Industrial policy and productivity: The case of import quota removal during post-war Japan

Kozo Kiyota, Tetsuji Okazaki 06 January 2014

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Quantifying the effects of industrial policies is one of the most important research issues in various fields of economics.1 One of the most controversial industrial policies is the Japanese policy during the post-war period.2 The controversy arises because the success of some of the Japanese industrial policies has been used to justify targeting policies in other countries, including the US.3 Accordingly, several studies have attempted to quantify the effects of Japanese industrial policy (e.g., Beason and Weinstein 1996, Kiyota and Okazaki 2005, 2010). From these studies we have learned that, although Japanese industrial policy may have contributed to the growth of labour productivity, it did not contribute to the growth of total factor productivity (TFP).

Even though these previous studies are insightful, there is some room for improvement. For example, Beason and Weinstein (1996) utilised relatively aggregated industry-level data (13 manufacturing industries), which makes it difficult to control for heterogeneity within those aggregated industries, despite the fact that targeting was conducted at a detailed industry level. In Kiyota and Okazaki (2005) we utilised firm-level data, but the industrial policy we focused on was implemented at a specific point in time, which means that time variation was not exploited. In Kiyota and Okazaki (2010) we also utilised different firm-level data and identified the government control at the firm level. However, the analysis is limited in scope in the sense that the focus was only on the cotton spinning industry.

Building upon these studies, we attempt to provide a more systematic analysis of the effects of industrial policy in post-war Japan (Kiyota and Okazaki 2013). Among various types of Japanese industrial policy, we focus on the removal of de facto import quotas through the foreign exchange allocation system.4 The de facto import quotas through the foreign exchange allocation system were utilised as a powerful tool for industrial policy in the 1950s; hence, their removal was supposed to have a substantial impact on industries, and this became an important industrial policy issue. The timing of the quota removal varied across industries, implying both time and cross-sectional variations within and across industries.5 It is remarkable that we can precisely identify the timing of the quota removal for each commodity, using original documents of the Ministry of International Trade and Industry (MITI). Moreover, we utilise detailed industry-level data from the Census of Manufactures, matching the information on trade protection (i.e. tariff rates and import quotas). This enables controlling for industry heterogeneity while covering the majority of manufacturing industries, and thereby overcoming the problems of the previous studies.

Several studies have discussed the removal of import quotas during the post-war period in Japan. For example, Itoh and Kiyono (1988) and Nakakita (1993) emphasised the positive effects of quota removal, using a simple descriptive analysis, and this view has been widely accepted. However, it is problematic because the period of the quota removal coincided with one of high economic growth in Japan. The arguments given in previous studies may be attributable to the spurious correlation between the quota removal and economic growth. To control for factors other than the quota removal, more careful quantitative analysis is needed.

Evidence

To examine the effects of quota removal, we follow the empirical framework of Head and Ries (1999). Their study tested whether or not the observed trends in output per plant and the number of plants are systematically related to tariff reductions in Canada, using industry-level data. They found that output increased while the number of establishments decreased in the Canadian manufacturing sector after trade liberalisation. Their result indicates that a smaller number of establishments began to produce at a larger scale after trade liberalisation, which they called the “rationalisation effect.”

We ask whether or not such effects are observable for the 1960–69 period in Japan, when de facto import quotas were removed, using a panel of 100 manufacturing industries. The statistical analysis revealed that the effects of the quota removal on productivity were limited although significantly positive, and took time to appear. On the other hand, the effects of tariffs on labour productivity were signed negative but insignificant. In the sample, the “rationalisation effect” did not exist.

One possible reason for this is that the Japanese government increased tariff rates before removing import quotas, and maintained high tariff rates afterward. Several studies such as Itoh and Kiyono (1984) and Nakakita (1993) emphasised the positive effects of the quota removal on the growth of the Japanese economy. However, the effects of that policy might be smaller than has been widely believed in the Japanese economic history literature. The Japanese government intended to mitigate negative impacts of quota removal on less competitive industries and firms by raising tariffs, which curtailed a positive “rationalisation effect.”

Editor's Note: The main research on which this column is based (Kiyota and Okazaki 2013) first appeared as a Discussion Paper of the Research Institute of Economy, Trade and Industry (RIETI) of Japan.

References

Beason, R and D E Weinstein (1996) ,"Growth, Economies of Scale, and Targeting in Japan (1955-1990)", Review of Economics and Statistics 78(2), pp. 286-295.

Head, K and J Ries (1999), "Rationalization Effects of Tariff Reductions," Journal of International Economics 47(2), pp. 295-320.

Ito, M and K Kiyono (1988), "Foreign Trade and Direct Investment," in Industrial Policy of Japan, 155-181, edited by Ryutaro Komiya, Masahiro Okuno-Fujiwara and Kotaro Suzumura, San Diego, CA: Academic Press.

Kiyota, K and T Okazaki (2005), "Foreign Technology Acquisition Policy and Firm Performance in Japan, 1957-1970", International Journal of Industrial Organization 23(7-8), pp. 563-586.

Kiyota, K and T Okazaki (2010), "Industrial Policy Cuts Two Ways: Evidence from Cotton Spinning Firms in Japan", Journal of Law and Economics 53(3), pp. 587-609.

Kiyota, K and T Okazaki (2013), "Effects of Industrial Policy on Productivity: The case of import quota removal during postwar Japan," Discussion Paper No. 13093, Research Institute of Economy, Trade and Industry (RIETI).

Nakakita, T (1993), "Boeki to Shihon no Jiyuuka Seisaku (Trade and Capital Liberalization Policy)," in Sengo Nihon no Keizai Kaikaku – Shijyo to Seifu (Economic Reform in Post-war Japan: Market and Government), 275-306, edited by Y Kosai and J Teranishi, Tokyo: University of Tokyo Press (in Japanese).

Noland, M and H Pack (2003), Industrial Policy in an Era of Globalization: Lessons from Asia, Washington, D.C.: Peterson Institute.


1 This includes industrial organization, international economics, development economics, and economic history (Noland and Pack 2003).
2 The Japanese government implemented an industrial policy to control international trade, investment, technology imports, and foreign exchange (Noland and Pack 2003, pp. 23–37).
3 “In fact, it is the success of Japanese targeting that is often used as the justification for targeting in the United States.” (Beason and Weinstein 1996, p. 286).
4 The effects of trade protection (or trade liberalization) are important issues not only in the literature on international trade but also on economic history. See, for example, Grant and Thille (2001), Irwin (2007), and Davis and Irwin (2008).
5 In this paper, the year when import quotas were removed is defined as the year when protection by de facto import quotas through the foreign exchange allocation system was removed.
 

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Topics:  Industrial organisation International trade

Tags:  tariffs, Japan, industrial policy, quotas

Professor of Economics at the Keio Economic Observatory, Keio University; Faculty Fellow, RIETI

Professor at the Graduate School of Economics, University of Tokyo and Faculty Fellow, RIETI