Getting Globalization Right: The Japanese Exception

明治大帝,before Westernisation

Today, in collaboration with Americas Quarterly, we’re publishing the first of a series of three articles on globalisation and the fight against poverty by Dani Rodrik, Professor of International Political Economy at the John F. Kennedy School of Government, Harvard University.  You can read a print version in AQ’s Spring 2012 edition on social inclusion (AQ’s own version of the article is here).

The proximate cause of poverty is low productivity. Poor people are poor because their labor produces too little to adequately feed and house them, let alone provide adequately for other needs such as health care and education.

Low productivity, in turn, has diverse and multiple causes. It may be the result of lack of credit, lack of access to new and better technologies, or lack of skills, knowledge or job opportunities. It may be the consequence of small market size, or exploitative elites, in cahoots with the government, who block any improvement in economic conditions that would threaten their power.

Globalization promises to give everyone access to markets, capital and technology, and to foster good governance. In other words, globalization has the potential to remove all of the deficiencies that create and sustain poverty. As such, globalization ought to be a powerful engine for economic catch-up in the lagging regions of the world.

And yet, the past two centuries of globalization have witnessed massive economic divergence on a global scale. How is that possible? This question has preoccupied economists and policy makers for a long time. The answers they have produced coalesce around two opposing narratives.

One says the problem is “too little globalization,” while the other blames “too much globalization.” The debate on globalization and development ultimately always comes back to the conundrum framed by these competing narratives: if we want to increase our economic growth in order to lift people out of poverty, should we throw ourselves open to the world economy or protect ourselves from it?

Unfortunately, neither narrative offers much help in explaining why some countries have done better than others, and therefore neither is a very good guide for policy. The truth lies in an uncomfortable place: the middle. It’s a point best illustrated by the country that has contributed the most—given its overall size—to the reduction of poverty globally: China. China, in turn, learned from Japan’s example, as did other successful Asian countries.

In the aftermath of the Industrial Revolution, globalization enabled new technologies to disseminate in areas with the right preconditions, but also entrenched and accentuated a long-term division between the core and the periphery. Once the lines were drawn between industrializing and commodity-producing countries, strong economic dynamics reinforced the division. Commodity-based economies faced little incentive or opportunity to diversify. As Jeffrey G. Williamson shows, this was very good for the small number of people who reaped the windfall from the mines and plantations that produced commodities, but not very good for manufacturing industries that were squeezed as a result. The countries of the periphery not only failed to industrialize; they actually lost whatever industry they had. They deindustrialized.

Geography and natural endowments largely determined nations’ economic fates under the first era of globalization, until 1914. One major exception to this rule would ultimately become an inspiration to all commodity-dependent countries intent on breaking the “curse.” The exception was Japan, the only non-Western society to industrialize prior to 1914. Japan had many of the features of the economies of the periphery. It exported primarily raw materials – raw silk, yarn, tea, fish – in exchange for manufactures, and this trade had boomed in the aftermath of the opening to free trade imposed by Commodore Matthew Perry in 1854. Left to its own devices, the economy would have likely followed the same path as so many others in the periphery.

But Japan had a local group of well-educated, patriotic businessmen and merchants, and even more important, following the Meiji Restoration of 1868 a government that was single-mindedly focused on economic (and political) modernization. That government was little moved by the laissez-faire ideas prevailing among Western policy elites at the time. Japanese officials made clear that the state had a significant role to play in developing the economy, even though its actions “might interfere with individual freedom and with the gains of speculators.”

Many of the reforms introduced by the Meiji bureaucrats were aimed at creating the infrastructure of a modern national economy: a unified currency, railroads, public education, banking laws, and other legislation. Considerable effort also went into what today would be called industrial policy – state initiatives targeted at promoting new industries. The Japanese government built and ran state-owned plants in a wide range of industries, including cotton textiles and shipbuilding. Even though many of these enterprises failed, they produced important demonstration effects. They also trained many skilled artisans and managers who would subsequently ply their trade in private establishments.

Eventually privatized, these enterprises enabled the private sector to build on the foundations established by the state. The government also paid to employ foreign technicians and technology in manufacturing industries and financed training abroad for Japanese students. In addition, as Japan regained tariff autonomy from international treaties, the government raised import tariffs on many industrial products to encourage domestic production.

These efforts paid off most remarkably in cotton textiles. By 1914, Japan had established a world-class textile industry that was able to displace British exports not just from the Japanese markets, but from neighboring Asian markets as well. (For varying accounts of the role played by the state and private industry in the take-off of cotton spinning in Japan, see W. Miles Fletcher and Gary Saxonhouse)

While Japan’s militarist and expansionist policies in the run up to the Second World War tarred these accomplishments, its achievements on the economic front demonstrated it was possible to steer an economy away from its natural specialization in raw materials. Economic growth was achievable, even if a country started at the wrong end of the international division of labor, if you combined the efforts of a determined government with the energies of a vibrant private sector.

In the next article, I’ll look at how the experience of Asian tigers after the Second World War (South Korea, Taiwan, Hong Kong, Singapore, Malaysia, Thailand, and Indonesia) reinforced the lesson.

Useful links

This series is adapted from Dani Rodrik’s The Globalization Paradox: Democracy and the Future of the World Economy published by Norton

Americas Society – Council of the Americas

Perspectives on global development (publications from the OECD Development Centre)

Natural Resources and Pro-Poor Growth: The Economics and Politics

OECD work on poverty reduction and social development

OECD work on the benefits of trade liberalisation

Comparative advantage: Doing what you do best (from the Insights blog)

OECD Forum 2010: Trade, jobs and innovation

Neanderthals had big brains. Several species of primates used tools and had elaborate social systems. But we invented shopping, and that meant we conquered the Earth, not them.

There, in a nutshell is the explanation of Homo sapiens’ amazing success, according to Matt Ridley’s latest book, The Rational Optimist . Or in a seashell. Archaeological evidence from around 80,000 years ago suggests that our ancestors stopped relying on whatever they could collect or kill in their own territory and started swapping local produce for imports from other areas, including luxury goods such as ornamental shells (although of course these may have had significant symbolic value).

As Ridley points out, this means that a single human had access to objects he or she couldn’t find or make. But they didn’t just swap steaks for necklaces. They were also trading services, and more importantly, knowledge. Even if all the members of the group didn’t understand a particular piece of knowledge, they all benefited.

As knowledge grew, so did specialisation. For example after the invention of agriculture, surplus production could be distributed by a new breed of specialist – the trader. Trade in turn encouraged innovation – from better alphabets and arithmetic in its early days, to insurance later on, to today’s global telecommunications networks.

Trade then, has always encouraged and disseminated innovation. What gets traded is changing though. As several panellists pointed out in this session, today finished products have only a minor share in world trade. With the globalisation of value chains, most trade is in intermediate goods – circuit boards, semi-finished products and the like needed to make other things. Unfortunately, trade statistics do not reflect the value added at each point along the chain.

This is one reason many people are worried about the rise of the emerging economies. They only see the “made in China” label, and while it’s true that the final product was assembled there, it was probably designed elsewhere and may contain parts and software from a dozen countries or more.

This multinational sourcing and specialisation means we all have access to far more goods, far more cheaply than ever before. But it also means that some traditional business can no longer compete. The panellists agreed that protectionism wasn’t the solution, for at least two reasons. Other countries would retaliate, and the country imposing the “protection” would actually handicap its own businesses by making inputs more expensive.

So the best way to strengthen employment and foster innovation is to open up to the world economy. But also to make sure that workers and firms have the capacities to take advantage of new markets and ways of doing things. This means investment in “capacity building”, a term that covers R&D and training, as well as physical infrastructures like ports or railways, and the less tangible, but no less important aspects such as business organisation and financial and legal institutions.     

The overall conclusion seemed to be that governments had resisted protectionism during the recessession, but that the temptation could re-emerge if recovery was slower than expected.

Useful links

OECD work on trade

How imports improve productivity and competitiveness

Trade, policy and the economic crisis

Why open markets matter