Development, Crisis, and Class Struggle: Learning from Japan and East Asia - Coursework Example

ECON337 4 Question The Japanese economic development after World War II is as a process of scrap and build. This is because while most of the light manufacturing companies were shifted to other countries or run down, the government embarked on an intensive investment in the heavy and chemical manufacturing industries. Therefore, while some of its industries were being scrapped more were being developed concurrently creating more opportunities and additional revenue for the country (Paul & Hart, p.110). The industries that were promoted in Japan after the World War II are the chemical and heavy manufacturing companies. These especially were; iron and steel, ships, chemicals and petroleum products. The growth of heavy manufacturing industries in Japan after World War II can mainly be to increased exports and wages of male workers(Paul & Hart., pp.110-111). The export of heavy-manufactured products increased as compared to the earlier over-reliance on domestic markets. The increased male wage and improved working conditions improved their purchasing power for the heavy manufactured goods like automobiles and advanced electronic products increasing the local market. In addition, the ability of Japan to keep real wage increases below productivity gains ensured that the heavy manufacturing industries would still make profits despite the increased labor costs. This gave Japan an added advantage over most of its international counterparts leading to rapid growth and export success (Paul & Hart, p.112). The industries scrapped off during this period were mainly the light manufacturing sector. These are the production of cotton textiles, synthetic textiles and labor-intensive electronic production- including radio, TV’s, and Tape recorders. The reason for scrapping off such industries was mainly the rising cost of labor in the country and external pressure from its bilateral (US &European governments) and multilateral trade partners (IMF, OECD & GATT).Unlike the heavy and chemical manufacturing industries that predominantly depended on male labor, the light manufacturing sector would accommodate both male and female employment. In this case, women, labor would be preferred since it would be cheap. Unfortunately, after WWII even women labor became expensive mostly due to the rapid growth of output as well as employment. As Japan increased its share of the worlds manufactured export market, other capitalists countries felt threatened and imposed import restrictions on Japan and demanded that it liberalizes its imports. This was mainly in its light manufacturing sector. The US mainly demanded that Japan place limits on its light-manufactured exports. This was after extensive pressure from those running light-manufacturing industries in the US complaining of ‘influx’ from Japan (Paul & Hart, p.110). There were three main stages of Japan’s scrap and built process. The first phase involved the shift from light manufacturing to heavy manufacturing of products. The second phase saw the move from chemical and heavy- manufacturing of products to machinery exports. Moreover, the third stage was characterized by the shift to production of only the most technologically advanced consumer and capital goods. In addition, components like robots, integrated circuits, and advanced machinery were also to be given priority (Paul & Hart, pp.110-120). Question 2 This type of economic recession occurs when high levels of private sector debt cause individuals or companies to embark on saving rather than investing. Mostly characterized by paying down debt rather than spending or investing, causing economic growth to stop or decline (Allen, Mark et al, p.12). In his book, Koo argues that Japan suffered a balance-sheet recession after the bubble economy. He barks his argument with the fact that companies in Japan stopped soliciting for loans but rather started paying off debts that they owed, even though, the interest rates were zero. This implied that they did not have proper use of money and clients would not receive interest or dividends. Therefore, liquidate their companies and return the investments of shareholders who would otherwise find a better use for their money (Koo, p.11). Structural or banking-related problems could not have caused the bubble sheet recession. This because even if the banks turned off the companies as potential loan borrowers, the companies had the option of borrowing from the corporate-bond market. However, during the recession the amount corporate bonds issued were steadily decreasing. In other words, the number of redemptions exceeded the number of new issuance of bonds (Koo, p.7). When companies are not borrowing funds to expand their operations in masses and instead focus on the debt payment, the economy losses demand. Organizations are not re-invest their money ad is unwilling to borrow the money saved by the household sector. This decrease in the aggregate demand causes the economy to fall into recession thus adversely affecting the economy (Koo, pp.12-13). Many companies also embarked on saving by reduction of labor, pay cuts, and company bonuses. This left many people jobless or else receiving very little pay as compared to the past years. This move negatively affected households, as they could no longer save as much as they intended. They were rather compelled to withdraw their savings from banks so as cover the mortgage and education cost of their children (Koo, p.23). The relevance of fiscal and monetary policies in addressing the long stagnation and deflation in the Japanese economy was phenomenal. Fiscal policy is the use of a government’s revenue collection and expenditure to influence the economy while monetary policies aim at regulating the amount of money within the population to prevent surplus or insufficiencies. Both these policies aim at preventing inflation and maintaining a country’s GDP. Despite the loss of corporate demand and national wealth, Japan’s GDP remained above bubbles peak levels in both nominal and real terms. This was because even after the recession the government was still running a surplus. This was attributed to the fact that revenues remained high in the immediate aftermath of the bubble. The government embarked on the issuance of bonds and increased spending the proceeds. It also borrowed from the savings of the household sector and spent the money on the construction of bridges and roads. This move can be described as wise because this money would have otherwise languished in the banking system. In turn, the economy stabilized soon after the fiscal stimulus was implemented (Koo, p.24). However, this sustained the economy was short lived as the economy slumped down the next year when the effects of the fiscal policies implemented wore off the next year. During the period when the economy was seen to improve, many companies had invested in real estate due to reduced prices down by 89% from the peak. Unfortunately, after the economy slump down, these companies were forced to turn back to the old system of paying debts as long as they had a positive cash flow. As long as this cycle continues, the companies will never borrow household sector savings, and the government will be forced to fill the resulting gap with yearly rounds of fiscal stimulus (Koo, p.24). Although Japan was left with an enormous national debt due to the fiscal policies it implemented, it was the wisest step to take. This because if it had not responded with this kind of action plan, the GDP would significantly fallen from its peak that would have been a much worse scenario. The government took a bold step of borrowing when the companies failed to. Koo, therefore, argues that Japan’s fiscal stimulus was one of the most successful economic policies in the human history (Koo, p.25). The monetary policy that was employed by the central bank of Japan is that they lowered their interest loans to nearly zero to encourage borrowing of funds. This was however not successful as there were no willing borrowers and even the existing borrowers were more focused on debt payment. It can, therefore, be that, monetary policies are only effective when there are more individuals or companies who are willing to borrow. Fiscal policies lose all its powers when there are no people who are willing to obtain borrowings from lending institution such as banks (Koo, pp. 28-29). The banks had their hands tied and resulted in buying government bonds with the extra savings that were available instead of just leaving the money languishing in the banks. The proceeds of the bond sales are spent on road and bridges construction, creating a source of employment and suppliers opportunities. The money is accruing from the construction industries, suppliers and construction workers eventually are deposited in banks. This therefore increases total deposits in the banking sector and once again being unable to lend to the private sector, banks turn to lending its money to the government (Koo, p.32). Conclusively, Japan’s monetary policies have exclusively depended on the government’s fiscal policy. There is, therefore, no measure that the central bank of Japan can pursue to help control the economy. The only way is by encouraging the government to spend more. The crisis that happened to Japan after the collapse of the country’s asset prices can happen to any country regardless of the financial status and wealth. A prolonged recession should not be on the government or banks for not implementing monetary of fiscal policies. It is the nationwide collapse of asset prices and subsequent deterioration of private sector balance sheets that trigger prolonged recessions (Koo, pp.36-37). Works cited Allen, Mark, et al. A balance sheet approach to financial crisis. No. 2002-2210. International Monetary Fund, 2002. Burkett, Paul, and Martin Hart-Landsberg. Development, crisis, and class struggle: Learning from Japan and East Asia. Macmillan, 2000. Koo, Richard C. The holy grail of macroeconomics: lessons from Japans great recession. John Wiley & Sons, 2011. Lecture notes Read More