? “The Japanese Miracle”... How did the Japanese giant rise from the ashes of war to become the third most powerful economy in the world
Japan's post-World War II "miracle" has lost much of its luster since the 1990s, when the country's economy fell into a long post-bubble recession. In this article, Okazaki Tetsuji presents a new historical perspective on the structural and institutional factors that have shaped the engine of rapid economic growth for nearly half a century, and examines their implications for Japan's economic policy in the future.
World War II has long been considered one of the crucial time periods in Japanese history, as the country witnessed massive economic and social transformations. After the war ended, Japan undertook great efforts to rebuild its economy and achieve development. Below we review some of the points that formed part of these transformations:
1. Economic reconstruction: After the war, Japan was almost completely destroyed, and the Japanese government had to bear the costs of reconstruction. It adopted economic policies focused on stimulating production and promoting foreign trade. Particular attention was directed towards the export industry, and Japanese companies contributed to building a strong economy.
2. Industrial economic transformation: Japan made a huge economic transformation from agriculture to industry. It had a strong governmental approach that supported key industries such as steel and automobiles. Japanese companies relied on modern technology and improvements in production processes.
3. Accelerated economic growth: Japan achieved tremendous economic growth in the period after the war. The desire to achieve economic superiority spread, and technological innovations and improvements in product quality contributed to this goal.
4. Social and cultural transformation: Japan experienced social and cultural transformations as well. It witnessed a liberalization of social roles and an increase in educational levels. Japanese culture has been influenced by global changes, and has embraced consumerism and a more modern lifestyle.
5. Alliance with the West: Japan began to build strong relations with Western countries, especially the United States. It received economic and technological support from the West, and international trade relations developed.
Japanese society witnessed very important changes during this period of world peace. Here I would like to examine some of the reasons behind these changes in the economic field and their repercussions on Japan's economic future.
Catching up with the industrial West
The chart below shows a comparison of changes in real GDP per capita in Japan, the United States, and Britain between 1870 and 2008. The values used in the graph are the natural logarithms of the GDP per capita in each of these countries, estimated in terms of the purchasing power of the US dollar in 1990. The GDP per capita in Japan in 1945 - the year that coincides with its surrender in World War II - amounted to 1,346 US dollars. Estimated by the purchasing power of the US dollar in 1990, it is equal to only 11% of its counterpart in the United States for the same year and about 47% of the per capita income of Japan itself in 1940, the year in which Japan entered World War II.
In the second half of the nineteenth century, Japan adopted a comprehensive modernization policy in an effort to catch up with the industrial West under the slogan “Fukoku Kyohei (Developing the Country’s Economic and Military Power).” The growth in Japan's GDP per capita between 1870 and 1940 reflects the economic success of this campaign, which continued until after the war. As the chart shows, Japan has been steadily catching up with Britain and the United States, two of the most advanced industrial economies in the world. Japan's GDP per capita grew from its value, which was equal to 23% and 30% of its counterparts in Britain and America, respectively, in 1870 to reach 42% and 41% of its counterparts in Britain and America, respectively, on the eve of the Pacific War.
But the outbreak of World War II suddenly reversed that progress. In fact, the war returned the modern Japanese economy to square one in terms of GDP per capita, virtually negating all the gains it had made since the end of the nineteenth century.
The Japanese miracle of the post-war period
The next chapter of the story is well known. The collapsed Japanese economy quickly emerged from the ashes of World War II. By 1956, real GDP per capita exceeded the 1940 prewar level. During the recovery period, which extended between 1945-1956, GDP per capita rose at an average annual rate of 7.1%. The recovery was followed by a period of rapid growth. As the chart shows, Japan is moving closer to the West again at a speed far exceeding the speed of progress before World War II.
The GDP per capita in Japan in 1973 was equivalent to 95% and 69% of its counterparts in Britain and the United States, respectively. It was the last year of what is known as the period of rapid growth, although the Japanese economy continued to expand at a relatively rapid rate over two additional decades. By 1991, the last of the “bubble economy” period, Japan’s GDP per capita was 120% and 85% of that of Britain and the United States respectively. Regardless of the setback that occurred in World War II, the process of catching up with the West, which began a little more than a century earlier, is essentially complete.
Common characteristics
Given this historical context, the Japanese economic experience in the period following the end of World War II can be seen as an extension of a national effort to catch up with the West that began at the end of the nineteenth century. Although there are consistent characteristics in the economic dynamism of the pre- and post-World War II periods, there are also differences.
The basic common growth factor in the pre- and post-World War II economies is the “underdevelopment” of the Japanese economy compared to the world’s advanced industrial economies. Because he was coming from behind, he was able to benefit greatly from technology imported from more advanced countries. “Technology” here includes not only technical knowledge directly related to manufacturing, but also social and economic systems and institutions. The fundamental difference in the development process of developed and developing economies was emphasized by scholar Alexander Grieschenkron (*1) in his classic works on the “underdevelopment” of economies, and his theories have since been incorporated into formal models of economic growth (*2) . The wide disparity in per capita income between Japan and the industrialized West reflects a gap between the technology that supports the Japanese economy and advanced technology in the world. For Japan, it is an indication of great potential for rapid growth through the adoption of these advanced technologies.
This analysis applies to Japan's post-World War II economy just as it did before the war. The history of the modern Japanese economy, from the end of the nineteenth century onwards, is replete with examples of the importation of Western technology in its broadest sense, including the adoption of Western systems and institutions.
Reasons for rapid growth in the post-war period
If the knowledge gap with the West was a persistent characteristic of the Japanese economy before and after World War II, why did the process of catching up with the West accelerate so dramatically in the postwar period? This question was answered by Fumio Hayashi and Edward Prescott in their paper entitled: “The Inhibitory Effect of Agricultural Institutions on Japan’s Pre-War Economy” (*3) .
According to Hayashi and Prescott, the main factor was the acceleration in the process of reallocating resources, especially the labor force, from the agricultural sector with relatively low productivity to the other sector with higher productivity and greater total per capita income. The researchers assumed that the main reason for this acceleration was the removal of obstacles that prevailed in the pre-war period regarding immigration, after the post-war reforms that undermined the patriarchal system. They point out that under pre-war civil law the male head of a family could keep his male heir (usually the eldest son) on the farm rather than allowing him to emigrate to the city. But under civil law and the post-war constitution, paternal authority was taken away from such dictatorial powers, eliminating a major obstacle to immigration and the redistribution of the labor force.
The distribution of resources between different sectors and the presence or absence of barriers to redistribution are certainly important elements in our understanding of long-term economic growth. Hayashi and Prescott have made a valuable contribution to our understanding of Japan's postwar 'miracle' by drawing a quantitative correlation between the speed of redistribution from the agricultural sector and the speed of Japan's economic growth. But their qualitative conclusions regarding the nature of barriers to pre-war redistribution remain controversial. As a result, the difference in income between the agricultural sector and other sectors must have constituted a strong incentive for migration towards cities, regardless of patriarchal authorities.
Here I would like to posit an alternative explanation for the acceleration in resource reallocation and economic growth after World War II, which is to focus on the institutional changes that began during the war. During the war, the Japanese government undertook a broad package of reforms aimed at transferring resources for the war effort, as I have explained in detail elsewhere (*4) . An important focus of these transfer efforts was the redeployment of the labor force to the munitions industry.
Under the workforce mobilization plan, the government implemented policies to enhance the strategic positioning of the workforce to military industries. One way the government could do this was to nationalize employment agencies that were controlled by several single municipalities and form a system in which those agencies worked closely with local schools to help distribute the students who would graduate - a major source of the labor force - to jobs in wider areas. (*5) . This government-supported cooperative employment system provided enterprises with mechanisms to reallocate to the post-war labor market, particularly the market for new graduates. One prominent mechanism was the “Shodan Shoshoku (Collective Employment)” programme, which helped young people from rural communities travel en masse to cities in search of work upon graduating from high school (*6) .
In my opinion, the biggest factor behind the acceleration of labor force redistribution that Hayashi and Prescott emphasized in their research was the enhanced feature of labor market matching that gained momentum as a result of these institutional changes. The costs of business operations related to labor market matching in the pre-war period represented a major obstacle to the reallocation of the labor force between sectors. Government changes to regulations have reduced these barriers.
Much of this applies to the redistribution of capital, another essential factor in production. During the war, the government adopted policies to enhance priority in distributing funds to war industries and government bonds. One result of this massive, nationwide fundraising effort was the replacement of direct financing - which had supported prewar economic development - with a rapidly expanding system of indirect financing based on bank and postal savings. For many years after the war, this system formed the financial basis for rapid economic growth by facilitating the absorption of savings and the efficient distribution of capital.
Find a new engine for growth
As I noted earlier, Japan's postwar economy had enormous inherent potential for growth from the beginning. It is a dynamic capability derived from two main factors: (1) the gap between Japanese technology and advanced technologies in the world and (2) the presence of a large agricultural sector with relatively low productivity. The sweeping changes made during the war helped the economy tap into this potential, achieve rapid growth as the graph shows, and eventually catch up with the industrialized West.
But Japan will find it difficult to maintain the same pattern of rapid growth once that potential is exhausted. By 1990, both sources of dynamism had dried up: the process of catching up with the West was virtually complete, as we have seen, and the proportion of the labor force employed in the agricultural sector had fallen from 36% in 1955 to 6.5%.
If we assume that what we mentioned above is a correct analysis regarding the rise and fall of rapid economic growth in the post-war period, what are the repercussions on the country’s economic future?
First, as many others have pointed out, if the Japanese economy is indeed at the global technology frontier, further growth will depend on its ability to expand those frontiers.
The 1956 government report on the economy declared that the post-war recovery period was over. He warned that the economy had exhausted its reconstruction growth potential and gave the nation the impression of the need for a new growth model. “We are about to find ourselves face to face with a very different situation,” he warned. The days of economic growth during the recovery process are over. Henceforth growth will continue through modernization'' (*7) .
More than half a century later, Japan is at a different stage of development, but it faces a similar challenge: finding a new model for economic growth. This is the problem that Japan has been facing since the 1990s and is still suffering from. I believe that in order to overcome this obstacle, new institutional mechanisms should be developed that lead to the massive allocation of resources to technological research and development. The key lesson to be drawn from the “Japanese miracle” is that well-designed systems and institutions have an important role in promoting efficient resource allocation and stimulating new growth.
(Banner photo: Okinawan high school graduates arrive in Tokyo en masse to participate in a “mass employment” program on March 6, 1969. Jiji Press)
(*١) ^ Alexander Gerschenkron, Economic Backwardness in Historical Perspective: A Book of Essays (Cambridge, MA: Belknap Press of Harvard University Press, 1962). See also Robert Barro and Xavier Sala-i-Martin, “Technological Diffusion, Convergence and Growth,” Journal of Economic Growth, vol. 2, no. 1 (March 1997), pp. 1-26.
(*٢) ^ Robert Barro and Xavier Sala-i-Martin, “Technological diffusion, convergence and growth,” Journal of Economic Growth, 2(1): 1-26.
(*٣) ^ Fumio Hayashi and Edward C. Prescott, “The Depressing Effect of Agricultural Institutions on the Prewar Japanese Economy,” Journal of Political Economy, vol. 116, no. 4 (August 2008), pp. 573-632.
(*٤) ^ See Tetsuji Okazaki and Masahiro Okuno-Fujiwara, eds., Contemporary Japanese Economic System and Its Historical Origins (New York: Oxford University Press, 1999).
(*٥) ^ See Sugayama Shinji, Sh ū sha shakai no tanj ō — howaito kar ā kara bur ū kar ā e (The Birth of Corporate Society: From White Collar to Blue Collar) (University of Nagoya Press, 2011).
(*٦) ^ Ibid . See also Saguchi Kazurō, “Nihon no naibu rōdō shijō” (Japan's Domestic Labor Market), in Yoshikawa Hiroshi and Okazaki Tetsuji, eds., Keizai riron e no rekishiteki p ā supekutibu (Historical Perspectives on Economic Theory) ) (Tokyo: University of Tokyo Press, 1990) and Kase Kazutoshi, Sh ū dan sh ū shoku no jidai—k ō do seich ō no ninaitetachi (The Era of Group Employment: The Upholders of Economic Growth) (Tokyo: Aoki Shoten, 1997).
(*٧) ^ Economic Planning Agency, Keizai hakusho (Economic White Paper) 1956, p. 42.