Economics

Chapter 1: Economic Environment of East Asia. Regional

integration and globalization.

General features
East Asia and other subregions
 East Asia countries: Greater China (People’s Republic of China, Taiwan, Hong Kong and
Macau), Japan, South Korea, North Korea, Mongolia.
 South East Asia:
-Continental: Cambodia, Laos, Mynmar, Thailand.
-Insular: Malaysia, Singapore, Brunel, Indonesia, Timor East, Philippines, Papua New
Guinea.
 South Asia: India, Pakistan, Bangladesh, Sri Lanka, Maldives.
 Central Asia: Former USSR, Kazakhstan, Uzbekistan, Tajikistan, Turkmenistan…

The demographic factor

 Asia
o The biggest continent and the most populated (almost 4.7 billion people)
o Area and population / total: 30% of total land area BUT 63% total population.
Asia has a high density of population.
o Population density: 150
o 51% urban population
o Fertility rate 2.2

 East Asia
o 1.7 billion people
o 23% of world’s population
o 11,8 million Km2
o Population density: 145 (P/km2)
o 64% urban population
o Fertility rate: 1,7

 South East Asia

o 670 million people
o 9.1% world’s population
o 4,3 million km2
o Population density: 154 (P/km2)
o 50% urban population
o Fertility rate: 2.2
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Was it always like that?

In modern history, Asia has always been the most populated continent.

The population of China, for instance, has oscillated between 20 and 35% of the world’s total
population. Nowadays is below average (around 19%).

From 1950s onwards, the population of Europe and North America have declined (in relative
terms) while the percentage of the African population has risen.

In 2000, the share of African population is higher than Europe’s.

In Asia, since 1970s the share of total population has remained stable (as well as America’s).

East Asia has been the region where economic growth has been more sustained (“economic
miracles”). 50% of the world’s economic growth comes from Asia.

GDP: The production of a country per year. How powerful the country is. Also show the
development. Production=Income=Value Added

The size of Asia in the world economy

In the last decades, Asia has been the most dynamic region in the world, especially China. The
GDP of Asia (PPP) is now superior to the European Union, the United States and the rest of the
world. However, Asia’s share of the world GDP is still inferior to its population’s share.

The distribution of wealth in Asia

According to the classification of the World Bank:

 Top high income: Brunei, Hong Kong, Macau.

 High Income: Japan, South Korea, Taiwan.
 Middle-high income: Malaysia, China and Thailand.
 Lower Middle Income: Indonesia, Vietnam, India.
 Lower Income: North Korea, Afghanistan, Nepal.

The income per capita it’s a good way to know how developed a country is. That does not
mean that this income it’s distributed in the country equally.

What factors may contribute to economic growth?

 Demography
 Natural Resources
 Technology
 Institutions

Production function:

Q=f (K,L,P)

Q: output
K: physical capital
L: labour
P: land
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If you take into account these three factors it has a relation with institutions, technology, and
demography. Always take into considerations these factors to analyze the function of
production.

1960s-present
Contextual history
Between 1945 and 1960, three dozen new states in Asia and Africa achieved autonomy or
outright independence from their European colonial rulers. There was a process of
decolonization. In some areas, it was peaceful, and orderly. In many others, independence was
achieved only after a protracted revolution.

During World War II Japan, itself a significant imperial power, drove the European powers out
of Asia. After the Japanese surrender in 1945, local nationalist movements in the former Asian
colonies campaigned for independence rather than a return to European colonial rule. In many
cases, as in Indonesia and French Indochina, these nationalists had been guerrillas fighting the
Japanese after European surrender or were former members of colonial military establishments.
These independence movements often appealed to the United States Government for support.

The Cold War is a term commonly used to refer to a period of geopolitical tension between the
United States and the Soviet Union and their respective allies, the Western Bloc and the Eastern
Bloc.

The term "Third World" arose during the Cold War to define countries that remained non-
aligned with either NATO or the Warsaw Pact.

The golden age of growth 1950-73

 World’s economic recovery after the devastation of war.
 Growth is spread in Communist and Capitalist countries alike.
 Japan is the country where growth is higher (the Japanese miracle)
 Asia remains the second larger region in economic growth (in terms of GDP is almost
the same as in the Western Europe)7

Economic convergence and divergence during the Golden Age

The Japanese economic miracle refers to Japan's record period of economic growth between
the post-World War II era and the end of the Cold War. During the economic boom, Japan rapidly
became the world's second-largest economy (after the United States). By the 1990s, Japan's
population demographics had begun to stagnate, and the workforce was no longer expanding
as quickly as it had in the previous decades’ despite per-worker productivity remaining high.

One reason for Japan's quick recovery from war trauma was the successful economic reform by
the government. The "Inclined Production Mode" refers to the inclined production that primarily
focuses on the production of raw materials including steel, coal and cotton. Textile production
occupied more than 23.9% of the total industrial production. Moreover, to further stimulate
growth, the Japanese government encouraged women to enter the labor market.

The second reason that accounts for Japan's rapid recovery from WWII was the outbreak of the
Korean War. As the United States was participating in the conflict on the Korean Peninsula, it
turned to the Japanese economy for procurement of equipment and supplies because the
logistics of shipping from the States soon became a significant problem for the military. Japan's
industry was soon providing the required munitions and logistics to the American forces fighting
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in Korea. The demand stimulated the Japanese economy enabling it to recover quickly from the
destruction of the Pacific War and provide the basis for the rapid expansion that was to follow.

Liberal state Welfare state Developmental state

USA, UK France, Germany Japan, South Korea
-Non-intervention (except -Mixed economy -Industrial policy
military) -Strong Welfare policies -Weak welfare policies
-Weak welfare policies -Consumption -Savings
-Consumption (Capitalism) -Keynesianism -Developmental State
-Monetarism -Low inequality -Low inequality
-High inequality

The Import Substitution Industrialization

Many countries decided that they wanted to do an industrialization.

 Dependency theory: Latin America, Middle East, India and other developing countries.
 High protectionism to industrial production and technology. The state tries to make
industrialization work.
 Economic policies prioritize industry instead of agriculture and/or services
 Industries are noncompetitive (because they are not updated)
 Inflation, scarcity of agricultural production (lack of help of the State)

At the end it produced a lot of problems that made think that maybe this is not the correct
way to growth economy. In most cases this import substitution is a failure.

The Export Oriented Industrialization

This emerges later than the Import Substitution and particularly it developed in Asia. This
policy is a very different point of view, they wanted to make the products the cheapest
possible.

 The state supports exports of manufactured goods.

 Industrial production is for export, not to sale in home.
 The state keeps a presence in the economy, it does not follow a laissez-faire policy.
 Private companies obey the state directives and strategies.
 The state does not open the country to financial flows: foreign that want to sell in
these countries need to be accepted.
 Emphasis on education, bureaucracy is meritocracy and technocratic.
 The state counters economic inequalities: land reform, high taxing, informal controls
over the capitalistic class…
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The flying geese pattern

The second globalization on wave, 1980-now

 1989-90s: Collapse of the USRR and of Communism, Capitalism is the only choice, and
the US, becomes the winner.
 Capitalist ideology becomes more radical: free trade, neoliberalism: the state has no
role in the economy, rich and poor are questions of merit (nonintervention), free
movement of capital.
 Multinationals delocalize production seeking better production costs, Production is
fragmented in niches. Asia receives Western companies and technology is transferred.
 IT Revolution (Third Industrial Revolution): popularization of PCs, internet, mobile
telephones. Huge growth of technology, industries of software & hardware.
Production of devices take a place in Asia
 From 1980s onwards: China starts the biggest and most impressive period of economic
growth in world history.

The fragmentation of production

 Since the 1970s, the end of the Bretton Woods system allows capital to move
worldwide freely.
 Production of any object can be divided between parts that are allocated in the most
efficient market.
 Multinational companies look for the most efficient places to produce.
 Asia is industrialized while Western Europe and the USA is progressively
deindustrialized.
 A multinational company becomes a worldwide contractor, skipping the regulations of
countries.

Basically, companies start to produce devices together, for example, a PC. The RAM could
be from Japan, the graphic could be form US, the case from Taiwan etc…

The crisis of 1997/98

 During the 1997s, some South-East countries made neoliberal reforms in their
economies: they opened their markets to foreign capitals without restrictions.
 Foreign Direct Investment entered but it was a highly volatile investment.
 When the economy of Thailand showed symptoms of overheating. Suddenly capital
flew from Thailand.
 The IMF recommends leaving the baht, the Thai currency. But the baht collapses, and
the panic extends to other markets: Indonesia, Philippines, South Korea…
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 Hongkong is kept out of the crisis, due to the intervention of the government of PRC.
Hong Kong is transferred to China on June 30, 1997.
 2010: Chiang Mai Initiative.

This graphic it shows how well the wealth is distributed in a country. For example, we see that
China have reduced its poverty from 1990 to 2016. The middle class had grown, it’s important
for China because it means they don’t need to import products to live, they can produce in
their own.

In countries such as Europe it has been a decline in terms of rich people.

Asia and the Great Recession 2007-2018

 Asia was more prepared for the Great Recession, thanks to the lessons learned in the
crisis of 1997-98.
 Asia continued to grow during the worst years of the crisis, accelerating the catching
up with the economies of the West.
 However, the importance of China in Asia and in the world economy has reached a
level never seen before. It will change the postwar equilibrium of power.
 From January 2017, President Trump has abandoned the politics of free trade, placing
China as the main supporter of this policy.

Human Development Index

It takes in account the GDP per capita, the life expectancy and the education. Gives us a much
wide perspective of the state of persons in the countries.

A problem of GDP per capita it’s that it assumes that the wealth is distributed equally in every
person, but that’s not true.

The GINI coefficient measures in equality, it can be applied in GDP, it shows how the well being
is distributed in the country. In the US when we apply the GINI coefficient, it shows that a lot of
people (poor) have lower levels of education and health but then we have little people (rich)
who have access to does things, although the GDP shows a high “development”.
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Chapter 2: The Japan Meiji Restoration. Imperialism and post-war

economy.

The Tokugawa society and the Edo period

The Japanese social order:
 Agricultural society: samurai (6%), peasants (85%), artisans (4%) and merchants (4%).
Samurai had political power.
 The rice tax is monetized (年貢) in Osaka and monopolized by state companies.
The way to pay the taxes to the State you have to give a proportion of what you have
grown, mostly rice.
 Feudal system but “increase production and foster industry”.

Features
 Political unity and stability
 Agricultural development in terms of both area and productivity
 The development of transportation and the mergence of national unified markets
 The rise of commerce, finance and the wealthy merchant class
 The rise of pre-modern manufacturing (food processing, handier etc...)
 High level of education

In this time, they included a development of technology for the agriculture. The type of energy
that they used it was human, they produced by hand. This is important in order to understand
why they had such a grow in industrialization.

Late Tokugawa economy

The investments provoked a development in production, health and education.

 Social stability until 1830. But high population growth and inflation pressures leads to
instability.
 High rate of urbanization: 1/6 (17%) and high literacy rate.
 Importance of non-agricultural production (handicrafts or proto-industry) and trade
monopolies: alliance merchants and daimyos.
 Growing social imbalances. Social unrest within peasants and merchants: growing
economic power but poor social status. The samurai have status but no fixed income.

Conclusions
 Tokugawa Japan was a pre-modern state but had some positive factors towards
industrialization: a smaller share of agricultural population, important cities, proto-
industry and education.
 However, the social and political structure of Tokugawa Japan was too inflexible and
poorly adapted to economic growth and modernization.
 The country was closed to foreign trade (but not totally). The sudden opening of trade
after Perry’s visit in 1854 created a shock in the shogunate.
 Besides, Japan, as China experienced in the Opium Wars, felt the weakness of its
situation vis-à-vis the Western Powers.
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The Meiji Restoration. A modern empire in the making (1868-

1905)
Crisis and war: 1863-68
• Peasant and samurai riots and foreign pressure: naiyu gaikan (内憂外患).
• Rebel samurai against feudal daimyos: shishi (志士).
• Rebel daimyos of Satsuma, Tosa and Chōshū against the Shogun. Battles in Kyoto
(1863-34) and Chōshū battles.
• 1867: Emperor Kōmei dies, Matsuhito becomes emperor Meiji (Meiji Tennō, 明治天
皇).
• 1867-68 Tokugawa Yoshinobu after trying to modernize with an alliance with France
resigns.
• Alliance Chōshū-Satsuma against the ex-Shogun army (Tosa and Kyoto is in-between).
• 1868-68 final Boshin War. The rebel daimyos win and the Shogunate ends.

The Meiji government and its goals

• Become a modern nation
• Maintain the national unity
• Catch-up with Western economies
How?

• Industrialization
• Introduce national institutions and parliament
• Military expansion outside Japan
Japan was the first country in have a parliament, this is important to the development of the
economy and the education. During this period Japan starts to colonize other areas of Asia.

The Meiji Restoration: Meiji Ishin 明治維新

• Capital: Edo changes for Tokyo.
• The need to empower the state and the military: Fukoku kyohei (富国強兵).
• 1871-72: fiscal centralization. National education system and modernization of the
bureaucracy.
• Military reform.
• 1871-74 Iwakura delegation to Europe and the US.
• Bank of Japan (1882)-
• The constitution of 1889: First Imperial Parliament outside from the West
• Foreign diplomacy: revise the unequal treaties with the West and impose unequal
treaties with neighbouring countries (in favour of Japan)
• Privatization and the appearance of the Zaibatsu

The military reform goes with the industrialization, to have a strong military they need ships,
especially Japan. They are going to have new policies in terms of relationship with other
countries. The US won’t have the power anymore, Japan is going to made their own decisions
in terms of economy.

The appearance of the Zaibatsu, private companies that where organized by very rich families
that have political power.
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The German model

Japan followed the German model of industrialization.

• Friedrich List:
– protectionism for new modern nation-states
In terms of trade protectionism is trying that the population buys products
from its country. Applying taxes for foreign products, custom taxes etc…
– Market integration: railroads
To trade with other regions it is needed great communication.
– Banks and finance
Banks are needed because allow to ask for credits, these can be invested in the
development of industry. Also allows to enter to the gold monetary system.
– Education
Everybody was allowed to have education. It’s important for the economy
because human labor is also capital.
• Emphasis on the military and the state’s intervention in the economy.
• Market expansion: Korea, Taiwan, China…
Benefits: Import products.
• Constitutional Monarchy: Against democracy or republicanism

In this time, it is important the first globalization, the 1870-1913. We say that is globalization in
economic history because there was integration in terms of goods (exports and imports
increased very much due to the new technology in transportation, what it’s called the
transportation revolution). The price of products is going to decline, which creates greater levels
in terms of exchanging products.

There was also integration in terms of the capital market, and level markets. The level markets
means that people could trade with other people form other countries, that means labor is more
free, you can go to another country to find a job.

There is a new monetary system, the golden system. This means that your currency was based
on the value of the gold in order to see the value of the country.

Industrialization, trade, and economic growth

Main features
• Main industry: light industry, especially textile
• Heavy and machinery industries: underdeveloped until WWI
• Introduction of modern technology from the West, but also traditional production
methods remained (from the Edo period)

Japan is focused on the light industry, daily consumption of products. Also, this industry was
cheapest. The new agreement with Europe and the expansion allows Japan to export a lot more,
when you import more than export it is negative, so at that time they had a positive economy.
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How did the Meiji government modernize its technology?

• Hiring foreign advisors
Allows Japan to know more about industrialization. They copied the best from every
country.
• Training Japanese engineers
• Copying, licensing, and technical cooperation

Trade

Basically from 1868 to 1910 Japan started to export less products and import more products,
that means that the economic stability returns to be negative.

In terms of the other countries, US and Europe are the ones who exports more products than
other regions but Europe imports much more.
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Exam question: based on the graphs, explain the modernization of Japan during the Meiji
Restauration.

First step: what is the graph saying. Then explain what is happening and why

Export: At the begging of the Meiji restauration the most developed industry was the cultural.
Before this era, a pact was made with the US, that forced Japan to export more materials, but
in the middle of the Meiji restauration they broke the trade agreement. The influence of
industrialization is also important. They started to colonize other regions of Asia and start to
do new trades with Europe.

Import: In term of manufactured goods there is a decrease of importation and foods, an

increase of materials. There was an improvement of agricultural technology, so they didn’t
need import much food. Universal education, by the end of the Meiji era the human capital
increase, so they were able to create their own technology. Banking institutions were essential
to have the money to develop new technologies. We can not forget the role of the Zaibatsu

During the early of Meiji we see that Japan will export silk, tea & other primary commodities to
Europe, but in the late Meiji period, once they started to industrialized they started to export
to other regions of Asia

The Zaibatsu (財閥 – Financial clique)

• Industrial and financial vertically integrated business conglomerates: family-controlled
vertical monopolies
• From the Meiji period to the end of WWII
• Structure: family-owned holding company on top, with wholly owned banking
subsidiary providing finance, and several industrial dominating specific sectors of a
market. Wealthy family
• It had great influence on internal and foreign policies
• Economic control
– 30% of the country’s mining, chemical, and metals industries
– Almost 50% control of machinery
– 70% control of the commercial stock exchange
There were different enterprises at that time, the private ones are the Zaibatsu. This type of
business has a vertical model, they have plenty control in all the process of the product. They
also had a banking system that gives credit to other people who were interested in opening a
new company.
They also had political power, every decision of the government the zaibatsu had a lot of power.
This wealthy families realise that UK and European countries noticed that the economy grow
with expansion. The expansion of Japan was mostly financially of Zaibatsu.

The creation of Zaibatsu

• The Big Four:
– Sumitomo (住友) traditional group.
– 1870: Mitsubishi (三菱), by Iwasaki Yatarō (岩崎 弥太郎, 1835 – 1885)
– 1876: Establishment of Mitsui Bussan and Mitsui Bank; later Mitsui Group (三
井) by Masuda Takashi (益田孝, 1848 –1938)
– 1863 Yasuda group (安田), Yasuda Bank.
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The Abyss towards first world war (1905-1913)

Japan’s imperialist pressures, 1895-1911
• 1876 Treaty of Kanghwa with Korea.
• 1894-95: Japan destroys the Chinese fleet in the first Sino-Japanese war.
• 1895: Treaty of Shimonoseki: Taiwan and Manchuria. Japanese companies are allowed
to invest in China.
• 1902: Alliance Japan-Britain.
• 1904-05: Russo-Japanese war. Japan becomes an international regional power.
• Importance of railways and the new sphere of influence for Japan.
• 1911: Formal colonization of Korea.

The Japanese “informal” empire, 1911

• Economic penetration supported by direct political control: Taiwan or Korea.
• Economic penetration with indirect control: Manchuria. South Manchuria Railway
Company (南滿洲鐵道株式會社 Minamimanshū Tetsudō Kabushikigaisha)
• Commercial pressures through FDI, zaibatsu and military threats (gunboat diplomacy):
Northern China.

Domestic expenditure of Japan

1897 Japan enters to the Gold Standard  devaluation of the Yen  Inflation  contraction
of consumption

Trade deficit & gold reserves loss  balance-of-payments crisis

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The alliance between zaibatsu and the state

• Ministry of Commerce and Industry creates Yawata Steel Works in 1896.
• Production begins in 1901.
• Mitsui and other zaibatsu dominate the northern markets of China (especially in
textiles).
• Japanese FDI in China: Naigai Wata (内外).
• Mitsubishi Shipbuilding: Yoshino Shinji starts working with Yamamoto Tatsuo (1911,
first Minister of Finance).

WORLD WAR I (1914-18)

Japan and the First World War
• Japan defends the alliance of Britain, France and Russia against Germany and the
European continental empires (Russia and Austria-Hungary).
• Japan occupies the German colonies in China (Qingdao) and puts pressure to the
warlords in China (21 demands, 1915).
• In the Treaty of Versailles, Japan’s new imperial demands are fulfilled against the
interests of Chinese and Korean nationalists.
• The industry of Japan (especially heavy industry) benefits from the standstill of trade
with Europe: boom of Japanese consumption goods.
WWI
• Japan benefits from WWI
– Exports increase, even though manufacturing products were still of inferior
quality
– GNP growth: 10%
– Inflation  contraction of domestic consumption  crowded out by foreign D
It allows Japan to get out from the balance-of-payments crisis (not by macro-economic
policies)

Post-War: Crisis and the beginning of the Showa Period

The 1920s: Collapse of the bubble
• 1920: Big crash
• Throughout the 1920s: recession and banking crisis
– The Showa Financial crisis, 1927
• Response from the Japanese government: emergency loans to rescue weakened
industries and banks and avoid bankruptcies and unemployment  only solves the
problem in the short-run
• However, heavy and chemical industries (HCI) keep growing (steel, chemicals,
electrical & general machinery, artificial silk) during the 1920s & 1930s. Helped
especially by the Zaibatsu

There is a contraction of the demand of Europe on the Japan goods. They had benefits but the
only reason was because of the war, after the war they had problems paying the banks for
credits. This is going to create a financial crisis in 1927.
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Precedents of the Showa Financial Crisis of 1927

• Kikan ginko (institution bank): bank set up to serve only one or a few firms. It is
captured and subordinated by the parent firm and no management independence
– Between 1900-1910: 2000 banks in Japan
– Many were institutionally weak
– These banks benefit from the boom of WWI, but are negatively effected by the
slow down of the economy during the post-war period  debt problem
– The emergency loans from the government and the Bank of Japan led to
overcapacity and debt increased
• Great Kanto Earthquake, 1923 (Tokyo and Yokohama)
– Bank of Japan extended special emergency loans: rediscounting earthquake
bills
• Companies and banks with bad debt take advantage  “earthquake
bill problem”
• After the collapse of the commercial banks, deposits were increasingly concentrated in
the “Big Five” banks: Mitsui, Mitsubishi, Sumitomo, Yasuda, and Daiichi

People took their money out of the bank, they wanted to rescue savings. This would create
failures on the financial system of Japan.

The Showa Depression, 1930-32

• Greater negative effects than the Financial crisis of 1927
• Causes
– Stock market crash in Wall Street (1929)
– Great Depression in the world economy (1930s)
• Consequences
– Deflation
– Increase of unemployment
– Social unrest
In the 1920 the US was leading the economies in terms of giving credits. In order to face their
own prices, they will start to ask for the return of money that they gave. It affected all the
countries that depended on the US economy.

Japan started to reduce the exports; it means we enter in an era of protectionism. The
international demand is even more contracted than in WWI. Companies started to have less
benefits, so they tried to low the cost of production by lower the wages of the workers or
directly fire workers. If we fire workers it is an increase of employment, so consumption is
going to decline, if consumption declines the companies have even less benefits, so it becomes
a circle.

Why HCI kept expanding during the recession of the 1920s and 1930s?
• Acquisition of the “know how” during WWI
• Policy support
– Tariff protection
– Military build-up
– Government supports industrial cartels to avoid excess competition
• Electrification
• Business treaties with foreign companies (General Electric, Siemens, Ford, GM…)
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– Foreign technology was absorbed through FDI

• Industrial linkages
A new type of zaibatsu emerged: Nissan, Nicchitsu, Mori

The beginnings of Japan’s automotive industry

• 1910s: old zaibatsu companies produce first models.
• Yoshisuke Aikawa, first president of Nissan Zaibatsu, from 1931 to 1945.
• New zaibatsu: DAT Jidosha Seizo Co., Ltd Automobile Manufacturing Co., Ltd. (ダット
自動車製造株式会社 DAT Jidōsha Seizō Kabushiki-Gaisha), later Nissan (日産),
models DAT and DATSUN (1930s).
• 1935: Toyoda starts manufacturing cars.
• Raw materials for the automotive industry: petroleum and rubber (South-East Asia).
• 1936 Automobile Manufacturing Industry Law (Toyota / Nissan)

Consequences of the Showa Depression: Turning towars the war

economy (1930’s to mid-1940’s)
Japan after the the Depression of 1930-32
1. Rural impoverishment and population pressure
2. Greater centralization
– Cartelization and rationalization supported by the government:
• agreement on output restriction
• State control and industrial monopoly
– Change in the mindset of politicians and intellectuals: shift from economic
liberalism toward more control under state management
3. Fascist movement and militarism
– End of democracy
– Military expansion to other countries
In this case, we are looking at the period of industrial monopoly, there is a significant change in
terms of monopolistic companies, so the Zaibatsu had even more power.
The allies in the WWI was France, but in WWII the allies was Germany.
China War & World War II (1937-45)

Population pressures
• Impoverishment of rural population and famine (1934)
– Industrialization creates pressures to population: rural exodus.
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– If agricultural productivity does not grow at the same time, the price of food
products increases.
– Japan seeks to send surplus population to its colonies.
– Social unrest in the 1920s and 1930s: strikes, radicalism and terrorism.

Many Japanese migrated to the colonies such as Taiwan, Manchuria etc… They migrate
because they are looking for a better life. They felt like they needed to colonize more territory
in order to emigrate.

The war economy 1937-45

In the 1930 the production was low but later the production of the military started to grow.
During the WWII this type of industry grows a lot.

The Americans are going to stop the Japanese to import what it could be energy. This is an
impact because this type of energy is used to the function of the military machines, if you can’t
have things like oil the production lower. The US wanted that Japan couldn’t use their own
machines.

In terms of supply of consumer good per capita we see that consumption declined in the 1930
but during the whole period of WWII the consumption declined even more. The industry is not
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producing anymore in textures or agricultural things, the country is focused on the military
industry. In the 1950 they have not recovered yet, after WWII they were in a very bad
economic position.

The oil embargo of the US is going to make Japanese lose the world, they couldn’t produce
more military weapons, ships, and they didn’t have the energy they needed to male machine
works.

The Asia Co-prosperity Sphere (大東亜共栄圏, Dai-tō-a Kyōeiken)

• 1937-41: Invasion of China
• December 1941 – January 1942: Japan attacks the British empire (Hong Kong,
Singapore, Malaysia, Burma) and the Pacific.
• November 1943: peak of the Japanese empire, meeting in Tokyo of Asian leaders.
• 1944-45: Counterattack of the Allied forces: USA (Pacific War), British Empire (Burma),
Chinese (Communists and Nationalists).
• August 1945 Rendition of Japan.
This colonization helped to growth the exports.

Conclusions
• Japan built a modern empire, with a strong emphasis on industry and aimed to create
an auto sufficient yen-bloc, but failed: in 1943 scarcity was already affecting the
Japanese consumer.
• Japan’s industrialization followed a particular model, a mix between Nazi Germany, US
and British industrial capitalism and Stalinist Soviet Union (economic planning).
• In 1945, Japan had lost an empire but its population was already used to working in
industries (education, skills, etc.). The country was devastated but some important
factors of pre-war economic growth remained (know-how, zaibatsu, banks, etc.).

Why do nationalism increase in terms of social crisis?

Nationalism say that the enemy are the others countries not yours, not our policies. This type
of propaganda was used all around the world

Chapter 3: The economic miracle and the lost decade of Japan

Japan and the immediate post war 1945-49

The end of WWII: Causes
 Destruction of most military and commercial ships: No means to transport energy and
raw materials for the industry→Negative effect on production
 Strategic bombing by the U.S. (mostly in 1945)
– East Tokyo: 100,000 fatalities
– Hiroshima: 90,000-12,000 fatalities
– Nagasaki: 70,000 fatalities

The atomic bombs were devastating. Those who survived had consequences in a long run and
in economic. This has become an issue in many levels, moral, military, diplomatic etc… When
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the bombs were sent, Japan just already lost, their economic didn’t allow Japan to continue
the war.

The end of WWII: Consequences

We see in the table the loses on the different sectors of the economy. There was a decline over
20% of many of them. In the ships the decline was over 80% thanks to the interventions of US
that destroyed many of these materials.

As well the industrial Production was affected. After de the war there is a great decline of the
industrial production. In this terms this decline is first because of the strategies of the US to
restrict the energy and second because many of the factories and machines were destroyed.

During the war they didn’t focus on the food production and textile production. Once the war
was over the colonies had to be liberated, this was one of the mandatory rulings for the US that
they impose in Japan. Japanese population that lived in this colonies had to return. This levels
of the different sector of the economy are going to stay pretty low, in the 1950 we see a very
slow improvement, but in the early 1950 they had a biggest improvement.
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The end of WWII: Political and economic situation

 1946-49:
o 6 million of Japanes back to Japan
o Black market
People send products without being regulated.
o Food storage and hyperinflation
Hyperinflation: Very high rate of inflation, over 50%
 General MacArthur and the Supreme Commander of the Allied Powers (SCAP) (1949-
51)
o Japanese government continues to function
 Economic control
 Subsidies (for intermediate goods and food)
 Monetization of fiscal deficits→hyperinfla on, but recovery of the
industry
o U.S controls foreign trade
 Private trade is prohibited
 Multiple exchange rates for exports (Yen more depreciated and
imports)
 Limited trade
o U.S provides with large amounts of humanitarian and economic aid
 Artificial functioning of the economy based on subsidies and foreign aid
The prices are not ruled because of the market but because of the subsidies. The
government is getting more into debt.

There was less food per capita and started a period of hyperinflation. The dollar is going to gain
a lot of power of the world, we have a new type of standard. During this time the US imposed
the devaluation of the Japanese currency, it means that it affects inflation because you need
more currency to pay things. What happens is that the prices might change even the same day.
There is no point of saving currency that is devaluated, because you don’t know if the prices are
going to increase more, so you buy it now.

But if there is no saving it means that there is more circulation of currency in the market, then
affects in prices and it tends to high prices. Increase the interest rates, asking for a credit in the
bank is going to be more expensive, people ask for less credits, there is a reduction of spending
in products. So, prices should tend to decline, there is less money in circulation in the market.
The value of is going to increase.

Exports are going to be reduced after the post war. US tried to recover the countries that has
been destroyed.
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General MacArthur and the Supreme Commander of the Allied Powers

(SCAP) (1946-51)
 First stage (1946-47)

– demilitarization → prohibition of heavy industry

 Second stage (1947-49): the “New Dealers”

– Introduction of Democracy à Constitution of 1947
– Zaibatsu breakup (and emergence of Keiretsu)
– New labour laws
– Land reform

 Third stage (1949-51):

– Free market and capitalist approach (less state intervention)
– Focus on economic recovery, heavy industry, and suppression of labour
movements
– Treaty of San Francisco (1951): Japan becomes an independent country and
the right to defend itself

 Why The U.S. changes its objectives over time?

– Cold War
– Burden to U.S. economy: aid is supported by tax payment from U.S. citizens

How to solve hyperinflation? The priority production system (PPS)

There is going to be a decline of this hyperinflation. They started to import materials and
energy to try to recover.

 First increase industrial output, then implement anti-inflation package

 PPS: policy of concentrating scarce resources in a few strategic industries
 1946, Primer Minister Yoshida asks General MacArthur to allow imports: steel, coal,
heavy oil, rubber, and buses
 “Dig 30 million tons of coal” campaign
 1947-48: industries achieve their production targets → recovery of industries, but
inflation remains high
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Dodge Line stabilization of 1949

 Austerity measures
– Abolish subsidies
– Strengthen taxation and cut expenditure
– “Super-balanced budget”
– Single exchange rate: 360 yen to the dollar

The government is going to cut many of the sources they were giving in the initial stage.
Supporting privatization, there is less intervention of the Japan government on the economy.

 Less state intervention → free market economy=Reduction of inflation, but recession

of the industry
 The Korean Wat (1950-53) will solve the problem: foreign demand (USarmy) will boost
the heavy industry → recovery of the economy

Japan produced goods from the heavy industry that allowed the Korean war. Important factor
to understand the recovery of Japan. Increase of GDP and exports.

The Japanese Miracle 1953-70

Main features

Once the war was over, they kept growing.

 GDP cumulative growth rate 10%

 Becomes the second largest economy in the capitalist world, after US
 Finally catches up with the West
 Transformation of Japanese economy and society
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Why the economy grows so fast?

1. Institutions
– Legacy from the post-war
– Ministry of International Trade Industry (MITI) → support of the industrial sector
2. Investment
– Economic planning is over and the industries do not concentrate on quantity, but on
quality and efficiency (free-market competition)
o Rationalization (gorika)
o Macroeconomic measures
3. Exports
– Greater role in the global economy.

4. Increase of Demand
– Conservatism in consumption in the 1950s
– Cause-effect: Increase of real wages
– “Three divine devices” (1950s) and the “three C’s” (1960s)
– Western goods

The World Bank is important because some of the investment that Japan do, comes from
international institutions as well. There is an increase of international demand and
consumption inside the country.
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An egalitarian, stable and conservative society

The society of Japan is one of the most egalitarian of the Postwar.

Long term political stability: The Liberal Democratic Party of Japan (自由民主 党 Jiyū-
Minshutō) rules from 1955 to 1993.

Social Harmony (Wa 和): stability between labor unions and companies (restrictions to strikes),
ideas of common interest.

Traditional patriarchal society: fixed life jobs for men, while women are employed in non
stable jobs.

During the 50’s to the 70’s increased the inequality of incomes. In the 1980’s Japan maintains
the level of the inequality, there is greater social discomfort. The foreign entrepreneurs see
this risk as an investment.

Rationalization: gorika (合理化) and macroeconomic measures

 Take the profits and improve productivity through investment in new technologies
imported from USA.
 World Banks loans invested in industry (1%) (no investment in wellbeing)
 Fiscal contention and deficit control to avoid inflation
 “Income Doubling Plan”
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They are earning more and spending more, this means that they don’t have that much debt.
There is more circulation of currency in the market so there is less money going into the
market, the value of the currency increases. That’s why we say of this type of policies try to
avoid inflation.

When we are talking about fiscal contention we talk about the taxes (that are reduced) and
less expenditure of the government. This is the policies that many liberal defends (less
intervention and reduction of taxes). In order to have more revenue and to maintain a
expenditure, if we don’t have a revenue it means that we are spending more than we
actually have, so the debt grow.

If there is not a bad expenditure it means that there is a lot of investments of the privacy
companies. When there is a decline is usually related to social goods. Increase expenditure
increase of investment in the industry.

If the government is applying this contention in the fiscal policies, it means that there is not
much debt.
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Change in business structure

Toyota and the “just-in-time” revolution

 To improve (kaizen): discipline, standardization, continuous improvements in
technology.
 Just-in-time (Kanban): inventory control and savings in stocking
 Subcontracting the manufacturing of auto-parts
 Quality controls in the process
 5S: Seiri, Seiton, Seiso, Seiketsu and Shitsuke

How to work with the data

Cumulative growth rate

CGR = ((((GDPfy/GDPiy) ^ (1/n) – 1) * 100))

Fy: Final year

Iy: initial year
N: numbers of years

Exercise US 1800-1830
Introduce always = first in the excel formula. =((((GDP1830/GDP1800)^( 1/31)-1)*100))
El -1)*100) se pone siempre

Primero el año final (1830) y luego el primero (1800)

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The end of the high speed growth (1970s-1980s)

Causes of the economic slowdown in the 70s & 80s
1. Exogenous causes
- The oil crisis
 It affects all industrial countries
 Inflation
2. Endogenous causes
- Catching up process with the West has come to an end
 There is no country to “copy” new technology. In order to grow, the country
must create new technology.
 Inevitable path of mature economies.

The oil crisis of the 1970s

 Japan has a major dependency on oil from the Middle East.
 Problems of pollution for coal and oil overuse in Japanese cities (公害). Environment
scandals.
 From the 1970s, development of nuclear plants.
 Efficiency in car production: smaller cars with less oil consumptions (competition
between Japanese and US car manufacturers)
 Shift to other industries: electronics, robotics.

The growth of nuclear plants in Japan

Technology and catching up

 Japan starts importing and (later on) manufacturing of high-tech (MITI): a high-tech
machine is only imported once.
 When your per capita GDP come closer to the leader you cannot only copy technology.
 Shift to other industries: electronics, robotics.
 Costs of production are not competitive anymore. Emphasis of efficiency and size.
 Efficiency in car production: smaller cars with less oil consumption (competitions
between Japanese and US car manufactures). 1980: Japan is the largest world car
manufacturer.
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Japan’s FDI in the 1980s

 As per capita GDP of Japan grew, some of its more previous sectors (textile) moved to
other countries.
 Japan invests in the USA in high technology, services companies and real estate (fear
of Japan in the USA)
 Japanese involvement in South-East Asia through the Asia Development Bank (ADB)
and other multilateral institutions.
 Japan leads technology transfers to China, in the beginning of the reform and opening
up.

Japan’s high-tech export revolution (1980-1990)

 1950-60s: Sewing machines, watches, cameras, steel, cars.
 1970: Videotapes by Japan Victor Company JVC.
 1979: First Walkman device launched by Sony.
 Videotapes, CD and DVD by Sony.
 Cameras by Sony, Canon, Nikon.
 Others electronics: Domestic Hi Fi by Hitachi.
 1990ss: PC laptops by Toshiba.

Conclusions
 Japan’s economic growth was around 10% year-to-year from 1955 to 1973. It slowed
down between 1975 and 1989 (but kept growing). The oil crisis was an important
factor in slowing down the Japanese economy.
 The oil shocks of the 1970s affected methods (Just-in-time) and in the production at
the edge of technology, with new sectors in the electronics of mass consumption,
robotics, etc…
 From the 1980s, the soft power of Japan (culture, manga, music, videogames, food)
became increasingly popular and contributed to the internationalization of the
Japanese economy.
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The “Lost Decades” of the 1990s and 200s and Abenomics

Japan and the second globalization and the end of the Cold War
 Criticism of “Japan Inc” and anti Japanese movement in the USA. Growing
international tensions in the area.
 Neoliberalism: weaker controls of the bureaucracy (and labor unions) over the
economy.
 Deregulation of labor: Flexibility of recruiting workers (crisis of the salarayman).
 Free movement of capitals, speculation in non-productive sectors (real estate).
Financial and economic bubbles.
 Social and economic stagnation.

Flotations of the yen and economic bubbles

 In the 1985, the Group of Five (G5) -the US, Japan, West Germany, France, and the UK-
jointly intervened to lower the overvalued dollar (the Plaza Agreement). Rapid
appreciation of the yen.
-Endaka periods 1990-99: An expensive yen deters exports.
 Funds went to other speculative sectors: stock exchange, real estate…
 1980s: bank’s over-lending to SME & consumers, low interest rates, monetary
expansion.
-When the bubble ended, the loans became huge amounts of bad debt.

Bubble burst in the 1990s

 After the bubble burst, deflation.
 Companies affected and banks close. Bankruptcies in the 1990s (172 banks).
 Crisis of the model bureaucracy-keiretsu-banks
 Rise of unemployment (at 5% margin) and wages precariousness.
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Japan’s ageing problem

 Urbanization and the downturn of fertility rates.
 Japan has the lowest fertility rate of around 1,4 births per woman.
 But it has one of the highest life expectancy, of around 83 years average.
 Therefore, the people of more than 65 years is above 25% of the total population and
will reach 40% at 2050.

The consequences of demographic decline

 Retirement of baby boomers (born between 1945-55) from 2010.
 Failure of the health system?
 Lack of immigration and low skilled workers (robots)?

A growing public debt, 1990-2015

 At first, the government tries to spend more to face the crisis.
 Government budget deficit and debt increase.
 Social security expenses grow due to ageing of the population (VAT).
 Nowadays, Japan is the most indebted country with a debt of around 250% of its GDP.

Unbalanced growth in the 2000s

 Growth is localized in export driven sectors: electronics, autos an machinery.
 However, from the mid200s the Japanese companies lag behind other competitors
(Korean, Chinese)
 Japan lack domestic demand (inner consumption is weak).

The Tohoku earthquake and the Fukushima crisis

 March 2011, Tohoku earthquake and further tsunami.
 15,000 deaths, 50,000 households displaced.
 Fukushima daiichi nuclear crisis.
 Mid2012 Nationalization of Tokyo Electric Power Company (TEPCO), a zombie
company with 40.000 employees.
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Riding international tensions

 North Korea sends missiles over the island of Japan.
 Art.9 of Constitution of 1947.
 Conflict with China with the Senkaku/Diaoyu islands.
 Degradation of the alliance with the United States: TTP, Trump and Kim Jong-un
meeting…

Shinzo Abe
 A conservative nationalist, primer minister 2006-2007 and 2012-2020.
 Aggressive nationalism revisionism against China and Korea.
 ¿How to face the rise of China as a superpower?

Abenomics from 2012

 Yoshihide Suga (today) follows Abe’s policies
 2012: Abenomics, the three arrow theory.
 Monetary policy: ¥10.3 trillion stimulus Bill to reach 2% inflation. Monetary policy
 Fiscal stimulus: Infrastructure, Industry 4.0, military. Fiscal policy
 Structural reforms: internet of things, pro-natalist policies, fiscal austerity. Structural
reform
 Results are not spectacular; the economy is still in stagnation.

Is Japan the new normality? The secular stagnation

 Developed countries have shown less growth than expected in the last decades.
 Salaries have stagnated or decreased, deindustrialization and generation gaps.
 Ageing societies and lack of consumption; increasing public debts.
 New technologies have not increased productivity/salaries.

Conclusions
 From the 1990s, Japan’s economic growth have been weaker than expected. The
economy has suffered from several crisis in the 1990s, 200s and 2010s.
 Several factors explain this trend: demographics, economic policy, international
market conditions (rise od China).
 At first, the economic policy of Japan adopted a neoliberal approach, but Shinzo Abe,
again, implanted another sui generis economic policy: Abenomics (a mix of
conservatism and interventionism).
 The results of this policy are mixed: stagnation continues, and it may be the new
normality, not only for Japan, but also for the rest of the developed countries
(however, because population is declining per capita GDP is rising)