Why Japan succeeded post WW2
In this podcast, I look at a paper by Professor H. Wade titled "Escaping the Periphery".
Few non-western countries have reached the general prosperity of Western Europe and North America in the past two centuries ...The clearest exceptions are ... Japan, Taiwan, and South Korea ... How did they do it?
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Transcript
And now I wanted to go final topic and I wasn't sure if I was gonna get to this,
Speaker:but looks like again, so this is to do with Japan and I found this article
Speaker:which was by a guy called robert H.
Speaker:Wade.
Speaker:He is a professor of global political economy at the London School of Economics.
Speaker:The New Zealand citizen worked at the instituted development
Speaker:studies at Sussex University.
Speaker:He worked at the World Bank, he worked at the US Congress.
Speaker:He was a Prince University and at MIT and around university.
Speaker:So he's got some credentials in in economics and political economy.
Speaker:So this is looking at Japan in particular, and Taiwan and Korea.
Speaker:And why did those countries end up becoming developed, prosperous first world
Speaker:countries when other countries did not?
Speaker:Of course the General IMF World Bank policy is with, say, developing
Speaker:countries and let's just typically think South America is, they would
Speaker:say to them, you guys are in trouble.
Speaker:We gave you a loan, you haven't repaid it.
Speaker:What you've gotta do is sell off your public infrastructure
Speaker:to multinational corporations.
Speaker:You've gotta let them come in and buy all of your good stuff and you can then
Speaker:use that money to pay off your debt.
Speaker:You have to reduce your social services.
Speaker:And you you know, you cannot put in any sort of trade barriers.
Speaker:So you might want to start a manufacturing sector, but you can't
Speaker:put in a trade barrier to protect that industry in its infancy while
Speaker:it's trying to get up and running.
Speaker:So that makes it impossible for these countries to develop industrial
Speaker:industries of manufacturing or high tech because you can't just go from zero to
Speaker:competing against the existing players.
Speaker:You need some protection.
Speaker:And the World Bank and the IMF just don't allow these countries to do it.
Speaker:They ban them from protecting these industries, and that's the
Speaker:secret to developing an industry.
Speaker:And so anyway, the question is, How did Japan, Taiwan, South Korea end up and
Speaker:to some extent also Singapore Hong Kong, how did these countries break through and
Speaker:and actually manage to become successful?
Speaker:Cheap, wasn't it at the time?
Speaker:So, Well, it's a combination of things, Joan, but the, the narrative that would
Speaker:like they'd like to tell you is that it was liberal minded, free enterprise
Speaker:that allowed these countries to succeed.
Speaker:Cheap labor, didn't spend much relied on cheap labor and
Speaker:therefore undercut everybody.
Speaker:To build up an industry is, is kind of, you know, one story for example,
Speaker:but that's not what happened, . So in this article, and again, it'll be
Speaker:in the show notes for the patrons.
Speaker:How did they do it?
Speaker:So I've highlighted bits from this article, which is gonna
Speaker:take me 10 or 15 minutes to go through and paint this picture.
Speaker:So abstract.
Speaker:Few non-western countries have reached the general prosperity of
Speaker:Western Europe and North America.
Speaker:Just about all of the countries which were in the periphery in
Speaker:1960, remain in the periphery today.
Speaker:The clearest exceptions are in capitalist Northeast Asia, namely
Speaker:Japan, Taiwan, and South Korea.
Speaker:And you could add Singapore and Hong Kong to that.
Speaker:So how did they escape the periphery?
Speaker:How did they do it?
Speaker:And he says here, the Northeast Asian countries remain among a still smaller
Speaker:set of non-Western countries, which have developed mostly indigenously
Speaker:owned firms across a broad range of Mabel, major global industries.
Speaker:They're able to act as first tier suppliers to Western multinationals.
Speaker:So in these countries, they're locally owned and operated
Speaker:and they're able to compete.
Speaker:And the types of industries that they're in includes chemicals, petrochemicals,
Speaker:electronics, steel ship building, cars, car parts, and more recently, biotech,
Speaker:advanced semiconductors, nanotechnology, and even space exploration.
Speaker:So these countries are located some 9,000 kilometers across the Pacific
Speaker:from the world's biggest and most innovative market, mainly the usa.
Speaker:While next door to the usa, Mexico has languished, nowhere near
Speaker:achieving what these countries did.
Speaker:It did.
Speaker:So how exceptional is the economic performance?
Speaker:How many non-Western countries have reached the general level of
Speaker:prosperity of Western Europe and North America in the past two centuries?
Speaker:And in this article, he says, fewer than 10 countries have managed to do it.
Speaker:And there was a World Bank study in 2013 that confirmed this conclusion.
Speaker:It identified 101 countries in 1960 as middle income, and found
Speaker:that of those only 13 reached high income almost five decades later.
Speaker:So 101 countries only 13 managed to do it.
Speaker:And there's a table there, which shows the average income of countries in 1970 as a
Speaker:percentage of US average income, and then it shows their average income in 2010.
Speaker:So 40 years later, again, as a percentage of.
Speaker:US income.
Speaker:So take for example, Taiwan.
Speaker:In 1970, the average income in Taiwan was 20% of US average income.
Speaker:And 40 years later, 40 years later, Taiwanese reached the point where the
Speaker:average income is 80% of the US income.
Speaker:So it's an amazing performance.
Speaker:Japan was 50%, now it's 70%.
Speaker:South Korea was 10% in 1970 10% of the American wage, average wage.
Speaker:And then 40 years later, the average South Korean was 70% of the average American.
Speaker:Whereas you look at countries like India, it was 5%, and now it's only 10%.
Speaker:Brazil was 15, now only 30.
Speaker:So that's the sort of.
Speaker:Progress that they're talking about.
Speaker:And this article says that there's seeing to be some sort of glass
Speaker:ceiling or some trap that stops countries progressing through.
Speaker:And the next section discusses the causes proposed by analysts writing in mainstream
Speaker:economics, often called neoliberalism.
Speaker:So by the 1980s when Northeast Asia's rise began to attract attention,
Speaker:most economists viewed their subject through the lens of neoliberalism.
Speaker:So they looked at these successful countries, most economists, and
Speaker:said, oh, that's the free market working in these countries.
Speaker:So neo-liberal philosophy says that the market is the best
Speaker:institution for growth and liberty.
Speaker:Even where there are market failures, you're best just leaving
Speaker:things untreated because the cost of correcting them through state
Speaker:intervention is is dangerous.
Speaker:And they look for a maximum degree of openness to the international economy.
Speaker:And maximum integration.
Speaker:And the idea that governments would curb competition in the interest of helping
Speaker:some firms and industries while they're sort of, getting themselves organized.
Speaker:That's not part of the formula.
Speaker:So the World Banks 1993 book called the East Asian Miracle proves this thinking.
Speaker:It examined the causes of success in eight high performing Asian
Speaker:economies, and the book argues that openness to international trade.
Speaker:Based on largely neutral incentives was the critical factor in their growth.
Speaker:Basically saying cuz they were open to trade, that's why they succeeded.
Speaker:And and this sort of confirmed the whole Adam Smith neoliberal argument
Speaker:and and, and basically the world bank promoting market liberalization pointing
Speaker:to these countries as success stories.
Speaker:But according to this paper, the writer says that's not the case.
Speaker:And it's a far more interesting answer than that.
Speaker:And it turns out that the answer is closely related to geopolitics of
Speaker:Northeast Asia and the United States.
Speaker:Beginning in the late 19th century there were three orders in East Asia.
Speaker:So we had Japan.
Speaker:With its basically Japan colonized career in Taiwan.
Speaker:And the Japanese colonial government treated career in Taiwan as offshore
Speaker:farms, mines and industries, and they were closely integrated.
Speaker:So by 1940, somewhere between 50 and 70% of Korean and Taiwanese
Speaker:children were in elementary school.
Speaker:And all three countries were more homogenous in terms of ethnicity and
Speaker:religion than most other countries.
Speaker:So that's interesting.
Speaker:For starters that Japan colonized Korea and Taiwan and basically
Speaker:Japanese, them and their cultures became very close and education was
Speaker:a big part of what was going on.
Speaker:Second area was Hong Kong and Southeast Asia, so we had the
Speaker:colonialists transformed the economy except for Hong Kong into commodity
Speaker:production for western markets.
Speaker:So thinking sort of Indonesia for example, we had the Dutch had colonized
Speaker:Indonesia and basically market Yes.
Speaker:And plantations, rubber, rubber, stuff like that.
Speaker:Big landlords an emphasis on single crops and, and a Landon class.
Speaker:So in those sorts of countries colonial governments was more passive.
Speaker:So the Dutch were passive in the sense of accepting the incumbent landed elites
Speaker:and allowing them to just do what they wanted to do provided the plantations
Speaker:were operating so, In those countries.
Speaker:By 1940 only about 2% of children were in elementary school, in the
Speaker:French colony of Vietnam, for example.
Speaker:So whereas Japan, when it colonized career in Taiwan, had 50 to 70%
Speaker:of children in elementary school, France, when had colonized.
Speaker:Vietnam only had about 2% of children in elementary school.
Speaker:And then the third area, so we had Japan with Korea and Taiwan.
Speaker:That's one area.
Speaker:We had these sort of colonies with plantations.
Speaker:That was the second area.
Speaker:And then China, different case altogether.
Speaker:, so turning back to Japan, Japan was forced in the mid 19th century
Speaker:to do stuff for some 250 years before the mid 19th century.
Speaker:Japanese rulers.
Speaker:Isolated the country.
Speaker:And then in 1853, Commodor Perry of the US Navy sailed into Edo,
Speaker:which is now Tokyo harbor with a fleet of warships and demanded that
Speaker:Japan open up to American commerce.
Speaker:Nothing's changed.
Speaker:1853.
Speaker:Nearly 200 years later, they're still doing it sailed.
Speaker:He learned it from the British.
Speaker:Come on.
Speaker:Yeah.
Speaker:Sailed in and said except the Americans didn't wanna occupy,
Speaker:they just wanted companies to operate and just wanted free trade.
Speaker:Yeah.
Speaker:So he sailed into the harbor in 1853 and demanded that the Japanese
Speaker:open up their economy, so his visits send shockwaves through the Japanese
Speaker:country's leaders who fear that America might take Japan as a colony.
Speaker:Because they had just watched.
Speaker:What had happened to China and thought, well, don't want that
Speaker:happening to us, are we next?
Speaker:So the Japanese government responded with wholesale reforms to create a
Speaker:centralized state and national identity as the basis for a strong military.
Speaker:And they had this thing which was, if we take the initiative, we can dominate.
Speaker:If we do not, we will be dominated.
Speaker:So they saw the writing on the wall and got their act together.
Speaker:So the meja restoration of 1868 launched a frenzy of industrialization
Speaker:and militarization that lasted several decades, and they had a real
Speaker:developmental mindset that emerged.
Speaker:So there was a big push in state capacity.
Speaker:They sent teams of officials around the western world to investigate ways
Speaker:to organize a modern society such as tax system, post office railroad.
Speaker:Army, parliament, judiciary, and the like.
Speaker:And then they implemented the best models that they could at home.
Speaker:So Japan militarized so fast and effectively that in 18
Speaker:94, 18 95, its Navy defeated.
Speaker:China's and Aade later defeated rushes.
Speaker:And this sent a shockwave through Western governments because for the
Speaker:first time in the modern era, an Asian state defeated a European state.
Speaker:So Japan went on to become the first non-Western country to catch
Speaker:up with the West in broad measures of production structure, military
Speaker:strength, and mass living conditions.
Speaker:So a combination there of, of culture and also pressing need, having seen
Speaker:what had happened to China and not wanting to succumb to the same fate.
Speaker:After the war, Japan continued to be ruled by this developmental mindset,
Speaker:which had been sort of institutionalized during the maje, the mija restoration
Speaker:and in the buildup to the war.
Speaker:And a similar mindset was also institutionalized in Korea and Taiwan.
Speaker:Just read on here.
Speaker:So basically also the developmental mindset emerged from the combination of
Speaker:a few factors, lack of natural resources.
Speaker:So above all, land and energy, having actual a lot of natural resources is a,
Speaker:can be a bad thing, Joe, because one, you just get lazy in that you rely.
Speaker:The natural resources thinking of a country maybe in present world that
Speaker:has abundant natural resources and just is fairly lazy as a result and allows
Speaker:that industry to essentially dominate in the Yes, bringing the wealth.
Speaker:And you don't bother doing anything with your other manufacturing industries cuz
Speaker:you think, ah, why should we bother?
Speaker:We can just dig stuff up.
Speaker:Mm-hmm.
Speaker:, well, so Japan wasn't able to just dig stuff up.
Speaker:The other disadvantage of that is if you do have stuff that can
Speaker:be dug up, countries like America want to take possession of you
Speaker:and take the stuff from you.
Speaker:So if you don't have it, then they don't want to take it off you.
Speaker:Is a, is another sort of benefit of it.
Speaker:So it forces you to work on creating an industrial developmental capacity and
Speaker:Places like America are not tempted to invade you and, and take your minerals.
Speaker:So there's that aspect.
Speaker:They also had an abundance of people, I was
Speaker:gonna say the Americans prefer to invade, stick in a puppet regime.
Speaker:Yes.
Speaker:And then take the stuff.
Speaker:Indeed.
Speaker:So they had that in their favor.
Speaker:They had to reconstruct from the war, but they weren't starting from zero.
Speaker:They had actually built up a, a civilization.
Speaker:And so they just had to reconstruct.
Speaker:They knew how to do it.
Speaker:And they had lots of American money.
Speaker:Yes.
Speaker:And, and the well, and the re the other thing that they had in their
Speaker:favor was communist China and Russia on the doorstep and the American fear.
Speaker:That communist China and Russia would start to take over the world.
Speaker:So they wanted some friendly countries.
Speaker:There is a bowl walk against the yellow peril, if you like from
Speaker:communist China and from from Russia.
Speaker:American
Speaker:protector for many years after the war anyway, wasn't
Speaker:it?
Speaker:Yes.
Speaker:So we're gonna get into the detail of that.
Speaker:So there's a few advantages for Japan in that it was already industrial
Speaker:develop, developmental via culture.
Speaker:It was spooked by what happened to China.
Speaker:So it ramped up, it lost the war, but it had no natural resources.
Speaker:So it's forced to rely on its people.
Speaker:Had a large population that was well educated and it It had the benefit
Speaker:of having a nearby threat so that the US would want to bolster it as
Speaker:a counter to that communist threat.
Speaker:Right.
Speaker:Just turning briefly to Taiwan the native Taiwanese, most of whose ancestors
Speaker:had come from the mainland two or more centuries before and had experienced
Speaker:50 years of total separation from the mainland under Japanese rule, saw the
Speaker:chanka as foreigners and vice versa.
Speaker:So they were very Japanese by that point, the Taiwanese.
Speaker:And in South Korea they had a tightly disciplined military dictatorship.
Speaker:They used that external threat of communism North
Speaker:Korea as its justification.
Speaker:And the the ruler park, 1961.
Speaker:He had been educated in Japanese military academy, served in
Speaker:the Japanese army in Manura.
Speaker:He had studied the history of the Meja restoration and the role of the
Speaker:state in Japan's industrialization.
Speaker:And so he was a chief architect and driving force of career's development
Speaker:until his assassination in 1979.
Speaker:So that was from 61 to 79.
Speaker:He's an interesting, fun fact.
Speaker:Soon after he took power, he arrested leading businessmen and threatened
Speaker:them with jail for corruption unless they left for the United States
Speaker:and returned with export orders.
Speaker:That's one way of doing it, isn't it?
Speaker:I, I make a living as a sales rep.
Speaker:I tell you that, that that would really focus the mind on getting some orders.
Speaker:Mm-hmm.
Speaker:The dominant political philosophies of these countries emphasized
Speaker:order and nationalism more than liberty and free enterprise.
Speaker:So where the West likes to paint these countries as lovers of
Speaker:liberty and free enterprise.
Speaker:In fact, culturally that cra Yeah.
Speaker:Having known people who grew up in Singapore, that
Speaker:was very much an autocracy.
Speaker:Indeed.
Speaker:So before the second World War, you, United States had little presence in
Speaker:Northeast Asia, but after the war, containment of communism became a
Speaker:top priority and the US saw China and North Korea as a severe threat
Speaker:to the US sphere of influence.
Speaker:So the US poured in assistance.
Speaker:To its three Asian allies providing troops, economic advisors, political
Speaker:advisors, teachers accompanied by large financial transfers, essentially,
Speaker:dear listener, because of the threat of communist China and North Korea,
Speaker:the Americans pretty much did a textbook of of how to help countries
Speaker:out and make them successful.
Speaker:On the downside, they did send them their Mormons.
Speaker:Yes.
Speaker:Did they send them the Mormons or did the Mormons just sneak in?
Speaker:Oh, the Mormons went anyway.
Speaker:Yeah, it's like rats and sailing chip.
Speaker:They're just there anyway US advisors helped construct centralized top
Speaker:level agencies, the plan, the use of various scarce capital and helped
Speaker:construct an effective civil service.
Speaker:During the American occupation of Japan from 45 to 52, the Japanese government
Speaker:instituted the most restrictive foreign trade and foreign exchange control
Speaker:system ever devised by a major free nation and did it with American blessing.
Speaker:Okay, so in the seven years, immediately following the war, Japan had incredibly
Speaker:restrictive foreign trade protectionism.
Speaker:Exactly.
Speaker:The country's renaissance was helped much by the Korean War as well because
Speaker:Japan was the main source of American procurements for the Korean War.
Speaker:And the Japanese Prime Minister at the time later declared that the
Speaker:war was a gift of the gods because of the business that it generated.
Speaker:Incidentally, it was the Korean War that that basically emptied
Speaker:the US government's coffers.
Speaker:And sent it into deficit where it had to break with the gold standard
Speaker:because it was the money spent on the Korean War that finally broke
Speaker:the back of, of the American budget.
Speaker:But I digress.
Speaker:Okay.
Speaker:US government gave strong backing for land distribution in all three countries,
Speaker:meaning they helped with land reforms that enabled people to get a piece of
Speaker:land, ordinary people, and they provided support for industrialization by curbing
Speaker:the landed classes and strengthening peasant support for the state so that the
Speaker:peasant population, the rural population, felt good about what was happening
Speaker:and didn't wanna start a revolution.
Speaker:So they made it clear the US that they would not sustain this indefinitely and.
Speaker:So the main periods of intense US involvement were basically from sort of
Speaker:1948 to around 19 six, the mid 1960s.
Speaker:And so thanks to the threat of communist state expansion US wanted
Speaker:to protect its sphere of influence.
Speaker:It transferred huge resources to the Asian Japanese, Taiwan, Korean economies,
Speaker:and it allowed provide lots in.
Speaker:It allowed these countries to run sustained account deficits that would
Speaker:never allow Latin America to run.
Speaker:And also, It gave the aids and loans in a form that did not dilute national
Speaker:ownership of the industrial sector.
Speaker:So the Japanese, Korean, and Taiwanese people were allowed to
Speaker:actually own these enterprises.
Speaker:And again, that's not what was allowed in the global south, where multinational
Speaker:country companies would come in and buy and own what had previously
Speaker:been owned by the local population.
Speaker:Right?
Speaker:And they also provided a market for all these goods that were being manufactured.
Speaker:So compare that to the Philippines, the US saw no existential threat.
Speaker:And they in terms of being worried about communists, they just relied
Speaker:on a counter insurgent strategy.
Speaker:They didn't try and do any land reform and didn't do anything like the
Speaker:assistance that it did in Northeast Asia.
Speaker:That's why a place like the Philippines got stuck.
Speaker:And basically, you know, supported the Filipino government in its efforts
Speaker:to provide agricultural goods and raw materials, but not industrial goods.
Speaker:And cuz it just wasn't worried about the threat, didn't need the
Speaker:Philippines to be a strong country.
Speaker:Let me just see here.
Speaker:I can skip through that part.
Speaker:I think I think I've already said that and.
Speaker:Basically goes on to say that the, the governments in these countries targeted
Speaker:specific sectors and protected industry and encouraged industry, provided
Speaker:support and kept tabs of what industry were doing and set goals for them and
Speaker:said, well, we'll give you this, but you have to achieve these certain goals.
Speaker:And so it was quite a target where they said, we want to develop a
Speaker:certain type of industry and U five comp companies, you are gonna do it.
Speaker:We're gonna keep an eye on you.
Speaker:You are going to create a little a As sort of an industry group, we're
Speaker:gonna provide from the government, a secretary for that group and
Speaker:we're gonna know what's going on.
Speaker:So really strong direction and monitoring by the government where they set targets
Speaker:and planned for these industries at the same time as allowing the individual
Speaker:companies some level of autonomy and market decision making, if you like.
Speaker:So really clever targeting is essentially like targeting with, not
Speaker:like the Russian version of a cost plan where they said exactly every
Speaker:step of the way what you have to do.
Speaker:It was a, a more sensible form of targeting and.
Speaker:Look, the article goes on, but I feel like I've been rabbiting on for long enough,
Speaker:and I'm gonna start repeating bits.
Speaker:The full notes are in the show notes that are given to the patrons.
Speaker:It does go on a fair bit on other things, but essentially that's it, Joe, is that
Speaker:the story of these countries was one of, of heavy state involvement, different
Speaker:inference by the Americans, and support by the Americans rather than crippling.
Speaker:And that's how they managed to break through.
Speaker:Interesting combination of factors.
Speaker:I particularly liked the factor of being unlucky enough to not have resources
Speaker:and unlucky enough to be next door to a communist threat, actually turned out
Speaker:to be lucky things in that it, it was.
Speaker:Stuff that helped trigger the United States to work hard
Speaker:to beef them up properly.
Speaker:Very interesting.
Speaker:Well, I wonder if how
Speaker:much Western Germany was the
Speaker:same.
Speaker:Mm, indeed.
Speaker:Indeed.
Speaker:mean, Japan and
Speaker:Germany, the debt was forgiven.
Speaker:Unlike the first World War, there was reparations indeed.
Speaker:Which they thought even if it didn't led into the poverty, that
Speaker:led to Hitler coming to power.
Speaker:Indeed.
Speaker:Yep.
Speaker:Which is why they
Speaker:forgave and also basically invested heavily to rebuild.
Speaker:Whereas Europe had to repay the debts, the repay the loans for equipment that
Speaker:they use to fight the ze World War.
Speaker:Mm.
Speaker:Now, next week, I think I'll be able to get onto talking about , the plaza record.
Speaker:So things went swimmingly well for Japan until the plaza record.
Speaker:And that was when the US said, hang on a minute, you guys are doing too good.
Speaker:And they changed some stuff.
Speaker:And so was this after
Speaker:the 1980s where they bought up half of America?
Speaker:Yeah, exactly.
Speaker:So next week we'll be the plaza record where the story is not so good for Japan,
Speaker:where in fact the US turns against them.
Speaker:So that'll be next week.