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General equilibrium evaluation of industrial policy in Japan
General Equilibrium Evaluation of Industrial Policy in Japan HIRO LEE
A question of continuing controversy is whether the Japanese economy responded to government industrial policy carried out in the early l!XOs. Using a multisectoral computable general equilibrium model, we find that it did indeed respond and that incorporating more realistic features of industrial organization in the model are critical. While sector-specificpolicy haslittleeffectin acompetitivemodel, theexistenceofscaleeconomiesamplifies the effects of industrial policy on sectoral output, trade flows, and resource allocation. When the effects of all instruments are combined, the steel and transportation equipment industries benefitted the most from industrial targeting, by expanding production levels and promoting exports. (EL. 053, F14)
To promote economic growth following the destruction of World War II, the Japanese government implemented highly interventionist policies, such as import protection, tax breaks, government loans and a variety of subsidies. As Japan faced a shortage of foreign exchange in the 1950s an emphasis was also placed on export promotion of selected manufacturing industries. Although the degree of government assistance has declined substantially since the early 197Os, the rapid Japanese export growth and consequent friction over U.S.-Japan trade imbalances in the past decade have led to renewed interest in the effects of industrial policy on economic growth, the composition of output, and international competitiveness. The extent to which Japanese industrial policy has contributed to the significant increase in competitiveness and global market share of the Japanese industry, however, remains a topic of great controversy. On the one hand, some economists and political scientists (e.g., Johnson, 1982; Tyson and Zysman, 1989) suggest that industrial policy implemented by the Ministry of International Trade and Industry (MITI) has promoted the growth and efficiency of firms in the targeted industries. They assert that policy interventions have had an important impact on Japanese industrial structure and comparative advantage over time. On the other hand, others (e.g., Krugman, 1984; Patrick, 1983; Saxonhouse, 1983) argue that an increase in Japanese competitiveness Him
Lee
Journal ISSN:
l
Department
of Economics.
d Asian Eoonomics,
University
Vol. 4, No. l,lS93.
ofCalifornia,
Irvine, CA 927 17.
pp. 25-40.
Copyright
1049-0078
8
All rights of reproduction
25
1993 by JAI Press, Inc. in any form resewed.
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JOURNAL OF ASIAN ECONOMICS, (4)1,1993
has been achieved primarily through the actions and efforts of private individuals and enterprises responding to opportunities provided by the free market. They contend that the Japanese government has only provided a favorable institutional and market environment conducive to economic growth.’ Theoretical justifications for industrial policy intervention, which have been discussed elsewhere, could arise in the presence of scale economies and imperfectly competitive markets. Itoh and Kiyono (1987) suggest that a promotion of sectors with increasing returns could enhance gains from trade while influencing the country’s comparative advantage in the long run. Krugman (1987) indicates that if economies of scale exist in an intermediate goods sector, then industrial policy could lead to beneficial linkage externalities. For example, a subsidy provided to a downstream linkage industry, which increases demand for the declining-cost intermediate goods, will lead to an additional reduction in the cost of the downstream industry without further subsidies. Other arguments for government intervention include profit-shifting from foreign to domestic firms (Brander and Spencer, 1985), the development of new technologies, learning-by-doing (Itoh, Kiyono, Okuno, and Suzumura, 1988), and coordination failure between interdependent industries (Okuno-Fujiwara, 1988). In contrast to the numerous theoretical contributions on the topic of strategic trade and industrial policies, empirical analyses on Japanese industrial policy are scarce and limited in their scope. Most of the previous studies are partial-equilibrium case studies on one particular industry (e.g., Baldwin and Krugman, 1988; Mutoh, 1988; Shinjo, 1988, Yamawaki, 1988) where linkages to other industries are excluded from their analysis. A large and growing body of evidence suggests, however, that generalequilibrium effects arising from policy changes are significantly larger than partialequilibrium effects. In this paper, a multisectoral computable general equilibrium (CGE) model is used to quantify the economywide effects of Japanese industrial policy when some sectors of the economy are characterized by scale economies and Cournot competition. The policy tools evaluated in this study are tariffs, export subsidies, accelerated depreciation, government loans, and research and development (R&D) subsidies. The model is calibrated to a 1960 data set, and the average values of these policy instruments during 19614 are computed and used for simulation experiments. It should be noted, however, that since policy interventions were larger in the 1950s than in the 196Os, a use of data from the 1950s would have been more appropriate in estimating the full impact of industrial targeting. The unavailability of some of the policy data before 1960 has resulted in the selection of 1960 as a “benchmark’ year. Other limitations in the data and model specifications should be mentioned. First of all, the Japanese government used many other policy tools other than those examined in this paper. They include restrictions on foreign direct investment, antitrust exemptions, and administrative guidance (gyosei shido) in which government officials guide firms in desired directions. Because there are no reliable data, the effects of these policy instruments are not analyzed in the present study. Secondly, the model is static which necessarily limits the scope of the analysis on the Japanese economy which was highly
Evaluation of Industrial Policy in lapan
27
dynamic in the 1960s. An introduction of dynamics significantly complicates the model, particularly when some industries are characterized by oligopolistic competition and increasing returns to scale as in the present model. In a dynamic model incorporating these industrial organization characteristics, the existence of unique, stable equilibrium is guaranteed only under a very restrictive set of assumptions.’ Thirdly, this model does not incorporate externalities associated with R&D. Finally, because of the lack of reliable estimates, the effects of the vast improvements in the physical infrastructure, such as roads, harbors, electric power, and industrial water supplies, on industrial productivity are excluded from the model. However, a significant portion of the Japan Development Bank loans were provided for the development of physical infrastructure, which is believed to have played an important role in the Japanese industrial development in the postwar period. Despite these limitations, the model casts new light on the impact of industrial policy on Japan’s trade patterns in the early 1960s. By consistently specifying both economywide interactions in the domestic markets and trade linkages with the rest of the world, the present model can assess the general equilibrium implications of different instruments of Japanese industrial policy.
I.
THE JAPANESE
CGE MODEL
In this section a brief description of the CGE model for the Japanese economy is presented.3 The model contains fourteen manufacturing and five non-manufacturing sectors, one of which is regulated public utility. Japanese consumers treat imported and domestic products as imperfect substitutes.4 For tradeables, they desire composite goods (X), which are Cl3 aggregates of imported goods (M> and home-produced goods (D): x =AM,D)
= q[BM-P + (1 - p)D-PI-‘@,
where $, p, and p are parameters. Minimization of the cost of purchasing a given amount of composite goods leads to the first order condition that the marginal rate of substitution between imported and domestic goods equal the ratio of the domestic price (Pd) to the import price (Pm) A4 ____ P Pa -=
D
(I-P)P” ’ [ 1 where u = l/11 + p) is the elasticity of substitution between imported and domestic goods. Similarly, foreign consumers view Japanese and foreign goods as imperfect substitutes. Since Japanese exports and imports were small relative to world demand in the 1960s it is assumed that prices in the rest of the world are unaffected by changes in the output and cost of Japanese industries. Firms employ capital, labor, and intermediate inputs to produce output. The input-output coefficients are fixed, and firms in the same industry produce a homogeneous product. The total cost function is Cobb-Douglas of the form
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JOURNAL
OF ASIAN ECONOMICS,
(4)1,1993
TABLE 1. Estimates of Cost Function Parameters Used in the Model IogCT= a+ + al log@ + azlogw + ajlogc + adloge + aSlogRD + u InduStrya
Agriculture Mining Food Textiles Wood & Paper Chemicals Petroleum Ceramics Steel Nonfer Metals Metal Prod Gen Machinery Elec Machinery Transport Eq Prec Inst Mist Manufac Tmns & Comm Public Utility Services Nofe:
%dustries:
Agriculture,
Ceramic,
Stone,
Machinery:
Public Utility;
a2
a3
44
0.436 0.347 0.084 0.159 0.165 0.093 0.043 0.219 0.059 0.100 0.322 0.224 0.178 0.184 0.259 0.180 0.436 0.175 0.445
0.212 0.280 0.077 0.075 0.114 0.201 0.212 0.207 0.135 0.099 0.144 0.167 0.143 0.137 0.142 0.108 0.242 0.462 0.193
1.000 1.000 0.909 0.902 0.884 0.701 0.699 0.844 0.602 0.670 0.784 0.782 0.856 0.773 0.861 1.000 0.903 0.482 1BOO
Forestry,
and Glass
Transportation
al
0.352 0.373 0.839 0.766 0.721 0.706 0.745 0.574 0.806 0.801 0.535 0.609 0.679 0.679 0.599 0.712 0.322 0.363 0.362 and Fishing;
Pmducts: Equipment;
Iron
Mining;
and Steel;
Precision
Food Processing: Nonfermus
Instrument;
Metals;
Miscellaneous
Textiles; Metal
Wood
0 -0.153 0 -0.201 0 -0.026 -0.166 -0.230 -0.480 0 0 -0.215 -0.218 -0.264 -0.470 0 0 -0.003 0
and Paper Products; Chemicals;
Products;
Manufacturing;
a5
General
Transport
Machinety;
Electric
and Communication:
Services.
1ogCT = ac + a,logP’ + a210gw + a310gc + a410gQ + aslogRD, where CT is total cost, P’ is a weighted average of price of intermediate inputs, w is a wage rate, c is a user cost of capital, Q is output, and RD is the stock of R&D. The degree of scale economies is measured by the ratio of average cost to marginal cost, which is equivalent to the inverse of the elasticity of total cost with respect to output. The coefficients on the sectoral cost functions are estimated in Lee (1988, Chapter 4) and presented in Table 1. The agricultural, mining, miscellaneous manufacturing, and service sectors are assumed to be perfectly competitive with constant-returns-to-scale technology (i.e., a, = 1). Every firm faces an infinitely elastic demand curve in both domestic and export markets, and domestic and export prices net of indirect taxes will equal its marginal cost: Pr\ld=Pp=MC In the other 15 sectors (transport and communication, public utility, and all the manufacturing sectors other than miscellaneous manufacturing), a4 is less than one, or there are economies of scale in production. The price of public utility sector is set by the Japanese Fair Trade Commission as
Evaluation ofIndustrial Policy in ]apan
29
PNd-(1
+p)AC,
where p is a “fair” rate of return on investment .5 In the remaining 14 sectors, the equilibrium sectoral output and price levels are determined assuming Coumot behavior by firms. When the market demand elasticity E is constant, a firm faces a perceived demand elasticity equal to no, where it is the number of firms.6 It can be shown that in a Cournot equilibrium, each firm’s percentage markup of the net price over marginal cost is the inverse of the perceived demand elasticity. Thus, in the domestic market (PNd - hlC)/Pl\ld - l/(ned), and in the export market (PM - MC)/PW = l/(ne”‘), where &dis the market demand elasticity for domestic goods, and Ed* is the rest of world’s market demand elasticity for Japanese goods (both elasticities are positively defined). In CGE models, an equation system is solved for commodity and factor prices that represent equilibrium in different markets and satisfy the accounting identities goveming economic behavior. Changes in these prices induce changes in the level and composition of supply and demand, production and income, and the remaining endogenous variables in the system. In calibrating the model, the tariff rates are set at their actual rates in 1960, but the other five policy variables are initially all set equal to zero. An increase in the tariff rate raises the price of imports. If the protected industry has considerable intrasectoral purchases and a large import share, the cost of intermediate inputs is likely to rise substantially with the increase in the import price. At the same time, a higher price for imports raises the demand for domestic goods and the output of the protected sector. Thus, protection of a declining-cost industry may strengthen the international competitiveness of firms in the protected industry if the degree of scale economies is sufficiently high and the size of the domestic market is large.’ An export subsidy reduces the Japanese export price to the rest of the world and raises export demand and the total output of the subsidized sector. Since industries must compete for scarce resources within the country, an expansion of output raises factor prices.’ As a result, a subsidy affects relative costs and the international competitiveness of each industry. Government loans and accelerated depreciation both alter relative costs and the production levels through their effect on the user cost of capital, which can be expressed as c=
PK(r+M%)(l (l-f)
-r’Z) ’
where PK is the price of capital assets (&Y H dPWPK), r is the rate of discount, 6 is the rate of depreciation of the capital stock, f the corporate tax rate, and Z is the present value of future depreciation allowances on a yen of investment. Since government loans
30
JOURNAL OF ASIAN ECONOMICS,
(4)1,1993
are extended at a rate of interest lower than the market rate, they lower r. In addition, they affect the share parameters for investment demand because a certain percentage of plant and equipment investment financed by government financial institutions would not be financed by commercial banks no matter what the rate of interest. When a special depreciation of a is granted on a yen of investment, Z=(l
-a)DA~e-%+a
where DA are straight-line depreciation allowances on a yen of investment. An increase in a raises the present value of depreciation allowances and lowers the user cost of capital. An R&D subsidy increases the stock of knowledge that flows from R&D.’ This leads to an improvement in productivity and a reduction in cost. As in the other four instruments, the overall effects of an R&D subsidy depend upon which industry receives the subsidy, as well as on various parameter values. Some of the key parameters which affect the policy outcome are the degree of scale economies, the elasticities of substitution between domestic and imported goods, the cost function parameters, and the input-output coefficients.
II.
QUANTITATIVE ASSESSMENTS OF JAPANESE INDUSTRIAL POLICY
In this section two sets of simulation experiments are conducted to analyze the effects of Japanese industrial policy in the early 1960s. In each experiment, the values of one type of policy parameters in all 19 sectors are changed simultaneously. Table 2 provides a list of the changes in policy parameters that are incorporated in each experiment. The first set of experiments is conducted using the base industrial organization (IO) model described in the previous section. In the second set, the model is recalibrated assuming that all sectors are perfectly competitive. This requires that for every sector the degree of scale economies is one and that each firm’s perceived demand elasticity is infinite. Table 3 summarizes the effects of each policy instrument on sectoral output (Q), marginal cost (MC), exports (E), and imports (M) obtained from the first set of experiments. The composite effect given in that table arises from simultaneously implementing all five policies, taking account of interactions and nonlinearities. Decomposition of the effects of targeting by type of policy instrument reveals that different industries benefitted from different instruments of industrial policy in the early 1960s. In the steel, nonferrous metal, electric machinery, and transportation equipment industries, export subsidies led to the largest effect on the output levels. In agriculture, food processing, textiles, and chemicals, government loans or interest subsidies had the greatest impact, while the accelerated depreciation tax allowances caused the most expansionary effects in the remaining 11 industries. During this period, the effects of R&D subsidies were negligible in all 19 industries, which may be because
Evaluation of Industrial Policy in Japan
TABLE 2.
Exogenous Changes in the Industrial Policy Parameters Incorporated in Simulation Experimentsa
Industly
AP
Agriculture Mining Food Textiles Wood & Paper Chemicals Petroleum Ceramics Steel Nonfer Metals Metal Prod Gen Machinery Elec Machinery Transport Eq Prec Inst Mist Manufac Tmns & Comm Public Utility Services Note;
*Af”‘is
31
1.749 3.772 -14.432 5.220 0.791 -0.264 5.328 3.031 -0.985 -1.248 23.027 3.162 3.897 9.299 24.007 16.675 0 n.a.b -17.874
the diffeleme
Aa
A4
0 0 1.687 0 0 1.747 0.066 0 1.710 0 3.101 7.760 3.091 13.398 3.490 1.881 0 n.a.b 0
0.689 6.911 4.124 4.038 5.339 2.096 7.941 1.642 4.344 4.233 7.167 9.261 4.259 10.302 6.615 5.902 7.804 0.301 2.238
0.843 0.824 0.182 0.190 0.155 0.164 0.034 0.140 0.059 0.129 0.320 0.376 0.091 0.169 0.253 0.378 0.568 0.285 0.058
in the sectoral ad valorem tariff ratesbetween
values for the 1961-65 ad valorem
Af
period of ad valorem equivalent
subsidy equivalent
of government
I%0
AP 0 0.025 0.014 0.006 0.003 0.085 0.000 0.040 0.046 0.412 0.022 0.101 0.351 0.136 0.016 0.027 0.019 0 0.041
and 1965. AI’, ha. As’. andti’o
arc average sectoral
of export subsidies, ratios of accelerated depreciation
loans, and real R&D
subsidies in 1960 billion
to investment,
yen, respectively.
All variables
except sao are expressed in percentages. bNot applicable
since public utility
Data Sources: (1) I”’ : Administrative
is nontradeable.
Management
Agency,
LinkInput-Output
1960-65-70
Tables.
(2)f.Thesumofadvaloremequivalentsof(a)cwpolatetaxsavingsrealizedfromdeductionsonexpwtearnings,(b)commodity tax rebates on exported
goods, and (c)export
procedure is given in Lee (1988, (3) a: Ministry
Smfisrics Anrum/.
of Finance, Corporotp
(4) s’: computed as s’ - [(P - ?)LJDB fioaocial
institution
Agriculture,
loans. Pa,
Forestry,
suppliers’
credits provided
by the Export-Impon
P”
and Fisheries
various issues.
+ (J+’- pF)LMF+
and P
(P - ?‘)LsB)lI.
where P is the effective interest rate on private
are interest rates on loans extended by the Japan Development
Finance
Corporation
(AFFFC)
and the Small
LJDB,LA” and LSB are new supplies of investment funds extended by JDB, AFFFC Data are obtained from the Bank of Japan JDB, AFFFC (5)X?
Nominal
R&Dfi&sreceivedfrom
from the prime Minister’s
Bank of Japan. A estimation
pp. 146-149).
Oftice.
Business Finance and SBFC,
Bank (JDB),
Corporation
the
(SBFC).
and I is sectoral investment.
and SBFC.
nationalandlocalgovemmcntsdividedbytheR&Ddcflator(I%O=
Statistics Bureau, Reporr on the Survey ofReseorch
100). obtained
and Devefopmenr.
positive spillover effects have not been explicitly incorporated in the model. In addition, if R&D subsidies were used in adopting foreign technology, the effects of R&D might have been substantially higher. lo Overall the industrial policy mix resulted in large increases in output and exports of the steel, transportation equipment, and general machinery industries.” Contrary to a priori expectations that home market protection of an increasing returns-to-scale industry could expand its output and lower cost, the tariff policy had a contractionary effect in all industries except mining. These results should be interpreted with caution because aggregation of industries causes a bias on the estimated
32
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TABLE 3.
OF ASIAN ECONOMICS,
(4)1,1993
Effects of Industrial Policy Mix on Output, Cost, and Trade Flows: Base (b) model (percentage change@ Sectoral Eflects of
Industries and Sectoral Variables
At”
AP
Aa
-0.37 -0.44 0.44 -2.49
1.32 1.44 -1.42 2.84
1.86
1.12 -0.19 0.19 -2.56
A.+
AsRD
Composite Effect
Agriculture
Q MC E M Mining
Q MC E M Food
Q MC E M Textiles
Q MC E M Wood & Paper
Q MC E M Chemicals
Q MC E M Petroleum
Q MC E M Ceramics
Q MC E M Steel
Q MC E M
0.04
-1.58 3.57
3.09 -0.33 0.33 2.78
4.04 0.08
5.99 2.28 -2.23 6.73
3.35 0.97 -0.96 4.38
3.71 0.45 a.45 4.20
3.28 -0.68 0.69 2.58
0.09 0.01 -0.01 0.11
12.44 0.54 -0.54 9.19
-0.85 a.12 0.41 10.62
I .72 0.86 -0.07 2.63
2.30 0.72 -2.35 3.12
3.02 -0.26 0.87 2.78
0.05 0.02 -0.08 0.07
6.26 I .20 -1.19 20.30
-0.49 AI.10 0.23 -3.19
0.77 -1.76 2.19
2.04 0.47 -1.07 2.78
2.07 -0.01 0.01 2.38
0.03 0.02 -0.05 0.06
5.02 1.13 -2.56 4.13
a.62 -0.12 0.48 -0.82
0.82 -3.20 1.92
2.26 0.50 -1.97 2.46
2.1 1 0.10 -0.40 2.18
0.05 0.02 -0.09 0.05
5.53 1.31 -5.01 5.87
-0.75 0.29 -0.78 0.06
2.50 -0.35 5.31 1.71
2.81 -0.79 2.15 1.62
2.83 -1.06 2.92 1.14
0.05 -0.01 0.02 0.05
7.60 -1.92 9.92 4.61
-1.05 -3.75 -1.24
3.23 -0.50 1.46 3.25
3.73 -1.59 4.41 3.57
2.17 -0.83 2.28 2.71
0.08 -0.02 0.04 0.08
9.25 -1.61 4.55 8.81
-0.65 0.23 -0.33 -4.48
0.42 -0.61 2.59
2.09 0.29 -0.42 2.79
I .94 0.06 -0.08 2.20
0.06 -0.01 0.02 0.04
5.24 0.96 -I .37 2.97
9.88 -7.52 24.95 2.00
7.62 -6.5 I 17.08 I .32
4.10 -3.33 8.26
0.19 -0.20 0.47 0.01
22.75 -15.75 55.38 5.46
1.43
-1.60
1.69 -3.85 0.63
1.28
1.65
1.69
1.60
I 04
0.04
33
Evaluation of lndustrid Policy in Japan
TABLE 3. (Continued) Sectoral E$ects of Industries and Sectoral Variables
Aim
A.+
AsRD
Composite Effect
Af
Aa
-0.92 0.90 -2.06 -0.52
5.37 -1.96 4.73 5.09
4.18 -1.77 4.26 3.89
2.67 -1.17 2.79 2.48
0.19 -0.08 0.19 0.18
12.00 -4.09 10.23 11.60
-0.61 0.26 -0.60 -20.88
2.85 -1.48 9.03 0.44
3.07 -1.62 3.88 0.90
2.34 -0.71 1.68
0.07 -0.04 0.09 0.02
7.88 -3.61 14.73 -18.71
-0.84 0.28 -0.46 -3.38
3.89 -1.31 15.57 1.48
3.94 -1.91 3.23
3.14 -1.08 I .80 2.12
0.11 -0.06 0.10 0.04
10.39 -4.02 20.99 1.99
-0.78 0.16 -0.49 -4.14
3.44 -0.61 9.77
3.27 a.79 2.44 2.55
2.53 -0.20 0.62 2.59
0.12 -0.04 0.13 0.07
8.64 -1.46 12.69 2.69
-0.84 0.32 -1.06 -8.13
Il.01 -3.20 50.04 0.98
4.59 -2.16 7.47 1.91
3.07 -0.84 2.81 2.27
0.11 -0.07 0.22 0.03
18.96 -5.89 64.68 -3.39
-0.25 0.04 -0.03 -13.19
2.05 0.35 1.54 2.42
2.69 -0.08 0.06 3.20
2.10 0.16 -0.12 2.71
0.07 -0.02 0.01 0.07
6.72 0.44 1.47 -5.80
-0.48 -0.15 0.49 -12.85
2.40 0.75 0.59 3.42
2.68 0.38 -1.21 3.61
2.24 0.09 -0.28 2.68
0.05 0.02 -0.07 0.08
7.02 -0.42 -4.09
-0.62 -0.23 0.23 -0.90
1.96 0.71 -0.7 1 2.87
2.84 0.46 -0.46 3.53
2.49 -0.0 I 2.64
0.05 0.03 -0.03 0.08
6.88 0.94 -0.94 8.42
-0.93 0.48
3.22 -0.73
3.47 -0.95
3.46 -2.02
0.08 -0.02
9.70 -3.3 1
Nonfer Metals
Q MC E M Metal Prod
Q MC E M Gen Machinery
Q MC E M Elec Machinery
Q MC E M Transport Eq
Q MC E M Prec rnst
Q MC E M Mist Manufac
Q MC E M Tram & Comm
Q MC E M Public Utility
Q MC E M
1.89
1.96
1.47
0.01
1.06
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OF ASIAN ECONOMICS, (4)1,1993
TABLE 3. (Continued) Sectoral Effects of Industries and Sectoral Variables
Atm
Af
Aa
A.+
1.06
I.85 1.33
1.80
AsUD
Cotnoosite Effect
Services
Q MC E M
-1.23 2.35
At”’
At’
Aa
A.+
hSRD
2.13 1.39 0.95 12.33 3.10
2.13
2.23
1.77
1.87
3.23 3.57 3.35
3.86 I .86 2.52
0.05 0.04 0.05 0.10 0.08
1.25
-1.31 3.24
Economywide Aggregate Variables Real GDP Consumption Investment Exports Imports Nore:
0.05
-0.65 -0.37 0.37 20.66
-0.66 -0.48 -1.32 -0.74 -0.82
1.29 -1.28 3.16
0.04 -0.04 0.08
4.06 3.53 -3.41 31.47
Effects of Composite Effect 6.00 4.64 6.68 19.09 8.51
‘See Table 2.
effects of protection in two ways. First, an increase in the sectoral tariff rate in this model is equivalent to uniform increases in the tariff rates on all commodities classified in that sector, failing to capture a complex tariff structure in practice. Second, for purely statistical reasons, the shares of intrasectoral purchases become larger when industries are more broadly classified, biasing upward the effect of protection on the price of intermediate inputs. For example, tariff protection in the machinery industry not only expands sectoral output along a declining average cost curve, but increases the costs of foreign-sourced intermediate inputs such as machine tools. If the latter is a sufficiently large component, a priori expectations would be reversed, as shown in the simulations. Changes in relative costs and relative prices affect trade patterns. In the absence of export subsidies, a change in exports is inversely related to a change in MC. The export promotion measures contributed to the rapid increase in exports of steel, metal products, general machinery, electric machinery, and transportation equipment. In addition, exports of these products were enhanced by the provisions of accelerated depreciation and government loans. In contrast, the export promotion of heavy industries led to reductions in exports of most of the nonsubsidized industries (e.g., agriculture, mining, textiles, wood and paper, and services). A close look at the effects of government loans and accelerated depreciation on MC yields some interesting findings. For example, the agricultural and mining sectors both received a larger amount of government loans than did the chemical, steel, nonferrous mental, or public utility sector during the 1961-65 period. Yet the estimated effect on MC is smaller in the agricultural and mining sectors than in the latter group of sectors with large degrees of scale economies. This is because an increase in output
Evaluation of Industrial Policy in Japan
35
reduces MC of an industry with increasing returns, but does not precipitate an induced change in MC of an industry with constant returns. The increase in the aggregate output leads to higher factor prices, causing upward shifts in the MC schedules for all 19 sectors. For this reason, although the transport and communication industry was the largest beneficiary of the tax policy, accelerated depreciation allowances are predicted to cause an increase in MC of this sector. As indicated in the percentage changes in MC, industrial targeting contributed considerably to the development of several heavy industries in the 1960s. It led to a deterioration in the international competitiveness of light industries, including food processing, textiles, wood and paper products, and ceramic, stone, and glass products. Also in Table 3 are the economywide effects of each policy instrument. The composite effect shows that exports have gained the most, increasing by over 19 percent. The majority of that increase has come from export subsidies. As expected, government loans and accelerated depreciation spurred plant and equipment investment. Japanese consumers also benefitted, measured both in real GDP and consumption. Table 4 summarizes the effects of industrial policy mix using the perfect competition (PC) model. A comparison of Tables 3 and 4 shows that the magnitudes of changes in endogenous variables are much lower in the PC model. In particular, the effects of promotional policies on output and MC are significantly smaller than those predicted using the IO model. This is because there is no scale effect on MC (i.e., &KX?Q = 0) for a constant-cost competitive industry. For example, in the steel industry the PC model predicts the composite effect of industrial policy on output is an increase of only 4.2 percent, whereas the IO model predicts an increase of 20.2 percent. In every sector the percentage change in output predicted in the PC model is less than one-half that obtained in the 10 model. The ratios of the percentage changes in output computed in the PC model to those computed in the IO model range from 0.12 (services) to 0.50 (agriculture). On average, the percentage change in output estimated in the PC model is only about one-quarter of that obtained in the IO model. The effects on MC and trade flows predicted using the PC model are also significantly smaller than when the IO model is used. Again using the steel industry as an example, the PC model estimates a reduction in MC of 0.3 percent and an increase in exports of 4.8 percent; the IO model predicts a reduction of 15.9 percent and an increase of 46.9 percent for these variables. In addition, the signs on MC and exports are opposite in many industries (e.g., agriculture, mining, and nonferrous metals) between the two models. A comparison of the two experiments suggests that if all industries were perfectly competitive, the role of industrial policy on the development of selected manufacturing industries would have been considerably weakened. Economywide results with the competitive, constant returns to scale model are sumrnarized at the bottom of Table 4. Total investment actually falls because govemment subsidies can lead to higher deficits, which in turn reduce aggregate savings. While exports still increase, the growth is less than half that in the oligopolistic model. Overall benefits to consumers are also considerably smaller.
36
JOURNAL OF ASIAN ECONOMICS, (4)1,1993
TABLE 4.
Effects of Industrial Policy Mix on Output, Cost, and Trade Flows: PC Model (percentage changes) Sectoral Effects of
Industries and Sectoral Variables
A+
Composite Effect
AP
Af
-0.10 -0.16 0.16 -1.94
0.10 0.00 0.00 0.10
0.79 0.40 -0.40 1.21
2.19 -1.14 1.15 1.03
-0.01 0.02
3.00 -0.89 0.90 0.38
1.60 -0.01 0.01 -1.92
0.62 0.00 0.00 0.62
1.53 4.32 0.32 1.21
1.87 -1.20 1.22 0.63
0.04 -0.01 0.01 0.03
5.75 -1.52 I .54 0.54
-0.49 -0.01 0.05 11.16
0.13 0.00 2.19 0.08
0.87 0.12 -0.40 1.02
1.83 -0.50 1.68 1.32
0.01 0.01 -0.02 0.02
2.35 a.39 4.13 13.87
-0.23 -0.01 0.03 -2.82
0.22 0.00 0.00 0.25
0.96 0.07 -0.15 1.16
1.13 -0.10 0.23 1.20
0.01 0.01 -0.01 0.02
2.09 -4l.04 0.10 -0.25
-0.29 -0.02 0.07 -0.46
0.02 0.00 0.00 0.02
0.87 0.00 0.00 0.89
I .08 -0.13 0.52 1.06
0.01 0.01 -0.03 0.01
1.70 -0.14 0.56 1.54
-0.32 0.09 -0.24 0.17
0.69 0.00 4.31 0.38
1.07 -0.13 0.35 0.93
1.32 -0.21 0.57 1.05
0.01 0.00 -0.01 0.02
2.77 -0.25 5.01 2.56
-0.52 1.20 -3.15 -0.74
0.40 0.00 0.09 0.42
1.38 -0.85 2.32 1.28
1.19 -0.25 0.67 1.19
0.02 0.00 0.00 0.02
2.47 0.09 -0.16 2.15
Q
-0.31
-0.1 I
MC E M Steel
0.24 -0.35
0.00
-4.10
-0.11
0.62 0.11 -0.16 0.87
0.91 0.03 -0.04 1.04
0.02 -0.02 0.03 -0.01
1.14 0.36 -0.53 -2.38
I .74 -0.58 I .37 1.35
0.80 -0.01 0.02 0.88
0.05 -0.04 0.09 0.01
4.24 -0.31 4.81 4.69
Aa
-
Agriculture
Q MC E M Mining
Q MC E M Food
Q MC E M Textiles
Q MC E M Wood & Paper
Q MC E M
0.01 0.01
Chemicals
Q MC E M Petroleum
Q MC E M Ceramics
Q MC E M
-0.40 0.31 -0.73 0.59
0.00
2.05 0.00 4.05 1.81
37
Eunluatim of Industrial Policy in Japan
TABLE 4. (Continued) Sectoral Efsects of Industries and Sector& Variables
@
Composite Effect
Aa
A?
1.95
1.52 -0.21 0.49 1.56
0.92 -0.15 0.35 0.94
0.11 0.00 0.00 0.12
4.05 0.18 -0.42 4.58
-0.16 0.02 0.04 -20.8 1
0.39 0.00 5.30 0.00
1.05 -0.30 0.70 0.70
0.98 0.06 -0.15 1.15
0.02 0.00 0.01 0.01
2.28 -0.25 5.92 -19.33
-0.24 0.01 a.02 -3.06
0.67 0.00 13.08 -0.41
1.30 4.66 1.10 0.63
1.33 -0.21 0.35 I.19
0.03 -0.02 0.04 0.01
3.12 -0.88 14.74 -1.67
-0.25 0.03 -0.08 -3.76
0.7 1 0.00 7.74 -0.28
0.98 -0.20 0.61 0.82
0.94 0.20 -0.60 1.36
0.0s -0.02 0.0s 0.03
2.43 0.01 7.72 -1.89
-0.22 0.04 -0.14 -7.85
5.53 0.00 34.73 0.47
-0.6% 2.28 0.84
1.12 0.09 -0.30 1.45
0.03 -0.03 0.09 0.00
8.21 -0.57 37.32 -5.29
0.09 0.13 -0.10 -12.75
0.17 0.00 1.80 -0.19
I .07 -0.20 0.15 1.12
O.% 0.09 -0.07 1.25
0.03 4.02 0.01 0.02
2.33 0.00 I .80 -10.82
a.18 -0.03 0.11 -12.40
0.79 0.00 3.04 0.47
1.36 -0.14 0.45 1.34
1.25 -0.20 0.64 1.14
0.01 0.01 -0.02 0.02
3.25 -0.36 4.26 -9.78
-0.29 -0.06 0.06 -0.37
0.11 0.00 0.00 0.12
a.16 0.16 1.25
-0.41 0.4 I 1.08
0.01 0.01 -0.01 0.02
2.62 -0.61 0.62 2.12
-0.36 0.16
0.38 0.00
I .03 0.10
1.60 -0.76
0.02 0.00
2.66 -0.49
ti
Af
-0.34 0.54 -1.25 -0.01
1.82 0.00 0.00
Nonfer Metals
Q MC E M Metal Prod
Q MC E M Gen Machinery
Q MC E M Elec Machinery
Q MC E M Transport E.q
Q MC E M Pm lust
Q MC E M Mist Manufac
Q MC E M Trans & Comm
Q MC E M Public Utility
Q MC E M
1.63
1.34
1.43
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TABLE 4. (Continued) Sectoral Efiects of Industries and Sectoral Variables
Aim
Af
Aa
A+
0.50 0.29 -0.29 0.80
0.86 0.55 -0.55
hsRD
Composite Effect
Services
Q MC E M
-0.34 -0.12 0.12 21.35
-0.56 0.00 0.00 -0.56
Economywide Aggregate Variables Real GDP Consumption Investment Exports Imports
Atm -0.29 -0.21 -0.62 -0.17 -0.31
III.
Af 0.10 0.06 -2.29 7.63 0.36
1.43
0.01 0.01 -0.01 0.02
Effects of
Aa
A?
@
0.51 0.65 0.32 0.69 1.14
I .07
0.01 0.01 -0.03 0.03 0.02
CONCLUDING
0.48 0.12 -0.72 23.40
1.02 1.78 0.13 1.00
Composite Effect 1.42 1.53 a.69 8.42 2.20
REMARKS
The effects of industrial policy carried out in the early 1960s in Japan have been estimated using a model incorporating industrial organization features and a standard perfectly competitive model. While the effects of industrial policy under constant returns are small, the empirical finding of this study supports the theoretical results that there is an important role for government intervention when some sectors of the economy are characterized by scale economies and oligopolistic competition. When the effects of all instruments are combined, the steel and transportation equipment industries benefitted the most from industrial targeting in the early 196Os, by expanding their production levels, strengthening their international competitiveness, and promoting exports. An important finding of this study is that the existence of increasing returns amplifies the effects of industrial policy on sectoral output, trade flows, and resource allocation. The production base in Japanese manufacturing was small in the 1950s and 196Os, making it easy to achieve economies of scale. Thus, industrial policy appeared to have played a major role in the development of heavy industries in the postwar era. The investment-led growth in many key industries was also enhanced by such favorable factors as the high and risingeconomywide savings rate and the availability of advanced foreign technology. In a dynamic model, these results are likely to be even larger. For example, the presence of learning-by-doing would give firms with a longer time horizon an incentive to produce more output than that suggested by short-run profit maximization. Similarly, the vast physical infrastructure investments during the 1950s and 1960s have certainly contributed to productivity and even greater expansionary effects.
Evaluation of lndustrid Policy in Japan
39
Today, the economic environment, both domestically in Japan and globally, is considerably different from that of the 1950s and 1960s. In many industries scale economies
have been fully exploited. Some have faced a problem of excess capacity
during the post-oil crisis era. In the past decade, Japan has liberalized its financial market, while the yen has continued to appreciate against the U.S. dollar. In the meantime, new protectionism has emerged and threatened the process of multilateral trade liberalization. Considering these new factors, it has become less and less appropriate for Japan to employ industrial policy as a tool to improve its competitiveness in the global market. Its use should be limited to cases where market failure would occur in the absence of government intervention. Acknowledgments: The author thanks Sherman Robinson, David Roland-Holst, Laura Tyson, John Ying, and two anonymous referees for their helpful comments. Financial support provided by the Institute of International Studies at the University of California, Berkeley is gratefully acknowledged.
NOTES 1. Macroeconomic plans carried out by the Japanese government in the 1950s and 1960% the Income-Doubling Plan in particular, raised expected future growth rates, inducing a rapid increase in plant and equipment investment expenditures. The investment-led economic growth was also enhanced by such favorable factors as availability of advanced foreign technology, the increasing supply of skilled labor, and stable import prices of raw materials throughout the 1950s and 1960s. Thus, even if the sector-specific policy had little impact, the Japanese government succeeded in boosting expectations of entrepreneurs, which itself was a great accomplishment. 2. In fact, economists often convert a dynamic model to an equivalent static model to simplify the analysis. See, for example, Baldwin and Krugman (1988). 3. See Lee (1988, 1992) for a complete set of equations describing the model. 4. The Japanese trade substitution elasticities for 14 product categories are estimated in Lee (1988, Chapter 5). 5. In simulation experiments, 1 is set equal to 0.05. 6. In order to simplify the model, it is assumed that all firms have the same cost structure and are of equal size. 7. A change in the international competitiveness of Japanese industry is measured by a percentage change in the sectoml marginal cost. Given the Cobb-Douglas specification for the cost function and the assumption of a constant market demand elasticity for each product, percentage changes in export prices, average cost, and marginal cost resulting from a policy change are all equal. 8. This was particularly prominent in the labor market, with an extremely low unemployment rate. The capacity utilization rate, with few exceptions, was also high in most sectors. 9. In this model, it is assumed that there is no gestation lag between outlay of R&D expenditures and commercialization of new technology, and the rate of obsolescence of R&D stock is zero. 10. To test this hypothesis, an interaction term with R&D stock and the stock of knowledge derived from technology imports has been added to the cost function. Subsequent simulation results show that the effects of R&D subsidies are generally larger by a factor of about 20. 11. When interpreting the results, however, one should keep in mind that in a CGE model, the time fmme for predicted changes in endogenous variables leading to a new general equilibrium does not correspond to a calendar year, but is believed to mnge from two to three years.
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REFERENCES Baldwin, Richard and Krugman, Paul R. 1988. “Market Access and International Competition: A Simulation Study of 16K Random Access Memories,” in R.C. Feenstra, ed., Empirical Methodsfor International Trade. Cambridge: MIT Press. Brander, James A. and Spencer, Barbara J. 1985. “Export Subsidies and International Market Share Rivalry, Journal of International Economics, 18: 83-100. Dixit, Avinash K, and Grossman, Gene M. 1986. ‘Targeted Export Promotion with Several Ohgopohstic Industries,” Journal of International Economics, 21: 233-249. Harris, Richard G. 1984. “Applied General Equilibrium Analysis of Small Open Economies with Scale Economies and Imperfect Competition," Ameticun Economic Review, 74: 1016-1032. Itoh, Motoshige and Kiyono, Kazuharu. 1987. “Welfare-enhancing Export Subsidies,” Journal of Political Economy, 95: 115-I 37. Itoh, Motoshige, Kiyono, Kazuharu, Okuno, Masahiro, and Suzumura, Kotaro. 1988. “Industrial Policy as a Corrective to Market Failures,” in R. Komiya, M. Okuno and K. Suzumura, eds., Industrial Policy of Jupun. San Diego: Academic Press. Johnson, Chalmers. 1982. MIT1 and Japanese Miracle: The Growth of Industrial Policy, 1925-1975. Stanford: Stanford University Press. Krugman, Paul R. 1984. ‘The U.S. Response to Foreign Industrial Targeting,” Brookings Pupers on Economic Activity, 1: 77-13 1. Krugman, Paul R. 1987. “Strategic Sectors and International Competition,” in R.M. Stem, ed., U.S. Trade Policies in a Changing World Economy. Cambridge: MIT Press. Lee, Hiro. 1988. Impetfect Competition, Industrial Policy, and Japanese International Competitiveness, unpublished doctoral dissertation, University of California, Berkeley. Lee, Him. 1992. ‘The Effects of Japanese Industrial Policy on Trade Flows and International Competitiveness,” in M.G. Dagenais and P.A. Muet, eds., International Trade Modelling. London: Chapman and Hall. Mutoh, Hiromichi. 1988. ‘The Automotive Industry,” in R. Komiya, M. Okuno and K. Suzumura, eds., Industriul Policy of Japun San Diego: Academic Press. Okuno-Fujiwara, Masahiro. 1988. “Interdependence of Industries, Coordination Failure and Strategic Promotion of an Industry,” Journal of International Economics, 25: 25-43. Patrick, Hugh. 1983. “‘Japanese Industrial Policy and Its Relevance for United States Industrial Policy,” prepared statement before the Joint Economic Committee, U.S. Congress, July 13. Saxonhouse, Gary R. 1983. “What is all this about ‘Industrial Targeting’ in Japan?’ World Economy, 6: 253-274.
Shinjo, Koji. 1988. “The Computer Industry,” in R. Komiya, M. Okuno, and K Suzumura, eds., Industrial Policy of Japan. San Diego: Academic Press. Tyson, Laura D. and Zysman. John. 1989. “Developmental Strategy and Product Innovation in Japan,” in C. Johnson, L.D. Tyson and J. Zysman, eds., Politics and Productivity: The Real Story of Why Japan Works. Cambridge: Ballinger. Yamawaki,Hideki. 1988. ‘TheSteelIndustry,“inR.Komiya, M.OkunoandKSuzumura,eds.,Industtia~ Policy of Japan. San Diego: Academic Press.
Received December
199 1; Revised June 1992
A question of continuing controversy is whether the Japanese economy responded to government industrial policy carried out in the early l!XOs. Using a multisectoral computable general equilibrium model, we find that it did indeed respond and that incorporating more realistic features of industrial organization in the model are critical. While sector-specificpolicy haslittleeffectin acompetitivemodel, theexistenceofscaleeconomiesamplifies the effects of industrial policy on sectoral output, trade flows, and resource allocation. When the effects of all instruments are combined, the steel and transportation equipment industries benefitted the most from industrial targeting, by expanding production levels and promoting exports. (EL. 053, F14)
To promote economic growth following the destruction of World War II, the Japanese government implemented highly interventionist policies, such as import protection, tax breaks, government loans and a variety of subsidies. As Japan faced a shortage of foreign exchange in the 1950s an emphasis was also placed on export promotion of selected manufacturing industries. Although the degree of government assistance has declined substantially since the early 197Os, the rapid Japanese export growth and consequent friction over U.S.-Japan trade imbalances in the past decade have led to renewed interest in the effects of industrial policy on economic growth, the composition of output, and international competitiveness. The extent to which Japanese industrial policy has contributed to the significant increase in competitiveness and global market share of the Japanese industry, however, remains a topic of great controversy. On the one hand, some economists and political scientists (e.g., Johnson, 1982; Tyson and Zysman, 1989) suggest that industrial policy implemented by the Ministry of International Trade and Industry (MITI) has promoted the growth and efficiency of firms in the targeted industries. They assert that policy interventions have had an important impact on Japanese industrial structure and comparative advantage over time. On the other hand, others (e.g., Krugman, 1984; Patrick, 1983; Saxonhouse, 1983) argue that an increase in Japanese competitiveness Him
Lee
Journal ISSN:
l
Department
of Economics.
d Asian Eoonomics,
University
Vol. 4, No. l,lS93.
ofCalifornia,
Irvine, CA 927 17.
pp. 25-40.
Copyright
1049-0078
8
All rights of reproduction
25
1993 by JAI Press, Inc. in any form resewed.
26
JOURNAL OF ASIAN ECONOMICS, (4)1,1993
has been achieved primarily through the actions and efforts of private individuals and enterprises responding to opportunities provided by the free market. They contend that the Japanese government has only provided a favorable institutional and market environment conducive to economic growth.’ Theoretical justifications for industrial policy intervention, which have been discussed elsewhere, could arise in the presence of scale economies and imperfectly competitive markets. Itoh and Kiyono (1987) suggest that a promotion of sectors with increasing returns could enhance gains from trade while influencing the country’s comparative advantage in the long run. Krugman (1987) indicates that if economies of scale exist in an intermediate goods sector, then industrial policy could lead to beneficial linkage externalities. For example, a subsidy provided to a downstream linkage industry, which increases demand for the declining-cost intermediate goods, will lead to an additional reduction in the cost of the downstream industry without further subsidies. Other arguments for government intervention include profit-shifting from foreign to domestic firms (Brander and Spencer, 1985), the development of new technologies, learning-by-doing (Itoh, Kiyono, Okuno, and Suzumura, 1988), and coordination failure between interdependent industries (Okuno-Fujiwara, 1988). In contrast to the numerous theoretical contributions on the topic of strategic trade and industrial policies, empirical analyses on Japanese industrial policy are scarce and limited in their scope. Most of the previous studies are partial-equilibrium case studies on one particular industry (e.g., Baldwin and Krugman, 1988; Mutoh, 1988; Shinjo, 1988, Yamawaki, 1988) where linkages to other industries are excluded from their analysis. A large and growing body of evidence suggests, however, that generalequilibrium effects arising from policy changes are significantly larger than partialequilibrium effects. In this paper, a multisectoral computable general equilibrium (CGE) model is used to quantify the economywide effects of Japanese industrial policy when some sectors of the economy are characterized by scale economies and Cournot competition. The policy tools evaluated in this study are tariffs, export subsidies, accelerated depreciation, government loans, and research and development (R&D) subsidies. The model is calibrated to a 1960 data set, and the average values of these policy instruments during 19614 are computed and used for simulation experiments. It should be noted, however, that since policy interventions were larger in the 1950s than in the 196Os, a use of data from the 1950s would have been more appropriate in estimating the full impact of industrial targeting. The unavailability of some of the policy data before 1960 has resulted in the selection of 1960 as a “benchmark’ year. Other limitations in the data and model specifications should be mentioned. First of all, the Japanese government used many other policy tools other than those examined in this paper. They include restrictions on foreign direct investment, antitrust exemptions, and administrative guidance (gyosei shido) in which government officials guide firms in desired directions. Because there are no reliable data, the effects of these policy instruments are not analyzed in the present study. Secondly, the model is static which necessarily limits the scope of the analysis on the Japanese economy which was highly
Evaluation of Industrial Policy in lapan
27
dynamic in the 1960s. An introduction of dynamics significantly complicates the model, particularly when some industries are characterized by oligopolistic competition and increasing returns to scale as in the present model. In a dynamic model incorporating these industrial organization characteristics, the existence of unique, stable equilibrium is guaranteed only under a very restrictive set of assumptions.’ Thirdly, this model does not incorporate externalities associated with R&D. Finally, because of the lack of reliable estimates, the effects of the vast improvements in the physical infrastructure, such as roads, harbors, electric power, and industrial water supplies, on industrial productivity are excluded from the model. However, a significant portion of the Japan Development Bank loans were provided for the development of physical infrastructure, which is believed to have played an important role in the Japanese industrial development in the postwar period. Despite these limitations, the model casts new light on the impact of industrial policy on Japan’s trade patterns in the early 1960s. By consistently specifying both economywide interactions in the domestic markets and trade linkages with the rest of the world, the present model can assess the general equilibrium implications of different instruments of Japanese industrial policy.
I.
THE JAPANESE
CGE MODEL
In this section a brief description of the CGE model for the Japanese economy is presented.3 The model contains fourteen manufacturing and five non-manufacturing sectors, one of which is regulated public utility. Japanese consumers treat imported and domestic products as imperfect substitutes.4 For tradeables, they desire composite goods (X), which are Cl3 aggregates of imported goods (M> and home-produced goods (D): x =AM,D)
= q[BM-P + (1 - p)D-PI-‘@,
where $, p, and p are parameters. Minimization of the cost of purchasing a given amount of composite goods leads to the first order condition that the marginal rate of substitution between imported and domestic goods equal the ratio of the domestic price (Pd) to the import price (Pm) A4 ____ P Pa -=
D
(I-P)P” ’ [ 1 where u = l/11 + p) is the elasticity of substitution between imported and domestic goods. Similarly, foreign consumers view Japanese and foreign goods as imperfect substitutes. Since Japanese exports and imports were small relative to world demand in the 1960s it is assumed that prices in the rest of the world are unaffected by changes in the output and cost of Japanese industries. Firms employ capital, labor, and intermediate inputs to produce output. The input-output coefficients are fixed, and firms in the same industry produce a homogeneous product. The total cost function is Cobb-Douglas of the form
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TABLE 1. Estimates of Cost Function Parameters Used in the Model IogCT= a+ + al log@ + azlogw + ajlogc + adloge + aSlogRD + u InduStrya
Agriculture Mining Food Textiles Wood & Paper Chemicals Petroleum Ceramics Steel Nonfer Metals Metal Prod Gen Machinery Elec Machinery Transport Eq Prec Inst Mist Manufac Tmns & Comm Public Utility Services Nofe:
%dustries:
Agriculture,
Ceramic,
Stone,
Machinery:
Public Utility;
a2
a3
44
0.436 0.347 0.084 0.159 0.165 0.093 0.043 0.219 0.059 0.100 0.322 0.224 0.178 0.184 0.259 0.180 0.436 0.175 0.445
0.212 0.280 0.077 0.075 0.114 0.201 0.212 0.207 0.135 0.099 0.144 0.167 0.143 0.137 0.142 0.108 0.242 0.462 0.193
1.000 1.000 0.909 0.902 0.884 0.701 0.699 0.844 0.602 0.670 0.784 0.782 0.856 0.773 0.861 1.000 0.903 0.482 1BOO
Forestry,
and Glass
Transportation
al
0.352 0.373 0.839 0.766 0.721 0.706 0.745 0.574 0.806 0.801 0.535 0.609 0.679 0.679 0.599 0.712 0.322 0.363 0.362 and Fishing;
Pmducts: Equipment;
Iron
Mining;
and Steel;
Precision
Food Processing: Nonfermus
Instrument;
Metals;
Miscellaneous
Textiles; Metal
Wood
0 -0.153 0 -0.201 0 -0.026 -0.166 -0.230 -0.480 0 0 -0.215 -0.218 -0.264 -0.470 0 0 -0.003 0
and Paper Products; Chemicals;
Products;
Manufacturing;
a5
General
Transport
Machinety;
Electric
and Communication:
Services.
1ogCT = ac + a,logP’ + a210gw + a310gc + a410gQ + aslogRD, where CT is total cost, P’ is a weighted average of price of intermediate inputs, w is a wage rate, c is a user cost of capital, Q is output, and RD is the stock of R&D. The degree of scale economies is measured by the ratio of average cost to marginal cost, which is equivalent to the inverse of the elasticity of total cost with respect to output. The coefficients on the sectoral cost functions are estimated in Lee (1988, Chapter 4) and presented in Table 1. The agricultural, mining, miscellaneous manufacturing, and service sectors are assumed to be perfectly competitive with constant-returns-to-scale technology (i.e., a, = 1). Every firm faces an infinitely elastic demand curve in both domestic and export markets, and domestic and export prices net of indirect taxes will equal its marginal cost: Pr\ld=Pp=MC In the other 15 sectors (transport and communication, public utility, and all the manufacturing sectors other than miscellaneous manufacturing), a4 is less than one, or there are economies of scale in production. The price of public utility sector is set by the Japanese Fair Trade Commission as
Evaluation ofIndustrial Policy in ]apan
29
PNd-(1
+p)AC,
where p is a “fair” rate of return on investment .5 In the remaining 14 sectors, the equilibrium sectoral output and price levels are determined assuming Coumot behavior by firms. When the market demand elasticity E is constant, a firm faces a perceived demand elasticity equal to no, where it is the number of firms.6 It can be shown that in a Cournot equilibrium, each firm’s percentage markup of the net price over marginal cost is the inverse of the perceived demand elasticity. Thus, in the domestic market (PNd - hlC)/Pl\ld - l/(ned), and in the export market (PM - MC)/PW = l/(ne”‘), where &dis the market demand elasticity for domestic goods, and Ed* is the rest of world’s market demand elasticity for Japanese goods (both elasticities are positively defined). In CGE models, an equation system is solved for commodity and factor prices that represent equilibrium in different markets and satisfy the accounting identities goveming economic behavior. Changes in these prices induce changes in the level and composition of supply and demand, production and income, and the remaining endogenous variables in the system. In calibrating the model, the tariff rates are set at their actual rates in 1960, but the other five policy variables are initially all set equal to zero. An increase in the tariff rate raises the price of imports. If the protected industry has considerable intrasectoral purchases and a large import share, the cost of intermediate inputs is likely to rise substantially with the increase in the import price. At the same time, a higher price for imports raises the demand for domestic goods and the output of the protected sector. Thus, protection of a declining-cost industry may strengthen the international competitiveness of firms in the protected industry if the degree of scale economies is sufficiently high and the size of the domestic market is large.’ An export subsidy reduces the Japanese export price to the rest of the world and raises export demand and the total output of the subsidized sector. Since industries must compete for scarce resources within the country, an expansion of output raises factor prices.’ As a result, a subsidy affects relative costs and the international competitiveness of each industry. Government loans and accelerated depreciation both alter relative costs and the production levels through their effect on the user cost of capital, which can be expressed as c=
PK(r+M%)(l (l-f)
-r’Z) ’
where PK is the price of capital assets (&Y H dPWPK), r is the rate of discount, 6 is the rate of depreciation of the capital stock, f the corporate tax rate, and Z is the present value of future depreciation allowances on a yen of investment. Since government loans
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are extended at a rate of interest lower than the market rate, they lower r. In addition, they affect the share parameters for investment demand because a certain percentage of plant and equipment investment financed by government financial institutions would not be financed by commercial banks no matter what the rate of interest. When a special depreciation of a is granted on a yen of investment, Z=(l
-a)DA~e-%+a
where DA are straight-line depreciation allowances on a yen of investment. An increase in a raises the present value of depreciation allowances and lowers the user cost of capital. An R&D subsidy increases the stock of knowledge that flows from R&D.’ This leads to an improvement in productivity and a reduction in cost. As in the other four instruments, the overall effects of an R&D subsidy depend upon which industry receives the subsidy, as well as on various parameter values. Some of the key parameters which affect the policy outcome are the degree of scale economies, the elasticities of substitution between domestic and imported goods, the cost function parameters, and the input-output coefficients.
II.
QUANTITATIVE ASSESSMENTS OF JAPANESE INDUSTRIAL POLICY
In this section two sets of simulation experiments are conducted to analyze the effects of Japanese industrial policy in the early 1960s. In each experiment, the values of one type of policy parameters in all 19 sectors are changed simultaneously. Table 2 provides a list of the changes in policy parameters that are incorporated in each experiment. The first set of experiments is conducted using the base industrial organization (IO) model described in the previous section. In the second set, the model is recalibrated assuming that all sectors are perfectly competitive. This requires that for every sector the degree of scale economies is one and that each firm’s perceived demand elasticity is infinite. Table 3 summarizes the effects of each policy instrument on sectoral output (Q), marginal cost (MC), exports (E), and imports (M) obtained from the first set of experiments. The composite effect given in that table arises from simultaneously implementing all five policies, taking account of interactions and nonlinearities. Decomposition of the effects of targeting by type of policy instrument reveals that different industries benefitted from different instruments of industrial policy in the early 1960s. In the steel, nonferrous metal, electric machinery, and transportation equipment industries, export subsidies led to the largest effect on the output levels. In agriculture, food processing, textiles, and chemicals, government loans or interest subsidies had the greatest impact, while the accelerated depreciation tax allowances caused the most expansionary effects in the remaining 11 industries. During this period, the effects of R&D subsidies were negligible in all 19 industries, which may be because
Evaluation of Industrial Policy in Japan
TABLE 2.
Exogenous Changes in the Industrial Policy Parameters Incorporated in Simulation Experimentsa
Industly
AP
Agriculture Mining Food Textiles Wood & Paper Chemicals Petroleum Ceramics Steel Nonfer Metals Metal Prod Gen Machinery Elec Machinery Transport Eq Prec Inst Mist Manufac Tmns & Comm Public Utility Services Note;
*Af”‘is
31
1.749 3.772 -14.432 5.220 0.791 -0.264 5.328 3.031 -0.985 -1.248 23.027 3.162 3.897 9.299 24.007 16.675 0 n.a.b -17.874
the diffeleme
Aa
A4
0 0 1.687 0 0 1.747 0.066 0 1.710 0 3.101 7.760 3.091 13.398 3.490 1.881 0 n.a.b 0
0.689 6.911 4.124 4.038 5.339 2.096 7.941 1.642 4.344 4.233 7.167 9.261 4.259 10.302 6.615 5.902 7.804 0.301 2.238
0.843 0.824 0.182 0.190 0.155 0.164 0.034 0.140 0.059 0.129 0.320 0.376 0.091 0.169 0.253 0.378 0.568 0.285 0.058
in the sectoral ad valorem tariff ratesbetween
values for the 1961-65 ad valorem
Af
period of ad valorem equivalent
subsidy equivalent
of government
I%0
AP 0 0.025 0.014 0.006 0.003 0.085 0.000 0.040 0.046 0.412 0.022 0.101 0.351 0.136 0.016 0.027 0.019 0 0.041
and 1965. AI’, ha. As’. andti’o
arc average sectoral
of export subsidies, ratios of accelerated depreciation
loans, and real R&D
subsidies in 1960 billion
to investment,
yen, respectively.
All variables
except sao are expressed in percentages. bNot applicable
since public utility
Data Sources: (1) I”’ : Administrative
is nontradeable.
Management
Agency,
LinkInput-Output
1960-65-70
Tables.
(2)f.Thesumofadvaloremequivalentsof(a)cwpolatetaxsavingsrealizedfromdeductionsonexpwtearnings,(b)commodity tax rebates on exported
goods, and (c)export
procedure is given in Lee (1988, (3) a: Ministry
Smfisrics Anrum/.
of Finance, Corporotp
(4) s’: computed as s’ - [(P - ?)LJDB fioaocial
institution
Agriculture,
loans. Pa,
Forestry,
suppliers’
credits provided
by the Export-Impon
P”
and Fisheries
various issues.
+ (J+’- pF)LMF+
and P
(P - ?‘)LsB)lI.
where P is the effective interest rate on private
are interest rates on loans extended by the Japan Development
Finance
Corporation
(AFFFC)
and the Small
LJDB,LA” and LSB are new supplies of investment funds extended by JDB, AFFFC Data are obtained from the Bank of Japan JDB, AFFFC (5)X?
Nominal
R&Dfi&sreceivedfrom
from the prime Minister’s
Bank of Japan. A estimation
pp. 146-149).
Oftice.
Business Finance and SBFC,
Bank (JDB),
Corporation
the
(SBFC).
and I is sectoral investment.
and SBFC.
nationalandlocalgovemmcntsdividedbytheR&Ddcflator(I%O=
Statistics Bureau, Reporr on the Survey ofReseorch
100). obtained
and Devefopmenr.
positive spillover effects have not been explicitly incorporated in the model. In addition, if R&D subsidies were used in adopting foreign technology, the effects of R&D might have been substantially higher. lo Overall the industrial policy mix resulted in large increases in output and exports of the steel, transportation equipment, and general machinery industries.” Contrary to a priori expectations that home market protection of an increasing returns-to-scale industry could expand its output and lower cost, the tariff policy had a contractionary effect in all industries except mining. These results should be interpreted with caution because aggregation of industries causes a bias on the estimated
32
JOURNAL
TABLE 3.
OF ASIAN ECONOMICS,
(4)1,1993
Effects of Industrial Policy Mix on Output, Cost, and Trade Flows: Base (b) model (percentage change@ Sectoral Eflects of
Industries and Sectoral Variables
At”
AP
Aa
-0.37 -0.44 0.44 -2.49
1.32 1.44 -1.42 2.84
1.86
1.12 -0.19 0.19 -2.56
A.+
AsRD
Composite Effect
Agriculture
Q MC E M Mining
Q MC E M Food
Q MC E M Textiles
Q MC E M Wood & Paper
Q MC E M Chemicals
Q MC E M Petroleum
Q MC E M Ceramics
Q MC E M Steel
Q MC E M
0.04
-1.58 3.57
3.09 -0.33 0.33 2.78
4.04 0.08
5.99 2.28 -2.23 6.73
3.35 0.97 -0.96 4.38
3.71 0.45 a.45 4.20
3.28 -0.68 0.69 2.58
0.09 0.01 -0.01 0.11
12.44 0.54 -0.54 9.19
-0.85 a.12 0.41 10.62
I .72 0.86 -0.07 2.63
2.30 0.72 -2.35 3.12
3.02 -0.26 0.87 2.78
0.05 0.02 -0.08 0.07
6.26 I .20 -1.19 20.30
-0.49 AI.10 0.23 -3.19
0.77 -1.76 2.19
2.04 0.47 -1.07 2.78
2.07 -0.01 0.01 2.38
0.03 0.02 -0.05 0.06
5.02 1.13 -2.56 4.13
a.62 -0.12 0.48 -0.82
0.82 -3.20 1.92
2.26 0.50 -1.97 2.46
2.1 1 0.10 -0.40 2.18
0.05 0.02 -0.09 0.05
5.53 1.31 -5.01 5.87
-0.75 0.29 -0.78 0.06
2.50 -0.35 5.31 1.71
2.81 -0.79 2.15 1.62
2.83 -1.06 2.92 1.14
0.05 -0.01 0.02 0.05
7.60 -1.92 9.92 4.61
-1.05 -3.75 -1.24
3.23 -0.50 1.46 3.25
3.73 -1.59 4.41 3.57
2.17 -0.83 2.28 2.71
0.08 -0.02 0.04 0.08
9.25 -1.61 4.55 8.81
-0.65 0.23 -0.33 -4.48
0.42 -0.61 2.59
2.09 0.29 -0.42 2.79
I .94 0.06 -0.08 2.20
0.06 -0.01 0.02 0.04
5.24 0.96 -I .37 2.97
9.88 -7.52 24.95 2.00
7.62 -6.5 I 17.08 I .32
4.10 -3.33 8.26
0.19 -0.20 0.47 0.01
22.75 -15.75 55.38 5.46
1.43
-1.60
1.69 -3.85 0.63
1.28
1.65
1.69
1.60
I 04
0.04
33
Evaluation of lndustrid Policy in Japan
TABLE 3. (Continued) Sectoral E$ects of Industries and Sectoral Variables
Aim
A.+
AsRD
Composite Effect
Af
Aa
-0.92 0.90 -2.06 -0.52
5.37 -1.96 4.73 5.09
4.18 -1.77 4.26 3.89
2.67 -1.17 2.79 2.48
0.19 -0.08 0.19 0.18
12.00 -4.09 10.23 11.60
-0.61 0.26 -0.60 -20.88
2.85 -1.48 9.03 0.44
3.07 -1.62 3.88 0.90
2.34 -0.71 1.68
0.07 -0.04 0.09 0.02
7.88 -3.61 14.73 -18.71
-0.84 0.28 -0.46 -3.38
3.89 -1.31 15.57 1.48
3.94 -1.91 3.23
3.14 -1.08 I .80 2.12
0.11 -0.06 0.10 0.04
10.39 -4.02 20.99 1.99
-0.78 0.16 -0.49 -4.14
3.44 -0.61 9.77
3.27 a.79 2.44 2.55
2.53 -0.20 0.62 2.59
0.12 -0.04 0.13 0.07
8.64 -1.46 12.69 2.69
-0.84 0.32 -1.06 -8.13
Il.01 -3.20 50.04 0.98
4.59 -2.16 7.47 1.91
3.07 -0.84 2.81 2.27
0.11 -0.07 0.22 0.03
18.96 -5.89 64.68 -3.39
-0.25 0.04 -0.03 -13.19
2.05 0.35 1.54 2.42
2.69 -0.08 0.06 3.20
2.10 0.16 -0.12 2.71
0.07 -0.02 0.01 0.07
6.72 0.44 1.47 -5.80
-0.48 -0.15 0.49 -12.85
2.40 0.75 0.59 3.42
2.68 0.38 -1.21 3.61
2.24 0.09 -0.28 2.68
0.05 0.02 -0.07 0.08
7.02 -0.42 -4.09
-0.62 -0.23 0.23 -0.90
1.96 0.71 -0.7 1 2.87
2.84 0.46 -0.46 3.53
2.49 -0.0 I 2.64
0.05 0.03 -0.03 0.08
6.88 0.94 -0.94 8.42
-0.93 0.48
3.22 -0.73
3.47 -0.95
3.46 -2.02
0.08 -0.02
9.70 -3.3 1
Nonfer Metals
Q MC E M Metal Prod
Q MC E M Gen Machinery
Q MC E M Elec Machinery
Q MC E M Transport Eq
Q MC E M Prec rnst
Q MC E M Mist Manufac
Q MC E M Tram & Comm
Q MC E M Public Utility
Q MC E M
1.89
1.96
1.47
0.01
1.06
34
JOURNAL
OF ASIAN ECONOMICS, (4)1,1993
TABLE 3. (Continued) Sectoral Effects of Industries and Sectoral Variables
Atm
Af
Aa
A.+
1.06
I.85 1.33
1.80
AsUD
Cotnoosite Effect
Services
Q MC E M
-1.23 2.35
At”’
At’
Aa
A.+
hSRD
2.13 1.39 0.95 12.33 3.10
2.13
2.23
1.77
1.87
3.23 3.57 3.35
3.86 I .86 2.52
0.05 0.04 0.05 0.10 0.08
1.25
-1.31 3.24
Economywide Aggregate Variables Real GDP Consumption Investment Exports Imports Nore:
0.05
-0.65 -0.37 0.37 20.66
-0.66 -0.48 -1.32 -0.74 -0.82
1.29 -1.28 3.16
0.04 -0.04 0.08
4.06 3.53 -3.41 31.47
Effects of Composite Effect 6.00 4.64 6.68 19.09 8.51
‘See Table 2.
effects of protection in two ways. First, an increase in the sectoral tariff rate in this model is equivalent to uniform increases in the tariff rates on all commodities classified in that sector, failing to capture a complex tariff structure in practice. Second, for purely statistical reasons, the shares of intrasectoral purchases become larger when industries are more broadly classified, biasing upward the effect of protection on the price of intermediate inputs. For example, tariff protection in the machinery industry not only expands sectoral output along a declining average cost curve, but increases the costs of foreign-sourced intermediate inputs such as machine tools. If the latter is a sufficiently large component, a priori expectations would be reversed, as shown in the simulations. Changes in relative costs and relative prices affect trade patterns. In the absence of export subsidies, a change in exports is inversely related to a change in MC. The export promotion measures contributed to the rapid increase in exports of steel, metal products, general machinery, electric machinery, and transportation equipment. In addition, exports of these products were enhanced by the provisions of accelerated depreciation and government loans. In contrast, the export promotion of heavy industries led to reductions in exports of most of the nonsubsidized industries (e.g., agriculture, mining, textiles, wood and paper, and services). A close look at the effects of government loans and accelerated depreciation on MC yields some interesting findings. For example, the agricultural and mining sectors both received a larger amount of government loans than did the chemical, steel, nonferrous mental, or public utility sector during the 1961-65 period. Yet the estimated effect on MC is smaller in the agricultural and mining sectors than in the latter group of sectors with large degrees of scale economies. This is because an increase in output
Evaluation of Industrial Policy in Japan
35
reduces MC of an industry with increasing returns, but does not precipitate an induced change in MC of an industry with constant returns. The increase in the aggregate output leads to higher factor prices, causing upward shifts in the MC schedules for all 19 sectors. For this reason, although the transport and communication industry was the largest beneficiary of the tax policy, accelerated depreciation allowances are predicted to cause an increase in MC of this sector. As indicated in the percentage changes in MC, industrial targeting contributed considerably to the development of several heavy industries in the 1960s. It led to a deterioration in the international competitiveness of light industries, including food processing, textiles, wood and paper products, and ceramic, stone, and glass products. Also in Table 3 are the economywide effects of each policy instrument. The composite effect shows that exports have gained the most, increasing by over 19 percent. The majority of that increase has come from export subsidies. As expected, government loans and accelerated depreciation spurred plant and equipment investment. Japanese consumers also benefitted, measured both in real GDP and consumption. Table 4 summarizes the effects of industrial policy mix using the perfect competition (PC) model. A comparison of Tables 3 and 4 shows that the magnitudes of changes in endogenous variables are much lower in the PC model. In particular, the effects of promotional policies on output and MC are significantly smaller than those predicted using the IO model. This is because there is no scale effect on MC (i.e., &KX?Q = 0) for a constant-cost competitive industry. For example, in the steel industry the PC model predicts the composite effect of industrial policy on output is an increase of only 4.2 percent, whereas the IO model predicts an increase of 20.2 percent. In every sector the percentage change in output predicted in the PC model is less than one-half that obtained in the 10 model. The ratios of the percentage changes in output computed in the PC model to those computed in the IO model range from 0.12 (services) to 0.50 (agriculture). On average, the percentage change in output estimated in the PC model is only about one-quarter of that obtained in the IO model. The effects on MC and trade flows predicted using the PC model are also significantly smaller than when the IO model is used. Again using the steel industry as an example, the PC model estimates a reduction in MC of 0.3 percent and an increase in exports of 4.8 percent; the IO model predicts a reduction of 15.9 percent and an increase of 46.9 percent for these variables. In addition, the signs on MC and exports are opposite in many industries (e.g., agriculture, mining, and nonferrous metals) between the two models. A comparison of the two experiments suggests that if all industries were perfectly competitive, the role of industrial policy on the development of selected manufacturing industries would have been considerably weakened. Economywide results with the competitive, constant returns to scale model are sumrnarized at the bottom of Table 4. Total investment actually falls because govemment subsidies can lead to higher deficits, which in turn reduce aggregate savings. While exports still increase, the growth is less than half that in the oligopolistic model. Overall benefits to consumers are also considerably smaller.
36
JOURNAL OF ASIAN ECONOMICS, (4)1,1993
TABLE 4.
Effects of Industrial Policy Mix on Output, Cost, and Trade Flows: PC Model (percentage changes) Sectoral Effects of
Industries and Sectoral Variables
A+
Composite Effect
AP
Af
-0.10 -0.16 0.16 -1.94
0.10 0.00 0.00 0.10
0.79 0.40 -0.40 1.21
2.19 -1.14 1.15 1.03
-0.01 0.02
3.00 -0.89 0.90 0.38
1.60 -0.01 0.01 -1.92
0.62 0.00 0.00 0.62
1.53 4.32 0.32 1.21
1.87 -1.20 1.22 0.63
0.04 -0.01 0.01 0.03
5.75 -1.52 I .54 0.54
-0.49 -0.01 0.05 11.16
0.13 0.00 2.19 0.08
0.87 0.12 -0.40 1.02
1.83 -0.50 1.68 1.32
0.01 0.01 -0.02 0.02
2.35 a.39 4.13 13.87
-0.23 -0.01 0.03 -2.82
0.22 0.00 0.00 0.25
0.96 0.07 -0.15 1.16
1.13 -0.10 0.23 1.20
0.01 0.01 -0.01 0.02
2.09 -4l.04 0.10 -0.25
-0.29 -0.02 0.07 -0.46
0.02 0.00 0.00 0.02
0.87 0.00 0.00 0.89
I .08 -0.13 0.52 1.06
0.01 0.01 -0.03 0.01
1.70 -0.14 0.56 1.54
-0.32 0.09 -0.24 0.17
0.69 0.00 4.31 0.38
1.07 -0.13 0.35 0.93
1.32 -0.21 0.57 1.05
0.01 0.00 -0.01 0.02
2.77 -0.25 5.01 2.56
-0.52 1.20 -3.15 -0.74
0.40 0.00 0.09 0.42
1.38 -0.85 2.32 1.28
1.19 -0.25 0.67 1.19
0.02 0.00 0.00 0.02
2.47 0.09 -0.16 2.15
Q
-0.31
-0.1 I
MC E M Steel
0.24 -0.35
0.00
-4.10
-0.11
0.62 0.11 -0.16 0.87
0.91 0.03 -0.04 1.04
0.02 -0.02 0.03 -0.01
1.14 0.36 -0.53 -2.38
I .74 -0.58 I .37 1.35
0.80 -0.01 0.02 0.88
0.05 -0.04 0.09 0.01
4.24 -0.31 4.81 4.69
Aa
-
Agriculture
Q MC E M Mining
Q MC E M Food
Q MC E M Textiles
Q MC E M Wood & Paper
Q MC E M
0.01 0.01
Chemicals
Q MC E M Petroleum
Q MC E M Ceramics
Q MC E M
-0.40 0.31 -0.73 0.59
0.00
2.05 0.00 4.05 1.81
37
Eunluatim of Industrial Policy in Japan
TABLE 4. (Continued) Sectoral Efsects of Industries and Sector& Variables
@
Composite Effect
Aa
A?
1.95
1.52 -0.21 0.49 1.56
0.92 -0.15 0.35 0.94
0.11 0.00 0.00 0.12
4.05 0.18 -0.42 4.58
-0.16 0.02 0.04 -20.8 1
0.39 0.00 5.30 0.00
1.05 -0.30 0.70 0.70
0.98 0.06 -0.15 1.15
0.02 0.00 0.01 0.01
2.28 -0.25 5.92 -19.33
-0.24 0.01 a.02 -3.06
0.67 0.00 13.08 -0.41
1.30 4.66 1.10 0.63
1.33 -0.21 0.35 I.19
0.03 -0.02 0.04 0.01
3.12 -0.88 14.74 -1.67
-0.25 0.03 -0.08 -3.76
0.7 1 0.00 7.74 -0.28
0.98 -0.20 0.61 0.82
0.94 0.20 -0.60 1.36
0.0s -0.02 0.0s 0.03
2.43 0.01 7.72 -1.89
-0.22 0.04 -0.14 -7.85
5.53 0.00 34.73 0.47
-0.6% 2.28 0.84
1.12 0.09 -0.30 1.45
0.03 -0.03 0.09 0.00
8.21 -0.57 37.32 -5.29
0.09 0.13 -0.10 -12.75
0.17 0.00 1.80 -0.19
I .07 -0.20 0.15 1.12
O.% 0.09 -0.07 1.25
0.03 4.02 0.01 0.02
2.33 0.00 I .80 -10.82
a.18 -0.03 0.11 -12.40
0.79 0.00 3.04 0.47
1.36 -0.14 0.45 1.34
1.25 -0.20 0.64 1.14
0.01 0.01 -0.02 0.02
3.25 -0.36 4.26 -9.78
-0.29 -0.06 0.06 -0.37
0.11 0.00 0.00 0.12
a.16 0.16 1.25
-0.41 0.4 I 1.08
0.01 0.01 -0.01 0.02
2.62 -0.61 0.62 2.12
-0.36 0.16
0.38 0.00
I .03 0.10
1.60 -0.76
0.02 0.00
2.66 -0.49
ti
Af
-0.34 0.54 -1.25 -0.01
1.82 0.00 0.00
Nonfer Metals
Q MC E M Metal Prod
Q MC E M Gen Machinery
Q MC E M Elec Machinery
Q MC E M Transport E.q
Q MC E M Pm lust
Q MC E M Mist Manufac
Q MC E M Trans & Comm
Q MC E M Public Utility
Q MC E M
1.63
1.34
1.43
38
JOURNAL
OF ASIAN ECONOMICS,
(4)1,1993
TABLE 4. (Continued) Sectoral Efiects of Industries and Sectoral Variables
Aim
Af
Aa
A+
0.50 0.29 -0.29 0.80
0.86 0.55 -0.55
hsRD
Composite Effect
Services
Q MC E M
-0.34 -0.12 0.12 21.35
-0.56 0.00 0.00 -0.56
Economywide Aggregate Variables Real GDP Consumption Investment Exports Imports
Atm -0.29 -0.21 -0.62 -0.17 -0.31
III.
Af 0.10 0.06 -2.29 7.63 0.36
1.43
0.01 0.01 -0.01 0.02
Effects of
Aa
A?
@
0.51 0.65 0.32 0.69 1.14
I .07
0.01 0.01 -0.03 0.03 0.02
CONCLUDING
0.48 0.12 -0.72 23.40
1.02 1.78 0.13 1.00
Composite Effect 1.42 1.53 a.69 8.42 2.20
REMARKS
The effects of industrial policy carried out in the early 1960s in Japan have been estimated using a model incorporating industrial organization features and a standard perfectly competitive model. While the effects of industrial policy under constant returns are small, the empirical finding of this study supports the theoretical results that there is an important role for government intervention when some sectors of the economy are characterized by scale economies and oligopolistic competition. When the effects of all instruments are combined, the steel and transportation equipment industries benefitted the most from industrial targeting in the early 196Os, by expanding their production levels, strengthening their international competitiveness, and promoting exports. An important finding of this study is that the existence of increasing returns amplifies the effects of industrial policy on sectoral output, trade flows, and resource allocation. The production base in Japanese manufacturing was small in the 1950s and 196Os, making it easy to achieve economies of scale. Thus, industrial policy appeared to have played a major role in the development of heavy industries in the postwar era. The investment-led growth in many key industries was also enhanced by such favorable factors as the high and risingeconomywide savings rate and the availability of advanced foreign technology. In a dynamic model, these results are likely to be even larger. For example, the presence of learning-by-doing would give firms with a longer time horizon an incentive to produce more output than that suggested by short-run profit maximization. Similarly, the vast physical infrastructure investments during the 1950s and 1960s have certainly contributed to productivity and even greater expansionary effects.
Evaluation of lndustrid Policy in Japan
39
Today, the economic environment, both domestically in Japan and globally, is considerably different from that of the 1950s and 1960s. In many industries scale economies
have been fully exploited. Some have faced a problem of excess capacity
during the post-oil crisis era. In the past decade, Japan has liberalized its financial market, while the yen has continued to appreciate against the U.S. dollar. In the meantime, new protectionism has emerged and threatened the process of multilateral trade liberalization. Considering these new factors, it has become less and less appropriate for Japan to employ industrial policy as a tool to improve its competitiveness in the global market. Its use should be limited to cases where market failure would occur in the absence of government intervention. Acknowledgments: The author thanks Sherman Robinson, David Roland-Holst, Laura Tyson, John Ying, and two anonymous referees for their helpful comments. Financial support provided by the Institute of International Studies at the University of California, Berkeley is gratefully acknowledged.
NOTES 1. Macroeconomic plans carried out by the Japanese government in the 1950s and 1960% the Income-Doubling Plan in particular, raised expected future growth rates, inducing a rapid increase in plant and equipment investment expenditures. The investment-led economic growth was also enhanced by such favorable factors as availability of advanced foreign technology, the increasing supply of skilled labor, and stable import prices of raw materials throughout the 1950s and 1960s. Thus, even if the sector-specific policy had little impact, the Japanese government succeeded in boosting expectations of entrepreneurs, which itself was a great accomplishment. 2. In fact, economists often convert a dynamic model to an equivalent static model to simplify the analysis. See, for example, Baldwin and Krugman (1988). 3. See Lee (1988, 1992) for a complete set of equations describing the model. 4. The Japanese trade substitution elasticities for 14 product categories are estimated in Lee (1988, Chapter 5). 5. In simulation experiments, 1 is set equal to 0.05. 6. In order to simplify the model, it is assumed that all firms have the same cost structure and are of equal size. 7. A change in the international competitiveness of Japanese industry is measured by a percentage change in the sectoml marginal cost. Given the Cobb-Douglas specification for the cost function and the assumption of a constant market demand elasticity for each product, percentage changes in export prices, average cost, and marginal cost resulting from a policy change are all equal. 8. This was particularly prominent in the labor market, with an extremely low unemployment rate. The capacity utilization rate, with few exceptions, was also high in most sectors. 9. In this model, it is assumed that there is no gestation lag between outlay of R&D expenditures and commercialization of new technology, and the rate of obsolescence of R&D stock is zero. 10. To test this hypothesis, an interaction term with R&D stock and the stock of knowledge derived from technology imports has been added to the cost function. Subsequent simulation results show that the effects of R&D subsidies are generally larger by a factor of about 20. 11. When interpreting the results, however, one should keep in mind that in a CGE model, the time fmme for predicted changes in endogenous variables leading to a new general equilibrium does not correspond to a calendar year, but is believed to mnge from two to three years.
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Received December
199 1; Revised June 1992