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Staple food control and industrial development in postwar Japan, 1950–1957
Jour J
of Development
Economics
4 (1977) 173-190. 0 Nor&Holland
Publishing
Company
STAPLE FOOD CONTROL AND INDUSTRIAL DEVELOPMENT IN POSTWAR JAPAN, 1950-54 The role of the black market Dennis L. CHINW* Food Research Im!it~~te. Starford Uniwrsit_s, Stanford, CA 94305, U.S.A. Received December
197.5, revised version received January
1977
Japanese rice policy in the early postwar period consisted of a compulsory delivery and rq:ioning system designed to transfer economic surplus from farmers to urban workers to relieve upward pressure on industrial wage rates. The system was not consistent with private incentives so a black market in rice about half the size of the official market existed. This paper uses simple welfare analysis to estimate the magnitudes of the transfers and social costs involved for 1950-57. The analysis suggests that the black market played an important role in the success of the rice policy during this period and provides a rationale for the apparent willingness of Japanese authorities to allow the black market to function alongside the oficisl market.
1. Introduction A common theme in the literature on economic development is the role that the terms of trade between agriculture and the industrial sector play in the development process. A movement in the terms of trade against agriculture is sometimes characterized as aiding development through the stimulus given to industrial production, and sometimes as hindering development through the disincentive effects on agricultural production. Thus, appropriate policies differ widely between countries, stages of development and development strategies, and in particular according to whether or not agriculture is capable of producing a substantial surplus above farm sector requirements. For example, Krishna (1967) has argued strongly in favor of ‘positive’ price: policies which support prices of agricultural products as a means of stimulating production in India, Pakistan, and other areas in which agricultural surplus is limited, whereas in cases in which there dots exist a substantial surplus, such as the Soviet Union during the earl:! 1930s or postwar Taiwan, emphasis on mobilizing the surplus *Partial support for economy of rice in Asia, help in clarifying several Anthony Ta;lg provided F
this research was providcJ bp the Stanford project on the political funded by U.S.A.I.D. The author wishes to thank Keith Acheson for conceptual points. Bruce Johnston, Yujiro HayanG, Leon Mears and helpful comments on . n earlier draft cf this paper.
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D.L. Chintz, Food control in postwar Japa:l
for industrialization purposes through ‘negative’ price policies may be quite appropriate. A particularly interesting case is that of Japan in the 1950s. The postwar development strategy adopted was basica& to industrialize as rapidly as possible. A requirement of that strategy was that real industrial wage rates be kept low, both to encourage investment through increased profits and to maintain competitiveness in export markets. The primary wage good was rice, so naturally keeping the price of rice in the urban sector low was critical. Unfortunately, the precarious balance of payments position and the inadequate national budget in the early postwar period limited the extent to which rice imports and direct consumption subsidies could be used and, in spite of the recover;; of rice production to prewar levels by the early 1950, allowing the domestic rice price to rise to its equilibrium level would have resulted in an unacceptably high price.’ However, agriculture was already quite well developed prior to the war and once recovery from wartime dislocations was completed the existence of some surplus was assured. Again, this is surplus over farm sector requirements and not surplus in the sense of potential exports. Thus, the rice policy took the form of a system for transferring that surplus from farmers to industrial laborers at less than market prices. The actual rice control system was a slightly modified version of the wartime system of direct control of all staple foods. The wartime system of staple food control was essentially a monopoly purchasing scheme for all staple foods through a network of government licensed merchants. 2 The procured supplies, supplemented when necessary with imported grain from government stocks, were used for military purposes and for rationing to civil servants, urban households, and factory workers ai a ration price fixed on the basis of cost-of-living considerations. After the war, as production recovered -.o prewar levels, the coverage of the direct control system was substantially reduced until by 1952 only rice remained under direct control. Until 1955 minimum delivery quotas for rice were set at the prefecture level by the national government, this total amount was divided among municipalities by the prefecture governments, and the municipalities set minimum delivery quotas for individual farmers. In 1955 the ‘system of offering in advance of delivery’ was instituted, under which farmers were requested to specify the amount they would deliver to the government of their own accord at the ‘In the immediate postwar period the rice shortage was extremely severe due to the repatriation of large numbers of Japanese nationals from abroad, the effects of war devastation on domestic productive capacity, and the loss of the colonial sources of supply. However, during the period undx consideration here, 19X1-57, the situation was much less severe and the immediate objective was to suppress the domestic rice price rather than to procure food supplies for the military. For a ck.)mprehensii.e discussion of the food situntion during the war and the occupation period, se- Johnston (1953). 2For a detailed dtioL: of the stape food control system during and after the war, see hlatsumoto (1959).
D.L. Chinn, Food control in postwar Japan
175
officlal qrice. If the amount offered was felt to be too small, the government added an additional amount which the municipal authorities agreed was reasonable. Output in excess of minimum delivery quotas and household requirements could not legally be sold outside the official purchasing channels but enforcement was not strict so a black market about half the size of the official market existed until ehe late 1950s. Between 1950 and 1957 the government collected roughly 40 percent of total rice output and about two-third.s of the rice which was mrirke ted. The formula for determining the official purchase price was ostensibly designed to assure farmers income parity, but actually contributed to a significantly slower rate of income growth for farmers than for urban workers. The system in fact served as a mechanism for transferring economic surplus from farsners to urban workers. This transfer continued until political pressure from fariners forced the government to change the formula used to determine the official price. The ‘production cost and income compensation formula’ adopted in 1960 included the provision that farm labor be valued at industrial wage rates in the cost calculation.3 As a result the official purchase price has since risen extremely rapidly as have farm household incomes. It seems quite likely that farm households as a whole have long since recovered the losses imposed on them by the rice control system prior to 1960. Since the ration price has not been raised in proportion to the purchase price the deficit in the food control account rose from 28.5 billion yen in 1960 to 346.2 billion yen in 1970 [Hayami (1972, P. 19)l. The period of the middle and late 1950s in Japan was a period of extremely rapid expansion of the industrial capital stock. By 1960 the importance of rice as a critical wage good had declined substantially so the impact of the change in the formula for calculating the purchase price for rice was not severe. Thus, the rice control system was effective in keeping the cost of living of urban industrial workers low ;mtil the industrial base was firmly established. The purpose of this paper is to use a simple analytical framework to provide quantitative magnitudes for the induced income transfers and the net social welfare losses that occurred as a result of the rice control system prior to 1960. It will be shown that the black market in rice which operated in Japan during this period played a critical role in determining those magnitudes, and may in addition have been an important factor in the government’s ability to postpcjne the change in the price formula until as late as ‘960. The organization of the paper is as follows. In section 2 a simple analytical framework is set out, section 3 concerns formulas for evaluating the welfare effects of the rice policy Glhin that framework. and section 4 explains the estimation of the relevant price and quantity variables. The numerical results of the analysis are discussed in section 3A brief description of the ‘production cost and income compensation formula’ is gkcn in Hayami (I 972).
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D.L. Chinn, Food control in postwar Japan
5, some qualifications are noted in section 6, and the r,tain conclusions paper are summarized in the final section 7. 2. The adgtical
of the
framework
In order to consider both the procurement and rationing aspects of the rice control system, two interrelated markets must be analyzed: the rural market in brown rice and the urban market in polished rice.4 The role of the marketing structure is to purchase brown rice in rural areas, process it, transport it 10 urban areas, and sell it as polished rice to urban consumers. For simplicity we assume that rice marketing is characterized by constant costs, both with regard to volume and over time. 5 This allows us to restrict our analysis to the rural market in brown rice. The prices in the u&an polished rice market are simply the corresponding rural market prices plus the constant marketing costs. The rural rice market can be represented as in fig. 1. The line QQ represents the marketed supply curve for brown rice in the rural sector. For each price the curve indicates the amount of rice which would be offered for sale by farmers. DD represents the rural market demand curve defined as the urban demand curve for polished rice net of all marketing costs. In the absence of government intervention the rural market-clearing price would be P, as shown and the total volume of sales would be Q. The critical elements of the Japanese rice control system during the 1950s can be stylized in terms of fig. 1 as follows. Farmers were required to deliver all rice in excess of onfarm requirements to the government purchasing agency at the administered price PG below the equilibrium price P,. If the system were strictly enforced, total sal:s volume would have been Q“. However, enforcement was not strict so a black market existed and official purchases were only QG. Following the early analysis of Boulding (1937), we pc;tul&e an inhibited market supply curve TQ’ lying above the normal supply curve. In order to elicit any given quantity of total sales, a nominal black market price above the required free market price is necessary because of the additional psychic and material costs associated with the illegality of the transactions. If there were similar costs associated with purchasing in the urban black market there would also be an inhibited demand curve lying inside the normal demand curve shown. In the Japanese case, however, there do not appear to have been significant enforcement efforts on the demand side nor is there any evidence that urban consumers were hesitant to buy rice in the black market, so we assume the inhibited and normal demand curves coincide. 4Brownrice is paddy rice which has been husked but not polished. %ince we are not at present interested in individual steps in the marketing process we use the term ‘marketing structure’ to refer to all steps between farmers and urban consumers. The constant cost assumption is imposed by the paucity of quantitative information regarding rice marketing costs during this period in Japan.
D.L. Chinn, Food confrol in postwar Japan
177
Tne nominal black market price PBM is determined by the intersection of the inhibiied supply and demand curves. Corresponding to the ruling nominal black market price there is an average net black market price Pf;d, that is, the price received after deducting the value of all additional psychic and material costs due specifically to the illegality of transactions in the black market channels. These costs include such things as guilt feelings from participating in illegal transactions, penalties or fines levied on those apprehended, and additional transport costs because more circuitous routes must be used to avoid detection ancl smaller lots are transported. The total vaIue of such additional transactions costs in per unit terms is represented by the verticai distance PBM-PiG in fig. 1. The greater are these costs, the steeper is the inhibited supply curve and the higher is the nominal black market price.
Farmers face a two market system in which they can either sell to the officia! purchasing agency and receive price Po or they car sell to black market middlemen and receive a net price Pi:. They must mak: two related decisions; how much of total output to sell, and how to divide the total salzs between the two mark&s. Why total sales will be divided between the offici,zI and black market channels must be explained. If the black market price i:; above the official purchase price, why would any rice at all be delivered to the official purchasing agency ? First, given a ruling nominal black market price the net price is partly subjective for the individual producer. For example, a farmer who happens to live next door to the vihage police station or for any other reason I‘ecls a strong urge
178
D.L. Clrinrr, Food control i-1postwar Japan
to be law-abiding may feel that the difference between tk$ prices is not adequate to make it worthwhile to sell in the black market. He may be risk-averse and feel that the chances of getting caught are high. In short, for him the net black market price may be below the official price and he will sell only in the official channels. Oa the other hand, another farmer facing the same nominal black market price may feel that since he is more clever than his neighbor the risk of his getting caught is small. Thus, he may market a substal.tial part of his output in the black market because to him the net black market price is substantially above the official price. Second, it can easily be shown that if the probability that the individual farmer will be detected selling illegally is positi:rely related to the proportion of his total sales which he diverts to the black market channels, then it is entirely rarional for the revenue maxirlizing individual producer to sell in both markets even though the nominal black market price exceeds the official purchase price.” Third, enforcement efforts in the case under consideration seem to have been concentrated on procuring the minimum delivery quotas. Once the farmer’s minimum delivery quota was filled he could divert rice to the black market with much less difficulty, but to not deliver at least some rice to the government was not possible. Note that as a result of this third factor the price received for the marginal unit sold, and hence the price determining total sales volume, was the net black market price P CA. In fig. 1, actual total sales volume can be read off the normal supply curve as Q *. The volume of recorded deliveries to the official purchasing agency is represented by QG, so actual black market sales volume is the difference Q* - QG.’ If enforcement were strict enough to eliminate the black market altogether the inhibited supply curve would be represented by the vertical line TQ”. Total sales would decline from Q* to QT and government procurement would increase from QG to QT. Government procurement would increase, but at the cost or a reduction in total market supply. In fact, given the general shortage situation and budgetary constraints, it is unlikely that the Japanese government could have eliminated all black market trade in rice. Later sections of this paper will provide a rationale for their not even attempting to do so. Nonetheless, a hypotherical situation in which the black market was effectively suppressed provides an interesting p,Jar case as will be explained in the following section. The other side of the rice control system consisted of rationing the procured supplies to urb;Ln consumers and factory workers. In or&r for the government to break even, the ration price would have to have been the official purchase 6~;.. i+made explicit in Chinn (1976). 7it i+Implicitlyassumed that the rice moving through the black market and official channels was of identical quality. In reality, there was likely to have been some quality differential in spite of government efforts to reflect quality differentials in the oficial prices paid, since marketing costs and the probability of getting caught vary with volume rather than value.
LX. C&m, Food control in postwar Japan
179
price plus the per unit costs of marketing the rice and administering the control system. In fact, the ration price was set on the basis of cost-of-living considerations and did not cover the costs of the program so there was a substantial budget subsidy involved for urban consumers. 8 If the government procured and rationed a total amount Q* and wanted to sri a maximum market clesring price, then the price would have been set at P6 ;blus marketing costs. Such a price would clearly have been inconsistent with the industrialization stratea. As mentioned earlier, the rice collected by the government from domestic pt,oducers was supplemented by releasing imported rice from government stocks when necessary to meet the total ration requirement. Imports were not explicitly taken account of in the analytical framework of fig. 1 for several reasons. First, although in the early 1950s imported rice accounted for a significant proportion of total rice consumption, bq 1956 domestic output had increased sufficiently to make imports relatively unimportant.’ Second, even though the price of imported rice was apparently between the equilibrium and official prices, given the marked preference of the Japanese for domestic rice it is extremely difficult tc- accurately locate the import price on the price axis of fig, I. Third, the intent of the present study is to evaluate the welfare effects of the rice control system to which rice imports were supplemental, since imported rice was released only as needed to meet ration requirements. Including imports in the analytical framework would re.quire an estimate of the level of rice imports which would have obtained in the absence of governmental intervention in the domestic rice market, and would thus add a further degree of uncertainty to the study. lo To ignore imp or ts temporarily, as we have done, is to im$icitly assume that imports would have been the same with or without the rice control system. While there is of course no firm basis for such an assumption it seemed best methodologically to proceed with the estimation of the welfare effects as if it were true and then, as \nill be done in section 6, indicate the likely direction of bias introduced by the omission of imports. 3. Measuring the welfare effects The primary purpose of this paper is to establish orders of magnitude for the actual welfare effects of the Japanese rice control system prior to 1960. The domestic equilibrium position will serve as the standard of comparison in ‘%eeMatsumoto (1959, p. 50) for a description of the method used in setting the ration price. 9See Japan Food and Agriculture Association (1963, p. 32) for tht data on which this statement is based. loA possible method for estimating imports in the absence of government i ltervention would be to extrapolate prewar rice production and consumption trends to 1950-57 by adjusting for changes in technology, population, incomes, prices, and ?astes and assurr:ing that imports would make up the difference. It seems doubtful, however. that :&I dn exercise would contribute much to the realism of the analysis of the present paper.
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D.L. Chintz, Food control in post war Japan
estimating those magnitudes. That is, the differences b,:tween the economic surpluses generated under the rice control system and those vhich would have been generated if the domestic equilibrium position obtained comprise the welfare effects of the rice control system. A secondary purpose is to assess the role of the black market in determining the magnitudes involved. Hence, we shall consider two alternative situations: situation I, the actual situation, in which enforcement was not strict and black market activity was significant; and a hypothetical sitmtiun 2, in which enforcerllent was sufficient to eliminate black market trade in rice. The differences between the welfare effects of the rice control system under the two alternative situations can then be attributed to the existence of the black market. The induced changes in economic surpluses can be represented as areas in fig. 1. The changes in producer rents, consumer surplus and net social welfare under the two cituations are set out in table 1. The lower case letters refer to the indicated artds in fig. 1 and each term in square brackets represents a positive magnitude. Given the assumed linearity of the demand and supply curves, the computation formulas for the indicated areas are immediately obvious. Table 1 Geometric representations of the welfare effects of the Japanese rice control system.” Actual Situation 1: Black market in operation Change in producer rent (dPR1) Change in consumer surplus (dCS1) Enforcement costs Change in net social welfare (dNSW1)
- Li+kl- If+gl-
[j+k!-[b+cI-[dl
14
Zz+c]--ll+g]-[e+dl-El
Hypothetical Situation 2: Black market effectively suppressed Change in producer rent (MR2) - [g+ i+j+ kl - [e +f+ hl Change in consumer stirplus (dCS2) [g+i+j+k]-[a+c+d] Enforcement costs -E2 Change in net social welfare (dNSW2) -[e+fthl-[a+c+d]-E2 “The: lower case letters refer to areas in fig. 1.
Consider thr. ;nduced changes in producer rent and consumer surplus associated with hypothetical situation 2. In fig. 1 the price received by farmers in the absence of government intervention would have been P,, but under the compulsory delivery scheme it was only PG. Thus, the area [g+i+j+k] represents the loss in producer rent on sales QT. However, the low official price would also have resulted in the restriction of total sales by Q-- QT and an additional loss in producer rent represented by [e+fi-h]. Thus, in the hypothetical situation in which the black mark;et is eliminated, the total change in producer rent induced by the rice control system (d.PW2) would have been - k+ i+j+lc] - [e+f+h] as shown in table 1. Producers as a group unambigu-
D. L. Chinn, Fid control in postwar Japan
181
ousy would have suffered a welfare loss. Urban consumers, on the other hand, gain [g+i+j+k] on the rationed rice (neglecting the budget subsidy), but lose [a+ c+dj due to the restriction in total market supply, so the induced change in consumer surplus (dCS2) is [g+i+j+k]-[a+c+d]. Whether on balance urban consumers would gain or lose cannot be determined a priori. Area [g+i+j+k] represents a transfer from producers to urban consumers so the induced change in net social welfare (dNSW2) is - [e +f+ h] - [a + c + d] - Ez , where E2 is the hypothetical enforcement budget necessary to eliminate the black market. Now consider the actual situation 1 changes. In the actual situation deliveries to the government purchasing agency were represented by QG in fig. I. On the delivered rice producers lost rents represented by area [i+k]. On black market sales Q* - Qc producers received an average net pricePg$ so the loss in producer rent would be Lf+g]. In addition, there was a loss to producers due to the restriction in output bj p- Q* so the total induced change in producer rent (MRl) e ] as shown in table 1. Urban consumers received a was -l)+k]-If+g]-[ transfer from farmers in amount Ij+k], but lost [b + c] on purchases in the black market because they had to pay PBM rather than P, and [d] due to the restriction in total market supply. The actual situation 1 change in net social welfare (ANSki-:> is given by - [b+c] - Lf+g]- [e+d]---E, , where E, is the actual enforcemr nt budget. The di’r’erences between the actual and hypothetical changes in producer ren. .- sumer surplus and net social welfare are due to the existence of the black LLL__ ‘. The effect of the black market on producer rent is given by [APRI -API?21 = [i+h], so the black market increased producer welfare but the effects on consumer surplus [ACSl - ACS2] = [a]- [b +g+ i] and net social welfare [ANSWI -ANSWZ] = [a+h]-[b+g]+E,-E, depend on the relative magnitudes involved. 4. The price and quantity variables In this section we b,ief’,y describe the procedures used to estimate the ~r;,~ znd quantity variables represented in fig. 1 for the years 1950 to 1957 : .:formed judgcment and a number of reasonable assumptions are required to ccmplete the calculations of the welfare effects of the rice control system so the results must be regarded as indicative rather than definitive. The final estimate:; can be tested for sensitivity to some of the more critical assumptions, however, so in spite of the uncertaintics some general conclusions can be drawn from the numerical results. The assumptions described here represent the most plausible assumptions given the limited information available. The official purchase price PG used in the calculations is the average price paid including various adjustments and bonuses paid. Black market transaci.ions are by definition illegal and hence tend to be concealed, but in the saparese case
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D.L. Chinn, Food control in postwar Japan
considered here some partial black market price data are available. The nominal black market price for brown rice in the rural market, PBM in fig. 1, is estimated as the recorded urban black market price for polished rice less marketing costs. The actual cost to the government of marketing 150 kilograms of rice under the rice control system including commission for collection, transportation charges, storage charges, office personnel expenditures, interest, losses, and sales expense amounted in total to 1,838 yen. l1 On the assumption that the private trade was as efficient, or inefficient, as the government in marketing rice this is taken as an estimate of the constant competitive per unit marketing costs for each year. The additional costs borne by the black market middlemen are represented by the difference between the nominal black market price PBM estimated as explained above and the recorded black market price for unpolished rice recei,ved by farmers.12 The latter price is the net price to farmers only if the black market middlemen bear all of the additional psychic and material costs associated with black market transactions. This seems unlikely so instead we assume that the farmer bears half the total additional costs so the net price Pz& is the recorded average price received by farmers from black market middlemen less an amount equal to the additional costs borne by the middlemen. There is of course no firm basis for such an assumption but in the absence of any information to the contrary it seems as good as any other. Of the quantity variables only actual deliveries to the government purchasing agency QG are observed. Total actual sales Q* is assumed to be 60 percent of total output. That is, 40 percent of total rice output is retained for farm household consumption and onfarm uses. This assumption is consistent with available observations about the volume of black market sales during this period. hlatsumoto (1959, p. 26) _states : ‘It is estimated that rice equivalent to about half the quantity of that coilected by the government is still [1957] being circulated in the black market channels.’ Applying the implicit relationship to the output and actual delivery figures yields an estimate of the percent of total output sold of about 60 percent. QT is strictly a hypothetical quantity. It represents the level of official purchases which would have obtained if the black market were effectively suppressed. For present purposes we assume Q’ = 1.2QG, that is, suppressing the black market would have increased total deliveries to the official purchasing agency by 20 percent of actual deliveries. Since we assume linear demand and marketed supply curves the remaining variables, P,, Qe and Pd, can be estimated on the basis of knowledge of the slopes of the two curves. Our procedure is to take available price elasticity estimates as the relevant elasticities at the actual level of total rice sales Q*. For this purpose we use Ohkawa’s (1959) estimate of the demand elas:icity “The official purchase price, the recorded urban black market PIice for polished rice, and the estimated marketing costs are all taken from Matsumoto (1959, pp. 48, 53 and 52 respeet~veb). 12The rural black market price received by farmers in brown rice equivalent is taken from Japan Food and 4griculture Association (1963, p. 32).
D. L. Chinn, Food contra! in postwar Japan
183
(-0 2) and derive an estimirte of the market supply elasticity using the productiJn elasticity es:imate of Hayami and Ruttan (1970) of (0.2) and the onfarm consumption elasticity of Ohkawa (-0.05). The price elasticity of marketed supply can be seen to be a weighted average of the last two elasticities by differentiating the marketed supply identity as pointed out by Krishna (1967, pp. 509-510). Performing the calculation yields an estimate of0.4. It is !;len a simple matter to convert the demand and marketed supply elasticity estimates into the required slope coefficients and to calculate P,, Qe and Pd as shown in fig 1. 5. Numerical results 5. I. Producer rm t The estimated effects of the rice control system on producer rent under the actual situation 1 and thz hypothetical situation 2 in which the black market is effectively suppressed are shown in table 2 The first three columns give the total actual change in producer rent in billion yen, in yen per farm household, and as a percc:nt of total farm household income, respectively. The actual burden imposed on farmers as a group in 19.50 was 84.3 billion yen or 6.7 percent of tot::1 farm household income, while for 1957 the loss was 52.4 billion yen or .xly 2.5 percent of total farm household income. This downward trend reflect; both the decline in the gip between the official purchase price and the domestic equilibrium price and the increasir.g importance of off-farm sources of income to fxm households. Differential rates of labor productivity growth between the two sectors would have tended to cause farm household incomes to lag behind urban household Incomes even in the absence of the rice control system, but farmers tended tc identify the low official purchase price as the primary cause of their worsening relative income position, and brought considerable political pressure to bear on the government to chrnge the formulas used in determining that price.” As noted previously this pressure was resisted until 1960 when the ‘productian cost and income compensation formula,’ was adopted. The adoption of this ljrmula led to upward pressure on industrial wage rates. Hayami (I 972) has argued that since rice had declined in importance as a critical wage good by 1960, the Japanese government could afford to yie!ti to pressure from farmers without severely hindering industrial growth, and hence did. But where does the black market fit into the picture?
131t should be noted that the absence of legislative reapportionment as the relative size of the agricultural sector declined during this period resulted in farmers having disproportionately strong political power as an important basis of support for the rulLlg Liberal Democratic Party [see Ike (1972)I.
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D. L. Chinn, Food control in postwar Japan
If the black market were eflectively suppressed the total burden imposed or farmers as shown in columr, 4 would have been considerably higher for each year. In 1950 the loss to farmers would have been 109.7 ballion yen compared to 68.3 billion in 1’957, or an average of 79.0 billion yen for the whole period 1950-57. Thus, the existence of the black market had the effect of decreasing the losses imposed on farmers by the rice control system substantially, as shown in the final column of the table. Were it not for the existence of the black market, farmers would have had to bear a burden 30.1 percent higher than the actual burden in 1950. For the whole period the black market reduced the farmers’ Table 2 Effects of the rice control system on producer rent, 1950-57. ---
Actual change in producer rent (dPR1)
Year
1c53
IS’51 1952 1953 1954 1955 1956 1957
Total (billion yen) (1)
Yen per farm household (2)
Percent of total farm household incomea (3)
- 84.3 -72.1 - 87.9 -65.2 -78.4 -51.2 - 16.6 - 52.4
- 13,650 -11,999 - 14,360 - 10,615 - 12,842 - 8,473 - 2,746 - 8,663
-6.7 -4.8 -5.1 -3.5 -4.1 -2.4 -0.8 -2.5
Hypothetical change (dPR2) (billion yen) (4)
Reduction due to black marketb (perceot) (5)
- 109.7 - 87.9 -112.2 -87.1 -91.4 -55.3 - 20.0 -68.3
30.1 21.1 27.6 33.6 16.6 8.0 20.5 30.3
aEstimates of total farm household income are taken from Japan, Ministry of Agriculture, Forestry, and Fisheries, Abstract of Statistics on Agriculture, Forestry, and Fisheries, various years. “Calculated as [(l) - (4) + (l)] x 100.
net loss by an average of 23.6 percent per year. While It is of course not certain
that the elimination of black market rice trade would have resulted in the new price formula being adopted earlier. it would certainly have increased the political pressure for the ch,xnge. Thus, the black market functioned as a safety valve which allowed the compulsory delivery and rationing system to function at subequilibrium prices until 1960. 5.2. Consumer surplus The estimated effects of the rice control system on urban consumer surplus are given in table 3 along with the implicit subsidies from the food control
D.L. Chinn, Food control in postwar Japan
185
accomt. Columns (3) and (6) then give the total net benefit conferred upon urban consumers as a group. The actual changes in consumer surplus (dCS1) are qtite large, ranging from as high as 83.1 billion yen in 1950 to as low as 8.0 billion in 1955. The net effect of the transfer from farmers to urban consumers and the loss due to the restriction in total market supply is a substantial gain on the part of urban consumers. In addition there was also a substantial subsidy involved as shown in column 2. The subsidy, recall, was due to the fact that the difference between the official purchase and ration prices did not cover the marketing and other costs associated with the control system. Thus, urban cocsumers did in fact experience a substantial welfare gain ; over the period 1950-57 it averaged 70.4 billion yen per year, although it declined over time. Table 3 Effects of the rice control system on consumer surplus, 1950-57 (billion ye?). Actual situation 1
Hypothetical situation 2
Year
dCSl (11
Subsidy (2)
Net consumer benefit (3) = (l)+(2)
dCS2 (4)
Subsidy (5)
Net consumer benefit (61 = (4) f (5)
1950 1951 1952 1953 1954 1955 1956 1957
83.1 52.6 80.5 53.4 28.3 8.0 9.6 45.9
41.4 22.7 32.9 47.8 8.6 19.8 9.4 19.2
124.5 75.3 113.4 101.2 36.9 27.8 19.0 65.1
77.7 43.9 70.0 -8.8 -2“.8 - 60.8 -40.2 2.0
49.7 27.2 39.5 57.3 10.3 23.8 11.3 23.1
127.4 71.1 lC9 5 4x:5 - 14.5 - 37.0 -28.9 25.1
But suppos: the black market had been suppressed. How would urban consumers ha\z fared? First, the induced change irl consumer surplus (LIC.S~) would have been positive end large fcr T%O-52, but for 1953-56 urban consumers would haveexperienced a substantial net welfare loss due to the restriction in total market supply. Second, the subsidy to consumers is larger because of our assumption that eliminating the opportunity to sell in the black market would increase official sales by 20 percent. However, even in the presence of z substantial subsidy, if the black market were effectively suppressed urban consumers as a whole would for 1954-56 hale experienced a net welfare loss, whereas with the black market in operation they experienced a net gain. The rice control system also had distributional efjects within the urban sector but the directions of these effects cannot be dctcrmined duz to the complexity of the problem and the lack of information. It cannot be determined, for exsmple, how the burden of financing the implicit subsidy was distributed. Also, even though the rationing system itself would seem to have favored wage income
D.L. Chinn, Food control in postwar Japan
186
earners by suppressing the cost of living, the objective of the system was after al! to ease the upward pressure on industrial wage rates. Quantities of rice above the ration limits had to be purchased at the higher black market prices so which groups gained or lost depends in part on individual household choices. For these and other reasons it is not possible to conduct a systematic analysis of the distributio;lal impact: of the rice control system within the urban sector. 5.3. Net social welfare Under either the actual situation 1 or the hypothetical situation 2 the change in net social we!fare induced by the rice control system is the sum of the changes in producer rent and consumer surplus less total costs of enforcement. The absence of quantitative information regarding the level of enforcement costs precludes any definitive statement about the net social welfare loss. However, ignoring the enforcement costs, the actual and hypotheticai social losses are given in table 4. Table 4 Effects of the rice control system 011 net welfare, 1950-57 (billion yen). Actual situation AIVSWl (1) 1950 1951 1952 1953 1954
-1.2 -19.5 - 7.4 -11.8 -50.1
1955 1956 1957
-43.2 -7.0 -6.2
Hypothetical situation ANSW2 (2) -32.8 -43.3 -42.7 -95.2 -111.9 -111.8 - 59.8 - 66.2
Effect of black market ANSWl - ANSW2 (3) 31.6 23.8 35.3 83.7 61.8 68.6 52.8 59.7
The actual net social welfare losses imposed on the economy by the rice control system, net of enforcement costs as shown in column (l), were significant only for 1954 and 1955.14 Although there were substantial transfers from farmers to urban households for other years as well, the net social *elfare losses for those years are quite small. In fact, for the whole period 1950-57 the net social welfare loss averaged only 19.1 billion yen per year. From 1952 on the Japanese government’s position became one of relying less on compulsion and more on using economic incentives in the form of bonuses to induce farmers to sell more rice ‘&IIIterms of economv as a whoL the net social welfare losses even for 1954 and 1955 were quite small, amounting to less than 1 percent of gross national product.
D. L. Chinn, Food coontrol in postwar Japan
187
to the official purchasing agency. The importance of the black market during this period, roughly one-half the size of the official market, is a reflection of the lax enforcement. Th.= tentative conclusion drawn from this is that even including enforcement costs the net social loss imposed on the economy by the rice control system was probably not substantial. If the black market had been suppressed the net social welfare loss as shown in column 2 would be much larger, as would enforcement costs. For example, for 1954-55 instead of the net social welfare loss being about 47 billion yen per year, the loss would have been about 112 billion yen per year. Thr.s, even ignoring the potentially large (perhaps infinite) increase in enforcement costs necessary to suppress it, the black market had the effect of reducing the net social welfare loss by the substantial amounts shown in column 3 of the table. For the whole period 1950-57 the average annual social welfare gain due to the black market was a minimum of 51.4 billion yen per year. The rationale for the Japanese government’s policy of lax enforcement was that strict enforcement would have imposed a substantial welfare loss on the economy, a loss which would have been counterproductive to the development process. Allowing the black market to exist was consistent with the rapid industrialization strategy. 6. Some additional considerations Before concluding this paper some additional justifications and qualifications seem to be in order. First, the assumption of linearity represents a departure from the standard practice of assuming constant elasticity demand and supply curves. Although it would perhaps be more elegant to specify alternative explicit functional forms for the cur’lres, such a procedure is as arbitrary as assuming linearity, and in addition gives spurious precision to what at best is an approximation procedure. Attributing the available elasticity estimates to the actual level of total sales and solving for the constant slope coefficient to derive P,, p and Pd seemed quite reasonable and in any case only the last proved sensitive to the procedure used. Assuming a constart elasticity demand curve would obviously have resulted in a SCnewhat higher c:stimate of Pi: and hence a larger estimate of area [a]. This would increase the estimated net social welfare loss associated with the hypothetical situation 2. Thus, the procedure adopted in the present paper is consistent with a minimum estimate of the role of the black market in reducing the net social welfare loss. Second, the assumption that farmers and black mnrkct middlemen share the additional psychic and material costs of black market transactions is clearly ar!:itrary. However, it seems to be an appropriate assumption, and in any case the final estimates were quite insensitive to variations in the assumed level of such CO%. Third, the assumption regarding the level of official sales which would obtain if the black market were effectively suppressed, a 20 percent increase over actual
188
D.L. Chinn, Food control in postwar Japan
sales, is critical and based on limited evidence. Assuming a Zreater hypothetical increase in official sales does not affect the estimates of the actual (situation 1) welfare effects, but it does affect the estimates of the hypothetical (situation 2) elects. The estimate of the hypothetical loss in producer rent (dPR2) would be increased as would the hypothetical increase in consumer surplus (dCS2) and the amount of subsidy, but the hypothetical loss in net social welfare (IINSW2) would decline. For example, if we assume th,at QT = 1.4QG (instead of 1.2QG), for 1950 APR2 is - 118.0 billion yen, KS2 is 117.0 billion, the subsidy is increased to 57.9 billion, and dNSW2 is only - 1.0 billion yen. Thus, the conclusions about the hypothetical transfer from farmers to urban consumers ars a result of the rice contrc’ system are strengthened, but the conclusion about the role of the black market in reducing the net social welfare loss is weakened. If, on the o’her hand, a smaller increase in official purchases is assumed, the conclusions are affected in opposite directions. Fourth, a critical condition for the area under the ordinary demand curve above a given price to be an accurate measure of the consumer surplus is that the income effect be negligible. Even though the income elasticity of urban worker demand for starchy staples declined from 0.2 in 1953 to less than 0.1 in 1961, it is unlikely that this condition was fulfilled.’ 5 Thus, in principle some correction ought to be made in the numerical results. Unfortunately, because of the crudeness of the available data it is not appropriate to make such a correction, and all that can be said is that since rice was not an inferior commodity, the area under the ordinary demand curve above a given price exceeds the consumer surph;. What effect this would have on the estimated welfare effects is uncert&in, but the general conclusions suggested by the order of magnitude estimates wouid almost certainly not be affected. Finally, the failure to allow for the effects of releasing imported rice from government stocks must be considered. In principle, the expected effects of rice imports would be to increase the farmers’ loss by lowering the black market price and IC increase the gain to urban consumers by increasing the total available supply. However, there was a strong preference for domestic as opposed to imported rice, most of which came from Burma and Thailand, so urban co:lsumers who could afford to would purchase domestic rice in the black market instead of consuming the rationed imported rice. In addition, ‘people in the low income classes consume[d] very little black market rice. . .’ [Matsumoto (1959, p. 29>]. ‘Thus, it seems plausible to speculate that the availability of imported rice had little effect on the black market price and hence (since the government purchase price was fixed independently) did not significantly increase the burden imposed on farmers by the rice policy. In the urban sector the benefit of the imported rice accrued directly to low-income consumers who lacked the capacity to exercise their preference for domestic rice in the black market. “The income elasticity estimates are taken from Kaneda (1968, p. 22).
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189
7. Cmclodhg comments Since this study by necessity has had to make use of numerous assumptions the conclusions cannot be regarded as definitive. Nonetheless, by choosing the most plausible assumptions at each step it does seem possible, subject to the qualifications of the previous section, to offer the following tentative conclusions regarding the welfare effects of the Japanese rice control system for 1950-57. (1) The rice control system resulted in a large transfer of economic surplus from farmers to urban worker households. The rationing system provided a basis for retarding the rate of increase of industrial wage rates by keepinr; the price of the critical wage good below the domestic equilibrium level. Thus, the system made a significant contribution to the postwar industrialization process. (2) The black market played an important role in this contribution. It served as a mechanism by which farmers could recover some of the potential loss imposed on them by the control system and may have had the effect of ameliorating the political pressure for higher rice prices until 1960. For several years it turned urban consumers as a group from net losers to net welfare gainers, and because it provided production incentives for farmers reduced the ret loss in social welfare by perhaps as much as 5G billion yen per year for 19’&Y1 even ignoring the saving in enforcement costs. (3) Finally, the ‘extra-governmental’ free market in rice which operated in Japan during this period, although formally illegal, was more gray than black in the sense that :he Japanese authorities were clearly aware of its existence (in fact they officially collected black market price data) and could have suppressed it to a much greater extent than they did. The analysis of the present paper has given a rationale for their not doing so.
References Boulding, K.E., 1937, A note on the theory of the black-market, Canadian Journal of Economics and Political Science 13, 115-l 18. Chinn, D.L., 1976, Disequilibrium policies, black markets 2nd en+‘orcement in developing countries, Working paper, Food Research Institute, Stanfcxd University. Hayami, Y., 1972, Rice policy in Japan’s economic development, American Journal oi Agricultural Economics 54, 19-31. Ha:;ami, Y. and V.W. Ruttan, 1970, Korean rice, Taiwan rice, and Japanese agricultural stagnation: An economic consequence of colonialism, Quarterly Journal of Economics 84. 562-559. Ike, N., 1972, Japanese politics: Patron-client democracy (Alfred A. Knopf, New York), Japan Food and Agriculture Association, 1963, Agriculture in Japan (Tokyo). Johnston, B.F., 1953, Japanese food management in World War II (Stanford University Press, Stanford, CA). G
1%
D-L. Chinn, Food control in postwar Japan
Kaneda, H., 1968, Long-term changes in food consumption patterns in Japan, 1878-1964, Food Research Institute Studies 8, 3-32. Krishna, R., 1967, Price policy for agricultural d,evelopment, ir: H.M. So&worth Pnd B.F. Johnston, eds., Agricultural development and economic grow ‘!I (Come .1Univers .j Press, Rhaca, NY) 497-540. Matsumoto, T., 1959, Staple food control in Japan (Agricultre, Forestry, and Fisheries Productivity Conference, Tokyo}. C&kawa, K., 1959, Structure of food demand: Prewar period (Translation Series no. 1, ed. ‘~r.nslaticn ‘Unit, Tokyo); translated from K. Ohkawa, 1945, Shokuryo keizai no riron to ke&u vhecry and measurement of food economy] (Tokyo).
of Development
Economics
4 (1977) 173-190. 0 Nor&Holland
Publishing
Company
STAPLE FOOD CONTROL AND INDUSTRIAL DEVELOPMENT IN POSTWAR JAPAN, 1950-54 The role of the black market Dennis L. CHINW* Food Research Im!it~~te. Starford Uniwrsit_s, Stanford, CA 94305, U.S.A. Received December
197.5, revised version received January
1977
Japanese rice policy in the early postwar period consisted of a compulsory delivery and rq:ioning system designed to transfer economic surplus from farmers to urban workers to relieve upward pressure on industrial wage rates. The system was not consistent with private incentives so a black market in rice about half the size of the official market existed. This paper uses simple welfare analysis to estimate the magnitudes of the transfers and social costs involved for 1950-57. The analysis suggests that the black market played an important role in the success of the rice policy during this period and provides a rationale for the apparent willingness of Japanese authorities to allow the black market to function alongside the oficisl market.
1. Introduction A common theme in the literature on economic development is the role that the terms of trade between agriculture and the industrial sector play in the development process. A movement in the terms of trade against agriculture is sometimes characterized as aiding development through the stimulus given to industrial production, and sometimes as hindering development through the disincentive effects on agricultural production. Thus, appropriate policies differ widely between countries, stages of development and development strategies, and in particular according to whether or not agriculture is capable of producing a substantial surplus above farm sector requirements. For example, Krishna (1967) has argued strongly in favor of ‘positive’ price: policies which support prices of agricultural products as a means of stimulating production in India, Pakistan, and other areas in which agricultural surplus is limited, whereas in cases in which there dots exist a substantial surplus, such as the Soviet Union during the earl:! 1930s or postwar Taiwan, emphasis on mobilizing the surplus *Partial support for economy of rice in Asia, help in clarifying several Anthony Ta;lg provided F
this research was providcJ bp the Stanford project on the political funded by U.S.A.I.D. The author wishes to thank Keith Acheson for conceptual points. Bruce Johnston, Yujiro HayanG, Leon Mears and helpful comments on . n earlier draft cf this paper.
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for industrialization purposes through ‘negative’ price policies may be quite appropriate. A particularly interesting case is that of Japan in the 1950s. The postwar development strategy adopted was basica& to industrialize as rapidly as possible. A requirement of that strategy was that real industrial wage rates be kept low, both to encourage investment through increased profits and to maintain competitiveness in export markets. The primary wage good was rice, so naturally keeping the price of rice in the urban sector low was critical. Unfortunately, the precarious balance of payments position and the inadequate national budget in the early postwar period limited the extent to which rice imports and direct consumption subsidies could be used and, in spite of the recover;; of rice production to prewar levels by the early 1950, allowing the domestic rice price to rise to its equilibrium level would have resulted in an unacceptably high price.’ However, agriculture was already quite well developed prior to the war and once recovery from wartime dislocations was completed the existence of some surplus was assured. Again, this is surplus over farm sector requirements and not surplus in the sense of potential exports. Thus, the rice policy took the form of a system for transferring that surplus from farmers to industrial laborers at less than market prices. The actual rice control system was a slightly modified version of the wartime system of direct control of all staple foods. The wartime system of staple food control was essentially a monopoly purchasing scheme for all staple foods through a network of government licensed merchants. 2 The procured supplies, supplemented when necessary with imported grain from government stocks, were used for military purposes and for rationing to civil servants, urban households, and factory workers ai a ration price fixed on the basis of cost-of-living considerations. After the war, as production recovered -.o prewar levels, the coverage of the direct control system was substantially reduced until by 1952 only rice remained under direct control. Until 1955 minimum delivery quotas for rice were set at the prefecture level by the national government, this total amount was divided among municipalities by the prefecture governments, and the municipalities set minimum delivery quotas for individual farmers. In 1955 the ‘system of offering in advance of delivery’ was instituted, under which farmers were requested to specify the amount they would deliver to the government of their own accord at the ‘In the immediate postwar period the rice shortage was extremely severe due to the repatriation of large numbers of Japanese nationals from abroad, the effects of war devastation on domestic productive capacity, and the loss of the colonial sources of supply. However, during the period undx consideration here, 19X1-57, the situation was much less severe and the immediate objective was to suppress the domestic rice price rather than to procure food supplies for the military. For a ck.)mprehensii.e discussion of the food situntion during the war and the occupation period, se- Johnston (1953). 2For a detailed d
D.L. Chinn, Food control in postwar Japan
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officlal qrice. If the amount offered was felt to be too small, the government added an additional amount which the municipal authorities agreed was reasonable. Output in excess of minimum delivery quotas and household requirements could not legally be sold outside the official purchasing channels but enforcement was not strict so a black market about half the size of the official market existed until ehe late 1950s. Between 1950 and 1957 the government collected roughly 40 percent of total rice output and about two-third.s of the rice which was mrirke ted. The formula for determining the official purchase price was ostensibly designed to assure farmers income parity, but actually contributed to a significantly slower rate of income growth for farmers than for urban workers. The system in fact served as a mechanism for transferring economic surplus from farsners to urban workers. This transfer continued until political pressure from fariners forced the government to change the formula used to determine the official price. The ‘production cost and income compensation formula’ adopted in 1960 included the provision that farm labor be valued at industrial wage rates in the cost calculation.3 As a result the official purchase price has since risen extremely rapidly as have farm household incomes. It seems quite likely that farm households as a whole have long since recovered the losses imposed on them by the rice control system prior to 1960. Since the ration price has not been raised in proportion to the purchase price the deficit in the food control account rose from 28.5 billion yen in 1960 to 346.2 billion yen in 1970 [Hayami (1972, P. 19)l. The period of the middle and late 1950s in Japan was a period of extremely rapid expansion of the industrial capital stock. By 1960 the importance of rice as a critical wage good had declined substantially so the impact of the change in the formula for calculating the purchase price for rice was not severe. Thus, the rice control system was effective in keeping the cost of living of urban industrial workers low ;mtil the industrial base was firmly established. The purpose of this paper is to use a simple analytical framework to provide quantitative magnitudes for the induced income transfers and the net social welfare losses that occurred as a result of the rice control system prior to 1960. It will be shown that the black market in rice which operated in Japan during this period played a critical role in determining those magnitudes, and may in addition have been an important factor in the government’s ability to postpcjne the change in the price formula until as late as ‘960. The organization of the paper is as follows. In section 2 a simple analytical framework is set out, section 3 concerns formulas for evaluating the welfare effects of the rice policy Glhin that framework. and section 4 explains the estimation of the relevant price and quantity variables. The numerical results of the analysis are discussed in section 3A brief description of the ‘production cost and income compensation formula’ is gkcn in Hayami (I 972).
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5, some qualifications are noted in section 6, and the r,tain conclusions paper are summarized in the final section 7. 2. The adgtical
of the
framework
In order to consider both the procurement and rationing aspects of the rice control system, two interrelated markets must be analyzed: the rural market in brown rice and the urban market in polished rice.4 The role of the marketing structure is to purchase brown rice in rural areas, process it, transport it 10 urban areas, and sell it as polished rice to urban consumers. For simplicity we assume that rice marketing is characterized by constant costs, both with regard to volume and over time. 5 This allows us to restrict our analysis to the rural market in brown rice. The prices in the u&an polished rice market are simply the corresponding rural market prices plus the constant marketing costs. The rural rice market can be represented as in fig. 1. The line QQ represents the marketed supply curve for brown rice in the rural sector. For each price the curve indicates the amount of rice which would be offered for sale by farmers. DD represents the rural market demand curve defined as the urban demand curve for polished rice net of all marketing costs. In the absence of government intervention the rural market-clearing price would be P, as shown and the total volume of sales would be Q. The critical elements of the Japanese rice control system during the 1950s can be stylized in terms of fig. 1 as follows. Farmers were required to deliver all rice in excess of onfarm requirements to the government purchasing agency at the administered price PG below the equilibrium price P,. If the system were strictly enforced, total sal:s volume would have been Q“. However, enforcement was not strict so a black market existed and official purchases were only QG. Following the early analysis of Boulding (1937), we pc;tul&e an inhibited market supply curve TQ’ lying above the normal supply curve. In order to elicit any given quantity of total sales, a nominal black market price above the required free market price is necessary because of the additional psychic and material costs associated with the illegality of the transactions. If there were similar costs associated with purchasing in the urban black market there would also be an inhibited demand curve lying inside the normal demand curve shown. In the Japanese case, however, there do not appear to have been significant enforcement efforts on the demand side nor is there any evidence that urban consumers were hesitant to buy rice in the black market, so we assume the inhibited and normal demand curves coincide. 4Brownrice is paddy rice which has been husked but not polished. %ince we are not at present interested in individual steps in the marketing process we use the term ‘marketing structure’ to refer to all steps between farmers and urban consumers. The constant cost assumption is imposed by the paucity of quantitative information regarding rice marketing costs during this period in Japan.
D.L. Chinn, Food confrol in postwar Japan
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Tne nominal black market price PBM is determined by the intersection of the inhibiied supply and demand curves. Corresponding to the ruling nominal black market price there is an average net black market price Pf;d, that is, the price received after deducting the value of all additional psychic and material costs due specifically to the illegality of transactions in the black market channels. These costs include such things as guilt feelings from participating in illegal transactions, penalties or fines levied on those apprehended, and additional transport costs because more circuitous routes must be used to avoid detection ancl smaller lots are transported. The total vaIue of such additional transactions costs in per unit terms is represented by the verticai distance PBM-PiG in fig. 1. The greater are these costs, the steeper is the inhibited supply curve and the higher is the nominal black market price.
Farmers face a two market system in which they can either sell to the officia! purchasing agency and receive price Po or they car sell to black market middlemen and receive a net price Pi:. They must mak: two related decisions; how much of total output to sell, and how to divide the total salzs between the two mark&s. Why total sales will be divided between the offici,zI and black market channels must be explained. If the black market price i:; above the official purchase price, why would any rice at all be delivered to the official purchasing agency ? First, given a ruling nominal black market price the net price is partly subjective for the individual producer. For example, a farmer who happens to live next door to the vihage police station or for any other reason I‘ecls a strong urge
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D.L. Clrinrr, Food control i-1postwar Japan
to be law-abiding may feel that the difference between tk$ prices is not adequate to make it worthwhile to sell in the black market. He may be risk-averse and feel that the chances of getting caught are high. In short, for him the net black market price may be below the official price and he will sell only in the official channels. Oa the other hand, another farmer facing the same nominal black market price may feel that since he is more clever than his neighbor the risk of his getting caught is small. Thus, he may market a substal.tial part of his output in the black market because to him the net black market price is substantially above the official price. Second, it can easily be shown that if the probability that the individual farmer will be detected selling illegally is positi:rely related to the proportion of his total sales which he diverts to the black market channels, then it is entirely rarional for the revenue maxirlizing individual producer to sell in both markets even though the nominal black market price exceeds the official purchase price.” Third, enforcement efforts in the case under consideration seem to have been concentrated on procuring the minimum delivery quotas. Once the farmer’s minimum delivery quota was filled he could divert rice to the black market with much less difficulty, but to not deliver at least some rice to the government was not possible. Note that as a result of this third factor the price received for the marginal unit sold, and hence the price determining total sales volume, was the net black market price P CA. In fig. 1, actual total sales volume can be read off the normal supply curve as Q *. The volume of recorded deliveries to the official purchasing agency is represented by QG, so actual black market sales volume is the difference Q* - QG.’ If enforcement were strict enough to eliminate the black market altogether the inhibited supply curve would be represented by the vertical line TQ”. Total sales would decline from Q* to QT and government procurement would increase from QG to QT. Government procurement would increase, but at the cost or a reduction in total market supply. In fact, given the general shortage situation and budgetary constraints, it is unlikely that the Japanese government could have eliminated all black market trade in rice. Later sections of this paper will provide a rationale for their not even attempting to do so. Nonetheless, a hypotherical situation in which the black market was effectively suppressed provides an interesting p,Jar case as will be explained in the following section. The other side of the rice control system consisted of rationing the procured supplies to urb;Ln consumers and factory workers. In or&r for the government to break even, the ration price would have to have been the official purchase 6~;.. i+made explicit in Chinn (1976). 7it i+Implicitlyassumed that the rice moving through the black market and official channels was of identical quality. In reality, there was likely to have been some quality differential in spite of government efforts to reflect quality differentials in the oficial prices paid, since marketing costs and the probability of getting caught vary with volume rather than value.
LX. C&m, Food control in postwar Japan
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price plus the per unit costs of marketing the rice and administering the control system. In fact, the ration price was set on the basis of cost-of-living considerations and did not cover the costs of the program so there was a substantial budget subsidy involved for urban consumers. 8 If the government procured and rationed a total amount Q* and wanted to sri a maximum market clesring price, then the price would have been set at P6 ;blus marketing costs. Such a price would clearly have been inconsistent with the industrialization stratea. As mentioned earlier, the rice collected by the government from domestic pt,oducers was supplemented by releasing imported rice from government stocks when necessary to meet the total ration requirement. Imports were not explicitly taken account of in the analytical framework of fig. 1 for several reasons. First, although in the early 1950s imported rice accounted for a significant proportion of total rice consumption, bq 1956 domestic output had increased sufficiently to make imports relatively unimportant.’ Second, even though the price of imported rice was apparently between the equilibrium and official prices, given the marked preference of the Japanese for domestic rice it is extremely difficult tc- accurately locate the import price on the price axis of fig, I. Third, the intent of the present study is to evaluate the welfare effects of the rice control system to which rice imports were supplemental, since imported rice was released only as needed to meet ration requirements. Including imports in the analytical framework would re.quire an estimate of the level of rice imports which would have obtained in the absence of governmental intervention in the domestic rice market, and would thus add a further degree of uncertainty to the study. lo To ignore imp or ts temporarily, as we have done, is to im$icitly assume that imports would have been the same with or without the rice control system. While there is of course no firm basis for such an assumption it seemed best methodologically to proceed with the estimation of the welfare effects as if it were true and then, as \nill be done in section 6, indicate the likely direction of bias introduced by the omission of imports. 3. Measuring the welfare effects The primary purpose of this paper is to establish orders of magnitude for the actual welfare effects of the Japanese rice control system prior to 1960. The domestic equilibrium position will serve as the standard of comparison in ‘%eeMatsumoto (1959, p. 50) for a description of the method used in setting the ration price. 9See Japan Food and Agriculture Association (1963, p. 32) for tht data on which this statement is based. loA possible method for estimating imports in the absence of government i ltervention would be to extrapolate prewar rice production and consumption trends to 1950-57 by adjusting for changes in technology, population, incomes, prices, and ?astes and assurr:ing that imports would make up the difference. It seems doubtful, however. that :&I dn exercise would contribute much to the realism of the analysis of the present paper.
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D.L. Chintz, Food control in post war Japan
estimating those magnitudes. That is, the differences b,:tween the economic surpluses generated under the rice control system and those vhich would have been generated if the domestic equilibrium position obtained comprise the welfare effects of the rice control system. A secondary purpose is to assess the role of the black market in determining the magnitudes involved. Hence, we shall consider two alternative situations: situation I, the actual situation, in which enforcement was not strict and black market activity was significant; and a hypothetical sitmtiun 2, in which enforcerllent was sufficient to eliminate black market trade in rice. The differences between the welfare effects of the rice control system under the two alternative situations can then be attributed to the existence of the black market. The induced changes in economic surpluses can be represented as areas in fig. 1. The changes in producer rents, consumer surplus and net social welfare under the two cituations are set out in table 1. The lower case letters refer to the indicated artds in fig. 1 and each term in square brackets represents a positive magnitude. Given the assumed linearity of the demand and supply curves, the computation formulas for the indicated areas are immediately obvious. Table 1 Geometric representations of the welfare effects of the Japanese rice control system.” Actual Situation 1: Black market in operation Change in producer rent (dPR1) Change in consumer surplus (dCS1) Enforcement costs Change in net social welfare (dNSW1)
- Li+kl- If+gl-
[j+k!-[b+cI-[dl
14
Zz+c]--ll+g]-[e+dl-El
Hypothetical Situation 2: Black market effectively suppressed Change in producer rent (MR2) - [g+ i+j+ kl - [e +f+ hl Change in consumer stirplus (dCS2) [g+i+j+k]-[a+c+d] Enforcement costs -E2 Change in net social welfare (dNSW2) -[e+fthl-[a+c+d]-E2 “The: lower case letters refer to areas in fig. 1.
Consider thr. ;nduced changes in producer rent and consumer surplus associated with hypothetical situation 2. In fig. 1 the price received by farmers in the absence of government intervention would have been P,, but under the compulsory delivery scheme it was only PG. Thus, the area [g+i+j+k] represents the loss in producer rent on sales QT. However, the low official price would also have resulted in the restriction of total sales by Q-- QT and an additional loss in producer rent represented by [e+fi-h]. Thus, in the hypothetical situation in which the black mark;et is eliminated, the total change in producer rent induced by the rice control system (d.PW2) would have been - k+ i+j+lc] - [e+f+h] as shown in table 1. Producers as a group unambigu-
D. L. Chinn, Fid control in postwar Japan
181
ousy would have suffered a welfare loss. Urban consumers, on the other hand, gain [g+i+j+k] on the rationed rice (neglecting the budget subsidy), but lose [a+ c+dj due to the restriction in total market supply, so the induced change in consumer surplus (dCS2) is [g+i+j+k]-[a+c+d]. Whether on balance urban consumers would gain or lose cannot be determined a priori. Area [g+i+j+k] represents a transfer from producers to urban consumers so the induced change in net social welfare (dNSW2) is - [e +f+ h] - [a + c + d] - Ez , where E2 is the hypothetical enforcement budget necessary to eliminate the black market. Now consider the actual situation 1 changes. In the actual situation deliveries to the government purchasing agency were represented by QG in fig. I. On the delivered rice producers lost rents represented by area [i+k]. On black market sales Q* - Qc producers received an average net pricePg$ so the loss in producer rent would be Lf+g]. In addition, there was a loss to producers due to the restriction in output bj p- Q* so the total induced change in producer rent (MRl) e ] as shown in table 1. Urban consumers received a was -l)+k]-If+g]-[ transfer from farmers in amount Ij+k], but lost [b + c] on purchases in the black market because they had to pay PBM rather than P, and [d] due to the restriction in total market supply. The actual situation 1 change in net social welfare (ANSki-:> is given by - [b+c] - Lf+g]- [e+d]---E, , where E, is the actual enforcemr nt budget. The di’r’erences between the actual and hypothetical changes in producer ren. .- sumer surplus and net social welfare are due to the existence of the black LLL__ ‘. The effect of the black market on producer rent is given by [APRI -API?21 = [i+h], so the black market increased producer welfare but the effects on consumer surplus [ACSl - ACS2] = [a]- [b +g+ i] and net social welfare [ANSWI -ANSWZ] = [a+h]-[b+g]+E,-E, depend on the relative magnitudes involved. 4. The price and quantity variables In this section we b,ief’,y describe the procedures used to estimate the ~r;,~ znd quantity variables represented in fig. 1 for the years 1950 to 1957 : .:formed judgcment and a number of reasonable assumptions are required to ccmplete the calculations of the welfare effects of the rice control system so the results must be regarded as indicative rather than definitive. The final estimate:; can be tested for sensitivity to some of the more critical assumptions, however, so in spite of the uncertaintics some general conclusions can be drawn from the numerical results. The assumptions described here represent the most plausible assumptions given the limited information available. The official purchase price PG used in the calculations is the average price paid including various adjustments and bonuses paid. Black market transaci.ions are by definition illegal and hence tend to be concealed, but in the saparese case
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considered here some partial black market price data are available. The nominal black market price for brown rice in the rural market, PBM in fig. 1, is estimated as the recorded urban black market price for polished rice less marketing costs. The actual cost to the government of marketing 150 kilograms of rice under the rice control system including commission for collection, transportation charges, storage charges, office personnel expenditures, interest, losses, and sales expense amounted in total to 1,838 yen. l1 On the assumption that the private trade was as efficient, or inefficient, as the government in marketing rice this is taken as an estimate of the constant competitive per unit marketing costs for each year. The additional costs borne by the black market middlemen are represented by the difference between the nominal black market price PBM estimated as explained above and the recorded black market price for unpolished rice recei,ved by farmers.12 The latter price is the net price to farmers only if the black market middlemen bear all of the additional psychic and material costs associated with black market transactions. This seems unlikely so instead we assume that the farmer bears half the total additional costs so the net price Pz& is the recorded average price received by farmers from black market middlemen less an amount equal to the additional costs borne by the middlemen. There is of course no firm basis for such an assumption but in the absence of any information to the contrary it seems as good as any other. Of the quantity variables only actual deliveries to the government purchasing agency QG are observed. Total actual sales Q* is assumed to be 60 percent of total output. That is, 40 percent of total rice output is retained for farm household consumption and onfarm uses. This assumption is consistent with available observations about the volume of black market sales during this period. hlatsumoto (1959, p. 26) _states : ‘It is estimated that rice equivalent to about half the quantity of that coilected by the government is still [1957] being circulated in the black market channels.’ Applying the implicit relationship to the output and actual delivery figures yields an estimate of the percent of total output sold of about 60 percent. QT is strictly a hypothetical quantity. It represents the level of official purchases which would have obtained if the black market were effectively suppressed. For present purposes we assume Q’ = 1.2QG, that is, suppressing the black market would have increased total deliveries to the official purchasing agency by 20 percent of actual deliveries. Since we assume linear demand and marketed supply curves the remaining variables, P,, Qe and Pd, can be estimated on the basis of knowledge of the slopes of the two curves. Our procedure is to take available price elasticity estimates as the relevant elasticities at the actual level of total rice sales Q*. For this purpose we use Ohkawa’s (1959) estimate of the demand elas:icity “The official purchase price, the recorded urban black market PIice for polished rice, and the estimated marketing costs are all taken from Matsumoto (1959, pp. 48, 53 and 52 respeet~veb). 12The rural black market price received by farmers in brown rice equivalent is taken from Japan Food and 4griculture Association (1963, p. 32).
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(-0 2) and derive an estimirte of the market supply elasticity using the productiJn elasticity es:imate of Hayami and Ruttan (1970) of (0.2) and the onfarm consumption elasticity of Ohkawa (-0.05). The price elasticity of marketed supply can be seen to be a weighted average of the last two elasticities by differentiating the marketed supply identity as pointed out by Krishna (1967, pp. 509-510). Performing the calculation yields an estimate of0.4. It is !;len a simple matter to convert the demand and marketed supply elasticity estimates into the required slope coefficients and to calculate P,, Qe and Pd as shown in fig 1. 5. Numerical results 5. I. Producer rm t The estimated effects of the rice control system on producer rent under the actual situation 1 and thz hypothetical situation 2 in which the black market is effectively suppressed are shown in table 2 The first three columns give the total actual change in producer rent in billion yen, in yen per farm household, and as a percc:nt of total farm household income, respectively. The actual burden imposed on farmers as a group in 19.50 was 84.3 billion yen or 6.7 percent of tot::1 farm household income, while for 1957 the loss was 52.4 billion yen or .xly 2.5 percent of total farm household income. This downward trend reflect; both the decline in the gip between the official purchase price and the domestic equilibrium price and the increasir.g importance of off-farm sources of income to fxm households. Differential rates of labor productivity growth between the two sectors would have tended to cause farm household incomes to lag behind urban household Incomes even in the absence of the rice control system, but farmers tended tc identify the low official purchase price as the primary cause of their worsening relative income position, and brought considerable political pressure to bear on the government to chrnge the formulas used in determining that price.” As noted previously this pressure was resisted until 1960 when the ‘productian cost and income compensation formula,’ was adopted. The adoption of this ljrmula led to upward pressure on industrial wage rates. Hayami (I 972) has argued that since rice had declined in importance as a critical wage good by 1960, the Japanese government could afford to yie!ti to pressure from farmers without severely hindering industrial growth, and hence did. But where does the black market fit into the picture?
131t should be noted that the absence of legislative reapportionment as the relative size of the agricultural sector declined during this period resulted in farmers having disproportionately strong political power as an important basis of support for the rulLlg Liberal Democratic Party [see Ike (1972)I.
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If the black market were eflectively suppressed the total burden imposed or farmers as shown in columr, 4 would have been considerably higher for each year. In 1950 the loss to farmers would have been 109.7 ballion yen compared to 68.3 billion in 1’957, or an average of 79.0 billion yen for the whole period 1950-57. Thus, the existence of the black market had the effect of decreasing the losses imposed on farmers by the rice control system substantially, as shown in the final column of the table. Were it not for the existence of the black market, farmers would have had to bear a burden 30.1 percent higher than the actual burden in 1950. For the whole period the black market reduced the farmers’ Table 2 Effects of the rice control system on producer rent, 1950-57. ---
Actual change in producer rent (dPR1)
Year
1c53
IS’51 1952 1953 1954 1955 1956 1957
Total (billion yen) (1)
Yen per farm household (2)
Percent of total farm household incomea (3)
- 84.3 -72.1 - 87.9 -65.2 -78.4 -51.2 - 16.6 - 52.4
- 13,650 -11,999 - 14,360 - 10,615 - 12,842 - 8,473 - 2,746 - 8,663
-6.7 -4.8 -5.1 -3.5 -4.1 -2.4 -0.8 -2.5
Hypothetical change (dPR2) (billion yen) (4)
Reduction due to black marketb (perceot) (5)
- 109.7 - 87.9 -112.2 -87.1 -91.4 -55.3 - 20.0 -68.3
30.1 21.1 27.6 33.6 16.6 8.0 20.5 30.3
aEstimates of total farm household income are taken from Japan, Ministry of Agriculture, Forestry, and Fisheries, Abstract of Statistics on Agriculture, Forestry, and Fisheries, various years. “Calculated as [(l) - (4) + (l)] x 100.
net loss by an average of 23.6 percent per year. While It is of course not certain
that the elimination of black market rice trade would have resulted in the new price formula being adopted earlier. it would certainly have increased the political pressure for the ch,xnge. Thus, the black market functioned as a safety valve which allowed the compulsory delivery and rationing system to function at subequilibrium prices until 1960. 5.2. Consumer surplus The estimated effects of the rice control system on urban consumer surplus are given in table 3 along with the implicit subsidies from the food control
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185
accomt. Columns (3) and (6) then give the total net benefit conferred upon urban consumers as a group. The actual changes in consumer surplus (dCS1) are qtite large, ranging from as high as 83.1 billion yen in 1950 to as low as 8.0 billion in 1955. The net effect of the transfer from farmers to urban consumers and the loss due to the restriction in total market supply is a substantial gain on the part of urban consumers. In addition there was also a substantial subsidy involved as shown in column 2. The subsidy, recall, was due to the fact that the difference between the official purchase and ration prices did not cover the marketing and other costs associated with the control system. Thus, urban cocsumers did in fact experience a substantial welfare gain ; over the period 1950-57 it averaged 70.4 billion yen per year, although it declined over time. Table 3 Effects of the rice control system on consumer surplus, 1950-57 (billion ye?). Actual situation 1
Hypothetical situation 2
Year
dCSl (11
Subsidy (2)
Net consumer benefit (3) = (l)+(2)
dCS2 (4)
Subsidy (5)
Net consumer benefit (61 = (4) f (5)
1950 1951 1952 1953 1954 1955 1956 1957
83.1 52.6 80.5 53.4 28.3 8.0 9.6 45.9
41.4 22.7 32.9 47.8 8.6 19.8 9.4 19.2
124.5 75.3 113.4 101.2 36.9 27.8 19.0 65.1
77.7 43.9 70.0 -8.8 -2“.8 - 60.8 -40.2 2.0
49.7 27.2 39.5 57.3 10.3 23.8 11.3 23.1
127.4 71.1 lC9 5 4x:5 - 14.5 - 37.0 -28.9 25.1
But suppos: the black market had been suppressed. How would urban consumers ha\z fared? First, the induced change irl consumer surplus (LIC.S~) would have been positive end large fcr T%O-52, but for 1953-56 urban consumers would haveexperienced a substantial net welfare loss due to the restriction in total market supply. Second, the subsidy to consumers is larger because of our assumption that eliminating the opportunity to sell in the black market would increase official sales by 20 percent. However, even in the presence of z substantial subsidy, if the black market were effectively suppressed urban consumers as a whole would for 1954-56 hale experienced a net welfare loss, whereas with the black market in operation they experienced a net gain. The rice control system also had distributional efjects within the urban sector but the directions of these effects cannot be dctcrmined duz to the complexity of the problem and the lack of information. It cannot be determined, for exsmple, how the burden of financing the implicit subsidy was distributed. Also, even though the rationing system itself would seem to have favored wage income
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186
earners by suppressing the cost of living, the objective of the system was after al! to ease the upward pressure on industrial wage rates. Quantities of rice above the ration limits had to be purchased at the higher black market prices so which groups gained or lost depends in part on individual household choices. For these and other reasons it is not possible to conduct a systematic analysis of the distributio;lal impact: of the rice control system within the urban sector. 5.3. Net social welfare Under either the actual situation 1 or the hypothetical situation 2 the change in net social we!fare induced by the rice control system is the sum of the changes in producer rent and consumer surplus less total costs of enforcement. The absence of quantitative information regarding the level of enforcement costs precludes any definitive statement about the net social welfare loss. However, ignoring the enforcement costs, the actual and hypotheticai social losses are given in table 4. Table 4 Effects of the rice control system 011 net welfare, 1950-57 (billion yen). Actual situation AIVSWl (1) 1950 1951 1952 1953 1954
-1.2 -19.5 - 7.4 -11.8 -50.1
1955 1956 1957
-43.2 -7.0 -6.2
Hypothetical situation ANSW2 (2) -32.8 -43.3 -42.7 -95.2 -111.9 -111.8 - 59.8 - 66.2
Effect of black market ANSWl - ANSW2 (3) 31.6 23.8 35.3 83.7 61.8 68.6 52.8 59.7
The actual net social welfare losses imposed on the economy by the rice control system, net of enforcement costs as shown in column (l), were significant only for 1954 and 1955.14 Although there were substantial transfers from farmers to urban households for other years as well, the net social *elfare losses for those years are quite small. In fact, for the whole period 1950-57 the net social welfare loss averaged only 19.1 billion yen per year. From 1952 on the Japanese government’s position became one of relying less on compulsion and more on using economic incentives in the form of bonuses to induce farmers to sell more rice ‘&IIIterms of economv as a whoL the net social welfare losses even for 1954 and 1955 were quite small, amounting to less than 1 percent of gross national product.
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187
to the official purchasing agency. The importance of the black market during this period, roughly one-half the size of the official market, is a reflection of the lax enforcement. Th.= tentative conclusion drawn from this is that even including enforcement costs the net social loss imposed on the economy by the rice control system was probably not substantial. If the black market had been suppressed the net social welfare loss as shown in column 2 would be much larger, as would enforcement costs. For example, for 1954-55 instead of the net social welfare loss being about 47 billion yen per year, the loss would have been about 112 billion yen per year. Thr.s, even ignoring the potentially large (perhaps infinite) increase in enforcement costs necessary to suppress it, the black market had the effect of reducing the net social welfare loss by the substantial amounts shown in column 3 of the table. For the whole period 1950-57 the average annual social welfare gain due to the black market was a minimum of 51.4 billion yen per year. The rationale for the Japanese government’s policy of lax enforcement was that strict enforcement would have imposed a substantial welfare loss on the economy, a loss which would have been counterproductive to the development process. Allowing the black market to exist was consistent with the rapid industrialization strategy. 6. Some additional considerations Before concluding this paper some additional justifications and qualifications seem to be in order. First, the assumption of linearity represents a departure from the standard practice of assuming constant elasticity demand and supply curves. Although it would perhaps be more elegant to specify alternative explicit functional forms for the cur’lres, such a procedure is as arbitrary as assuming linearity, and in addition gives spurious precision to what at best is an approximation procedure. Attributing the available elasticity estimates to the actual level of total sales and solving for the constant slope coefficient to derive P,, p and Pd seemed quite reasonable and in any case only the last proved sensitive to the procedure used. Assuming a constart elasticity demand curve would obviously have resulted in a SCnewhat higher c:stimate of Pi: and hence a larger estimate of area [a]. This would increase the estimated net social welfare loss associated with the hypothetical situation 2. Thus, the procedure adopted in the present paper is consistent with a minimum estimate of the role of the black market in reducing the net social welfare loss. Second, the assumption that farmers and black mnrkct middlemen share the additional psychic and material costs of black market transactions is clearly ar!:itrary. However, it seems to be an appropriate assumption, and in any case the final estimates were quite insensitive to variations in the assumed level of such CO%. Third, the assumption regarding the level of official sales which would obtain if the black market were effectively suppressed, a 20 percent increase over actual
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D.L. Chinn, Food control in postwar Japan
sales, is critical and based on limited evidence. Assuming a Zreater hypothetical increase in official sales does not affect the estimates of the actual (situation 1) welfare effects, but it does affect the estimates of the hypothetical (situation 2) elects. The estimate of the hypothetical loss in producer rent (dPR2) would be increased as would the hypothetical increase in consumer surplus (dCS2) and the amount of subsidy, but the hypothetical loss in net social welfare (IINSW2) would decline. For example, if we assume th,at QT = 1.4QG (instead of 1.2QG), for 1950 APR2 is - 118.0 billion yen, KS2 is 117.0 billion, the subsidy is increased to 57.9 billion, and dNSW2 is only - 1.0 billion yen. Thus, the conclusions about the hypothetical transfer from farmers to urban consumers ars a result of the rice contrc’ system are strengthened, but the conclusion about the role of the black market in reducing the net social welfare loss is weakened. If, on the o’her hand, a smaller increase in official purchases is assumed, the conclusions are affected in opposite directions. Fourth, a critical condition for the area under the ordinary demand curve above a given price to be an accurate measure of the consumer surplus is that the income effect be negligible. Even though the income elasticity of urban worker demand for starchy staples declined from 0.2 in 1953 to less than 0.1 in 1961, it is unlikely that this condition was fulfilled.’ 5 Thus, in principle some correction ought to be made in the numerical results. Unfortunately, because of the crudeness of the available data it is not appropriate to make such a correction, and all that can be said is that since rice was not an inferior commodity, the area under the ordinary demand curve above a given price exceeds the consumer surph;. What effect this would have on the estimated welfare effects is uncert&in, but the general conclusions suggested by the order of magnitude estimates wouid almost certainly not be affected. Finally, the failure to allow for the effects of releasing imported rice from government stocks must be considered. In principle, the expected effects of rice imports would be to increase the farmers’ loss by lowering the black market price and IC increase the gain to urban consumers by increasing the total available supply. However, there was a strong preference for domestic as opposed to imported rice, most of which came from Burma and Thailand, so urban co:lsumers who could afford to would purchase domestic rice in the black market instead of consuming the rationed imported rice. In addition, ‘people in the low income classes consume[d] very little black market rice. . .’ [Matsumoto (1959, p. 29>]. ‘Thus, it seems plausible to speculate that the availability of imported rice had little effect on the black market price and hence (since the government purchase price was fixed independently) did not significantly increase the burden imposed on farmers by the rice policy. In the urban sector the benefit of the imported rice accrued directly to low-income consumers who lacked the capacity to exercise their preference for domestic rice in the black market. “The income elasticity estimates are taken from Kaneda (1968, p. 22).
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189
7. Cmclodhg comments Since this study by necessity has had to make use of numerous assumptions the conclusions cannot be regarded as definitive. Nonetheless, by choosing the most plausible assumptions at each step it does seem possible, subject to the qualifications of the previous section, to offer the following tentative conclusions regarding the welfare effects of the Japanese rice control system for 1950-57. (1) The rice control system resulted in a large transfer of economic surplus from farmers to urban worker households. The rationing system provided a basis for retarding the rate of increase of industrial wage rates by keepinr; the price of the critical wage good below the domestic equilibrium level. Thus, the system made a significant contribution to the postwar industrialization process. (2) The black market played an important role in this contribution. It served as a mechanism by which farmers could recover some of the potential loss imposed on them by the control system and may have had the effect of ameliorating the political pressure for higher rice prices until 1960. For several years it turned urban consumers as a group from net losers to net welfare gainers, and because it provided production incentives for farmers reduced the ret loss in social welfare by perhaps as much as 5G billion yen per year for 19’&Y1 even ignoring the saving in enforcement costs. (3) Finally, the ‘extra-governmental’ free market in rice which operated in Japan during this period, although formally illegal, was more gray than black in the sense that :he Japanese authorities were clearly aware of its existence (in fact they officially collected black market price data) and could have suppressed it to a much greater extent than they did. The analysis of the present paper has given a rationale for their not doing so.
References Boulding, K.E., 1937, A note on the theory of the black-market, Canadian Journal of Economics and Political Science 13, 115-l 18. Chinn, D.L., 1976, Disequilibrium policies, black markets 2nd en+‘orcement in developing countries, Working paper, Food Research Institute, Stanfcxd University. Hayami, Y., 1972, Rice policy in Japan’s economic development, American Journal oi Agricultural Economics 54, 19-31. Ha:;ami, Y. and V.W. Ruttan, 1970, Korean rice, Taiwan rice, and Japanese agricultural stagnation: An economic consequence of colonialism, Quarterly Journal of Economics 84. 562-559. Ike, N., 1972, Japanese politics: Patron-client democracy (Alfred A. Knopf, New York), Japan Food and Agriculture Association, 1963, Agriculture in Japan (Tokyo). Johnston, B.F., 1953, Japanese food management in World War II (Stanford University Press, Stanford, CA). G
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D-L. Chinn, Food control in postwar Japan
Kaneda, H., 1968, Long-term changes in food consumption patterns in Japan, 1878-1964, Food Research Institute Studies 8, 3-32. Krishna, R., 1967, Price policy for agricultural d,evelopment, ir: H.M. So&worth Pnd B.F. Johnston, eds., Agricultural development and economic grow ‘!I (Come .1Univers .j Press, Rhaca, NY) 497-540. Matsumoto, T., 1959, Staple food control in Japan (Agricultre, Forestry, and Fisheries Productivity Conference, Tokyo}. C&kawa, K., 1959, Structure of food demand: Prewar period (Translation Series no. 1, ed. ‘~r.nslaticn ‘Unit, Tokyo); translated from K. Ohkawa, 1945, Shokuryo keizai no riron to ke&u vhecry and measurement of food economy] (Tokyo).