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Of MITI and men: Japan's industrial policy sets the standard, but can the United States do better?

For several years now, industrial policy has been hotly debated among experts in and out of Washington while attracting little attention from the mass media. Its proponents argue that government could and should assist the progress of American industry, now facing foreign competitors greatly helped by their own governments. Opponents insist that any government interference with the free workings of market forces can only be wasteful and counterproductive. Now that we are done with the presidential election, the time has come to raise this subterranean debate to the surface.

The case for industrial policy can be summarized in one word: Japan. Or, more fully, the success of the Japanese bureaucracy lies in its nurturing of highly successful new industries by funding research and development of innovative products and production techniques; by inducing banks to lend them long-term investment capital at low interest, allowing them to acquire efficient large-scale plants early on; making tax concessions in favored sectors, as long as they use the extra money for investment rather than high executive salaries or dividends; and by restricting or prohibiting imports to assure high profit margins on domestic sales, thereby enabling companies to subsidize their own exports (this is Japan's product-improved alternative to "dumping," i.e., selling abroad below cost, which is not a violation of international trading norms).

Further measures on behalf of particular industries have included government purchasing regardless of price or performance (critical to the growth of Japan's mainframe computer industry), manipulation of import restrictions to force foreign (mostly U.S.) companies to hand over technology to Japanese companies in exchange for access to the Japanese market (much used to nurture the petrochemical industry), and the behind-the-scenes organization of "voluntary" mergers to consolidate industries that bureaucrats considered too fragmented to compete effectively in world markets. But consolidation never reaches the point of monopoly. In fact, it is one of the basic principles of Japan's industrial policy that precisely because they are collectively protected, the different enterprises within each industry must remain fiercely competitive with each other, lest they become sluggish and self-indulgent.

From the introduction of government-sponsored iron mills, foundries, textile mills, and shipyards at the start of Japan's modernization in the 1870s, to the creation of the computer industry out of nothing in the 1960s, to the present encouragement of software, nanotechnology, and advanced materials, Japan's entire development has owed much to its highly original industrial policy. The Japanese did not invent government support of industry (it was already old hat in 18th-century France), but Japan has led the way in systematically promoting new industries while phasing out decaying ones. American proponents of industrial policy see no reason why the United States should not adopt Japan's winning formula, which is now widely imitated in both Asia and Europe.

The case against industrial policy can also be summarized in one word: bureaucracy. This view holds that government officials cannot outperform the free market in shaping the development of industry and would probably damage it instead with waste, fraud, and mismanagement. It is certainly true that the largely corrupt and inefficient bureaucracies of most countries are not to be trusted with anything so delicate as industrial policy. Even in ordinary state functions, from the issue of obligatory documents to the operation of schools, hospitals, prisons, or the armed forces, plain incompetence is almost a norm, and so is corruption. It follows that virtually any form of industrial policy is bound to be turned into a further way of looting the public treasury or exploiting hapless consumers or both.

Thus state funding for industrial investment would mostly go to sham enterprises providing false or inflated plant and equipment invoices, rather than pay for any actual plant or actual equipment. This was the case with Italy's Cassa del Mezzogiorno, whose grants have littered the southern countryside with empty factory buildings, built by companies whose peak earnings came just before they opened for business, and just after they collected on the phony invoices they had sent in. Likewise, Japanese-style tariffs and import restrictions meant to raise the profits, capital, and investments in export industries would merely spawn facade industries made up of one-screwdriver local assemblers and re-labeling outfits, as well as inefficient producers of non-exportable high-cost/low-quality goods. This happened in most Latin American countries until the recent wave of trade liberalization, and most notoriously in Peru, before President Fujimori's abolition of most import restrictions. hi extreme conditions, as for example in West and Central Africa, even the seemingly most foolproof measures have a way of becoming counter-productive. Thus industrial-policy prohibitions on the export of raw logs, meant to induce the growth of local sawmills, have merely reduced hard-currency earnings from timber exports. Few sawmills have been built to cut wood for export simply because political insecurity inhibits investment. At the same time, raw-log exports have greatly declined, and because the remnant is now smuggled out, the proceeds are illegal and cannot be remitted to local banks accounts, flowing instead into equally illegal foreign accounts.

The U.S. bureaucracy, however, is not supposed to be corrupt. Thus American opponents of industrial policy prefer to emphasize the bureaucracy's vulnerability to pork-barreling, log-rolling, and vote-seeking politics-as-usual in distinctive U.S. style. As they see it, investment funds provided or channeled by the government would not go to promising but needy start-up sectors, but to the industries that are already best represented in Congress by way of PAC monies and other forms of lobbying, which are best able to deliver votes at election time. By definition, these would be well-established industries, the ones that least need government help, and which are much more likely to have glorious pasts than promising futures. Equally, import restrictions would not lead to the capital enrichment of industries poised to become champion exporters, but rather would be applied to help the weakest industries least fit to compete in world markets. The same is true of all other industrial-policy measures, such as stimulative government purchasing: They too would be captured to fatten the fattest political cows, while doing little to help new industries that lack the money and the connections to extract favors from Congress.

Change of fools

But free-market true believers are not content with such merely pragmatic arguments. They insist that industrial policy would fail even in the hands of government officials both perfectly honest and miraculously apolitical. Their argument begins by noting that, especially in our times of accelerated change, technologies and product markets develop in unpredictable ways. That is why IBM was caught utterly unprepared by the PC revolution, GM missed out on minivans and sport utility vehicles, and America's electronic industry mistakenly thought that VCRs and fax machines would be $20,000 items, of interest only to a handful of highly specialized users. No group of government officials is likely to do any better in picking future winners and losers. As the opponents see it, if in the fifties we had established an activist bureaucracy to encourage and help finance the growth of the most promising new industries, the United States would have wasted much money on plants built to produce nylon shirts, mimeograph machines, eight-track tape players, and analog calculators.

Nor does such an outcome necessarily imply an incompetent industrial policy. Competence in any ordinary sense has nothing to do with it, because even the best analysis of present information cannot anticipate the configuration of future products, or the future evolution of production technologies. They can be uncovered only by trial and error in the broadly varied strivings of many different enterprises. Most are destined to fail while a handful succeed triumphantly, as Xerox, Apple, and Microsoft each did in turn, and as a great many other start-ups have done on smaller scales within their own more narrowly specialized sectors--within the biotechnology industry, for example.

Compelling though it is, the theoretical argument against industrial policy immediately evokes a practical counter-argument: Japan's evident success. If its bureaucrats have been able to do the theoretically impossible, so can ours. Nor does the highly successful growth of Japan's industry derive from any visible process of natural selection. The great flood of Japanese products that have claimed primacy on world markets has come almost entirely from a few very familiar names (Hitachi, Toshiba, Canon, Matsushita, Sony, etc.) and not from a lucky few among a myriad of start ups.

In response, the American opponents of industrial policy challenge the evidence. They argue that even the champion economic Samurais of Japan's mythic Tsusho Sangyo-Sho, or Ministry of International Trade and Industry (MM), have in fact failed--except in claiming much of the credit for the achievements of Japan's private enterprise. They hold that Japan's phenomenal industrial success was actually due to hard work, a sound system of mass education, the abundance of capital supplied by a very high savings rate, and the strength that Japanese corporations derive from the exceptional loyalty of their employees--all the results of deep-seated cultural propensities, not bureaucratic wisdom. To that end, the free marketeers are forever reciting the list of MITI's greatest errors: its failure to forecast--or support--the growth of Japan's automobile industry (Honda was advised to stick to motorcycles); its over-investment in steel during the sixties and in aluminum during the seventies; and the failure of its "Fifth Generation" computing program. As for the absence of start-up success stories from the Japanese scene, the explanation given is that natural selection and the finding of developmental paths through trial and error take place all the same--but within the large Japanese companies. In effect, they function as conglomerates of many different enterprises, many of which fail and wither, while others succeed and grow.

MITI issues

These are persuasive arguments, but it is revealing that they are least persuasive to those who know the most about Japan and its economy. Thus Chalmers Johnson, the noted Japanologist who wrote the standard work on MITI, is not coincidentally a fervent advocate of industrial policy for the United States. While recognizing that MITI has failed at times, Johnson insists that it is eminently worthwhile to have a government department staffed with elite officials to promote the country's industrial development. Only an American MITI could coordinate the uses of all government resources, regulatory powers, research activities, and foreign trade policies for the greater benefit of American industry. Today, different agencies pursue different goals, each on its own divergent track. An American MITI could, for one thing, stop the drain of U.S. inventions and technology, especially when their development was actually funded by the government.

At present, for example, the United States spends some $5 billion of the taxpayers' money each year on medical research; that is more than three times the amount Japan spent. But in the American case, the commercial exploitation of the results is neither guided nor assisted, nor controlled by the government. Instead, when individual scientists working in university or government laboratories have completed 99 percent of the research on a promising new product at government expense, they join with venture capitalists to set up their own bio-technology companies on the side, which fund the final 1 percent of the research. Much more often than not, when one of these outfits comes up with a valuable product, it does not in fact grow to manufacture and market it, providing rewarding employment for many in the process. Scientists are mostly disinclined to go into business, while venture capitalists generally want to collect their winnings, not pour more capital into building up a production company. Hence the know-how is sold to an established pharmaceutical company, often enough one of the large Japanese or European mass-production "fermenters." Thus the lucky scientists and venture capitalists become personally rich; the taxpayers who have paid 99 percent of the research get nothing; and the manufacturing, marketing, and management jobs generated by the new product end up overseas.

An activist American MITI could certainly be of use in this setting, first to assert control over valuable inventions that belong to the government, and then to ensure that they are sold to American pharmaceutical companies equipped to produce and market the goods, so as to generate jobs and tax revenues within the United States. At present, by contrast, there are only government scientific research agencies that know little and care less about the economic consequences of their programs, and a Department of Commerce that does little more than keep statistics on the continuing outflow of U.S. biotechnology.

But the strongest argument for industrial policy is perhaps that we already have one, albeit very fragmentary and inefficient. U.S. military research and development does generate "spin-off" inventions and production techniques of civilian value. But of course, that is not the primary goal and the commercial results are inevitably meager as compared with the cost. Likewise, all sorts of government agencies and departments act every day in ways that have an impact on U.S. industry, through the regulations they issue, the equipment and services they purchase, etc. It would require only their conscious coordination to extract valuable benefits--if, that is, an American MITI is granted the authority to impose such coordination. We have, moreover, some examples of deliberate, rather than incidental, industrial policy, such as the U.S. government-sponsored Sematech semiconductor research consortium. (On the other hand, the lack of a thriving semiconductor industry in Hong Kong, which has no industrial policies of any kind under its laissez-faire regime, provides a noteworthy contrast.)

Nor is Sematech the only example. While the Bush administration was loudly proclaiming its devotion to free enterprise and its horror of industrial policy, the U.S. Department of Energy quietly organized the "U.S. Advanced Battery Consortium" to come up with a better power source for electrical cars than heavy and inefficient lead-acid batteries. That Japanese-style venture, jointly funded by the government and by GM, Ford, and Chrysler, is of course a sin against the doctrine of free enterprise. It also offers a promising mechanism for the development of a critical component, which could yet determine the fate of the U.S. automobile industry. If we are to be sinners anyway, let us sin more effectively, by assisting important industries systematically.
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Title Annotation:Japan's Ministry of International Trade and Industry
Author:Luttwak, Edward N.
Publication:Washington Monthly
Date:Dec 1, 1992
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