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MEIJI INDUSTRIAL DEVELOPMENT: A CASE STUDY by Kevin Mark Wilds A thesis submitted in partial

fulfillment of the requirements for the degree of Master of Arts in International Relations

in the College of Social Sciences

California State University, Fresno

August 2003

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Copyright 2003 by

Wilds, Kevin Mark

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For the Department of Political Science:

We, the undersigned, certify that the thesis of the following student meets the required standards of scholarship, format, and style of the university and the student's graduate degree program for the

awarding of the master's degree Kevin Mark Wilds Thesis Author Russell Mardon Political Science MD, 7 21 _ Alfed Evans “° Political Science Quan ma

Sidney Chang History

For the University Graduate Committee:

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OF MASTER’S THESIS

X I grant permission for the reproduction of this thesis in part or in its entirety without further authorization from me, on the

condition that the person or agency requesting reproduction absorbs the cost and provides proper acknowledgment of authorship

Permission to reproduce this thesis in part or in its entirety must be obtained from me

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Chapter

1 LIBERALISM, MERCANTILISM, AND JAPANESE POLITICAL ECONOMIC DEVELOPMENT DURING THE MEIJI PERIOD

Liberalism: Market Driven Forces

Applying Liberalism to the Japanese Developmental Model Mercantilist Policies

Mercantilism and Japan

2 JAPANESE POLITICAL ECONOMIC HISTORY: THE MEIJI STATE

The Japanese Developmental State Model Conclusion

3 CENTRALIZATION OF THE STATE

4 GOVERNMENT CONTROL OVER THE BANKING SYSTEM 5 TARGETING STRATEGIC INDUSTRIES

The Close Relationship between the Meiji Government and the Zaibatsu

Suppression of the Working Class

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LIBERALISM, MERCANTILISM, AND JAPANESE POLITICAL ECONOMIC DEVELOPMENT DURING THE MEIJI PERIOD

The struggle of nations to transform from agriculturally based economies to stable industrial economies is occurring in many parts of the world today These countries would do well to emulate Japan as a model of rapid and successful industrialization Japan was the first country outside of Europe and the United States to successfully industrialize During the Meiji Restoration!, Japan

developed an economy which rivaled that of Europe and the United States The Japanese government implemented plans that would keep its country from becoming a Western colony and would make it an economic superpower

How was Japan able to accomplish such a feat in a mere fifty years? Liberal theorists like Takafusa Nakamura and Johannes Hirschmeier have argued that it was competitive, open-market forces that developed the Japanese

economy.” This would imply that Japan followed the policies of classical

economic liberalism as characterized by Adam Smith Other theorists such as Ian Inkster and E.H Norman argued that Japan’s strict governmental regulation played a major role in the development of the Japanese economy during the Meiji

1 The restoration was a return to effective rule by centralized monarchy, and its rationale

was the idea of restoring the emperor to his rightful position which had been usurped by the

Fugiwara and the succession of shoguns R.H.P Mason and J.G Caiger, A History of Japan (Boston: Tuttle Publishing, 1997), 258

2 Nakamura Takafusa, Economic Development of Modern Japan (Tokyo: Ministry of

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industrial development The question becomes, how did Japan successfully industrialize? Which theory best applies to Japan, mercantilism or liberalism? This thesis will examine how Japan developed during the Meiji period, from 1868-

1912 To anticipate the conclusion, this thesis argues that the Japanese state was highly active in planning and implementing industrial development and therefore followed the mercantilist political economic theory when developing Japan’s industrial economy

Liberalism: Market Driven Forces

Classical liberal economic theory began to develop in the 1770s, partly as a reaction against the mercantilist policies of the European countries The

theoretical arguments were first put forward by Adam Smith in the Wealth of Nations Smith felt the government should not interfere with the economic

development of the society because that development should be determined by the natural law of the marketplace.4 The marketplace should set the prices and wages and determine which goods and services should be offered Smith felt that the wealth of a nation was measured not in its gold but in the labor of its individuals.° The basis of Smith’s open market economics was the individual Individuals are motivated by self-interest They will provide the goods and services that others will buy This, in turn, will produce the wealth which allows the economy to grow and provides order to the society

3 Ian Inkster, Japanese Industrialization: Historical and Cultural Perspectives (New York: Routledge, 2001).; ELH Norman, Japan ’s Emergence as a Modern State; Political and Economic problems of the Meiji Period (Wesport: Greenwood Press, 1940) 152

4 Martin Cohen, Smith’s Wealth of Nations (London: Hodder &Stroughton, 2001), 28

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advocated Laissez-faire is, “the classical liberal idea that governments ought not to intervene in markets — [the market] should be left alone because competitive markets are understood to be self-regulating.””©

Smith argued that the market is controlled by an invisible hand.” Smith hypothesized that there is a natural law which controls the marketplace and individuals Individuals are free to pursue their own interests Smith’s invisible hand theory is related to the law of supply and demand.® Producers will produce commodities that are demanded by consumers

The invisible hand also controls how the suppliers produce products Because of market forces, the suppliers will attempt to cut costs in order to

produce their product less expensively The less it costs to produce a product, the less the supplier will charge The less the supplier charges for his product, the more products the consumer will buy

The producer charges the lowest price for a product in order to undersell his competitors Thus, the invisible hand will find a natural price for goods This idea is known as equilibrium.? This equilibrium will assure the entrepreneur a fair return for his investment and the consumers will be able to afford the goods, or services that are provided The invisible hand of the market leads the individual to the choices that he makes: what prices to set for goods or services, how many © Paul R Viotti and Mark V Kauppi, International Relations Theory (Needham Heights: Allyn &Bacon, 1999), 478 7 Cohen, 28 8Ibid., 57

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employees to hire, and how much money the employees should earn All of these choices affect the economy, even if it is ever so slightly Martin Cohen stated:

The invisible hand does indeed spread the wealth around Smith was a scientist of society, he made his observations with as honest and open a mind as any mere human could be expected to and he was struck by the way in which the market does seem to work as a self-regulating machine, balancing supply and demand with

changes in prices

Smith believed that this invisible hand is what keeps the market from overcharging consumers while giving adequate profits to suppliers The invisible hand is what drives the decisions made by the suppliers and consumers in the marketplace

Although Smith believed the government should not intervene in a

country’s economic affairs, he viewed government as having three distinct roles The first role of the government is to provide defense Without a national defense system there is no national security or stable environment in which industrial growth can occur With a strong defense system, individuals are able to pursue market incentives Thus, economic success is dependent on a well-defended

nation !!

The second role of the government is the administration of justice The ability to dispense swift justice is necessary to protect each individual from other individuals who would otherwise take advantage of them Justice is important not only because it protects all people from lawlessness, but because it protects

people’s property The protection of the people, not only from a foreign invader, but also from domestic raiders, is the duty of the state Legitimate roles of the

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individual himself, and thus to protect the effectiveness of the market.!”

The third role of the state, according to Smith, is to provide an effective intensive economic infrastructure The development of these infrastructures

would normally not be feasible for an individual firm to undertake It is the role of the state to provide capital for projects such as railroads, highways, and

communications which are the basis of economic development These projects are necessary for the propagation of a free market system Michael Beaud wrote

about these three roles of the state:

The sovereign has only three duties to attend to; three duties of great importance, indeed, but plain and intelligible to common

understandings: first, the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the societ from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and, thirdly, the duty of erecting and maintaining certain public works and certain

public institutions !3

This was the basis of Smith’s argument Government involvement in any aspect of the economy is detrimental to a free market system The invisible hand should control the market, not the government The government only needs to involve itself with the three roles that Smith states

Economic liberals, like Adam Smith and David Hume, also believe that the

free market system will encourage entrepreneurialism and the creation of jobs They believe that labor is a key to economic development The more people are working and making a profit, the greater the economy will grow The individual

l2[bid, 49,

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by economic liberals, wealth is based on labor The wealth of a country is dependent on individual self-interest and desire for profit The individual must have the freedom to pursue his desires for profit The government should stay out of economics.!* The government cannot and should not hinder the individual and the entrepreneur in the pursuit of profit Government gold supplies are not a sign of a wealthy nation; the production of entrepreneurs and labor in a free market system are a sign of wealth in a nation.!°

Economic liberals also believed that the government should not regulate trade Adam Smith was highly critical of the mercantilists who favored setting tariffs and blocking imports to protect domestic companies This protection allows “inefficient” domestic producers to produce goods at higher prices and remain dominant in the market.!© This costs a society precious resources

According to Smith, it is in the best interest of all nation states if there is free trade and no government interference

Another aspect economic liberalism concerned government sponsorship and subsidies to certain companies Economic liberals believed that the invisible hand would encourage free enterprise and domestic industries The government should not directly assist industries to develop The free market would take care of that If the corporation was efficient, then the market would have a place for this

14 Jacob Oser, The Evolution of Economic Thought (New York: Harcourt, Brace and World, Inc., 1963)

15 Lionel Robbins, A History of Economic Thought,ed Steven G Medema and Warren J Samuels (Princeton: Princeton Universtiy Press, 1998)

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market for this corporation The government would bring inefficiency to the marketplace if it subsidized private corporations Economic liberals advocated that the domestic economy would grow as industries grow in a free market atmosphere No government interference would be necessary due to the natural law of the marketplace or the invisible hand.!7 The free market would be the determining factor of a corporation’s survival, not the government

According to liberal economists, competition should exist between

corporations within nation states This competition is good for both the consumer and the corporations The consumer will have greater choice of goods and

services when there is competition The corporation will develop new techniques

to undersell its competitors and, in turn, become more efficient The

government’s interference with corporations diminishes or limits competition

within the marketplace !8

Colonialism is another factor in the world economic system that economic liberals criticized Capturing other countries and using them to supply raw materials and markets for industrial products is a practice which interfered with free trade Liberals believe that colonies are a burden to the national economy Nations should not take colonies because all they can do is drag the economy down Smith stated that colonies are not economically worth the trouble of running and keeping them up They are expensive to maintain and free trade will do the job better Instead of taking countries as colonies, the more powerful

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concerned

According to economic liberals, workers should be compensated at market prices for the work that is rendered The workers need good wages so that they can spend the money and consume products By compensating the workers fairly, the workers will go out and spend money which in turn will improve the economy Jacob Oser interpreted Adam Smith: “The minimum rate of wages must be that which will enable a workman and his family to survive and perpetuate the labor supply.”!9 The workers should not and cannot be exploited It is the worker who will spend the money to keep the economy growing

Economic liberals also argue that economic and social stability within a country will result if liberal theories are applied When a company makes a profit, it can reinvest into the company and hire more people Working people with money to spend provide a stable base for the economy and the country Economic liberals argue that profits expand production which creates more jobs and causes income to rise This creates progress and harmony in society.2° With government staying out of the way, companies can turn profits and keep the citizenry of the country productive

The main point to all of these economic liberal policies is that the

government needs to stay out of the economy The free market should dominate the economy, not the government Government involvement in the economy is detrimental to the free market system and the invisible hand

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Some theorists like Nakamura and Taguchi have concluded that the Meiji government used the principles of Liberalism when industrializing their country These theorists argue that the Japanese government encouraged entrepreneurs but allowed the market to function relatively freely The individual in Japan took the risk for his own gain, not for the gain of the country, according to Nakamura.”! The government may have had a hand in the economy when Japan began

industrializing, but the economy took off when the individual began investing in Japan Nakamura had written:

Despite the government initially investing in imported technology and setting up model modern plants, it was the private sector from the late-1880s and into the twentieth century that was the principal vehicle of modernization through capital accumulation and

subsequent investment in imported technology This reflected the quick acceptance of the profit motive and beginning of a high and stable savings rate which has basically continued until today.?2

The pursuit of profit brought entrepreneurs into the market According to this viewpoint the government let the invisible hand control the market and the government did not control Japan’s economic growth

Taguchi, a noted journalist and economic philosopher during the early Meiji period, promoted /aissez-faire economics He believed that government interference was detrimental to the economy Taguchi’s goal was to educate the Japanese about political economic theory:

Taguchi's aims in the Tokyo Keizai Zasshi were not only to report and comment on current economic topics, trends and problems, but also to propagate political economy as a science among people Noting that there was no academic journal of political economy at that time, his purpose to disseminate the knowledge of political

21 Takafusa, 4

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economy was highly worthy In Taguchi’s journal various economic schools ranging widely from British classical, protectionist, German historical, Austrian marginal to the socialist school were introduced and commented on in plain form by appropriate specialists apart from Taguchi’s own Laissez-Faire standpoint In this respect the Tokyo Keizai Zasshi, until around the turn of the century, played a

pivotal role in the enlightenment of political economy in Japan.”

The Meiji government did involve itself in the development of an

infrastructure The government built a communications system, roads, and

railroads throughout the country The government took care of the public works sectors in the economy Mikiso Hane wrote about government’s railroad project:

The government took the initiative in constructing modern

transportation and communication systems, which were essential for the modernization of the economy The first railroad line, the

Tokyo- Yokohama Railway, was opened in 1872, and this was followed by the Tokaido line linking Tokyo and Kobe, which was completed in 1889 In 1869 the telegraph line between Tokyo and Yokohama was completed, and in 1871 a postal system linking

Tokyo and Osaka was introduced 24

The government instituted these programs because it was necessary for economic

development, thus following one of the roles Adam Smith recommended

The government also wanted to establish a military that could defend the country One of the first industries that the government wanted to focus on was the military arms industry The government also understood that for the state to survive encroaching Western imperialism, it needed a strong military Thus the Japanese government successfully fulfilled the second primary role of the state according to Adam Smith, defending the country from foreign invaders E.H Norman gave statistics about military expenditures:

23 Shiro Sugihara and Toshihiro Tanaka, Economic Thought and Modernization in Japan

(Cheltenham: Edward Elgar Publishing, 1998), 33

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.despite retrench in other state expenditures in this period (1881-7) there was sharp increase (over 60%) in military

expenditures and (1881-91) naval estimates (200%)

These projects required the import of expensive finished and semi-finished military equipment But in this sphere of

enterprise, profit or loss was of no account, and strategic consideration was everything.2>

The government also set up a judicial system within the country The judicial system was wholly separate from the legislative branch The judicial

branch was implemented to dispense the justice system that Smith advocated J.G Craig and R.H.P Mason wrote:

By creating a national Diet (Parliament) and an independent

judiciary, the ruling officials in effect agreed to share their hitherto untrammeled powers In the courts, they now had to defer to the decisions of professional judges with whose appointments they were

not supposed to tamper.”

The Meiji government followed a Western example of government The

government decided to implement a judicial system as a separate and independent branch of the government This was not only to protect the individual political rights of citizens, but according to Smith’s theory these actions would protect the property rights of entrepreneurs

Liberal theorists like Nakamura and Taguchi have made their case that Japan used liberal principles to promote its industrial development The basis of their arguments is that the Japanese government allowed individuals to act in their own self-interest and to create open and competitive businesses The question then becomes, “Is this an accurate interpretation of the Japanese motives and

actions?”

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Mercantilist Policies

Mercantilism was a form of economic nationalism for the purpose of

building a wealthy and powerful state.2” The political economic theory of

mercantilism arose in the early 1500s in Europe and was a result of the co-

existence of several circumstances It coincided with the rise of nation states and

the end of feudalism, the growth of commerce and industry, the increase in trade

and the establishment of colonies, and the use of metal money over barter as a means of exchange.28 Competition for wealth between nation states led to conflict which, in turn, led to the necessity for standing, not temporary, armies Soon the goal of each nation state was to have enough hard currency available to be able to financially support an army and navy which would protect the nation, its trade, and its colonies.2? Under mercantilism, a country’s wealth was primarily

measured by the amount of gold and silver that it had in its treasury One way to

attain gold and silver was by maintaining a “favorable balance of trade.”39 This

led to a close relationship between the merchants and the government

Mercantilists like Thomas Mun and Charles Davenant believed that the government should have strict control over all aspects of the economy The government should make sure that its goals for the economy were being met Under mercantilism a nation’s government strictly regulated economic affairs to

enrich its treasury.3!

27 Robbins

28 Harvey W Peck, Economic Thought and Its Institutional Background (New York:

Farrar and Rinehart, Inc., 1935)

29 Ibid 39 hid

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The accumulation of precious metals was the measure of wealth for mercantilists The more precious metals within a country, the wealthier the country Precious metals showed that the country was strong and the government was well entrenched The wealth of the country was more important than the quality of life for the individuals Countries would even prohibit the sale of precious metals to foreigners.°2 In order to quickly attain gold, some countries in Europe would pillage and strip colonies of their precious metals However, precious metal accumulation was a short term solution for the mother country’s treasury Precious metals, once spent, have no return investment Those countries that participated in a precious metal trade were broke within a matter of time Michael Beaud stated this about precious metals:

Conquest, pillage, extermination: this is the reality out of which came the flow of precious metals to Europe in the sixteenth century But the ocean is immense, and passing by way of the royal treasuries of Spain and Portugal, the money boxes of the merchants, and the accounts of the bankers, this gold was totally “laundered” by the time it got into the coffers of the financiers of Genoa, Antwerp, and Amsterdam

This gold, gold of the prince, gold of the state (these “purses” were at that time hardly distinct one from another) — how to keep it once one had it? How to siphon it off from somewhere else when it was lacking? The formula of the hoarders, corresponding to a static view of the world — forbidding precious metals from leaving the kingdom — didn’t work Another formula was proposed by the

mercantilists: buy little from, and sell more to, other countries; and

in order to do that, produce more goods of better quality Wasn’t this in the interests of both the prince and the merchants.?3

Precious metals are not a renewable resource They do not stimulate the national economy for long Spain was one country which amassed large amounts of gold Within two hundred years, however, Spain was left behind by other

32 Ibid

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colonial powers because these countries exploited their colonies by different means These countries promoted production and trade

Trade is important to bring in capital according to Thomas Mun, as quoted by Oser: “the answer lay neither in production nor in the accumulation of capital, but in a surplus of exports.”34 What created a favorable balance of trade to mercantilists? Mercantilists believed a favorable balance of trade resulted from the state strictly controlling the level and quality of production while restricting imports and increasing exports.2> The government needed to take control of production and trade to assure that exports increased and imports decreased

Mercantilists argued that the government needed to encourage the growth of domestic industries in order to discourage imports and improve local markets

and exports.2© The government’s purpose was to minimize imports and maximize

exports Mercantilists argued that imports could hinder the economic growth of a country by taking jobs away from its citizens Imports could take money out of the country and send it to another country It was beneficial for a country to export more than it imported It would bring more jobs to the country and more money for the country’s economy J.W Horrocks wrote about this subject:

The doctrine was that in international commerce a country should seek to

secure that its exports should exceed its imports, as the balance must then

be inevitably paid in treasure or in money This declared Mun, was the only way in which treasure could be obtained, and he held that the old restrictive devices were altogether ineffective The ordinary means to increase our treasure is by foreign trade, “wherein we must ever observe

34 Oser, 16

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this rule to sell more to strangers yearly than we consume of theirs in value.’

Here the mercantilist principle is stated clearly by Mun, as quoted by Horrocks: in order to maintain the gold supply in the country the government must do all it can to limit imports and maximize exports

Some countries closed their markets all together to imports Other governments put high tariffs or duties on imported goods High tariffs or duties discouraged citizens from buying imported goods On the other hand, countries wanted their companies and corporations to export as many of their goods as possible The government gave them economic incentives to export goods to other countries

The colonies on the other hand, were to export to only the mother country and only import goods from the mother country Gustav Schmoller wrote about this aspect of mercantilism:

Commerce with the colonies, and the supplying of them with European wares, was reserved for the mother country The

importation of colonial produce had to take place directly from the colony itself, and not by way of other European ports; and

everywhere an attempt was made to establish direct trading relations by great privileged trading companies, and by state aid in manifold ways

Colonial expansion was another important component of mercantilism

Mercantilists believed that the government must establish secure lines to supply raw materials and markets to an industrial economy.>2 Colonies served this purpose directly Not only could a colony’s natural resources be exploited by the

37 JW Horrocks, Short History of Mercantilism (London: Methuen & Co Ltd., 1925), 63

38 Gustav Schmoller, The Mercantile System and Its Historical Significance, Illustrated

Chiefly from Prussian History (New York: Macmillan and Co., 1895), 58

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mother country, but its markets could be monopolized by the mother country’s producers The colonial system brought about much wealth for the mother countries

Some imperial countries forced their colonies to grow renewable

commodities such as sugar, cotton, and tobacco These commodities were shipped to the mother country The mother country produced goods from these

commodities and sold them on the world market Every year that these commodities were grown and sent to the mother country, the mother country received return on its colonial investment This formula helped the mother country’s economy to grow steadily

Another aspect of mercantilism was the propagation of monopolies Monopolies occur when a firm has solitary or complete control over a market Marx and others noted an increasing concentration of capital or a tendency toward monopoly in advanced capitalism.4° Monopolies limit competition in the market place but lead to large economy of scale production Mercantilists argued that the government should allow merchants to become monopolies and make laws which help them grow Then merchants would be willing to pay taxes in exchange for governmental policies which protect their companies from competition and promote their growth The governments would then take advice from the

merchants concerning how to improve the national economy Ernesto Screpanti and Stefano Zamagni declared:

However, it is important to realize that it was precisely from the beginning of the seventeenth century that the sovereigns of the great nations began to prefer to take advice from merchants rather than from nobles It was also the century in which the merchants began

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to present the principles that underpinned their own private

economic activity as the principles of ‘public economics’ *!

The state, under mercantilism, began a close relationship with the corporations or companies of the nation This close relationship fostered economic growth The growth of the national economy was beneficial to both the national government and the corporation

This close relationship between the companies and the state did not always work to the advantage of the average citizen In fact, the mercantilist country was not above exploiting its own citizens In order to support the economy Jacob Oser wrote: “the mercantilists favored a large, hard-working population that would provide cheap labor and an abundance of soldiers and sailors ready to fight for the glory of the nation and the enrichment of their masters.”42 A large labor pool kept wages down Another argument of mercantilism was that the “cost of labor must be kept as low as possible, and in fact, that it must be calculated to strengthen the

country’s position on the world market.’”*3 Thus, unionism was outlawed or

discouraged by the state This worked to the benefit of the merchants, but created poor working and living conditions for the workers

These policies could lead to revolt of the citizenry within the country, therefore, the government had to have ultimate control so it could put down a revolt The government also attempted to develop a concept of patriotism and national fervor to defend its policies The government’s argument was that personal sacrifice was necessary for the country to help it gain wealth and power

41 Ernesto Screpanti and Stefano Zamagni, An Outline of the History of Economic Thought (Oxford: Claredon Press, 1993), 34

42 Oser, 12

43 Eli F Heckscher, Mercantilism Vol 2 (New York: The Macmillan Company, 1955),

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The stronger the economy, the stronger the nation would become As the nation’s economy strengthened, it was argued, the living and working conditions of its citizens would also improve

Another aspect of mercantilism was the importation of advanced technology Ifthe country could acquire new technology then it could manufacture more products more efficiently and export them Under

mercantilism, the government sets out to acquire those manufacturing secrets Mercantilism and Japan

The most important tenet of mercantilism was the concept that the

government of a country be involved in all significant aspects of the economy In Japan there were many examples of this practice and these will be discussed in detail in later chapters The government became involved in the banking system, centralized the state, developed a close relationship with large corporations, controlled foreign investment, controlled trade, suppressed the working class, and acquired colonies W.G Beasley wrote:

Meiji economic policy was a blend of the old mercantilism, with its state protection, and the new style monopoly This new monopoly was linked organically to the pre-existing mercantile monopoly in Tokugawa Japan so that to a large extent the same favored merchant families with banking interests now became privileged directors of

banks and industries.*4

The Japanese government also played a leading role in creating production and trade policy that promoted exports and restricted imports The government focused on keeping a trade surplus The more exports the Japanese sent out of the country the more capital was brought into the Japanese economy The Japanese

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understood that they must export goods to bring surplus more capital into the national economy W.G Beasley stated:

Because the stipulations of the treaties made it impossible to employ tariffs as a means of regulating foreign trade, the Meiji government had to find other devices for redressing its unfavorable balance of payments One was a drive to increase exports, involving not only greater production of silk and tea, but also improvements in

standardization and quality Regulations to control silk-reeling, introduced in 1873, were coupled with the setting up of government-

financed filatures at Maebashi and Tomioka, which served to

introduce Japanese entrepreneurs to Western manufacturing techniques and factory methods Students were sent to acquire a knowledge of the European silk industry; pamphlets on sericulture were widely circulated; and instructors were sent out at government expense to silk producing districts Between 1868 and 1883

production of raw silk increased by 60 per cent, exports by over 100 per cent More than half of the exports went by the end of that

period to the United States, whose domestic silk market was growing

rapidly during these same years.*>

The government played a direct role in providing knowledge of factory methods The exportation of goods was sought by the companies within Japan and by the Japanese government Mercantilists policies were at work in the Japanese state

The government had close ties with businesses in Japan The Japanese government would subsidize specific businesses The government would also

give subsidies and tax breaks to specific corporations within the country.4° Again

this was a win-win situation for both entities The government would guide the national economy The company or the corporation would make a profit

This close relationship between the state and merchants did result in the workers in the state being exploited The exploitation of the worker by the companies and the state was another principle that was laid down by mercantilist

45 W.G Beasley, The Rise of Modern Japan (New York: St Martin’s Press, 1990), 106

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JAPANESE POLITICAL ECONOMIC HISTORY: THE MEIJI STATE

The Japanese industrial development under the Meiji government owes some of it success to the regime it replaced — the Tokugawa regime The

Tokugawa Shogunate lasted from 1600 to 1868! Prior to the Tokugawa period, Japan had never truly been a united country The Tokugawa united Japan in 1604 with the defeat of its enemies at the battle of Sekiguhara However, while the Tokugawa were in power, Japan was a feudal state, ruled by regional lords, defended by samurai, and supported by their farm worker vassals Merchants were considered a lower class than the warriors and the workers.2 The Tokugawa feudal society had four distinct classes The samurai were the highest class Wealth and power were based on land ownership Land was divided into domains Each domain was under the control of a feudal lord or samurai The most powerful samurai (the leader of the Tokugawa clan) ruled over the other samurai and the country and was referred to as the Shogun.3

Japan’s economy was based upon agriculture and local cottage industries With agriculture production dominating economic activity and with the merchants occupying the lowest class, there was no powerful segment of the society

encouraging industrial development in Japan prior to the 1850s However, the

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economy under the Tokugawa was relatively organized and began to connect all of Japan into a primitive market system Edwin Reischauer wrote about the

Tokugawa period:

Tranquility and order do not necessarily put an end to change In fact, they can encourage peaceful evolution The reunification of the land and then complete peace, which lasted from 1638 until the

1860s, naturally brought growth, and growth inevitably produced change

.For one thing, a great increase in productivity had taken place All the domains were naturally eager to expand the

agricultural lands on which their wealth depended This they did by

the reclamation of swamps and other wastelands, which was

particularly possible in the more peripheral, less densely inhabited areas Agricultural technology also made steady progress, and by the late eighteenth century an extensive literature on improved farming techniques was being written.4

The Tokugawa era was a relatively peaceful and stable period in Japanese history This atmosphere led to the development of certain attitudes and institutions which later enabled the Meiji government to successfully industrialize the country Under the Tokugawa regime, Japan was ripe for economic development, and it was also ripe for exploitation from the west

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The Shogunal Government® was aware that China had been conquered in just a few years time The Opium Wars of the 1840s had placed British and other

Western powers in a position to occupy all the major port cities of China During this period the Shogun had ordered that all foreign ships be fired upon if they entered Japanese waters The Japanese emperor disagreed with the Shogun and weighed in with his power and ordered that any foreign ship or sailor who was asking for help in Japanese waters be granted that help.” The emperor’s reasoning for doing this was that if China could not stand up to the Western imperial powers, then he believed the best course for Japan was to cooperate with the West

However, after the shogunate saw the power of the United States displayed by Perry’s fleet they knew they could not mount a defense The shogunate then believed they had no choice but to agree to the terms that Commodore Perry had presented to the Japanese

The Tokugawa regime in 1856 signed what came to be known as the Unequal Treaties and began to cooperate with the Western imperial powers The primary article of the “Unequal Treaty” was that Japan would open its markets to American goods and that American ships would have access to ports in Japan These ports were Hakodate and Shimoda There were some basic elements common to the unequal treaties One was that all foreigners were to be granted entry and residence into treaty ports A second element of the treaties was that Japan was to offer foreigners protection under extraterritoriality Third, the Japanese were to limit or eliminate tariffs charged on imports Finally, the most

6E.H Norman, Japan’s Emergence as a Modern State; Political and Economic Problems of the Meiji Period (Westport: Greenwood Press, 1940), 14

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favored nation status had to be granted by the Japanese The meaning of this clause is summed up this way by Louis G Perez:

In Japan, any special concessions or privileges granted to one nation were automatically given to all the others It also worked in reverse That is, Japan could never revise a treaty with any nation unless every other nation also agreed At that time the Western nations could not even agree upon what time of day it was (there was actually no mutual agreement on world time until after the First World War), so the chances of Japan getting all nations to agree on

any treaty were slim indeed.®

With the signing of these treaties, the Japanese public was becoming nationalistic and began to resist foreign incursions into Japan An opposition to the Shogun was developing This opposition believed that Japan must resist Western imperialism in Japan and that to do so would require Japan to develop an industrial economy and a modern military

During this tumultuous time, an idea was espoused about industrializing the Japanese economy Certain members of the Japanese government decided that Japan should learn from the imperial powers to become just as powerful as those

countries.?

In 1866, a rebellion was led by dissatisfied samurai from western Japan These samurai wanted to expel foreign influences in the current regime The Shogun’s regime desperately tried to hold onto power and a civil war ensued between the Tokugawa and these western samurai However, in early 1868, the Tokugawa regime was routed by these western samurai The western samurai

then instilled a new government, which they called the Meiji.!

8 Ibid., 86

9 Yasumasa Kuroda, “Arab Affairs Special Issue: Japan and the Arab World,” Journal of Arab Affairs 10 (Spring 1998): 8

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When the new Meiji government assumed power, Japan was being threatened by external powers that wanted to colonize and exploit the country China, the traditional power in Asia, the country that discovered gunpowder, had been conquered and divided by colonizing powers By this time, much of the rest of the world had been conquered by European countries Most of Africa was already split up among European powers India was already colonized by the British Once China fell to the West, all that was left was Japan The people who revolted against the Tokugawa regime did not want to see Japan fall into this cycle of colonialism

The Meiji government decided that to protect the country from this foreign menace they had to adopt key aspects of Western industry and culture They had to industrialize and build up their military to stand against the Western powers Tom Kemp wrote:

If Japan did not learn from and emulate the foreigners who were battering at its door they might take over control and turn the country into acolony The Tokugawa regime had been obliged to accept unequal treaties which gave foreign nationals a privileged status in Japan The succeeding regime, whilst being unable to

repudiate these treaties, learned a lesson and made a cardinal

principle of its policy opposition to foreign penetration, by adopting the foreigner’s own methods and instruments

.The state strenuously promoted industrial development and encouraged the importation of advanced technologies from the

West, both in the shape of machinery and foreign technicians.!!

Japan needed to open up to the rest of the world in order to preserve its unique identity The Japanese understood that their society and way of life would be threatened if the colonizing powers came in and conquered the country

The Meiji government of Japan played a vital role in the development of

!Ì Tom Kemp, /ndustrialization in the Non Western World (London: Longman House,

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the state The government led the development and implementation of the policies that the country followed The government did not play a passive role in

economic activity as Adam Smith had advocated Instead, the government of Meiji Japan intervened in all aspects of the economy as the mercantilists

advocated The specific areas of government involvement in Japan’s economic development are clearly stated by Yasumasa Kuroda:

The government fostered the consolidation of the nation’s banking system into one national system The government promoted the development of railroads, sea transportation systems,

communication systems and postal networks and established model factories to be sold later to private entrepreneurs Thus began coal mining, cement and glass factories, silk reeling, and the textile

industry

The nation’s heavy industries, from steel to weapons, were initiated by the government at the outset of the Meiji government But they were sold in the 1880s to prominent business groups, such as Mitsui, Mitsubishi, and Sumitomo, for the purpose of raisin enough funds to finance the development of armed forces This was the beginning of close working relationships between business and

government

The heavy involvement of the government in the economy and the particular manner by which the government structured economic activity has been called the Japanese developmental state model

The most important element of the developmental state model is the high level of involvement of the state in the economy Under this model, the

government plans and develops the economy by providing subsidized finance and other incentives to develop an industrial economy in a sequential manner Instead of the market determining the flow of investment capital, the state directs

investment into key strategic industries and develops these industries to enhance state power Dr Russell Mardon declared:

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the state itself initiates the industrial development process by taking control of primary developmental functions and by organizing and promoting the enhancement of the nation’s international

competitiveness Central to the plan-rational approach is the development of an economic bureaucracy that 1s responsible for establishing substantial economic goals and for planning sectoral development 3

The Japanese Developmental State Model

There are several elements of the Japanese developmental state model These will be briefly discussed here and then more thoroughly discussed in the following chapters At the time the Meiji government took power, Japan was a splintered nation In 1868, the old society based on the Shogun was ended and a new society emerged based upon the ideas and policies of the Meiji state The first thing that the Meiji government needed to do was to politically unify its country Only a politically unified country could contribute to the goals that the Meiji leaders wanted to fulfill Once the country was politically unified then the government needed to modernize the military through developing an industrial based economy The Meiji government needed to develop into an industrial society to obtain their key goal, and that was independence from foreign domination A centralized state would bring the whole population under its control for the purpose of national production A unified state would allow

progress to occur With a united Japan, there would be more production and more revenue collected in the form of taxes These taxes would then be used to build up industry and military power

Another element of the Japanese developmental state was to take

governmental control over the banks and financial institutions In this way, the

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government would have control of the flow of capital throughout the country State control of the banking system also minimized the outflow of capital from the country This system allowed the Meiji state to direct the flow of capital to state

planned industries and assured that the capital would stay within Japan.!4

The Meiji government understood that the other nation states around the world were economically and industrially far more advanced than Japan The government understood that it must adopt Western ways in order to compete and survive in a world of industrial powers The Meiji government sent students abroad to learn from the West and imported engineers and specialists from the West to help modernize Japan into a power that could stand up to the West.!>

The government then focused on targeting strategic industries By targeting a strategic industry the government built up a specific sector of the economy by providing subsidized capital and other incentives The government became instrumental through sectoral planning and control of financial flows in

deciding which industries would be developed, and which industries would not be pursued !6

The next element of the developmental state that the Meiji government implemented was the development of large diversified corporations Capital was scarce in Japan in the 1870s and the government took the initiative and started the first industries in Japan However, by the 1880s the Meiji state started to sell off state holdings to private “merchant family” businesses Soon these family

l4 E.H Norman, Origins of the Modern Japanese State; Selected Writings of E.H

Norman, ed John W Dower (New York: Pantheon Books, 1975), 206

15 Kuroda, 8

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businesses would become the large corporations that the Japanese government would turn to continually in order to develop new industries in the country These

new enterprises would become known as the Zaibatsu.!7? These Zaibatsus would

soon gain a monopoly control over most production sectors in Japan The government’s encouragement of monopolies and their use to gain capital and technology is a major element of mercantilist philosophy and the Japanese developmental state

The next element of the Japanese developmental state model is the

suppression of the working class Japanese workers were paid very low wages and were taxed heavily The government also outlawed unions and collective

bargaining The workers had no legal right to demonstrate against the

corporations or the government.!8

Another element of the Japanese developmental state model is government control over the inflow of foreign capital and technology During the Meiji period the government only contracted two foreign loans.!? The government used this foreign capital to develop key targeted industries

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markets, imports were limited and the balance of trade would favor the Japanese

economy.2°

Conclusion

The government played a heavy role in the industrialization of Japan The economy was planned by the state and the state formulated and allocated the capital for a considerable part of industrial development Wayne Nafziger wrote:

Throughout the late nineteenth century, the Meiji regime accounted for about half the investment outside agriculture State investment included infrastructure such as railroads, bridges, warehouses, lighthouses, ports, itrigation, harbors, steamships, electricity, water supply, postal services,

and telegraphy.?!

The Japanese did not practice laissez-faire economics The Japanese did not follow Adam Smith who advocated that the state should leave the economy to its own functioning The government did not stay out of the economy, because it felt it needed to develop specific industries such as steel and military hardware

rapidly In all of the aspects of the Japanese developmental state model we see the Japanese government orchestrating the industrialization of Japan

The Meiji government wanted the country and the regime to rapidly industrialize It could not depend on the invisible hand of the market The only thing that the government would depend on was itself People were unsure of how to go about building a national economy Mikiso Hane wrote about the Japanese government involvement in the economy:

Under these circumstances the government had to play an active role in removing many of the feudal barriers and in creating and

stimulating the conditions necessary for modern economic growth

20 Norman, Origins of the Modern Japanese, 216-217

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Internal checkpoints that obstructed travel and trade were

removed, and freedom of occupation was granted The government fostered better agricultural techniques, instituted a uniform system of land tax, and established a new financial base by creating a public budget system and a modern currency and banking system It also actively propagated Western knowledge and introduced compulsory public education More directly, it encouraged the development of new industries by, among other things, building and operating key enterprises, constructing model plants, and granting government subsidies to private entrepreneurs.”

The Meiji government needed to have industrial investment in country but

investors were skeptical about investing in the country The government chose to play an active role in the economy This choice helped foster the Japanese

developmental state model

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CENTRALIZATION OF THE STATE

Within months of being established, the Meiji government set forth policies that would politically unite Japan The Meiji revolution had overthrown the

Tokugawa regime, but the new Meiji government was not yet in control of the whole country Some of the samurai were still in control of areas of the countryside where the armies of the Meiji government were not at hand The Meiji government needed to centralize political control and develop a modern military that could eliminate or minimize the power of the samurai class

In order to develop a large industrial economy and a strong military in a short amount of time, the Meiji government needed to develop a strong centralized state There were four significant changes that the Meiji government implemented

in order to achieve this:

The creation of a national land tax

The abolition of the four-class social system, especially the power of the samurai class

The creation of a national conscripted military

Haihan Chiken (“Abolition of Domains, Establishment of

Prefectures”)!

AY

ONE

When the Meiji government took power, the Japanese treasury did not have sufficient capital to pay for its ambitious projects The creation of a land tax was to help pay for the national debt and to develop the national economy The Japanese economy was too weak to be able to obtain money from foreign countries Its only source of income was its own people The land tax that was

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implemented by the Meiji government had a two-prong effect on the centralization of the state First, it would raise the needed capital for the government to develop the economy and build an army Second, it would weaken the samurai class Most land owners in Japan at the time were upper class samurai These samurai could and did threaten the power of the new Meiji government The tax was aimed at all land owners The money would be used to pay off debts and help pay for the creation of a national conscripted military The land tax was developed to be a stable tax which would not change as readily as a tax on commodities E.H

Norman in 1909 wrote:

The three basic principles of the land tax were: (1) whereas formerly the norm for tax payment had been the harvest, now it was to be the value of land; (2) the rate of taxation was to be 3 per cent of the land value (reduced in 1876 for a short time to 2% per cent) with no increase or decrease for good or bad years, and adjustment possible under the paternalistic feudal regime; (3) the tax was to be collected in money, not as formerly in kind.2

The land tax altered the class structure in the country Samurai within Japan were taxed the most because they were landowners The land tax weakened the samurai class and placed them under government legal and financial control This tax also strengthened the government, because it brought in much needed revenue

A second major reform that would strengthen central state power was the abolition of the four-class system This was a high priority for the Meiji

government because the elimination of descriptive class boundaries would allow the Meiji government to increase central government control over society The

2 E.H Norman, Origins of the Modern Japanese State; Selected Writings of E.H