Explain why Hart-Landsberg describes Japanese economic development after WWII as a scrap-and-build process. What industries were promoted or scrapped? Why? What industries replaced those that were scrapped?
The initial burst of industrialization in Japan originated from the export-led growth strategy employed by the Japanese government. At the beginning of the industrial revolution in Japan, the concentration was primarily in the light-manufacturing sector. These light manufactures were exported to the US market throughout the 60s(Burkett and Hart-Landsberg 110). However, due to pressure from the trade unions in the US, the US government, along with the European countries, tried to open up the Japanese economy.
In the meantime, Japanese growth had led to higher wages in the country, which increased the cost of production and reduced their international competitiveness(Burkett and Hart-Landsberg 110). So, the light manufacturers ventured out of the country to East Asia in search of a country where labor cost was low. The outward migration of the light manufacturers led to the “scrap-and-build” process by the Japanese government, which then shifted their focus on building a core competency in heavy and chemical industries (Burkett and Hart-Landsberg 110).
These industries in Japan were initially dependent on imported raw material; however, they became export-oriented with the advent of the new policy of the government. This policy created rapid growth of the Japanese economy and increased the employment of few skilled-male laborers in the workforce. There was an increase in the female workforce, but it was mostly in part-time and temporary jobs (Burkett and Hart-Landsberg 111). In order to sustain cost advantage, Japanese firms kept the real wage level below the productivity level, which resulted in their rapid growth. Thus, the concentration of Japan’s industrial development shifted from light to heavy and chemical manufacturing and then to transport and precision machinery(Burkett and Hart-Landsberg 120).
The scrap-and-build process gained initial success; however, the embedded problems of pollution raised environmental concerns throughout the country. With this problem arose the issue of higher cost on land, which threatened the cost-competitiveness of the Japanese industries. On the other hand, in the international arena, the USA started levying a 10 percent surcharge on all imports from Japan (Burkett and Hart-Landsberg 113).
Further, reevaluation of Yen and an increase in oil prices in the 70s created another crisis for the Japanese economy. The exchange rate and the oil-price shock undermined the cost competitiveness of the country (Burkett and Hart-Landsberg 113).
Thus, as a measure to counter this problem, the Japanese government shifted many of these heavy and chemical industries to South Korea and East Asia. Further, in Japan, the government boosted some targeted industries like general and electrical machinery, transport machinery, and precision machinery (Burkett and Hart-Landsberg 114). Thus, the Japanese industry moved to the heavy and chemical industry from textile and food industry and eventually to advanced electrical and precision machinery.
The third phase of the scrap-and-build process created further problems for the country, as 60 percent of the motor export of Japan was to North America. The rising US deficit was due to the high import dependency on Japanese goods. International pressure forced Japan to sign the Plaza Accord that pegged the exchange rate and forced a more balanced trade relationship. Thus, in the 80s, Japan began to invest more in electrical industries in other Asian countries. Further, Japan increased FDI in the US and in European countries. In the 80s, Japan increased FDI investment in the electrical industry in Asia.
The industries that first became a popular source of Japanese growth were in the post-world war II period when Japan started promoting the light industry, which produced textile and food products. The government, due to an increase in labor cost and increasing global political pressure, scrapped this industry. As this industry was labor-intensive, production costs became non-competitive in the international market.
Then the economy developed heavy and chemical industries like chemical, petroleum, and metal industries. However, these industries created a pollution problem for the country. Consequently, the heavy and chemical industry created higher land costs, thus, threatening to increase the cost of production. Hence, the government-sponsored to shift these industries to South Korea and East Asia, where governments were willingly embracing industrialization even at the cost of environmental concerns. In the third phase, the advanced electrical and precision machinery industry was developed in Japan.
These industries mainly produced automobiles and precision machinery. However, even in this case, the products were mostly sold in the North American markets. This again created a problem for Japan as the US wanted to sign a trade relation agreement with Japan, as it believed that its trade deficit was due to the high volume of imports from Japan. Hence, Japan moved away from the manufacturing of products in its homeland and started investing in other countries. The countries where it sent its FDI were mostly ASEAN countries.
Koo argues that since the bursting of the bubble economy, Japan has suffered a balance-sheet recession. Explain what this means. What has been the role of fiscal and monetary policy in addressing the long stagnation and deflation in the economy?
Richard Koo points out that structural problems were not the root cause of the prolonged Japanese recession. Instead, the balance sheet recession was the reason behind the decade-long recession in Japan. A balance sheet recession may be explained as an initial aggregate demand shock, wherein the aggregate demand declines considerably. In the case of Japan, the bursting of the housing bubble was a strong indicator of the decline in consumer demand (Koo 19).
The housing bubble burst created a strong plunge in the demand of houses, which reduced the price of real estate considerably. This created a huge fall in consumer spending as both private companies and households started saving. Thus, there were no takers of loans even at a lower interest rate. Thus, the Japanese government stepped in to increase liquidity in the market such that the production did not fall.
Thus, Koo showed that balance sheet recession was caused due to the tendency of corporates to minimize debt instead of maximizing profit. The austerity of the private sector companies reduced consumer spending and increased savings, thus, driving down prices and bursting the bubble of asset prices(Koo 8). Accordingly, savings secured the balance sheet anomalies at the cost of reduced aggregate demand. This created the deficit in the balance sheet of the private sector companies. Increase in savings reduced aggregate demand as it reduced consumer spending. This was the root cause of balance sheet recession.
Monetary policy becomes an ineffective tool in removing recession in case of a balance sheet recession. This is so because, monetary policy, in case of recession, tries to pump in more liquidity in the economy. However, in case of balance sheet recession, as corporates and households tries to reduce debt by increasing savings, liquidity is not demanded by households and companies, as they do not want to take loans and increase their debt at any interest rate.
Moreover, private sector companies diluted their bank deposits and other government bond investments in order to repay the accumulated debt in their balance sheet, which reduced central bank’s deposits of private companies considerably, reducing liquidity in the market. One possible way is to inject more liquidity into the banking system and maintain the balance of the bank deposits. Thus, when there are no borrowers, the money multiplier becomes zero. Hence, Koo states “monetary policy is impotent during a balance sheet recession” (28). In other words, monetary policy becomes ineffectual when there is no demand for liquidity.
Fiscal policy, on the contrary, was able to resolve the problem. As monetary policy failed to drive Japan out of the balance sheet recession, government started borrowing. This fiscal policy of the government created a corresponding increase in the money supply in the economy. According to Koo (32-33) when a private company finds balance sheet deficit and debt piling on, it must try to handle the problem by reducing debt.
In case of balance sheet recession, Koo demonstrates that the monetary aggregates can be segregated as credit of the private companies, cash in circulation, and bank reserves at central bank of the country. Conventionally, if the central bank increases liquidity in the market to boost money supply in the economy, the bank lending and money supply should also expand by the same rate. However, if a monetary policy induced liquidity in the market, it simply made the aggregates move in “lockstep” (Koo 34).
In this situation, neither the government nor the central bank of a country has any means to stimulate their spending. However, if the government just watches private companies handling their debt, the whole economy will spiral down to a deflation as was observed in the US between 1929 and 1933 (Koo 33). In such a situation, the government has to start borrowing and spending the savings as the private sector companies take austerity measures (Koo 33).
Works Cited
Burkett, Paul and Martin Hart-Landsberg. Development, Crisis, and Class Struggle: Learning from Japan and East Asia. New York: St. Martin’s Press, 2000. Print.
Koo, Richard C. The Holy Grail of Macroeconomics. Hoboken: John Wiley & Sons, 2009.