The Japanese Developmental State - Essay Example

? The Japanese developmental served as a model for other Asian s industrialization, but do the problems that Japan has experienced since the 1990s reveal fundamental flaws to this model? Contents The Japanese developmental state served as a model for other Asian state's industrialization, but do the problems that Japan has experienced since the 1990s reveal fundamental flaws to this model? 1 Introduction 3 Developmental State Model 3 The model and the Problems for Japan 4 Conclusion 8 References 10 Bibliography 11 Introduction The term “developmental state” is used by the scholars of political economy to identify the macroeconomic scheduling in East Asia that began in the late twentieth century. In the model the state enjoys the right of controlling the economy more efficiently. The state in the model has been defined as an independent and autonomous political power. A developmental state is supposed to have strong intervention of the government with extensive planning and regulations. The countries outside East Asia satisfy the criteria for developmental state. Developmental State Model A regulatory state is governed by the regulatory agencies empowered to enhance the protection of the public from different kinds of market failure including monopolistic competition. The regulatory agencies also provide collective goods that aim to curb the excessive demand of the market that remains unsatisfied. A developmental state has more direct intervention into the economy and contributes in promotion of new industries and reduces the dislocations that are caused by the shifts in investments as well as profits from the old to the emerging industries. The main difference between regulatory state and developmental state is developmental state can pursue the policies directed for industries while regulatory states cannot do so. In Japan, there is little ownership of the government in industry. The private sector is rigidly guided as well as constrained by bureaucratic government elites. The government elites are not the elected officials and thus lack the capability to influence the working or the corporate class through political process (Woo-Cumings, 1999, p. 93). The developmental state emphasises on the market share rather than profit, focuses on the transfer of technology to foreign countries, lends time to promote economic growth rather than political freedom. Japan was the first country to witness successful industrialization. If the perspective of economic development is taken into account the development of the country followed the same pattern as in other developing countries. The factors that influenced the development of Japan include macroeconomic stability, development of human capital and economic infrastructure. It is difficult to equate a booming economy with a developmental state where the economies are dependent on external factors like inflows of foreign support in the form of aid or exports of raw materials. Therefore it can be stated that the concept of developmental state not only refers to economic and human development but presents the role of the state in enhancing the natural resources and lay down a distinctive and clear decision making processes. The model and the Problems for Japan The industrial policy of the country was based on the financial support and the taxation systems of the government. For the allocation of financial resources for prioritized sectors a large amount of loans were directed to develop the infrastructure of economy. The support of the government was modest but the activities of the government encouraged additional funding from the private banks. The total funding was under the supervision of the Export-Import Bank of Japan. The outcome of the implementation of the industrial policy was not always envisaged. Three reasons can be accounted for the implementation failure. The choices of the policies were flawed, the power of enforcement was not stringent as it allowed the private sector to work against the intension of the government and government ex ante failed to anticipate the private dynamism in proper fashion. Emergence of industrialization can take place when industrial policies support the mechanisms of market while private dynamism counteracted industrial policy. The developmental plan included protection for infant industries and promotion of strategies relating to import substitution. Such plans were possible theoretically but in the real world it was extremely difficult to implement. The infant industries preferred to remain infants and ask for support of the government. The plan of the government was to limit the protection up to a certain point till the industries are capable enough to gain profits. Instead the industries took the strategy to look out for support and the plan summarily failed (Tsai, and Pekkanen, 2005). The degree of mercantilism was evident and lack of logical consistency deferred the process. The policies acted as the constraints to international competition. Uncertainty remained on the trade protection practices and an effective trigger was constituted by the time imposed upon the private firms to prepare themselves for global competition. Incoming FDI was not utilized efficiently by Japan. International competitiveness was gained through import of advanced and upgraded technology. The purchases of new technology constituted essential steps in the process of attaining international competitiveness. A negative feedback loop developed in the case of Japan among the falling prices of assets, instability in financial culture of the country and stagnation of the economic activity. The negative feedback loophole has been regarded as “Japanization” (Elger, 2010). The early stage of development did not contain the negative feedback loop. Therefore the deleveraging of Japan became serious. The government of the country did not react promptly to recapitalize the banks. The banks were suffering from erosion of capital stocks. The holdings of stocks can be accounted as the reason for the situation to arise. The banks of the country stopped to provide lending to the new promising projects and failed to recognize the bad loans. The slow process protracted the sales of assets which resulted the decline of the asset prices a long process. The non financial companies looked upon the unhealthy balance sheets as permanent situation and took the steps to reduce the spending drastically. Since the economy of the country stagnated the estimated amounts of bad loans took the steep rising curve. When the economy is confronted with “Japanization” the central bank is on the frontline. The Bank of Japan’s reaction was slow in 1990s. Critics argued that Bank of Japan was not aggressive in fighting against inflation. There have been negative rates of inflation since 1998 and therefore the cumulative decrease in the consumer price index stayed at 5%. The dynamics of debt and inflation made it harder to repay the loans and the lack in buying power pushed the economy into deflation further. The rate of real interest maintained higher levels than anticipated and threw the plan of zero interest rates to stimulate the economy to the back of the minds. The risk taking behaviour of the banks in banks were under severe threats since the decline in the capital ratios. The asset shrinkage generated two types of macroeconomic costs for the economy. The credits level crunched while the fire sales. Fire sales were spread across over long periods and failed to provide desirable results in one bout. The credit crunch led to further misallocation of credit which created short age of credit at the prevailing prices. Therefore economic stagnation became a long delayed process for the country which aggravated the decline of asset prices. The stagnation played the role of catalyst in causing financial instability. The costs associated with the processes were magnified with the protracted nature of the deleveraging policy of the country. The delay caused by the decisions of the regulatory bodies in Japan. Capital adequacy regulation was poorly formed and was not in line with the international standards of established by Basel committee. The minimum of the regulation was kept at the fixed level which limited the fluctuations is response to the state of the economy. Even the definition of capital was flawed. It included unrealized gains on stocks which were under the regime of banks. Therefore a sharp fall in the prices of stocks signalled rapid erosion of capital from the banks. In spite of the realized problems the regulatory authorities delayed the process of recapitalization. The plan was rejected in 1992 and the process got delayed further. As a result the banks were under difficult times to dispose the bad loans. The decline in property prices was the indirect effect of the non disposal of bad loans (Sasada, 2012). The fall in property prices inserted panic to the non financial firms. They began to repay the loans by cutting expenditures mostly on investment structures. The investment structures are the component of aggregate demand that is sensitive to property prices. The banks were forced to lend to unregistered companies with the aim to avoid losses on the balance sheet. The difficult times for the banks were amplified and the lending to the promising projects shattered. The regulators controlled the entry of banks into the sector. The phases laid the stone for long period of stagnation and the banks became vulnerable to creative destruction. The regulatory authorities followed the convoy approach in resolution of troubled institutions of finance. They allowed the takeover of sick financial institutions by the healthier ones which was seen as the act of protecting the depositors and debt holders. The people believed on the authority and were thought that the authority would sustain the approach. This was the reason of absence of serious liquidity crisis for the banks. However there was a change in circumstances in late 1990s (Katada, 2001). The crisis of East Asia hit Japan badly and the financial panic led to series of bankruptcies for the banks and the securities firms of the country. Despite the meltdown in the country, the risk premium rose in 1997 and 1998. Finally, the government took the decision of recapitalization of banks on two stages in 1998 and 1999. The government committed to use the public money to protect the bank debt and the depositors. The period marked the phase of departure of banking policy of the country. The activities of the banks were made more independent and resulted in separation of the financial service from Ministry of Finance. The law of Bank of Japan was also revised. Smooth communication between the bankers and the officials were maintained. The new agency focused on prompt resolution of the problems of bad loans but turned deaf ear to the macroeconomic implications. But the situation became worst. The banks now had the capital to delimit the bad loans and the growth of bank loans turned negative. Negative effects of deterioration were felt on the balance sheets of the banks on business fixed investments. The feedback loop became more serious after the credit crunch of 1997-98. The expectations on inflation and growth declined. The property prices of the country largely came back at the pre-bubble levels in the latter half of 1990s and in the early phase of 2000 but it continued to decline thereafter. This implies the possibility of an existence of negative interaction between prices of assets and growth. The Bank of Japan initiated to lower the call market rate in 1991. The bank began to provide stimulus to the economy by cutting the nominal interest rate faster than the rate at which inflation fell. With the setting of the deflationary trend the decrease of the real interest rates began to take the stable path. The constraint on the monetary policies was the resulted of the inability of the Central Bank to limit the rates of interest below zero percent (Anchordoguy, 2005). The suboptimal policy making can be served as the reason for the ineffectiveness of the monetary policy which is thought to intensify the deleveraging forces. The lack of well developed capital markets created difficulties for the Bank of Japan to stimulate the economy with the help of non conventional monetary policies. The stock prices and the yields of corporate as well as government bonds were affected by the asset prices of Bank of Japan. Therefore the evidence of the portfolio rebalancing effects can be found. The forward guidance that was introduced in 1999 and the quantitative easing introduced in 2001 generated larger than the anticipated effects. The asset prices remained more or less unaffected by the increase in the targeted amount of current account balance. Conclusion The use of market mechanisms have been successfully implemented in South Korea, Hong Kong and Taiwan. Conclusively from the above discussions it cannot be said that the developmental model was free from flaws. The intervention of the government and the regulatory committees delayed many processes which included the recapitalization of the banks and several monetary policies. The stagnation of the economy was the resulted. It cannot be argued on the intensions of the developmental model as it was intended to improve the welfare of the people. But delay in the policy implementation acted to be the constraint. Therefore, it can be stated that there were no flaws on the model but there are problems in implementing the policies of the model in the real world. Japan had to surrender to the grasp of stagnation and policy makers opine the damage to be self inflicted. The relation between the state and business is now regarded as the prime obstacle to make reforms. But during the formation of the developmental state the relation was supposed to be beneficial to focus on the intensions and the objectives of the model. The model was designed to eliminate the barriers and lay the successful path for future development but the implementation drawbacks and the unrecognized problems served to be the reasons of failure. References Anchordoguy, M. 2005. “Reprogramming Japan: The High Tech Crisis under Communitarian Capitalism”. Cornell University Press. Elger, T. 2010. “Global Japanization?: The Transnational Transformation of the Labour Process”. Taylor & Francis US. Katada, S. 2001. “Banking on Stability: Japan and the Cross-Pacific Dynamics of International Financial Crisis Management”. University of Michigan Press. Sasada, H. 2012. “The Evolution of the Japanese Developmental State: Institutions locked in by ideas”. Routledge. Tsai, K., and Pekkanen, S. 2005. “Japan And China In The World Political Economy”. Taylor & Francis. Woo-Cumings, M. 1999. “The Developmental State”. Cornell University Press. Bibliography Low, L. 2004. “Developmental States: Relevancy, Redundancy Or Reconfiguration?”. Nova Publishers. Xia, M. 2000. “The dual developmental state: development strategy and institutional arrangements for China's transition”. Ashgate. Read More