#97-DOF-25 "Policies for Industrial Development and Structural Reform:
            Lessons from Japanese Industrialization and Rapid Economic
            Growth"
          ¡ÊMasayuki Morikawa, March 1997.¡Ë

A WHOLE SENTENCE

ABSTRACT

    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.