Business Groups and the Big Push: Meiji Japan’s Mass Privatization and Subsequent Growth

Assignment: Summarize the main points. How convincing do you find the paper?
This paper discusses how and by whom a so-called “Big Push” should be operated. A big push is a flood of state-controlled investment across all sectors, sparking off industry (micro level) and economic (macro level) growth. It argues that a state-run big push is likely to fail and instead, pyramidal business groups can coordinate such a big push overall and more efficient. Japan is chosen as the example of such a business-coordinated big push success.
The authors argue that nowadays we know that intensive state intervention leads to political rent-seeking, whereas investments go into productive projects which can accelerate economic growth and progress, opposite to rent-seeking. It is therefore likely that an elite will try to take advantage of, or influence governmental decisions and investments.
The main argument for a state-run big push is the issue of hold-up problems: In order to develop complementary industries, investors need to be certain of the demand from complementary industries when they’ve built their industry. Sometimes even subsidizing one with the help of the other is needed. Since that seems normally not to be the case, state-run intervention is called for.
That explanation was the state-of-the-art-model to coordinate a big push. Japan undertook the following and ended up – as already mentioned – through government failure in a financial crisis. As a result, the prior created state-owned enterprises (SOE) were mass-privatized. Wealthy families and entrepreneurs bought those and in turn, built up zaibatsu, large diversified pyramidal groups of listed firms.
Within those structures, an apex family firm controlled a first tier of listed firms, each of which controlled other listed firms, and so on. That had several advantages: In terms of e.g. lawsuits, those firms where independent of each other. Another advantage was the centralized control, under which investments could be channeled from one business area to the other, thus providing vital funds (i.e. subsidies) to firms that still needed to be developed (e.g. complementary industries). Therefore, hold-up problems were resolved and the overall Japanese industry grew fast. Competition between those zaibatsu also ensured that decisions were taken efficiently, which led to Japan entering a high-grow era and catching up with the Western world. It was the private business that coordinated and managed the big push due to a very weak government in several points in time.
Exceptional is the role of Japans government throughout this time: Before its state-run big push, Japan underwent great changes, which marginalized the elite and sparked off growth. After the government’s failure, due to rent-seeking, etc., the business world was left alone and the zaibatsu brought the big push into completion. They were then marginalized by the military and the USA, so economic growth would not be hampered. That is what distinguishes Japan from other nations, which could not complete such a big push, since dislodging elites is always very difficult to do so.
The authors therefore suggest re-thinking the role of private business groups in terms of organizing a big push rather than the government. The highly industrially diversified pyramidal structure common to business groups permits the shareholder to coordinate growth across diverse complementary industries and with several structures doing so, to sparking off a big push. If the countries’ elites can be marginalized, business groups emerge to propel the big push and upon completion, shareholders can be marginalized as well, the authors state that a big push can be successfully completed without the government’s coordination, thus ruling out rent-seeking problems. Further, the government should focus on the supply of public goods like education, a law-system, etc.
In my eyes, there is one point that is unclear: A government-run big push has a certain aim, e.g. fostering growth in certain or all industries. However, if those conditions, as suggested by the authors, are installed, no one can guarantee that a big push will actually happen. It is therefore not a direct process that leads to a certain outcome, but rather a chance that is given, to provoke a certain outcome, which however must remain uncertain. Business groups could rather concentrate on fighting against each other leading to a vicious circle in which case the state-run big push would have been more successful.
Furthermore, if the government remains weak, as suggested, then that does not lead to economic efficiency in those business groups’ interactions (only the strongest survive, etc.), as stated in the article. For example, resources could be used to uphold a monopoly instead of competing in that business area with several other firms, which would probably be more efficient. That however would call for a stronger government, implementing anti-trust acts, which however is not wanted by the authors, since they stated that during a big push, the government should avoid to intervene in the economy.
It makes good sense to dislodge the country’s elites in order to avoid rent-seeking or corruption, but that actually assumes, which is not explicitly stated by the authors, that a stronger force can actually manage to marginalize those elites without leading the country into war and that it can implement rules that will actually be helpful to economic growth. That may be given in the case of Japan and the USA, but if we wanted to proceed to Greece, for instance, that would probably not work.
Personally, I think this question is of great importance, since we see and will see lots of big pushes going on within the next 5-10 years (South Africa, South Korea, etc.) and different approaches are gone (e.g. China vs. Brazil) in order to reach the very same outcome (economic growth, a higher standard of living, rising productivity, etc.). I, however, highly doubt that the special case of Japan can be regarded as a general model, since probably only in African countries elites can still be chased away by foreign powers. It provides nevertheless a thoughtfully described analysis of the events that led to progress and setback of the big push in Japan.