Evolution of the Economic System in Japan (review)

The political economy of Japan's high-growth period between the mid-1950s and the early 1970s has been the subject of heated debate in academic and policy circles. Was it efficient? What were its main characteristics? When and why did the system come into being? Was its long-run legacy the retardation and stagnation of the 1990s and early 2000s?

In this volume, a translation of his book Nihon no keizai shisutemu (Iwanami Shoten, 2003), Teranishi provides bold answers, couching his arguments in a detailed historical account of Japan's political economy since the Meiji Restoration. The gist of his argument is that the system of the high-growth era emerged because a very different system—which he dubs the Meiji-Taisho system—deteriorated. The key institutions of the high-growth era only emerged during the period 1937–47. Like the institutions of the Meiji-Taisho system that began decaying—becoming dysfunctional in both the economic and political realms—during the 1920s, the institutions of the high-growth period have outlived their usefulness. They should be consigned to the dustbin of history.

To make this argument, Teranishi constructs a model of evolutionary change for the Japanese economy. In the first section of the volume—chapters one and two—he lays out the model by arguing that the rules of a system ultimately change when three conditions are met: (1) the economic costs of maintaining it are too high, (2) the political costs of maintaining it are too high, and (3) the rules become incompatible with prevailing social mores. There are three major subsystems to political economy: the division of labor between the private sector and government, the institutions of the private sector, and the interface of governmental and private-sector institutions giving rise to policies. When the costs of keeping these subsystems functional grow, and when norms regarding the utility of the key features of the subsystems change, system atrophy sets in. A new system emerges through a gestation period potentially painful and protracted.

This argument is general, applicable to any political economic system. To make it specific to Japan, Teranishi puts forward three constraining, exogenous conditions. First, Japan was involved in catch-up growth until the late 1970s, borrowing technology from Western countries. Second, prior to the 1980s, Japan was the only Asian country to successfully industrialize; its geographic isolation encouraged the development of a "full set" industrial structure, with every major subsector of manufacturing appearing in the set. And third, the major economic paradigms put forward internationally for analyzing market-oriented economies shifted, from an emphasis on pure laissez-faire prior to World War I to doctrines embracing limited government intervention in economic affairs, especially working through the agency of monetary, fiscal, and welfare (income redistribution) policies.

In Part II (chapters three through five) of the volume, Teranishi explains how the Meiji-Taisho system operated. He argues that it was private-market oriented and government was relegated to the shadows. It was dominated by wealthy political and economic elites in the private sector: rural landlords and merchants (the meibōka) played a major role in securing loans from small local banks for small companies; a small cadre of wealthy investors gobbled up the stocks issued by large nationwide enterprises that relied on internal accumulation of capital from profits or the equity market to fund their growth; and former samurai filled many of the managerial posts in the emerging big-business sector. The main interface between the government and the private sector was decentralized, mainly operating at the local level. The political parties emerging in the late nineteenth and early twentieth centuries leaned on the meibōka rural elite who were more than willing to cooperate; the meibōka lobbyied for infrastructure investment (roads, railways, harbors) in their local districts in return for their efforts in drumming up votes.

Teranishi argues that structural change set off by economic development and competition between the political parties undermined the functionality of the system...