Policies for Industrial Development and Structural Reform: Lessons from Japanese Industrialization and Rapid Economic Growth

The purpose of this paper is threefold: to provide a general overview of Japanese industrial policy, to evaluate its results from both an economic and a political economy perspective, and to discuss the outlook for future industrial policy in light of the challenges that currently face Japan's economy and industry.

There are three main points with respect to the role of industrial policy in past economic development: 1)The key factors in Japanese economic development were quality of human capital, vigorous competition between companies, international openness and the resulting competitive pressures and acceptance of foreign technologies, and personal motivation for high growth. In other words, the basic factor was private-sector vitality, 2)Where government intervention has played an important role in economic development has been in policies for appropriate institutional reform and physical infrastructure creation-factors outside of "narrowly-defined industrial policy." Recent theoretical studies show the latent potential for industrial policy to be effective, but there is little evidence of empirical effectiveness. The role of narrowly-defined industrial policy in industrial promotion is secondary and has declined over time, 3)However, there are few cases in which industrial policy has actually proved harmful to Japan and it was not an impediment to growth. There were indeed some aspects of it that were effective, if only marginally so. Japanese industrial policy fit the economic system as a whole, and behind this can be seen the skill with which industrial policy was administered. The fact that the econcmy as a whole was achieving high growth also made it easy to prevent the negative aspects of industrial policy from surfacing.

There are also four points to be made concerning the future role of government action and industrial policy in Japan: 1)Institutional reform is essential to dealing with the challenges that Japan currently faces. This could be a reform period every bit the equal of the Meiji Restoration or the postwar reforms. The focus of industrial policy for the foreseeable future should be on these aspects, 2)Among narrowly-defined industrial policies, the handling of backwards-looking adjustments is likely to be of major importance. The experience of other countries indicates that backwards-looking industrial policies rarely function effectively. Japan has luckily had very few cases of such policies, but judging from its limited experience with them, it cannot be an exception, 3)Industrial policy has changed to keep pace with the times and will continue to do so. Much of this will be a process of trial and error and it is extremely important that failed policies be quickly curtailed. This in turn makes ex-post evaluation of industrial policy of critical importance, 4)The building of these new economic systems will require not only economic structural reform and administrative reform but also judicial reform and educational reform.