How did Japan rebuild itself and become an advanced nation? - Bulletin Cafe

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Tuesday, 12 September 2017

How did Japan rebuild itself and become an advanced nation?

"There are four kinds of countries in the world: developed countries, undeveloped countries, Japan and Argentina" - Simon Kuznets.

Even though both Japan and Argentina have fallen out of favor with this quote but it is still one of the best descriptors of the near vertical growth of Japan from 1950 to the late 1970's. The prelude to economic growth in Japan began with land reforms initiated by Wolf Ladejinsky and Hiro Wada under which almost 40 percent of the land in Japan was redistributed and abolishment of Zaibatsu's. Though it was later reversed after the occupation, it helped liberalize the Japanese economy [1]

The next big stimulus came in the form of the Korean War where Japan Japanese industry was developed for providing war supplies to the United Nations forces. 

A Japanese factory post WW II for 'special procurement' by the UN forces in Korea [2] 

Japan capitalized on that reconstruction efforts by exploiting 'two key opportunities of backwardness' as Angus Maddison describes it, the low base which provided for mass employment in reconstruction efforts and the revival of the suspended Meiji Restoration to catch up with the west once again. The main reasons for what spurred Japan's growth are debated a lot on their marginal effectiveness but the most common ones are: 
  1. Socio political stability: After the end of WW II, Japan was highly stable under the SCAP. It is culturally a homogeneous society with no stalled internal rebellions like the Chinese or Korean civil wars. It's literacy rate was an outlier in Asia. Their labor markets had been one of the most stable in the world with strong unions and permanent employment.
  2. Demilitarization: Complete demilitarization helped release a lot of economic surplus that was directly put for nation building. This was not the first time that demilitarization had been used to boost the economy though. The Japanese had used a similar strategy during the Meiji restoration by breaking up the Tokugawa military. This break up released hundreds of military personnel, engineers, scientists as well as normal workers employed by military factories. 

    Masaru Ibuka and Akio Morita, co-founders of Sony were both Naval Engineers in the Japanese Navy [3]

    According to Angus Maddison, Japanese per capita GDP increased by 8.3 percent every year from 1956 when the demilitarization was complete till 1973.
  3. Extremely high labor productivity: This is an extension of point 2. Military personnel and people employed by the military provided Japan with one of the most disciplined workforces ever created. Japan had a literacy rate comparable to Germany and years ahead of other Asian countries and the intensive nature of rice cropping, the dominant occupation made sure the Japanese were used to working long hours. The high literacy rate boosted labor productivity and competitiveness of the Japanese economy.   

    This had an enormous impact in facilitating economic catch-up. I visited Japan for a month in 1961—the year of Jimmu prosperity when GDP rose 1 per cent a month. I visited the Sony factory founded by Akio Morita and Masaru Ibuka (ex-naval engineers). It produced simple transistor radios,the foremen had PhDs in physics and all the operatives working and living in the factory had high school education. I had the same impression of efficiency in the Ishikawajima Harima shipyards, in riding the bullet train from Tokyo to Kyoto, and in the Bank of Japan, the Economic Planning Agency, the Ministries of Education and Agriculture, where one could find ten economists in a room all fresh and eager to talk after their morning calisthenics [4]
  4. Demographic Dividend: Japan's demographic dividend's timing was impeccable. The demographic transition allowed for a very high workers to population ration and historically lowest dependency ratio. 

    Japan saw in 1950 what China saw in the 80's and India is seeing now [5]
  5. High Savings Rate: Japan was and still is a very frugal society. The high savings rate led to rapid capital accumulation in Japan compared to other war torn countries and gave the government an extraordinary ability to spend on infrastructure projects. At one point, Japan's per capita GDP was increasing at 8.3 percent per year because of the savings rate. 
  6. Bonhomie with the United States of America: Japan was a key ally of the United States of America since day 1 of the American occupation. It enjoyed a lot of preferential access to global markets by virtue of being an American ally and fueled American consumption with a very competitive exchange rate**. It allowed Japan to become a founding member of OECD, an early member of GATT and take a lead in establishing the ADB. 
  7. A Culture Programmed to Succeed: I give a lot of emphasis on the national character and culture of a country because aggregate culture influences economic growth to a very large extent. Japan was and still is a culture programmed to succeed and prosper. Take a look at the Japan's Hofstede 6-D culture scores, 

    Japanese society scores high in Masculinity, Uncertainty Avoidance, Pragmatism and scores low in indulgence. [6]
    • Masculinity: A high masculinity score combined with a low score in individualism makes Japan one of the most competitive societies in the world where people are the most motivated when they are competing together as a team against other teams. Japanese workaholic nature is another manifestation of this.
    • Uncertainty Avoidance: At 92, Japanese society is one of the most risk averse countries in the world. This shows in their attention to detail, attention to product quality and meticulous nature of risk assessment and surveys before starting a project.
    • Pragmatism: At 88, Japanese society is one of the most pragmatic society in the world. Thrift, saving for the future and adopting modern education and customs to succeed are hallmarks of Japanese culture. Corporate Japan since the beginning invested a lot on R&D and companies prioritized long term growth over quarterly profits.
    • Indulgence: Japanese society with a score of 42 is a society of restraint. The high savings rate and less emphasis on leisure are manifestations of the same.
In conclusion, Japan grew fast and regained its pre WW II level within 15 years because of a resilient culture, a good jump start given by the American occupation, demilitarization, high early emphasis on education and the timing of its demographic dividend. 

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