According to standard neoclassical economics, markets can encounter inefficiencies when externalities, market distortions and scale economies are present. Even so, economists hesitate to recommend government intervention from fear of making matters even worse. In contrast to this view, Japan has successfully guided its economy especially in areas having to do with scale economies, imperfect competition, and the adaptation of foreign technology. This paper seeks to outline the industrial policy and incentives utilized by Japan as well as the lessons that the Philippines can learn from it.
The Management of Competition in Japan
Japan has maintained control over the economy since the end of World War II. These controls were gradually removed and were replaced by fiscal and monetary policies such as including measures that manage competition, control over particular industries, easy credit from government financial institutions for selected industries, depreciation allowances for specified industries, two-way consultation between government and industry, foreign exchange rationing and quantitative import controls and tariffs, government buying shares in infant industries and public relations measures (Bieda, 1970).
Japan redefined the Anti-Monopoly Act and the Fair Trade Commission in 1952 and strove for a balance between the benefits from competitive and monopolistic market structures. The benefits of the former are well-known while the latter avoids inefficient production scale and duplication of costly activities.
Cartels do not always serve the public interest. In Japan’s pursuance of its anti-monopoly policy, conflicts were encountered between agencies and among political parties. But in contrast to the Philippine experience, a constructive compromise was acquired in the midst of lack of consensus.
Japan did not see competition as the only way to improve economic efficiency. The bureaucracy also played an important role. In fact, the government did not hesitate to intervene and promote the manufacturing sector – an area that is not usually covered by laws protecting the public interest – because doing so will produce economic progress.
Japanese Tax Incentives
Japan used the tax system to control the allocation of resources in the industrial sector. Special depreciation allowances were allowed to be deducted from taxable income for certain firms and many incentives were given to exporters and overseas activities. However, such tax incentives must not be employed without caution. They were sometimes given on the basis of political considerations that have nothing to do with improving market efficiency. In addition, tax incentives are difficult to remove even if they are no longer needed.
Because of this, Japanese fiscal experts became critical of tax incentives. It played a significant role in promoting investments and allocating capital, but they were not sufficient to change the level and composition of investments. It made the tax system more complicated. Some analysts even hypothesize that a reduction of incentives could have been more effective.
Other Instruments of Japanese Industrial Policy
The Japanese government influenced credit allocation which also promoted priority industries. This encouraged private banks to lend to the same priority industries. Also, in the midst of foreign exchange scarcity, industrial policy utilized foreign exchange allocations, tariffs and quantitative restrictions on imports, and control of importation of technology. They were used to promote the movement of resources to certain favoured industries. Furthermore, industrial policy involved picking winners, forecasting technological developments, and encouraging firms to achieve scale economies. In addition, two-way communication between The Ministry of Trade and Industry (MITI) and the business sector enhanced MITI’s influence.
MITI believed that scale economies and the choice of technology are the most important factors in international competitiveness. However, since it will not be healthy to have very few firms, MITI also encouraged the growth of firms in high priority industries.
Urging firms to scale efficiency and at the same time encouraging competition can result to excess capacity if promoted industries do not succeed in export expansion. Fortunately, Japanese firms thrived in export expansion. Even though there were firms which lost comparative advantage and those that became successful years after the promotional stage, what the government did was it used financial and fiscal powers to prevent excessive price competition. Depression cartels were formed for the former case while rationalization cartels were used for the latter case. These cartels were administered successfully on the whole.
Firms welcomed government guidance not only because of self-interest; cultural and institutional factors were also involved. Industrial policy were supported by politicians and accepted by voters, showing their sense of patriotism, solidarity and cohesion.
Industrial Policy and the Japanese Miracle
Bieda (1970) presented two views on the government’s role in Japan. The first one sees the Japanese economic system as the “most intelligently dirigiste system in the world” where “the ultimate responsibility for industrial planning for deciding in which directions Japan’s industrial effort should try to go, and for fostering and protecting business as it moves in those directions, lies in the government”. On the other hand, economist such as Okita (1980) and Tsuru (1963) categorized the Japanese economy as a highly competitive market economy. The second view takes the high bankruptcy rates into account, indicating the high level of competency in Japan. This is coupled by the low government expenditures in GNP. Despite this, government guidance still contributed to economic growth by providing channels for including private sector inputs into national plans and by influencing the action and plans of firms. There were also instances where industrial policy did more harm than good, but in sum, Japan’s industrial policy record remains mixed. The strengths of individual entrepreneurs explain why government intervention did not suppress entrepreneurial achievement. It is not likely that economic growth would have been higher if government did less government intervention.
Government intervention provided a stable environment which stimulated private sector growth. Its consistency, the government’s commitment to economic growth, the honesty and competence of the bureaucracy, and the two-way communication between the government and business sector all inspired business confidence, made business planning easier and encouraged investors to use longer planning horizons.
Lessons from the Japanese Experience
It is dangerous for the Philippines to draw inferences from Japan given the huge differences between the two countries. The Philippine experience shows that government intervention did more harm than good for the country. What the country should learn from Japan, however, is its focus on export promotion. Protectionism would eventually contribute to sustainable economic growth.
Government intervention in Japan addressed market failures, consistent with the findings of World Bank. Industrial policy also did well because economic agents were disciplined; the bureaucracy was competent and honest. Some inward-looking policies caused a few drawbacks – some industries were protected for too long – but even critics of Industrial policy in Japan did not think that they did more harm than good.
Critics of Philippine industrial policy would likely think that the system is so bad that political failures even outperform market failures and that intervention must be kept at the minimum. However, this should not hinder the government from promoting exports as well as helping industries which can yield international competitiveness. To do this, the Philippines must have a transparent system which identifies industries and the extent of government support that will be granted to them.
Source:
Medalla, Felipe, “Incentive and Industrial Policy: What We Can Learn from Japan?” Philippine Economic Society, Political-Economic Restructuring and National Development (1994).
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