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Japan’s economic crisis during the 1990s Was the crisis in Japan during the 1990s due to its model for economic development? Content: 1. Introduction 2. Japan, a late developer 2.1. The origins of economic inequality 2.2. A model for economic growth 2.3. A model of state-led development 3. The Japanese model of development 3.1. A social model of development 3.2. Japan’s model of capitalism 3.3. Managerial advantages 4. The crisis of the Japanese model of development 4.1. High non-performing loans 4.2. High-technology 4.3. The bubble burst in 1991 4.4. Financial institutions exposed to global financial markets 5. Conclusion Introduction Until the end of the 1980s, Japan was considered, rightly, to be the world’s success story of economic development and technological modernisation of the past half-century. After its defeat in World War II, Japan achieved an extraordinary hyper economic growth and a technological transformation that enabled the country to succeed in the process of catching up with the Western European states and North America. This “Japanese economic miracle” was, initially, based on the so-called Kaldorian strategy that allowed the states, which had started to industrialize after Britain, to develop successfully. But most importantly, the Japanese success was due to its model of state-led economic development, which not only induced its own revival after World War II, but also provided a role-model that has been admired by many other countries. By the 1980s, the major state’s interest in Japan had intensified considerably. It seemed, Japan had redefined the notion of competition, the organisation of production, and economic progress and development (“Explaining the Japanese economic miracle”, Japan and the World Economy, 2001, Vol. 13, Issue 3). Then suddenly, in 1991, the speculative bubble in Japanese land and stock prices burst, and the Japanese economy began its long slide through lower growth rates into recession. While in 1999 the Japan’s economy seemed to be on its way to recovery, most of the problems underlying the financial crisis were unsolved, so that the restructuring of the country was still unfolding at the turn of the century (Castells, 2000: 233). If we are to expect a successful restructuring of Japan, we should determine the factors that caused the decline of the Japanese economy. I suggest that the state guidance that had been seen, before the bubble burst, as one of the main engines driving Japanese economic success and was now regarded as inept and rudderless, could be the main problem underlying the Japanese crisis. In doing that, my purpose here would be to examine whether the crisis in Japan during the 1990s was due to its model for economic development. In order to do that, I will first look at Japan, as a late developer. Secondly, I will outline the Japanese model for development. And finally, I will explain the factors that were crucial in the Japanese financial crisis. Japan, a late developer The origins of economic inequality The industrial revolution in Britain at the end of the 18th century posed a great challenge for the rest of the world. However, it did not change the inner working of the world economy so much as it accelerated a process that was already underway. A process of economic inequality, explained by the 19th century economist, Johann von Thunen, that emerged after 1400 and that originated from the global economy. Von Thunen created a town that produced manufactures and exported them to the farms around it, while these supplied the town with agricultural products and raw materials. Referring to this distinction, I will also use the terms core and periphery. Von Thunen argued that it would generate a spatial division of labour with sharp disparities in incomes between the core and the periphery. The outermost rings would have much lower incomes than the town. Consequently, the cause for this economic inequality would be the periphery’s engagement in commerce with the core. The economic growth generated by the industrial revolution underpinned Britain’s rise to global hegemony after 1814 (Schwartz, 2000: 77). Similar to Von Thunen’s town, Britain’s exploding demand for raw materials and rising industrial population pushed agricultural production out of Europe, generating a global set of agricultural production rings. But Von Thunen argued that although the urban industrial core exerted pressure into the peripheral zones, this did not necessarily mean underdevelopment or lower living standards. The industrial revolution in Britain drove the states in the periphery to an industrial backwardness, but in the same time forced them into more intensive development. Japan was one of the many states that was driven to the periphery and that started to industrialize four generations after Britain. A model for economic growth As a late developer, Japan succeeded in catching up with the Western world. It applied, initially, a model for industrial growth, called a Kaldorian strategy. This strategy relied mainly on the so-called verdoorn effects or increasing returns to scale. This meant that if a firm increased its output, the productivity of the same firm would increase also. Another element of the Kaldorian strategy was learning by doing. If a given firm increased its production, it would have enough experience in its production process to become more efficient at producing its goods. Ignoring Ricardo’s comparative advantage, a state, which initially was not competitive in the production of a good, could become competitive through a process of learning by doing. A state that applied the Kaldorian strategy would be oriented towards the production of manufactures and their export. Most importantly, the Kaldorian strategy for economic growth attempted to construct a new town somewhere in the agricultural or low value industrial supply zones surrounding a larger town (Schwartz, 2000: 62). The British demand for raw materials forced the Asian states to become exporters of primary products to Britain. This, in turn, created demand for manufactured goods inside East Asia and the returns derived from the exports to Europe allowed the East Asian states to pay for the industrial products. Japan was the state that started to satisfy the intra-Asia’s demand for manufactures, creating an industrial town there, reorienting production around itself and therewith stimulated growing demand that, finally, displaced the pressure emanating from the larger town, Europe. Japan took advantage of the East Asian textile market, which had remained untouched by the European producers. The country used the agricultural surplus to fund its initial investment in the local textile production. By applying the verdoorn effects and by concentrating capital for investment in its nascent industry, Japan increased its textile productivity to the point where it could compete with Europe.
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