Comparación critica con la literatura existente

Bureaucratic values and preferences

The values and practices of one era, no matter how firmly entrenched, are unlikely to persist in a second era unless they have a readily apparent utility for the problems and interests of the second era. In the immediate postwar period the state bureaucracy, its prewar rivals for power (army, navy, the old political leadership, former business leaders) being imprisoned, purged, displaced, marginalized or otherwise weakened, was in a privileged position to define those problems, to decide and to promote its own calculus of ‘‘utility.’’ This was something it was well able to do: the prewar imperial bureaucracy had never been conceived of as an instrument in service of a public interest in a Weberian sense, nor had it ever known subordination to a leading or ruling social class. Indeed one of the first tasks of the nascent bureaucracy at the turn of the century was the abolition of the dominant social class of the ancien regime. The imperial bureaucracy was conceived for the task of leading the drive to modernization. The principal limits upon its powers were the practical political limits that might be imposed by its rivals in what was a very messy and sometimes violent game. The postwar bureaucracy inherited not only these traditions and instincts but also the very structures and the personnel of the prewar period.

In the 1950s and the 1960s, through postwar reconstruction and into the high-growth period, the bureaucrats had their heyday. This was the high point for industrial policy and this was their terrain. The public agencies responsible for the detailed design and implementation of industrial policy – the genkyoku – then as now were the Ministry of International Trade and Industry (MITI), the Ministry of Finance (MOF), the Ministry of Health and Welfare (MHW; pharmaceuticals), the Ministry of Transport (MOT; shipbuild- ing ocean transport, airlines, and all other transport), and the Ministry of Agriculture, Forestry and Fisheries (MAFF; food processing, agriculture, forestry, and fishing). Jealous of their prerogatives – the more so as their erstwhile rivals reasserted themselves with the consolidation of party politics, the return of purgees, the growth of business and the emergence of new business leaders – these agencies and their subsections under whose jurisdiction a particular industry fell had a strong tendency ‘‘to want its industry to be orderly and organized,’’ to prefer good order and good housekeeping in the sector to growth and competition.92 Competition threatens good order. It risks creating ‘‘losers’’ who will run to the party political government for help and comfort. It creates the opportunity for the intervention of politicians eager to fish in dirty waters and undermines the ability of the bureaucrat to deliver ‘‘his’’ industry in interministerial discussions and agreements. These values of the bureaucrat are reinforced by the widespread societal antipathy to competition to which reference has been made above and which the state bureaucracy was in turn eager to encourage. It is then no surprise that the responsible bureaucrats

strongly favor policies that limit competition and encourage restructuring; that is, mergers, vertical and horizontal firm groupings, and interfirm agreements.

Monopolistic and oligopolistic concentration

The preferences of the economic bureaucrats were underpinned by their economic analysis. The problems confronting Japanese industry that were noted in the 1963 report on the ‘‘New Industrial System’’ by the Industrial Structure Advisory Committee of the Ministry of International Trade and Industry were those of scale. The typical firm was too small and there were too many of them. The proliferation of small firms gave rise to ‘‘excess competition’’ in price, product development, research and development, and investment. Such competition was harmful and detrimental to the emergence of firms of a size capable of competing in foreign markets. The answer was to effect a reduction in firm costs through an expansion of firm size – and so of economies of scale – buttressed by ‘‘promoting mergers, business tie-ups, and collective behavior among firms’’ so as to rein in excess competition. In fact the number of mergers rose sharply in the 1960s, and the process of industrial concentration through mergers carried on steadily until the mid-1970s. One peak was 1963 when the number of mergers rose to more than 1,000, another was in the period 1968–73 when the number of mergers again exceeded 1,000.93 The facts and figures for mergers are striking, but if anything they underestimate the extent to which the concentration of production developed in Japan at this time. ‘‘Softer’’ forms of combination also grew as evidenced by the tendency for the controlling firm to take up directorships in other firms, often in combination with capital participation. The process of concentration was particularly encouraged and evident in the strategic and heavily promoted heavy-industry sector.

These tendencies to encourage coordination and to limit competition have an institutional reinforcement in the very structures of the state that to a considerable extent determine how policy will be implemented. Ministries have a wide remit; a very broad jurisdiction with insufficient coercive powers to require compliance – this must be negotiated, it cannot be imposed. The preferred means of implementing policy follows from this. It is implemented not by detailed legislative statute but by informal adminis- trative guidance buttressed by the authority of an enabling law that accords the agency a general responsibility for the good conduct or the smooth running of that industry.94 The preference for informal guidance leads inexorably to a bureaucratic concern with ‘‘entry control.’’ Control of market entry is a condition of the stability of the close, long-term association of the responsible bureaucracy and its industry. That close association is, in turn, the precondition for effective informal guidance. The Ministry of International Trade and Industry (for example) has policed entry by domestic newcomers in the steel, oil refining, petrochemical, synthetic fiber,

automobile and computer industries. Foreign firms were prohibited entry (until the mid-1970s) by means of the Foreign Exchange Law. The combi- nation of increasing monopolistic and oligopolistic concentration, a bureau- cratic distaste for competition and preference for sectoral order, the preeminence accorded to production, dependence upon informal guidance together with an associated willingness to police entry has resulted in pervasive cartel-like behavior encouraged by the state bureaucracy. The importance of cartelization and of the quasi-cartelization of the Japanese economy in the period of postwar reconstruction and high growth, and up to and including the mobilization by the Ministry of International Trade and Industry and the Ministry of Transport of recession cartels in the late 1970s, has been widely remarked. The bureaucracy encourages the forma- tion of cartels to coordinate production and facilities investment, cartels to undertake research (R&D cooperatives), cartels to counter recession, and cartels to eliminate capacity.95

A core contention of this chapter builds upon this to argue that the economic bureaucracy favors the award of rents to groups of firms, and awards rents so as to encourage the grouping of firms to the extent that it becomes legitimate to speak of a cartel–rent nexus in Japan. The cartel–rent nexus informs the award of rents, the nature and organization of the rent- seeker, and the design of the rent itself.

In short we argue that there is at the core of institutionalized rent practice in Japan a cartel–rent nexus. Its origins are multiple: prewar practices, enduring bureaucratic values, the nature of bureaucratic authority, the particular Japanese models of economic organization (interfirm groupings, one set-ism), and even culture.96 More often than not it takes the form of the regulatory cartel, a term we have borrowed from Milhaupt and Miller.97 The persuasiveness of this particular form of cartel is due in large part to an equally pervasive sense that unites government and business, that competition without regulation quickly becomes excessive and destructive. At issue then is not regulation itself (both parties desire this), but rather who will have the leading role in the regulatory exercise. Economists are skeptical and remain far from persuaded that the term ‘‘excessive com- petition’’ makes any kind of theoretical sense. This has not lessened the persuasiveness of the term to government and business.

Milhaupt and Miller developed the notion of the regulatory cartel to model Japanese finance:

In part, the basic purpose of the regulatory cartel is similar to the purpose of any cartel: to control entry and output and thereby to increase price above the market clearing level (that is to create rents). The Japanese regulatory cartel differs from the standard industrial cartel familiar from price theory textbooks in that (a) it is extremely far reaching, extend- ing not only within industries but across industry groups; and (b) responsibility for the coordination and enforcement of the cartel is

vested not only in groups within particular industries, but also in bureaucrats and ultimately in politicians.98

We are broadly in agreement with this definition and would add only that (a) the regulatory cartel is by no means peculiar to the finance industry, and that (b) where the regulator of first instance is a sector-specific genkyoku agency the regulatory cartel is also specific to an industry, since the regulator is also ipso facto the rent-awarder; the regulatory cartel institutionalizes a cartel–rent nexus. The regulatory cartel is extremely widespread in the political economy of Japan and is the characteristic mode of rent allocation in sectors with a relatively small number of leading firms – the classic pyramid form of industrial organization.

A word of caution is in order here. The cartel–rent nexus was the preponderant, even the dominant, mode of rent-seeking in economic pro- motion and economic management in Japan in the first 25 years after the Pacific War. It was not the exclusive mode of rent-seeking, any more than lifetime employment, the seniority wage system and the internal labor market constituted the exclusive mode of labor utilization in the period in question. Thus economically contingent rents in the guise of the export-based special depreciation scheme were not tied to the cartel but to the firm. Any firm with rising exports could claim a ‘‘special depreciation’’ allowance that was equal to the product of the increase in its export/sales ratio together with the ‘‘normal’’ depreciation allowance.99 However, it is important to note that the degree of concentration of the Japanese economy from the 1960s on meant that even the award of rents to firms occurred in a monopolistic and oligopolistic environment amongst a relatively limited number of players and subject to state pressure to engage in horizontal and vertical ‘‘coordination’’ with other players in respect of price, capacity and R&D.100

In short it is not the intention to suggest that industrial policy is reducible to the cartel–rent nexus. Nor for that matter is it suggested that there was no evolution in industrial policy thinking in the first two decades after the war. Indeed, whereas in the time of which we speak the interests of government and industry were all but coterminous, they began to diverge sharply at the end of this period. Symptomatic of this divergence was the announcement in May 1969 that Mitsubishi Heavy Industries had agreed with Chrysler to set up a new company, the Mitsubishi Automobile Company, despite the opposition and disapproval of the Ministry of International Trade and Industry. Shortly thereafter the emergence of Japan on the world stage as a major economic player, recording spectacular year- on-year trade surpluses, triggered the round of reactions and protests we know as trade friction which drove a wedge not only between Japan and the West but also at home between a state increasingly mindful of diplomatic considerations and industry eager to pursue profits abroad. Industrial policy after this time had to adjust so as to take account of this divergence of interests.

Arguably the Ministry of International Trade and Industry’s anticompetitive procartel, promerger instincts attained their apogee in the Special Industries Bill submitted to the Diet and rejected by the Diet in 1963. The bill was informed by three guiding principles: (1) industry was characterized by excessive competition and insufficient scale; (2) to cope with international competition it was essential to merge firms, concentrate production, and promote firm size; (3) the Anti-Monopoly Law should be neutered so as to allow greater scope for the formation of cartels and to arrange mergers. It is important to note that the bill was opposed by industry not because of any objection to these principles (including cartelization, which it fully endorsed) but because the bill anticipated a leading role for the state bureaucracy in the mobilization of cartels and mergers. Industry favored a higher degree of business autonomy in pursuit of much the same ends.101

The persistent reliance of the Ministry of International Trade and Industry since this time (1963) upon the regulatory cartel as its preferred modus operandi is familiar, whether this is in respect of industrial promotion or in the management of industrial decline. Perhaps less well known than the recession cartel is the Ministry of International Trade and Industry’s insistence that its industrial sector partners should organize themselves as a regulatory cartel if they were to benefit from rent awards. Thus in the case of the Depressed Industries Law of 1978 the terms of this actually required (a) industry representatives to submit an industry-wide (gy
okai) plan for the management of the industry with particular reference to the control of entry and exit to the industry as the condition for access to government financial support for capacity reduction; and (b) industry members of the regulatory cartel to carry the exit costs which might otherwise be borne by firms leaving the industry.102

The Ministry of Finance is another highly significant rent-awarder that understands the ‘‘cartel’’ to be the natural bearer or recipient of the rent and so accordingly works to maintain the cartel. Indeed the extent to which Japanese finance was ‘‘animated by cartel-like behavior’’ from the immediate postwar period, and probably until as late as the 1990s, is one of the renowned and stylized ‘‘facts’’ of the Japanese political economy – too well known to detain us for long. Hamada and Horiuchi are very much to the point: ‘‘the (monetary) authorities supported the formation and mainte- nance of cooperative behaviour, including quasi-cartels among financial institutions.’’103 In fact, it seems that the indirect support by the Ministry of Finance and the Bank of Japan (BOJ) of cooperation among private financial institutions was the preferred means of intervention in financial markets during the high-growth period, more so than by direct controls based on the law or through the administrative guidance of private financial institutions. The efforts of the Ministry of Finance and Bank of Japan to promote a finance cartel were directed at a range of public or semipublic organizations: the Bond Issue Committee, the Financial Institutions Fund Council, and the Industrial Finance Committee of the Ministry of International

Trade and Industry. The Bond Issue Committee was the ‘‘control lever’’ by means of which the Ministry of Finance guided bond financing following the abolition of formal controls in 1948. Bond issue interest rates are ‘‘determined by an implicit cartel arrangement.’’104Long-term loan rates are also fixed by the Ministry of Finance-sponsored cartel.

For all the Ministry of International Trade and Industry’s (and Ministry of Finance’s) preference for restricting access to rents to cartels rather than individual firms, and equally its use of rents as inducements to firms to form cartels, it cannot impose cartels. Renowned defeats include the failure to organize a capacity reduction cartel in steel mini mills, and the failure to impose standardized formats for video equipment,105 the machine tool industry’s rejection of consolidation and cartelization,106 and the failure to impose order and restrict entry in the electronics and high-technology markets.107The Ministry of International Trade and Industry is not unique in this, and the Ministry of Finance has also experienced some famous defeats. The latter’s preference is for ‘‘a strong highly concentrated financial sector (since) it would be easier to regulate and less likely to produce panics and scandals that invite political intrusion’’108but the Ministry of Finance, much as the Ministry of International Trade and Industry, does not always get its way. In the new Banking Act of 1981 it legislated to this end, tightening up disclosure rules in the hope that this would lead to consolidation of the small banks as public knowledge of bad loans and of the weakness of the small banks grew. As Rosenbluth tells it, ‘‘The banks fought back.’’ They appealed directly to the LDP and secured the deletion of the offending provision from the Banking Act bill (in all probability at quite a price in terms of campaign contributions).109

However, these defeats are in no sense evidence of the absence of cartel behavior in many of these industries. Nor for that matter do they weaken the rent–cartel link. Powerful cartels can defeat the state when it seeks to eliminate a rent, sometimes with, sometimes without the intervention of the politicians. Effectively the absence of clear disclosure rules constitutes a rent enjoyed by the small banks since it obscures and interrupts information flows and the operation of the market. Powerful cartels can insist upon a particular rent design. The computer market, almost a classic instance of infant industry promotion, is a case in point. The Ministry of International Trade and Industry authored protectionist policies that kept foreign firms and computers out of Japan in the 1960s.110Its officials, through the issue of import licenses, strictly policed import quotas. Fifteen Japanese firms had made contracts to use IBM technology but only six of them (‘‘the big six’’: Hitachi, Fujitsu, NEC, Mitsubishi, Toshiba and Oki) were to be allowed access to the principal promotional rents. These were disbursed through the Japan Electronic Computer Company (JECC) set up with the Ministry of International Trade and Industry’s help in 1966. Over the next 20 years, US$2 billion dollars in low-interest loans flowed through the JECC to the electronics cartel. The former used the money to buy computers from

its joint owners, the big seven, which were then to be rented to the public at low monthly fees ‘‘to grow the market.’’ The cartel also benefited from bank loans to the JECC that they could not have accessed outside of the company. The JECC was the conduit for a variety of subsidies, low interest loans, tax benefits, and loan guarantees.111 Through the JECC and under the aegis of the Ministry of International Trade and Industry the electronics cartel colluded in price setting. The cartel also benefited from exclusive access to a series of government-funded cooperative research projects. The resultant patents were owned by the government and sold to cartel members at low cost.

This practice of industrial promotion failed at times but was finally hugely