Japan’s industrialization and natural resources

Japan’s policies on early industrialization in the late 19th and early 20th centuries are analogous to the Rosenstein-Rodan’s (1943) prescription for a state-led Big Push industrialization program to orchestrate rapid industrialization. His prescription requires extensive state control over the economy. Every firm in an advanced industrial economy relies on the mere existence of countless other firms, scattered throughout the economy, most of which have no direct business with it. He concludes no private sector mechanism can simultaneously plan industrialization of several complementary industries and only comprehensible state control mechanisms can achieve such Big Push based industrialization.

As Murphy, Shleifer and Vishny (1989) predict, this form of state owned enterprise (SOE)-led, economy-wide rapid industrialization cannot take place. Attempts to do so have failed so far, Japan is not an exception.

Japan’s Meiji government attempted initial industrialization by developing many SOEs in industries across the country in the 1860s on. Few of these SOEs, owned and managed by the government, succeeded as businesses, to undertake key investments in a rapid and coordinated manner. They concluded that they failed and sold most of these SOEs to the private sector in massive privatization processes.

We analyze Japan’s early industrialization experiences with SOEs. We show how the government driven rapid industrialization project failed despite Rosenstein-Rodan’s prediction. We show many of the former SOEs became more efficient once they became members of emerging pyramidal business groups.

The large, family-controlled pyramidal business groups (zaibatsu) contained one or more large mining firms. The earnings from the firms were critical in capitalizing their first manufacturing, financial, and services firms, and remained important in financing expansions until the early twentieth century, when active stock markets became a major alternative source of capital.

In this process each zaibatsu group was able to successfully tunnel funds obtained from their mining companies to invest in new, modern industries such as chemicals, electric and machinery.

We employ quantitative research methods such as limited dependent variables, ordinary least squares and non-parametric methods using rich historical data. Our data sets are based on the period from 1868 -1945. The data sources come from records of business history for the Japanese pyramidal groups. Sample sizes range between 12 and 80. Because of relatively small sample sizes, we employ qualitative reasoning methods to draw conclusions.

This paper concludes that zaibatsu groups facilitated Japan’s early Big Push industrialization. It also recounts how pre-industrial Japan avoided a natural resources curse.