branch store of MITI’.” (page 76)
This inter-agency competition, while seemingly inefficient, acts as a kind of check-and-balance on the system. Given the immense power that resides in the bureaucracy, competition prevents the state from bringing its full political force to bear, while maintaining a strong esprit de corps among bureaucrats within a ministry.
Generalizable lessons of industrial policy and competent bureaucracy:
“The first element of the model is the existence of a small, inexpensive, but elite bureaucracy staffed by the best managerial talent available in the system. The quality of this bureaucracy should be measured not so much by the salaries it can command as by its excellence as demonstrated academically and competitively, preferably in the best schools of public policy and management. Part of the bureaucracy should be recruited from among engineers and technicians because of the nature of the tasks it is to perform, but the majority should be generalists in the formulation and implementation of public policy. They should be educated in law and economics, but it would be preferable if they were not professional lawyers or economists, since as a general rule professionals make poor organization men. The term that best describes what we are looking for here is not professionals, civil servants, or experts, but managers. They should be rotated frequently throughout the economic service and retire early, no later than age 55.
The duties of this bureaucracy would be, first, to identify and choose the industries to be developed (industrial structure policy); second, to identify and choose the best means of rapidly developing the chosen industries (industrial rationalization policy); and third, to supervise competition in the designated strategic sectors in order to guarantee their economic health and effectiveness….”
This book was written in 1982 so it may be a bit out of date with current thinking on ideal program managers. While I think a drive for talent and clearly set expectations for retirement are generalizable principles, I’m less convinced on the emphasis of law and economics over technical skills. In an increasingly technology-driven world, people who desire to shape development need to understand technology (and history, policy, law, finance).
“Perhaps the most important market-conforming method of intervention is administrative guidance. This power, which amounts to an allocation of discretionary and unsupervised authority to the bureaucracy, is obviously open to abuse…[but] it is necessary to avoid overly detailed laws that, by their very nature, are never detailed enough to cover all contingencies and yet, because of their detail, put a strait jacket on creative administration. One of the great strengths of Japanese industrial policy is its ability to deal with discrete complex situations without first having to find or enact a law that covers the situation. Highly detailed statues serve the interests primarily of lawyers, not of development. The Japanese political economy is strikingly free of lawyers; many of the functions performed by lawyers in other societies are performed in Japan by bureaucrats using administrative guidance.”
Japan’s legislature, known as the Diet, is portrayed by Johnson as essentially subservient to the state ministries, which themselves are not exactly equivalent to US federal departments, as the ministry heads don’t really answer to the prime minister either. (note: LDP is Japan’s ruling political party)
“Cabinet bills originate and are drafted exclusively within the ministries. They are then passed to the LDP for its approval and introduction in the Diet. As a matter of routine, ministerial officials are also present in the Diet to explain their legislation and answer questions.
Genuine deliberation on laws takes place within and among the ministries before they are sent to the cabinet, and civilians do play some role. A kind of ministry-dominated quasi deliberation occurs in the 246 (as of 1975) “deliberation councils” … that are attached to the ministries. These are official standing organs created by a minister and composed of civilian experts selected by him to inquire into and discuss policies and proposed legislation…To the extent that laws are scrutinized and discussed at all in Japan by persons outside the bureaucracy, it is done in the councils. Even such critical matters for a parliament as tax and tariff laws are merely rubber-stamped by the Diet after having been considered by the deliberation councils.”
What role does the Diet play then?
“…the Japanese Diet is not a ‘working parliament’ in Weber’s sense, ‘one which supervises the administration by continuously sharing in its work.’ The most important work of the government is done elsewhere and is only ratified in the Diet. As we have already stressed, the Diet’s dependent relationship with the bureaucracy originated in the prewar structure….Many party politicians themselves accept the orthodoxy of a vertical relationship between the state’s activities and their own activites. ‘They tend,’ writes Campbell, ‘to perceive voters as animated almost solely by particularistic, pork-barrel desires rather than by concern over issues of broad social policy.’
Although Japan’s fused relationship between the executive and legislative branches may be disappointing…it has some hidden advantages. In the postwar world the Diet has replaced the Imperial institution in the role of what Titus has called ‘the supreme ratifier’, the agency that legitimates decisions taken elsewhere. Like the emperor under the Meiji Constitution, the Diet is the public locus of sovereignty, but the same discrepancy that existed earlier between authority and power is still maintained…
This puppet Diet, working through its LDP majority, has nevertheless served as a mediator between the state and society, forcing the state to accommodate those interests that could not be ignored - agriculture and medium and smaller enterprises for example - and, on occasion, requiring the state to change course in response to serious problems such as pollution. At the same time, it has held off or forced compromises from those groups whose claims might interfere with the development program.”
How Johnson perceives the role of a “hands-off” legislature in enabling effective state bureaucracy:
“The second element of the model is a political system in which the bureaucracy is given sufficient scope to take initiative and operate effectively. This means, concretely, that the legislative and judicial branches of government must be restricted to ‘safety valve’ functions. These two branches of government must stand ready to intervene in the work of the bureaucracy and to restrain it when it has gone too far (which it undoubtedly will do no various occasions), but their more important overall function is to fend off the numerous interest groups in the society, which if catered to would distort the priorities of the developmental state…A non-japanese example of the kind of relationship we are looking for would be something like the American legislative branch’s relationship to the wartime Manhattan Project or to the postwar nuclear submarine development program. The political system of the developmental state covertly separates reigning and ruling: the politicians reign and the bureaucrats rule. But it must be understood that the bureaucrats cannot rule effectively if the reigning politicians fail to perform their positive tasks, above all, to create space for bureaucratic initiative unconstrained by political power.”
In the introduction, Johnson discusses the multiple western approaches and to explaining the “Japanese Miracle” and in them, you can hear echos of today’s analysis of China.
projectionists: “are writers who project onto the Japanese case Western…concepts, problems, and norms of economic behavior…This type of work is not so much aimed at explaining the Japanese case…as it is as at revealing home-country failings in light of Japan’s achievements” (pages 6-7)
“the economic miracle occurred because the Japanese possess a unique, culturally derived capacity to cooperate with each other….The most important contribution of the culture to economic life is said to be Japan’s famous "consensus", meaning virtual agreement among government, ruling political party, leaders of industry, and people on the primary of economic objectives for the society as a whole…My reservations about the value of this explanation are basically that it is overgeneralized and tends to cut off rather than advance serious research…Positing some "special capacity to cooperate" as an irreducible Japanese cultural trait leads inquiry away from the question of why Japanese cooperate when they do…and away from the probability that this cooperation can be, and on occasion has been, quite deliberately engineered by the government and others.”
Part of the rebuttal to the free-market school of thought that says there was no economic “miracle”:
“Sahashi Shigeru, former vice-minister of MITI, asserts that the government is responsible for the economy as a whole and concludes "It is an utterly self-centered businessman’s point of view to think that the government should be concerned with providing only a favorable environment for industries without telling them what to do."”
Johnson goes on to highlight several important differences in the Japanese economy from the US, including “a budgetary process where appropriations precede authorizations”, a financial system overly dependent on the central bank, which is itself essentially “an operating arm of the Ministry of Finance”, and the lifetime employment system.
Short-term Financial Rewards
“…one of the most powerful social supports for private managers’ cooperation with the government is that Japanese managers enjoy freedom from being judged exclusively in terms of short-term financial performance. Just as the essential spirit of Japanese industrial policy…lay in the search for ways to replace competition with cooperation without a drastic loss in efficiency, the industrial rationalization campaigns sought criteria of good management other than short-term profitability. These included the maintenance of full employment, increased productivity, expansion of market share, cost reduction, and the management of long-term innovation.
Morita Akio, chairman of Sony Corporation, believes that the emphasis on profitability has been a major cause of American industrial decline. He asserts "The annual bonus some American executives receive depends on annual profit, and the executive who knows his firm’s production facilities should be modernized is not likely to make a decision to invest in new equipment if his own income and managerial ability are judged based only on annual profit"…The result is not simply a lack of long-term planning in the US but also exorbitant executive salaries, private corporate aircraft, palatial homes, and other major discrepancies between the rewards of labor and management. In postwar Japan, the living standards of top executives and ordinary factory workers have differed only slightly (Morita observes that the American president of Sony’s US subsidiary makes more in corporate salary than Morita himself receives from Sony). On the other hand, it might be noted that managers in Japan have access to corporate entertainment funds of a size unparalleled in any other economy…
The point is that Japan’s more flexible means of evaluating managers contributes to smoother labor-management relations than in some enterprises and with the government.
This comment around American firms focus on short-term profit and the over financialization of profit is one that has been echoed by EmployAmerica’s report on semiconductors and by Dylan Patel’s scathing (and multi-perspective view) of the US semiconductor industry (this in particular should be required reading for anyone interested in semiconductor policy).
“Above all, the US must learn to forecast and to coordinate the effects of its governmental policies. Agricultural policy has for too long been left outside any integrated economic strategy; commercial and economic representatives have for too long endured second-class status in the State Department’s hierarchy; domestic regulatory actions have for too long been taken without a prior cost-benefit analysis of their economic impact; and a growing legal thicket has for too long replaced goal-oriented strategic thought in economic affairs…It is not clear that the US could ever free such an apparatus from the constraints imposed by congress, the courts, and special interest groups, but if economic mobilization becomes a national priority, then MITI will be an important institution to study and think about.”
A commonly echoed phrase through this section is the prevalence of “old-boy networks”. The strong existance of social networks within ruling elites is something that has been noted as increasingly absent in the US. Lack of elite coordination is something that has been suggested as one of the causes of Trump’s rise.