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Whither Labor-Intensive Industrialization?

How Did Japan Catch-up On The West? A Sectoral Analysis Of Anglo-Japanese Productivity Differences, 1885-2000

By Stephen Broadberry (London School of Economics), Kyoji Fukao (Hitotsubashi University), and Nick Zammit (University of Warwick)

Abstract: Although Japanese economic growth after the Meiji Restoration is often characterised as a gradual process of trend acceleration, comparison with the United States suggests that catching-up only really started after 1950, due to the unusually dynamic performance of the US economy before 1950. A comparison with the United Kingdom, still the world productivity leader in 1868, reveals an earlier period of Japanese catching up between the 1890s and the 1920s, with a pause between the 1920s and the 1940s. Furthermore, this earlier process of catching up was driven by the dynamic productivity performance of Japanese manufacturing, which is also obscured by a comparison with the United States. Japan overtook the UK as a major exporter of manufactured goods not simply by catching-up in labour productivity terms, but by holding the growth of real wages below the growth of labour productivity so as to enjoy a unit labour cost advantage. Accounting for levels differences in labour productivity between Japan and the United Kingdom reveals an important role for capital in the catching-up process, casting doubt on the characterisation of Japan as following a distinctive Asian path of labour intensive industrialisation.

URL: http://d.repec.org/n?u=RePEc:cge:wacage:231&r=his

Distributed by NEP-HIS on 2015-5-30

Reviewed by Joyman Lee

Broadberry, Fukao, and Zammit focus our attention on productivity comparisons between the UK and Japan, departing from existing works on U.S.-Japan comparisons.

Broadberry, Fukao, and Zammit focus our attention on productivity comparisons between the UK and Japan, departing from existing works on U.S.-Japan comparisons.

Summary

Broadberry, Fukao, and Zammit argue that previous authors such as Pilat’s reliance on a U.S.-Japan comparison to measure Japan’s productivity has greatly distorted our periodization of Japan’s economic growth (Pilat 1994). This was partly because like Japan, the U.S. grew very quickly between 1870 and 1950, and the effects of the Great Depression in the U.S. also blunted our perception of the relative stagnation of the Japanese economy between 1920 and 1950. By comparing the Japanese data with that of the UK, Broadberry, Fukao, and Zammit show that Japanese catch-up began in the late nineteenth century during the Meiji period, and stagnated in the interwar period before resuming again after the Second World War.

In contrast to Pilat, the authors find that manufacturing played an important role in Japanese growth not only after but also before the Second World War. Whereas strong U.S. improvements in manufacturing (the U.S. itself was undergoing catch-up growth vis-à-vis the UK) might have obscured our view of Japanese performance in these areas, comparison with the UK reveals that Japanese manufacturing performed strongly until 1920. In terms of methodology, Broadberry, Fukao, and Zammit emphasize their use of more than one benchmark for time series projections to provide cross checks, and they selected 1935 and 1997 as benchmarks.

One of the most intriguing aspects of the paper is the suggestion that capital played a crucial role in Japan’s experience of catch-up growth. The authors challenge the growing view among economic historians that Asia pursued a distinctive path of economic growth, based on a pre-modern “industrious revolution” (Hayami 1967) and labor intensive industrialization (Austin & Sugihara 2013) in the modern period. Broadberry, Fukao, and Zammit’s data (table 12) shows that across our period, Japan caught up with the UK not only in terms of labor productivity but also capital intensity. Crucially, “by 1979, capital per employee was higher in Japan than in the United Kingdom” (p17). The authors explain this phenomenon by observing that “capital deepening played an important role in explaining labour productivity growth in both countries, but in Japan, the contribution of capital deepening exceeded the contribution of improving efficiency in three of the five periods” (p18). Contrary to the view put forward by those in favor of labor-intensive industrialization, the authors argue, “Japan would not have caught up without increasing [capital] intensity to western levels” (p19).

The authors contend that capital played as important a role as labor in shaping Japan's productivity growth.

The authors contend that capital played as important a role as labor in shaping Japan’s productivity growth.

Comment

This paper provides a valuable quantitative contribution to our knowledge of labor productivity in two countries that are highly important in studies on global economic history. The greater intensity of Japan’s external relations with the U.S. in the period after the Second World War has led to scholars’ greater interest in comparisons with the U.S., whereas as Broadberry, Fukao, and Zammit point out, the UK remains one of the main yardsticks in terms of productivity before the Second World War. In this respect, a comparison with the European experience is valuable, and offers a good quantitative basis for illustrating the character of Japan’s industrialization efforts in the period before the Second World War. The conclusion that manufacturing played a key role in Japan’s catch-up growth vis-à-vis the UK is consistent with the historical literature that has foregrounded manufacturing, and in particular exports to Asia, as the main driver of pre-WW2 Japanese economic growth.

What is more surprising in this paper, however, is the authors’ contention that capital was the primary factor in Japan’s productivity growth. The authors note that until 1970 Japan enjoyed lower unit labor costs vis-à-vis Britain largely because real wages were artificially repressed beneath the level of labor productivity. It was in the 1970s when Japan started seeing increases in real wages, and as a result its labor cost advantage disappeared until faster real wage growth in the UK in the 1990s (p15). In other words, the authors suggest that Japan’s export success was due not so much to improvements in labor productivity as it was to artificially low labor costs. While Japanese labor productivity growth was not exceptional except between 1950 and 1973, the contribution of capital deepening in Japan (2.29% and 1.32% for 1950-73 and 1973-90, as opposed to 0.67% and 0.58% for the UK; table 13) was on the whole greater or at least as much as that of the UK.

While few commentators would dispute the importance of capital in driving economic growth, it is unclear whether the data presented here sustains the conclusion that Japan did not follow a distinctive path of labor-intensive industrialization. The authors cite Allen’s paper on technology and global economic development (Allen 2012) to support their claim that western levels of capital intensity were necessary for productivity-driven growth that is characteristic of advanced industrial economies. While that latter point is well taken, aggregate measures of “capital intensity” do not on their own reflect the types of industries where capital (and other resources) is invested, or the manner in which labor is deployed either to create growth or to generate employment for reasons of political choice or social stability. In fact, proponents of the labor-intensive industrialization argument acknowledge that post-WW2 Japan witnessed a step-change in its synthesis of the labor and capital-intensive paths of industrialization, at the same time that Japanese industries often opted for relatively labor-intensive sectors within the spectrum of capital-intensive industries, such as consumer electronics as opposed to military, aerospace, and petro-chemical sectors (e.g. Austin & Sugihara 2013, p43-46).

Labor-intensive industrialization does not itself preclude high levels of capital investment, e.g. consumer electronics, which employs a great number of individual workers.

Labor-intensive industrialization does not itself preclude high levels of capital investment, for example consumer electronics, which employs great numbers of individual workers.

The key arguments in labor-intensive industrialization are not the role of capital per se, but the constraints imposed by initial factor endowments (e.g. large populations) and the transferability of the model through national industrial policies and intra-Asian flows of ideas and institutions. Broadberry, Fukao, and Zammit do not challenge these core ideas in the model, and confine their critiques to labeling Japan’s technological policy breakthroughs as changes in “flexible production technology” (p. 19). Doing so ignores the basic fact that the balance between population and resources in Japan has little similarity to that in the West, either at the eve of the Industrial Revolution or in the present day. In other words, there is little inherent contradiction between the need for capital accumulation and the selection of industries that make better use of the capital and technology (e.g. “appropriate technology”, Atkinson & Stiglitz 1969 and Basu & Weil 1998).

Finally, it seems to me that basing a critique primarily on a comparative study of the advanced economies of the UK and Japan misses a broader point that labor-intensive industrialization is as much about exploring paths that have been overlooked or inadequately theorized because of our simplistic insistence on “convergence” in economic growth. From this angle, foregrounding the subtle but profound differences between successful models of economic development, e.g. the experience of Japan in East Asia, and dominant Western models seems to be at least as valuable as attempts to reproduce the “convergence” argument.

Additional References

Allen, R 2012. “Technology and the Great Divergence: Global Economic Development since 1820,” Explorations in Economic History, vol. 49, pp. 1-16.

Atkinson, A & Stiglitz, J 1969. “A New View of Technological Change,” Economic Journal, vol. 79, no. 315, pp. 573-78.

Austin, G. & Sugihara, K (eds.) 2013. Labour-Intensive Industrialization in Global History. Abingdon, Oxon.: Routledge.

Basu, S & Weil, D, 1998, “Appropriate Technology and Growth,” The Quarterly Journal of Economics, vol. 113, no. 4, p. 1025-54.

Hayami, A, 1967. “Keizai shakai no seiretsu to sono tokushitsu” (The formation of economic society and its characteristics”) in Atarashii Edo Jidai shizō o motomete, ed. Shakai Keizaishi Gakkai. Tokyo: Tōyō Keizai Shinpōsha.

Pilat, D 1994. The Economics of Rapid Growth: The Experience of Japan and Korea. Cheltenham, Glos.: Edward Elgar Publishing.

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On #Trade, #Globalization, #Development and Steamships

The Wind of Change: Maritime Technology, Trade and Economic Development

by

Luigi Pascali (L.Pascali@warwick.ac.uk) University of Warwick (UK) and Pompeu Fabra University (Spain)

ABSTRACT

The 1870-1913 period marked the birth of the …first era of trade globalization. How did this tremendous increase in trade affect economic development? This work isolates a causality channel by exploiting the fact that the steamship produced an asymmetric change in trade distances among countries. Before the invention of the steamship, trade routes depended on wind patterns. The introduction of the steamship in the shipping industry reduced shipping costs and time in a disproportionate manner across countries and trade routes. Using this source of variation and a completely novel set of data on shipping times, trade, and development that spans the great majority of the world between 1850 and 1900, I …find that 1) the adoption of the steamship was the major reason for the …first wave of trade globalization, 2) only a small number of countries that were characterized by more inclusive institutions bene…fited from globalization, and 3) globalization exerted a negative effect on both urbanization rates and economic development in most other countries.

URL: http://econpapers.repec.org/paper/wrkwarwec/1049.htm

Review by Natacha Postel-Vinay

The 1870-1913 period saw the first significant wave of trade globalization, which introduced important economic and social changes throughout the world. Despite an abundant literature on the causes of globalization at the time, there are significant methodological issues with these studies. Even more surprisingly, very little has been said about the impact of globalization in this era on the economies of countries around the world. In particular, an essential question to ask seems to be whether the increase in trade witnessed at the time was conducive to greater economic development worldwide.  In a highly ambitious move, Luigi Pascali’s paper (distributed by NEP-HIS on 2014-07-13) tackles both issues at the same time, and in so doing contributes significantly to the larger debate on the causes and consequences of trade globalization.

The main challenge in answering these two questions is to deal in each case with an endogeneity problem. Start with the causes of the trade boom. In their attempts to determine whether the rise in international trade could be due to transportation costs, authors have often used freight rates as a proxy for these costs. The problem with this approach is that freight rates are the actual price of transportation. They may be affected by factors which are themselves related to the state of trade (such as demand for goods or economic activity). So causation may not actually run from freight rates to trade – but from other factors related to trade to freight rates.

A similar issue arises when looking at the causal relationship (if any) from trade to economic development. As economic activity may itself have a positive impact on trade – and not just the other way around – a researcher dealing with this question may find a positive correlation between the two but will eventually be faced with a potential endogeneity problem.

Pascali found a creative solution to these difficulties. He did so by making use of the fact that the steamship introduced asymmetric changes (ie. exogenous variation) in trade distances between countries.  Before the steamship, shipping times by sail were mainly determined by wind patterns. The steamship therefore introduced greater changes in shipping times between some countries than between others. Such changes were purely independent of other factors affecting trade, and only linked to such things as the direction of wind and water currents. It thus became possible for the author to examine the effect of a large change in shipping time on trade, independent of other factors linked to trade such as economic activity or market structure.

Clipper ship from the 1850s.

Clipper ship from the 1850s.

To compute such a variable, Pascali built an enormous dataset on sailing times (using such variables as velocity and direction of sea-surface winds) and calculated the likely effect of the adoption of the steamship on shipping times for 129 countries between 1850 and 1900. He also expanded available datasets to include more than 5,000 entries on imports and exports and data on urbanization for more than 5,000 different cities.

What he found was that the introduction of the steamship had a much larger (positive) impact on trade than was previously thought.

Pascali also found that he could use the steamship variable to search for causal links running from trade to greater income levels and development. As mentioned above he had isolated changes in shipping times including the influence of countries’ economic activity. But these changes were strongly related to trade itself. They were then used as instrumental variable in a two-stage least squares (2SLS). In other words, this variable effectively dealt with the endogeneity problem in the analysis of the effects of trade on development.

His results were somewhat surprising. Using this variable as an instrument, the regression of development (urbanization, population density and per-capita GDP) on trade yielded mostly significant but negative coefficients on the explanatory variable. It therefore appears that variation in the intensity of trade between two locations does not have a large impact on development – and may even have a negative one.

Even more interestingly, his findings suggest that whether an increase in trade has a positive impact on development depends on a country’s institutions:  only a few countries having a better established rule of law (as measured by “constraints on the executive” – taken from Acemoglu and Johnson (2005)) benefited from an increase in international trade in terms of development. This finding can be related to relatively recent literature (such as Krugman (1991) or Crafts and Venables (2007)) according to which a reduction in trade costs is only beneficial to a certain set of countries (in particular, those specializing in manufacturing).

A steamship from the 1900s.

A steamship from the 1900s.

Pascali’s paper thus contributes to questioning the positive effects of lowering trade barriers, which are too often taken for granted. He carefully suggests that trade may have a differential impact depending on countries’ institutions. Perhaps some elaboration and discussion on how exactly these relationships play out would have been welcome.  Nevertheless the author’s questions, creative methodology and findings all make for a fascinating read.

Additional References

Acemoglu, D. and S. Johnson (2005). “Unbundling institutions”. Journal of Political Economy 113(5): 949–995.

Crafts, N. and A. Venables (2007). Globalization in Historical Perspective. University of Chicago Press.

Krugman, P. (1991). “Increasing returns and economic geography”. Journal of Political Economy 99: 483-499.