Category Archives: Political Science

The Middle Income Trap

Development State Evolving: Japan’s Graduation from a Middle Income Country

By Tetsuji Okazaki (University of Tokyo)

Abstract: This paper reexamines the industrial policy in postwar Japan from perspectives of the literature on a “development state” and a “middle income trap”. Japan transited from a middle income country to a high income country in the period from the 1950s to the 1970s. This process was characterized by a large structural change, such as resource reallocation from the primary industry to the secondary and the tertiary industries as well as resource reallocation within the secondary industry. Transition to a high income country is a challenging task for a middle income country. With respect to Japan, the industrial policy played a positive role in the transition. This was achieved by interactions between MITI and other related actors, who constrained and corrected MITI’s attempts of excess intervention.

URL: https://EconPapers.repec.org/RePEc:tky:fseres:2017cf1063

Distributed by NEP-HIS on 2017‒09‒03

Review by: Joyman Lee (University College London)

Summary

Students of modern Japanese economic history are familiar with the work of Chalmers Johnson (1982) on the Ministry of International Trade and Industry (MITI). In that work Johnson argued that MITI was the leading state actor in Japan’s economic miracle, playing a vital coordinating role between policymakers and the private sector. Johnson’s emphasis on the role of the state in the East Asian experience has triggered similar studies on the development state in Korea (Alice Amsden) and Taiwan (Robert Wade).

As Okazaki notes, the emergence of newly industrialising economies facing the challenges of globalisation and democratisation has led to a renewed interest in the development state. Okazaki argues that rather than constituting a static set of policies, Japan’s developmental state was highly dynamic and adaptive, echoing Douglass North’s idea of “adaptive efficiency” (North 2005). Significantly, this ceased to be the case in Japan after the 1990s. A second strand of literature that informs the paper is the idea of the “middle income trap” (Gill and Kharas 2007), which highlights a particularly challenging transition which middle-income economies face, as the policies that have fueled the initial stages of growth are no longer appropriate for continued growth. The idea has gained considerable traction among commentators in China.

china middle income

The fear of the “middle income trap” has been particularly acute in China.

Okazaki’s paper shows that Japan’s successful voyage through the “trap” was partly facilitated by its success in resource allocation across industries, in addition to well-known increases in the intra-sector productivity. Between 1955 and 1975, Okazaki attributes 29% of the increases in labour productivity to resource allocation, which he stresses was “substantial” (p. 4).

Okazaki traces the evolution of policies from the American occupation period, when U.S. advisor Joseph Dodge initiated the abolition of strict wartime controls. A 1953 government report was followed by the Five Year Plan of 1955, which highlighted the need to transition from light to heavy industries. MITI was formed in 1949 to pursue the policy of “industrial rationalization”. Formal economic controls were replaced by a portfolio of public financial institutions, including the Japan Development Bank (1951), tax relief, and foreign exchange allocation, and a central coordinating Council for Industrial Reorganisationolic . The government promoted new sectors, particularly the machinery and the automobile industries within it, which included the use of cultural strategies such as a campaign to promote the purchase of domestic cars at the same time as regulating foreign direct investment (1952) and curtailing the foreign exchange available for car imports (1954). The government also actively implemented policies concerning the automobile parts industry, which was quite atypical given the miscellaneous and low tech nature of that sector.

japan car industry

A Toyota factory in 1948. MITI’s policy in supporting the automobile parts industry which supplied major manufacturers such as Toyota was particularly distinctive.

At the same time as developing the domestic economy, MITI also foresaw foreign pressure on trade liberalisation, and formed a committee to formulate its strategy in 1959. While the ministry remained ambivalent with respect to its effects, it nonetheless adopted a sequential programme of liberalisation that was intertwined with plans to upgrade the industrial infrastructure. The high level of alert to likely external treasures had a direct effect on the government’s sector-specific strategies, e.g. to focus on passenger cars in the automobile sector. However, MITI’s more radical plans to consolidate the industry by policy intervention were not adopted, and instead the government aided the industry through JDB loans and low interest loans to small and medium-sized suppliers. MITI also successfully resisted IMF pressures to remove the industry from the foreign exchange system until Japan was well established in the world market (1963). Meanwhile, the government conceded that the coal industry would be uncompetitive and adopted a programme of gradual phasing out.

Comment

Okazaki’s study provides a timely, quantitative and authoritative review on an important and relatively understudied topic (given the acceptance of Johnson’s view as orthodoxy among historians) by one of Japan’s leading economic historians, whose trans-war perspective is particularly useful in teasing out more subtle changes amidst MITI’s strong posture towards industrial policy. As Okazaki observes,  the difficulties that middle-income economies face are acute, as “one of the difficulties that middle income countries face is that they should compete with low income countries in the markets of labor-intensive industries as well as with high income countries in the markets of capital and technology intensive industries” (Bulman 2017). In this context, Japan’s success appears remarkable, perhaps no less than the historiographically well-recognised significance of Japan’s Meiji-period Westernisation.

However, the complexity of policies required for breaking the “middle-income trap” in Japan’s case may not provide much comfort for middle-income economies currently facing the challenge. Although Japan rejected centralised state controls, the Japanese example appears to require a complex set of policies that presupposes a high degree of political cohesion and long-range economic planning, which is often difficult in many middle income economies given various political and social challenges. It also requires a state that is highly persuasive to the populace with respect to its vision for economic development. These factors appear to mark Japan out as an exception rather than an example that can be easily perceived as immediately relevant by many developing countries.

Perhaps the most avid student of Japan’s experiences will be China, which possesses a similar state capacity for a coordinated industrial policy and a qualified commitment to the market, even if it may not enjoy the same degree of social cohesion. This likely Chinese interest may explain the timing of Okazaki’s paper. However, the requirement of a strong state may produce perverse incentives for middle-income countries to maintain authoritarian systems of government (even though Japan was not classically authoritarian in that period in its history), and reminds us of unresolved tensions between economic development and democratisation.

Additional References

Alice, A, 1992. Asia’s Next Giant: South Korea and Late Industrialization. New York, NY: Oxford University Press.

Bulman, D, Eden, M, Nguyen, H, 2017. “Transition from Low-Income Growth to High-Income Growth: Is there a Middle-Income Trap ?” Journal of the Asian Pacific Economy, 22(1): 5-28.

Gill, I, Kharas, H, 2007. An East Asian Renaissance: Idea for Economic Growth. Washington DC: The World Bank.

Johnson, C, 1982. MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975. Stanford, CA: Stanford University Press.

North, D, 2005. Understanding the Process of Economic Change. Princeton, NJ: Princeton University Press.

Wade, R, 2003. Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization. Princeton, NJ: Princeton University Press.

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Illusions of Control

Democracy by Mistake

Daniel Treisman (UCLA)

Abstract: How does democracy emerge from authoritarian rule? Influential theories contend that incumbents deliberately choose to share or surrender power. They do so to prevent revolution, motivate citizens to fight wars, incentivize governments to provide public goods, outbid elite rivals, or limit factional violence. Examining the history of all democratizations since 1800, I show that such deliberate choice arguments may help explain up to one third of cases. In about two thirds, democratization occurred not because incumbent elites chose it but because, in trying to prevent it, they made mistakes that weakened their hold on power. Common mistakes include: calling elections or starting military conflicts, only to lose them; ignoring popular unrest and being overthrown; initiating limited reforms that get out of hand; and selecting a covert democrat as leader. These mistakes reflect well-known cognitive biases such as overconfidence and the illusion of control.

URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:23944&r=his

Circulated by NEP-HIS on: 2017-11-05

Revised by Thales Zamberlan Pereira

In his paper “Democracy by Mistake,” Daniel Treisman attempts to provide a new answer to the important question of how democracy emerges from authoritarian rule. Different from previous theories, which attribute the fall of non-democratic regimes to calculated decisions by those in power, Treisman argues that most episodes of democratization happened because dictators – like everyone else – are in fact bad at probabilities. Like all humans, but especially so given their circumstances, dictators are prone to overconfidence and the illusion of control. Living the life of confirmation bias, therefore, non-democratic regimes start to lose their grip on power making avoidable mistakes. Mistakes, of course, are only truly avoidable in hindsight, but the strength in Treisman’s paper relies on his argument that two thirds of his recorded cases of democratization do not fit the usual interpretation that dictators deliberately choose to share or surrender power when democracies start to emerge.

Chile after pinochet

Chile after Pinochet – Source: http://www.bbc.com/news/uk-scotland-24014561

In the democratization by choice category, Treisman presents six common arguments from the literature and divides them into three schools of thought – democracy by bargain, splits within ruling circles, and democracy as a peace-making device. The general argument, nonetheless, is that intentional democratization happens when the ruler weights his probabilities and concludes that if he does not reduce his personal power in the short run, he will have worse problems in the long run – e.g., the dictator will have no money to fight wars or will have people with torches at his front door.

In the democratization by “bad choice” category, the mistakes that lead to democratization are, in a simplified way, the following: ignoring warnings and getting overthrown by popular revolt; calling a referendum or election— and losing; initiating or entering a military conflict—  and losing; enacting partial reforms to stabilize the regime— but undermining it; selecting a leader to preserve the regime— who destroys it; and using repression counterproductively.

To divide cases of democratization between intentional and non-intentional, Treisman analyses 218 episodes since 1800 using two definitions of democracy. The first one is a binary concept, called “qualitative,” which uses data from Boix, Miller, and Rosato (2013).  In their definition, democracy exists in a country when elections are free and competitive, the head of government is either directly elected or answerable to an elected parliament, and at least half the male population has the right to vote. The second definition of democratization is called “directional”, and it uses the Polity IV database, which measures countries regimes on a 21-point scale – from -10 for hereditary monarchies to +10 in the case of consolidated democracies. For a country to be considered a democracy, the Polity IV establishes that it must have a score of at least 6.

olddictator

Some people just can’t let it go

With these categories, how can we interpret the empirical results of the paper? Is it the case that most episodes of democratization happened because dictators, overconfident in their position, made critical mistakes that ultimately undermined their power? The answer, it seems, depends a lot on what the author considers as a mistake. For example, among the episodes of intentional democratization, the end of the military dictatorship in Brazil in 1985 is categorized as a “great compromise.” I agree that this is a good example of intentional democratization due to political compromise, however, one could argue the opposite using the framework presented in the paper. It is known in Brazilian political history that the last military president in Brazil did not begin his term planning to be the last. In fact, his indecision in choosing/supporting a successor led to the strengthening of civil groups demanding increased access to the government (Dimenstein 1985). Therefore, the democratization of Brazil after 1985 also started with a dictator who was overconfident he could maintain the status quo (and who also overestimated his own relative competence). However, is this sufficient to defend the hypothesis that democracy was the outcome of individual mistakes? What about the institutional environment that allowed such significant transformations to happen? It seems that “critical mistakes that undermine power” cannot be restricted to the cognitive biases of “great men.” The fact that democratic reforms are not intentional does not necessarily lead us to the “democracy by mistake” camp.

Another issue of using multiple categories is that sometimes it is not clear which examples are really being used as a mistake. Take the “initiating or entering a military conflict – and losing” category, which account for 6-9 percent of democratization processes, according to the paper. Among the examples is the well-known miscalculated attack by the Argentine military government on the Falkland Islands in 1982. However, Treisman also uses as an example for this category Paraguay’s attack on Brazil in 1864, which started the War of the Triple Alliance. It is strange that these two episodes are bundled together because the death of Solano López (the Paraguayan dictator) was not followed by a democratic government. In fact, the data that Treisman uses also don’t assign this period to a democratic transition: Polity IV only assigns democracy to Paraguay in 1994, and Boix et al. data indicates that Paraguay became democratic in 2003. Moreover, one must not forget that Solano attacked Brazilian officials right after Brazil deposed his allies in Uruguay and potentially ended his access to important continental rivers and the sea. This could be considered a critical mistake, but I couldn’t understand if the author is considering any mistake that weakens authoritarian rule as a valid example, or if his examples are only for when the mistakes turn into a democracy. Does Solano’s choice count as a “leap in the dark” to democracy or not?

Polity_IV_Brazil_1946-2013

Policy IV authority trend for Brazil (with comments)

Treisman asserts that intentionalist theories find weak support in historical cases, but using behavioral science as a mechanism to explain democratic transitions seems insufficient to explain transformations that usually are larger than individuals. Treisman makes arguments such as: “neurological evidence suggests power can impair the ability to process the actions and emotions of others” (p. 28), and “physical and mental deterioration affect[ing] leaders in all systems, they are more likely to impair decision making in autocracies.” (p. 29). Nonetheless, it is surprising that even today dictatorships seem stable in the eyes of those outside it – until the day they are no more. Angola and Zimbabwe are recent examples of this. It seems that there is always the illusion of control, even if dictators stay in power. Isn’t it the case that our mistakes inevitably turn into naive memories that, if not for one detail, make us think that everything could have been different?

References

Boix, Carles, Michael Miller, and Sebastian Rosato. (2013) “A Complete Data Set of Political Regimes, 1800–2007,” Comparative Political Studies, 46 (12), pp. 1523–1554.

Dimenstein, Gilberto. O Complô que elegeu Tancredo (1985). Rio de Janeiro: Editora JB.