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Japanese Capital Formation: The Role of the Public Sector*

Published online by Cambridge University Press:  03 February 2011

Henry Rosovsky
Henry Rosovsky
Affiliation:
University of California, Berkeley
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Extract

Assessing the role of government in economic development in situations where public and private sectors coexist is extremely difficult. The nature of modern government is so complex and its activities are so broad, that a clear statement of “influence” or “impact” on a national economy becomes almost impossible. Interpretations of Japanese economic history illustrate these problems vividly. Few scholars have dealt with the issue explicitly, and those that have seem unable to reach clear conclusions.

Type
Articles
Information
The Journal of Economic History , Volume 19 , Issue 3 , September 1959 , pp. 350 - 375
Copyright
Copyright © The Economic History Association 1959

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References

1 “Government, through national policy, of course dug the channels within which it was profitable for enterprise to flow, but more by determining directions and gross measures and by providing a nutritive milieu than by direct executions and decisions. The economy served state policy as faithfully as it did, it seems, because the Japanese shared in a remarkable consensus with the bureaucrats and oligarchs the convictions that state power and national welfare are indeed overriding goods, and that they can be maintained only through unity of effort led by competent authority.” Pelzel, John C., “The Small Industrialist in Japan,” Explorations in Entrepreneurial History, VII (December 1954), 81.Google Scholar

2 In English, the best general statement and description of the problem can be found in Lockwood, William W., The Economic Development of Japan: Growth and Structural Change, 1868—1938 (Princeton: Princeton University Press, 1954)Google Scholar, ch. x. See also Norman, E. Herbert, Japan's Emergence as a Modern State (New York: Institute of Pacific Relations, 1940)Google Scholar; Allen, G. C., A Short Economic History of Modern Japan (London: George Allen and Unwin, Ltd., 1945)Google Scholar; Moulton, Harold G., Japan: An Economic and Financial Appraisal (Washington, D.C.: The Brookings Institution, 1931)Google Scholar; Smith, Thomas C., Political Change and Industrial Development in Japan: Government Enterprise, 1868–1880 (Stanford: Stanford University Press, 1955).Google Scholar A most illuminating discussion will also be found in Hubbard, G. E., Eastern Industrialization and its Effect on the West, with Special Reference to Great Britain and Japan (London: Oxford University Press, 1935).Google Scholar Of all the works cited Hubbard's views are closest to my own.

3 See Kaysen, Carl, “On Defining a Subsidy,” Public Policy, IV (1953), 3–10.Google Scholar

4 For more detailed definitions and a discussion of the sources refer to the Appendix.

5 This method of comparing public and private investment tends, perhaps, to understate the role of private enterprise. Government purchases were produced by private firms and depended on the ability of the private sector to deliver the needed commodities. I have, of course, no intention of depreciating the undoubtedly important role of private enterprise in Japanese development. On the other hand, the entrepreneurial tasks of private business must have been significantly altered by large government purchases of durable goods.

For my present purposes, the role of government in economic development is shown by its contributions to civilian and military capital formation. A number of alternative formulations could perhaps be quantified, such as government demand for goods and services or government demand for the output of heavy industry.

6 See Kobayashi, Ushisaburo, The Basic Industries and Social History of Japan, 1914–1918 (New Haven: Yale University Press, 1930), pp. 1–8.Google Scholar

7 Because my effort at the moment is directed toward quantifying the broad impact of government as seen through its expenditures on durables, military equipment is considered as a part of investment. For those who feel that military expenditures must be uniformly classified as consumption, I add Table 3. This table entirely drops military expenditures, and redefines investment in terms of exclusively civilian components. Government still retains a major share of total investment. For fifty years it averaged 44.9 per cent.

Table 2 deals only in ratios, and because of this the situation in the 1920's may be somewhat misleading. Some of the relative increase in public investment is caused by the decline of private investment.

8 It must be remembered that government in the present context means central and local government. Since all military expenditures in this system of computation take place at the central level, the military expenditures of that sector taken alone would form a much heavier proportion of expenditures. See Table 6. On the basis of these distributions, one might perhaps suggest that in Japan, central-government investment was primarily military, while local-government investment was more developmental. But this interpretation attaches too much importance to a technical accounting division.

9 A further complication starts in 1911, when we begin measurement of private corporate inventory investment. As a rule, the addition of this series increases the amount of private relative to public investment, but inclusion of inventory investment does not change the general conclusions. During the entire period the amount of private investment would have been somewhat larger. During the spurt, private investment still outstrips the public sector, although by a much smallel margin. It is likely that if inventories were included sooner, public and private investment would reach positions of equality at an earlier date.

The actual inventory series gives its first flow figure for 1915, which means that the first five-year total will be centered in 1917. But since total gross investment is also a five-year moving total, the influence of inventories will start in 1911.

10 It would have been especially instructive to make a comparison with nineteenth-century Russia and Germany, but I have not been able to find the necessary data.

11 Norway and Hungary are at about the same level for different time periods, and Canada lies far below this. It is noteworthy that the great upheaval of defeat and subsequent American democratization does not seem to have upset the traditional Japanese investment pattern. Government stands high and, according to the latest figures, is rising.

12 In the postwar period a number of countries have approached Japan in the intensity of government investment. For example, in Israel and Ceylon, government investment accounts for over 50 per cent of all investment, and in Burma and Mexico, government investment is 40 per cent of the total. See Lubell, Harold and others, Israel's National Expenditure, 1950–54 (Jerusalem: Falk Project for Economic Research in Israel and Central Bureau of Statistics, 1958), p. 23Google Scholar, and Aubrey, Henry G., “Mexico: Rapid Growth,” in Economic Development: Principles and Patterns, ed. Williamson, Harold F. and Buttrick, John A. (New York: Prentice-Hall, Inc., 1954), p. 539.Google Scholar Aubrey adds a conclusion which is applicable to most countries: “[The importance of Government expenditures] for economic development is inadequately expressed by investment figures, for they are the nucleus of further progress in which private investment can participate more prominently.” One can infer that countries that are trying to overcome economic backwardness today follow—in so far as government investment is concerned—a path that resembles the Japanese pattern.

13 The time series clearly show the effects of the following events: the Satsuma Rebellion of 1877, the naval program of the 1880's, the Sino-Japanese War of 1894, the Russo-Japanese War of 1905, the mild impact of World War I, brief disarmament in the 1920's, and rapid arming since the Manchurian incident of 1931. See Borton, Hugh, japan's Modern Century (New York: The Ronald Press Co., 1955), pp. 85 and 157.Google Scholar

14 Werner Sombart assumed that standardized mass provision for war was among the decisive conditions affecting the development of modern capitalism. Max Weber believed that this was overstating the case and said, “… the army needs were met to an increasing extent, developing in parallelism with capitalism itself, by the military administration on its own account, in its own workshops and arms and munition factories; that is, it proceeded along noncapitalistic lines.” See General Economic History, trans, by Knight, F. H. (Glencoe, Illinois: The Free Press, 1950), p. 309.Google Scholar In the case of industrial latecomers, Weber's view misses an important point. Military technology has not stood still. In the nineteenth century it underwent revolutionary changes, making it technologically more complex. The manufacturing of military equipment became a branch of capital-intensive heavy industry. A few conclusions would seem to follow. Military demand probably became more important as technology developed, and military demand undoubtedly played a larger role in countries that industrialized after the new technology reached a certain state of maturity.

15 The figures underlying the graph derive from measurements of government investment, the sources of which are indicated in the Appendix.

16 A few words must be said about changing prices in Japan. This analysis is carried out only in current prices. Deflating has been avoided because the relevant indices are not believed to be adequate. Is it not possible, then, that these government construction cycles are only reflections of the changing price level? If it is permissible to use the best Japanese price index to supply the answer, then this is clearly not the case. The wholesale price index shows only very moderate increases from 1902 to 1916, and declines irregularly from 1919 to 1931. Some of my Japanese friends assure me that the wholesale price index is the best available indicator of the direction of change of over-all business conditions. If this is the case—and no other measure seems readily available—it is possible to conclude that government construction on a number of occasions moved in the opposite direction of general business activity. This was obviously so throughout the 1920's. See Ohkawa and others, Part II, ch. iv.

17 I have calculated the proportions that natural disaster expenditures constituted of total central-government construction outlays. At best this is an imperfect measure of the impact of natural disasters. The calculations had to be restricted to central-government construction and leave out local government, equipment, and the entire private sector. At times, reconstruction expenditures became very large. For example, in the late 1880's or the early 1890's, during the first construction cycle, disaster reconstruction reached 65 per cent of all public construction. In this period there were serious earthquakes in Gifu and Aichi Prefectures and a tidal wave at Sanriku. In 1923, the worst disaster of Japan's recorded history almost annihilated the Tokyo-Yokohama region. The Great Earthquake, taking a toll of over 700,000 dwellings, had long-range effects and explains the pattern of government construction during the third cycle on record. From 1924 to 1928, reconstruction expenditures averaged 30 per cent of all public construction. The initial steep upswing of the third cycle was the result of two entirely different forces: a sharp rise in the price level during World War I and a general economic expansion during a period of great prosperity. The continued extraordinarily high level of expenditures, however, must be attributed to government attempts to restore and rebuild the devastated areas.

For a short account of the history of Japanese natural disasters, see Tsuneta Yano Memorial Society, Nippon: A Chartered Survey (Tokyo, 1957), pp. 262 ff.Google Scholar

18 Table 6 indicates that military expenditures are of much greater importance in the durable-equipment sector. In construction these expenses are rather minor.

19 For example, Aubrey, Henry G., “The Role of the State in Economic Development,” American Economic Review, Papers and Proceedings, XLI, no. 2 (May 1951)Google Scholar, and “Deliberate Industrialization,” Social Research, XVI, no. 2 (June 1946).Google Scholar