Turning Japanese: Asian economic development in historical perspective

Volume 1, no. 2, April 2013

Author: John Tang, ANU

While the dramatic emergence of the Chinese and Indian juggernauts in recent years may appear unprecedented, a cursory glance back in time would suggest otherwise. Indeed, these Asian giants follow a familiar path blazed by others, including the tiger economies of South Korea, Taiwan, Singapore, and Hong Kong in the post-war period, and to the even earlier pre-war industrialisation of the first modern Asian economy, Japan.

Many parallels exist between the current era of globalised trade and finance and that of the late nineteenth century, and this is particularly true in the Asia- Pacific region. At that time it was Japan instead of China that inspired both admiration and anxiety in the course of its rapid development, transitioning from an isolated, agrarian economy to an industrial power in the span of a few decades. Concerns about the efficacy of industrial policies, the roles of innovation and entrepreneurship, and the allocation of scarce resources all while engaging with trade partners-cum-competitors remain the same.

“In contrast to the modern era of Big Data, much less is known about how Japan emerged as an industrial power.”

Of course, there are major differences between then and now, one being that in contrast to the modern era of Big Data, much less is known about how Japan emerged as an industrial power. This may seem puzzling given that Japan is considered a model of successful late development, whose policies are avidly adopted in the region and beyond. But given the period in question, when few countries collected and maintained detailed economic records, this is understandable, even if it makes substantiating the efficacy of economic policies difficult.

Another difference is that given awareness of issues like labour and inequality, regional stability, and the environment, would-be modernisers have the benefit of hindsight and are not consigned to bear the negative consequences of breakneck development. For better and worse, in the course of its modernisation Japan emulated not only the industrial and technological “best-practices” of its western contemporaries, but also their extractive operations and imperialist ambitions.

The aim of my current research, generously funded by the Australian Research Council, is to better understand some of the mechanisms by which Japan industrialised during the late nineteenth century, which in turn may have applications for modern emerging economies. The first step in this project is to collect new firm-level data from historical archives to supplement existing statistics that are largely at the national or highly aggregated level. While documentation for government enterprises and major firms exists, smaller firms and those engaged in less strategic or visible sectors are under-represented in existing studies of pre-war Japan. These firms may account for non-negligible shares of employment, technology adoption, and national wealth creation, so their inclusion in empirical studies would improve the identification of characteristics important to growth, and in turn validate (or reject) conventional interpretations of Japanese economic development.

“The aim of my current research, generously funded by the Australian Research Council, is to better understand some of the mechanisms by which Japan industrialised during the late nineteenth century, which in turn may have applications for modern emerging economies.”

One under-utilised source of micro-data is the corporate genealogy or firm family tree. Like any family tree, a corporate genealogy can track over time the births and deaths of firms; the identities of their parents and offspring; geographic location; and relationships with other firms via common ancestry or joint ventures. While much less detailed than a company registration or financial report, the genealogy nonetheless is valuable for including many firms that would not otherwise be documented (perhaps due to the lower information content required for a genealogy). I have been able to identify from corporate genealogies a few thousand firms spread across the industrial spectrum for Japan in the pre-war period, which can be used to test specific hypotheses about the country’s initial period of industrialisation at the turn of the twentieth century.

What might some of these hypotheses be? In a new working paper “Railroad expansion and entrepreneurship: evidence from Meiji Japan,” I look at the relationship between an expanding rail system and firm start-up and survival in the late 1800s. Conventional wisdom credits the railroad as the catalyst for industrialisation due to the lower transaction costs, the access to natural and human resources which the railroad provided, and by aiding the development of related industries like machinery and engineering. At the same time, it is unclear whether the most obvious advantage, improved transport of goods and labour, would have an outsized impact on Japan given its island geography and long-established coastal shipping.

Using the genealogical data, I find that in terms of firm activity, prefectures that gained access to railroads had greater numbers of firms compared to those without rail and that this result is robust to controlling for differences between regions and over time. Most of these firms were in manufacturing sectors like textiles, which is consistent with anecdotal accounts of this period, and is now backed up by additional empirical evidence. Interestingly, I also find that among prefectures with rail access, those with larger initial populations gained a disproportionate share of firms. This suggests industrial agglomeration, which may be economically efficient, but can exacerbate regional differences in terms of employment opportunities and development.

“Admittedly, economists may too easily generalise conclusions across very different contexts, but acknowledging possible patterns over time and space, between Meiji Japan and modern-day developing economies, seems to be a reasonable first step to addressing some of the challenges we face in the region today.”

Besides infrastructure investment in the Meiji Period, I also examine the growth of the domestic financial system and its influence on other sectors. Along with introducing foreign technologies and capital equipment, Japan also modelled many institutions such as the national banking system on western examples. In the paper “Financial intermediation and late development in Meiji Japan, 1868 to 1912” I compare prefectural firm activity across different industry groups and find that the number of financial establishments in an area is a robust predictor of future industrial activity. These results correspond with other scholarship in the finance-led growth literature, but use an extensive measure of firm activity at the subnational level instead of aggregate statistics of banking assets and national income.

These studies of the pre-war Japanese economy are concrete illustrations of historical research that may have wider application to current economic issues. The discrete improvement to interregional transportation via the steam-engine train has analogues in high-speed rail and broadband internet access, with concomitant economic benefits and distributional consequences. The global financial crisis notwithstanding, financial intermediaries had and will continue to perform a valuable function in mobilising capital for investment. Admittedly, economists may too easily generalise conclusions across very different contexts, but acknowledging possible patterns over time and space, between Meiji Japan and modern-day developing economies, seems to be a reasonable first step to addressing some of the challenges we face in the region today.

About the author

Dr John Tang is a lecturer in the Research School of Economics at the Australian National University. Dr Tang’s current ARC project is titled, ‘Understanding Industrialization, Entrepreneurship, and Technology Adoption in Emerging Economies: New Evidence from Historical Japanese firms’ and his recent working papers include Railroad expansion and entrepreneurship: evidence from Meiji Japan and Financial intermediation and late development in Meiji Japan, 1868 to 1912. John’s paper Railroad expansion and entrepreneurship: evidence from Meiji Japan was also the winner of the Australia-Japan Research Centre’s 2012 Crawford Award and will be published in the AJRC Working Paper series in 2013.

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