Political institutions and economic performance

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Session 3

Chalmers Johnson, “Political institutions and economic performance,” in Fredric Deyo, ed. The Political Economy of the New Asian Industrialism, 1987, pp. 136-164

Political institutions and economic performance: the government-business relationship in Japan, South Korea, and Taiwan
Chalmers Johnson is writing this paper to argue that a measure of government authoritarianism has been a good thing for Japan, Korea, and Taiwan. These successes debunk old arguments that (1) capitalism leads to class strife and political instability (the Marxist view, still espoused back when this paper was written) and (2) that government intervention in the economy is inefficient and damaging.
Keep in mind that this article was published in 1987, at the height of hype for East Asia’s economic miracle. Johnson is very adamant about the case for government intervention. Most would agree, but it won’t hurt to take this paper with a grain of salt.
As professor Kohli pointed out in his last lecture, the pendulum of public opinion on how much authoritarianism is good swung back a bit in 90s, particularly after the ’97-’98 Asian financial crisis. Many observers believe that a good bit of the blame for the Asian crisis lies with the overly snug relationship of business and finance in Asia’s miracle-grow economies; the standard argument is that governments encouraged – or at least did not sufficiently discourage – close relationships between business and finance which made Asia’s giants vulnerable to financial instability. Growth has recovered, but remember that there can be a real downside to some of this stuff.
The fact that Japan, Korea, and Taiwan grew at remarkable rates in the latter half of the last century is undeniable. After giving you a rundown of the figures in his first paragraph, Johnson suggests that high performance in these three countries has been due in large part to the adoption of a degree of government authoritarianism based on the example of Japan.
Brief Overview of Three Cases
Japan provided the rest of Asia with a blueprint for positive government intervention. Pre-war Japan combined absolute government power with capitalism. Since 1947 Japan has adopted a more democratic approach, but retains a strong interventionist bureaucracy, orchestrated one-party political stability, and a consistent set of economic priorities. Some would argue (especially the Japanese themselves) that Japan’s economic success is explained by its unique culture. Johnson disagrees; he sees the success of similar systems in Korea and Taiwan as proving that there’s more to this than a unique Japanese cultural character. (pp.137-138)
Korea has adopted Japan’s interventionist style but takes a more direct role in the market. Hasan, a scholar writing in 1976, said that Korea’s government “seems to be a participant and often the determining influence in nearly all business decisions.” This role for government is facilitated by a strong public-private agreement on what is good for the country and by a widespread nationalist brand of team spirit. The presence of a hostile North Korea provides an easy justification for maintaining a strong, authoritarian government. (pp.138, 144)
Taiwan is the hardest of the three, making no pretense of democracy in the 80s. (Taiwan has since held democratic elections and lost a lot of the one-party flavor it had when Johnson wrote this article.) Taiwan justifies a tougher government by pointing to the ever-present Chinese threat across the strait. (P.144-145)
Major Characteristics of Capitalist Developmental States and the Developmental Elites who run them
Johnson’s main framework for analyzing the robust economic performance of these three countries is what he calls the system of the Capitalist Developmental State. The key idea here is that successful intervention requires a respect for the importance of the market; government policy coexists with the market, it does not guide it.
Successful growth-oriented intervention depends on four major elements (p.145):

  1. Stable rule by a political-bureaucratic elite that can resist political demands that would undermine economic growth.

  2. Cooperation between the public and private sectors under the overall guidance of a strategic planning agency.

  3. Heavy and continuing investment in education for everyone, combined with policies to ensure the equitable distribution of wealth.

  4. A government that understands and respects the importance of market-determined prices.

The motivating force for this sort of system is what Johnson calls a developmental elite, a political group that sets economic growth as its main goal, does not get too caught up in perpetuating its own privilege (Anne Krueger and a few of our Week 1 authors would probably take issue with this assumption), believes that an overly socialist/populist approach would threaten its growth goal by creating rigid bureaucracies, fomenting corruption, introducing poor incentives, and inefficiently allocating resources. (p.140)
Developmental elites are the people running these interventionist governments; they want to push their countries out of stagnation and dependency and they recognize the key role of the market in this effort. The market demands efficiency of input allocation, motivates workers effectively, and limits the potential for corruption. Developmental elites thus help to nurse weak markets (most underdeveloped countries are characterized by weak markets) by reducing political and economic uncertainties (making it easier for businesses to make and carry out longer-term strategic plans), identify and spread the word about investment opportunities, and push popular support for national growth strategies. (p.141)
There is a danger in authoritarianism, exemplified by what happened when Japan in the 30s and 40s strayed from these imperatives: The elite assumed total power, pumped up the ideological volume, and allowed itself to lose focus on developmental goals, replacing them with all that South-east Asian co-Prosperity Sphere stuff. Kohli asked the other day why Japan never loudly promoted its model of economic growth. As Jian Xin remarked the other day, one good reason is that after WWII, few people in Asia are comfortable with the idea of Japan promoting its ideas of what’s good for its neighbors. (p.143)
Seven Key Issues in the theory of the Capitalist Developmental State
Financial Control (pp.147-149): This section reads like the chronicle of a big financial crisis foretold. Most of what Johnson says in this section has turned out to be problematic for these countries. Read with care.
Johnson says that a common and key feature of economic success was the reliance of governments on the financial system to guide and control private activities. (He totally contradicts his earlier exhortation to think of best-practice intervention as working “with” the market, not guiding it.) In particular, governments focused on directing capital to identified key industries. They did this by influencing the lending of banks to businesses. (More Ollie commentary: Government-directed lending is a widely acknowledged no-no number one in the bible of banking sector best practices.)

Labor Relations (pp.149-?) I’m missing pages 150-151 in my reader, so all I have to go on here is ½ the intro paragraph.

Some analysts would attribute Japanese success in large part to its unique culture of management and labor in that country. When Johnson was writing there were no strikes in Japan, employment was for life, and wages depended on seniority as much as on performance. Johnson disagrees, because Taiwan and Korea have been successful without similar labor relations. Unions, for example, are very strong (and disruptive) in Korea. I’m not sure what was said in those missing pages, but I would speculate that it was something to the effect of: “It’s great to have labor on your side (Japan), but you can’t let unions stand in your way (Korea).”

Autonomy of the Economic Bureaucracy (p.152-156): The bottom line is that, when intervening in the market, you need to be very objective and must take steps to ensure that pure political considerations don’t exert undue influence.
To this end, smart authoritarian governments insulate their economic planners. Often this is done by setting up a visible political front to distract attention and pressure from the real behind-the-scenes policymakers in the bureaucracy.
The bureaucracy itself usually recruits the sharpest, most qualified people in the system, nurtures its ties with the educated elite, and perpetually seeks to distance itself from political oversight, confident in its own objective infallibility. For a history of each country’s experience with this process, check out pages 152-156. It’s interesting, but not important to write about at 3:12 am.

Autonomy of the State from business interests (p.156-158): Here the important fact is that the government must be careful to avoid undue influence from private businesses. This is not easy to achieve, since businesses are a primary source of financial support for the government. However, it must be done of the best long-term economic goals and industrial policies are to be pursued. Again, you can read a bit for country-specific history if you are so inclined.
Balancing Incentives with Commands in Administrative Guidance (pp.158-160): A government can push its policies in two ways. (1) It can use the legal system to mandate certain behavior, and (2) it can coerce economic actors to do what it wants. The advantage of using the legal system is that an explicit set of rules makes for transparent incentives and thus a greater responsiveness to market incentives within those rules. BUT, relying on the law has a big downside in the pure effort necessary to manage legal complexities and conflicts. Johnson seems to like this other idea of benevolent coercion. He claims that leaning on businesses with, for example, subtle threats of extensive tax audits, has the advantage of provoking a quick reaction and avoids the possibly far-reaching implications of changing the legal landscape.
Large Business Conglomerates (p.160-162): Zaibatsu in Japan, Chaebol in Korea, and large-scale enterprises in Taiwan are controversial characters in the history of Asian economic performance. Although many criticize the concentration of so much economic power in so few large private actors, there is an acknowledgement that such organizations protect their members from going the risks of business alone, and make capital and information more readily available to developing arms of the conglomerate. The main downside lies in relaxing anti-trust oversight, risking harmful anti-competitive actions in the market.
Foreign Capital (p.162-164): The Japanese have prevented foreign competition in their economy, favoring protectionist approach and relying in large part on the power of their domestic demand to fuel growth. The Koreans and Taiwanese have been more open about foreign involvement. Exports have been critical, since domestic demand in these countries is not strong enough to support fast growth by itself.

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