The Myths Of Japanese Industrial Policy

Many people preach the adoption of Japanese-style industrial policy, meaning government targeting of high growth ''sunrise'' industries. Yet, according to Professor Ali El-Agraa in the latest issue of the Economic Journal, this supposed style of industrial policy is largely a myth. In fact, the high growth industries of Japan seem to have received less support than the low growth sectors: the Japanese sectors that experienced the lowest growth rates between 1955-90 were often amongst the biggest recipients of loans and subsidies. What's more, in recent times, the Japanese have been ''going British'', emphasising Thatcherite policies of privatisation and deregulation.

El-Agraa first argues that if industrial policy is defined as ''state measures designed primarily to affect the allocation of resources between economic activities, rather than the provision of the appropriate environment for making all industries prosper'', then what is generally referred to as ''Japanese industrial policy'' is something that belongs to the distant past. Japanese industrial policy has not just varied over the post-war period, but today bears no resemblance to what it is still characterised as.

Second, he points out, while many people are preaching the adoption of Japanese-style industrial policy, meaning the targeting of high growth ''sunrise'' industries, the Japanese themselves have been ''going British'', emphasising privatisation and deregulation. Indeed, no other country seems more preoccupied with Thatcherite economic policies, and the Baroness herself will find no matching admirers anywhere else, be they in the government, business or academic field. At the same time, though, the Japanese have not abandoned their traditions: they continue to take full advantage of their consensus-building tradition, often much to the frustration of the rest of the world, which is looking for quick decisions.

El-Agraa''s third point is that those who would like their governments to emulate the Japanese example of targeting high growth industries are in for a real surprise. The hard evidence does not appear to support the claim of Japanese success in this field: the supposedly targeted industries do not seem to have received as much support as the low growth sectors. Indeed, the sectors that experienced the lowest growth rates between 1955- 90 were often among the biggest recipients of resource diversion. Of particular interest are Mining and Textiles, which ranked in the top three in terms of receipts of Japan Development Bank loans, net government subsidies and tax relief, yet were in the bottom three in term of growth rates out of a list of 13!

Taken together, these three points demonstrate what El-Agraa calls Japanese ''consensual pragmatism''. They avoid obsession with what they have achieved in the past, not only in economics, but also in other areas. For example, it is common knowledge that the Japanese general educational system is the best in the world, yet committees have been busy for decades trying to reform it. The Japanese are rather more concerned with maintaining an edge in the indefinite future. This consensual pragmatism gives them their strength, but which country can emulate that, and, more importantly, can Japan itself continue to count on it?

El-Agraa concludes by turning to the UK and certain claims by the last UK government about the success of its competitiveness policy. It was delighted with the OECD''s finding that the combined productivity of capital and labour in the UK business sector had experienced the fastest productivity growth of any major advanced nation since 1979; proud that foreign investment by Japan and the US was finding the UK a more attractive location; and satisfied that UK exports to East Asia were on a par with those of France, Germany and Italy, its major EU competitors.

But apart from the sin of selecting bits and pieces of data without any coherent methodology, the last government would still not be justified in claiming success for its policy, defined as one aimed at enhancing overall economic performance, since one would need to know how the economy would have performed otherwise before reaching such a conclusion. Needless to add, doing so is not just a Herculean, but a truly impossible task.

''UK Competitiveness Policy Versus Japanese Industrial Policy'' by Ali M. El-Agraa is published in the Autumn 1997 issue of the Economic Journal. El-Agraa is Professor of Economics at Vanderbilt University, Nashville, Tennessee