Brief summary of Bai Gao’s Japan’s Economic Dilemma: Institutional Origins of Prosperity and
Decline.
This summary is to enable a better understanding of Gao’s arguments. When you use the Gao
book, you still need to cite the relevant pages instead of this summary here.
After World War II, Japan established a welfare society rather than a welfare state. (chapter 3)
The welfare society differed from the welfare state in that the former takes care of welfare
through public spending of taxpayers’ money, and the latter achieved social security by having
the private companies maintaining social stability through “total employment,” so that no one
who wanted to work needed welfare. One reason for this move was the need for economic
growth and the shortage of funds to do that. The money the Japanese state saved from public
spending was invested in the economy in the form of liberal bank loans from the Bank of Japan to
the citibanks and other regional banks that boosted competition and technological innovations.
(chapter 4) There was very little monitoring done by the banks on the companies they loaned
money to. Loans were almost automatically renewed, enabling companies not to focus always on
immediate profit but spend money on Research and Development for long term gain.
Despite fierce competition in some areas of the economy, the two ends of it, the big companies
that produced for export, and the sunset and other inefficient industries, were both protected by
the state, the former in the form of tax breaks and low interest loans, the latter in the forms of
cartels where high prices are protected by assigning quotas of production to each cartel member
to avoid competition between them. Besides financial policies, the state also guided economic
development in spotting the industries that Japan needed to develop, which, in the 1950s and
1960s, were the heavy industries, and in the 1970s and 80s after the First Oil Shock, were the
automobiles, home electronics, and bio-technology, industries that less and less required energy
sources. (chapter 7)
The asymmetrical development of Japanese trade with the US (chapter 5) eventually led to the
appreciation of the yen against the US dollar (chapter 6) and led to a smaller export market for
Japanese goods. The more and more expensive yen was then exported (purchase of real estate in
the US, Europe, purchase of MGM, investments overseas), but the export of the yen differed from
the export, e.g. of cars, in that financial speculations were more unstable, leading to heavy losses.
(chapter 8)
The financial losses contrasted with the overheated stock market in Japan because of high
financial speculations due to the rapid growth of the economy in the 1980s. When the stock
prices finally fell (compare that with our stock market setbacks in recent years because of
overinvestments in the dot.coms and the technology sector), it led to a chain reaction: banks and
individuals preferred to hold cash to investment. Japan fell into a recession. The recession was
exacerbated by the state policy to cut public spending, reinforce bank monitoring of loans, and
tax increase, leading to even less spending, in 1996. Starting from 1998, public spending
increased, but because the government continues to protect the economy in one way or another by
preventing some banks or large corporations from collapsing, a full market economy is not
developed yet. To many Japanese today, a full market economy is the solution to the problem.