INSIDE THE BLACK BOX OF INSTITUTION 　　　 – AN INSTITUTIONAL ANALYSIS OF JAPAN’S DEVELOPMENT BANK, PRIVATE SECTOR AND LABOR

Go ShimadaSenior Research Fellow, JICA Research InstituteVisiting Scholar, Columbia UniversityAdjunct Researcher, Waseda University

INSTITUTION – WHY? Even though development banks have

received a negative assessment, this is contradicted by what we know of successful cases, such as Japan, South Korea, China and Brazil, among others.

A significant portion of past literature has singled out the importance of institution (e.g., World Bank 1993; Vittas and Cho 1996).

THE WORLD BANK (1993:358)

“[Rapid grow economies such as Japan, Korea, Taiwan and China] had competent and insulated bureaucracies and banks to select and monitor projects, and each applied export performance as the main yardstick for credit allocation … Few developing economies today have the institutional resources to consistently impose performance based criteria for credit allocation.”

WHAT IS INSTITUTION?

Institutions include a variety of actors that form a society by interacting with each other through formal (e.g., legal) and informal (e.g., traditional rules and social norms) structures (North 1990; Olson 1982).

Ostrom (2005) defines institutions as rule-structured situations, which assist individuals to act collectively as communities or networks to tackle the problems they face. The rule of law and court systems reduce uncertainty and transaction costs, such in the case of a contract.

INSTITUTION FOR INDUSTRIAL POLICY - IN THE CASE OF JAPAN

Network, Long-term transaction and Trust

•Market Failures-Reduce transaction cost -risk co-sharing•Division of roles•Positive externalities

STAKEHOLDERS

PATH DEPENDENCE

(Source: Modified by the author based on Sydow and Koch 2009: 692)

1945–1951 (post-WWII to establishment of the

Japan Development Bank

Pre-formation Period Formation Period (1952-1970s)

Lock-in Phase (Since 1980s)

Five KEY CONCEPTS

1. Autonomy of the JDB2. High appraisal capacity of the JDB3. Complementarity among sectors

(Horizontal and Vertical)4. Inclusive and Decentralized PPP5. Labor-Management relationship

THE GENESIS

RECONSTRUCTION FINANCE BANK (RFB)

PRIORITY PRODUCTION SYSTEM

• 1947 RFB is established• Hyper-inflation due to short

supply of goods• Policy priority: Production

increase

• There was no coal available for industrial production.

• Allocate necessary resources to produce coal (70% of the RFB finances went to this sector alone).

• With increased production of coal, basic goods, fertilizer and electricity were produced.

• Further enhance the production of coal.

1. CRITICAL JUNCTURE TO AUTONOMY - SHOWA DENKO SCANDAL

• Bribery Scandal in 1948 (Showa Denko Scandal)• Politicians and Senior Bureaucrats were arrested.• The RFB was abolished in 1949.

• The RFB had weak autonomy. Outside organizations could intervene in the decision-making process of loan appraisal.

• The REB (1950) also looked back: “RFB was a policy implementation organization rather than a financial institution.”

• In 1951, the Japan Development Bank (JDB) was established with strong autonomy from political forces.

• Self finance principle

2. HIGH APPRAISAL CAPACITY - SELF-FINANCE PRINCIPLE

Low default record (0.01%) = considered to have high appraisal capacity.

JDB’s loan decision was considered to be non-biased (reliable).

Became “Signal” for Private banks and companies (lower the risk of providing loan).

High appraisal capacity The JDB retained all the

staff members who wished to stay (utilized knowledge and experiences of the RFB).

All senior management (above the level of division director (Kacho)) was newly installed from outside (Bank of Japan, Hypothec Bank (Kangyo Ginko), Industrial Bank of Japan).

3. COMPLEMENTARITY (1/2)- JDB AS A PART OF INDUSTRIAL POLICY

The JDB loan is provided as a part of industrial policy Complementarity: Horizontal and Vertical Spillover

Industrial Policy

Mutual benefits and Crowding-in effects among sectors (Iron, Coal, Ship building, Electricity, Infrastructure)

Spillover to supporting industries industries (SMEs)

(Source: Author)

3. COMPLEMENTARITY (2/2)- JDB AS A PART OF INDUSTRIAL POLICY

Transition to Private Banks (Exit Policy) One lesson from the

failure of the RFB Crowding-in effect to

private banks The JDB steps aside

once private funds are ready to finance them

4. INCLUSIVE AND DECENTRALIZED PPP Changing the nature of the PPP

Before (exclusive) After (Inclusive) 25,000 tons of steel

- Infrastructure- Coordination

between steel industry and shipping industry

- Steel became competitive

- Machine industry also became competitive

5. LABOR AND MANAGEMENT RELATIONSHIP

The GHQ policy: Japan transitions to a non-autocratic and non-

military country1. Dissolution of conglomerate (believed to

support Japan’s militarism)2. Promote SMEs

1947 SME agency 1947 Antimonopoly law 1949 National Finance Corporation 1953 Japan Finance Corporation for Small and Medium

Enterprises

3. Support Labor movement

LABOR AND MANAGEMENT RELATIONSHIP Soon after the war, the GHQ released Communist

leaders from prison to liberate Japan. However, the labor movement became too active

and combative, and spread all over Japan. In 1946, more than 300,000 workers joined a strike. International relations: Cold War and establishment

of China (1949) Marshall Plan and Point Four Program: US assisted

productivity movements in Europe and then Japan.

LABOR AND MANAGEMENT RELATIONSHIP

Aid from the US: 1955–1961(3,986 people were invited to visit US factories)

After 1961, Japan continued to send missions to the US, reaching 6,072 people in 1965.

In 1955, the Japan Productivity Center (JPC) was established to receive aid from the US; however, labor union was against the movement.

The JPC issued three guiding principles: 1. Expansion of employment2. Cooperation between labor and management3. Fair distribution of the fruits of productivity

Gini: 0.31 in 1963 to 0.25 in 1971

INSTITUTIONAL CHANGE

  Resistance for change of the institution

Status-quo orientation in the politics

  Strong Weak

Strong Drift Conversion

Weak Layering Displacement

(Source: Amended based on Kitayama (2011: 54) by author)

DOS AND DON’TS

Key concepts

1. Autonomy of the JDB

2. High appraisal capacity of the JDB

3. Complementarity among sectors (Horizontal and Vertical)

4. Inclusive and Decentralized PPP

5. Long-term transaction among stakeholders

6. Labor-Management relationship

Fundamental factors

Autonomy Network inside the

institution Reduce transaction

cost Risk co-sharing Clear division of

labor (exit policy) Shared prosperity

LOCK-IN AND UNIQUE ASPECT

Lock-in (after 1980s) The same institution could not respond to the

changing economic environment. Needs structural change to revive the institution’s

dynamic nature. Unique aspect

Some aspects of institution are too specific to Japan Low human mobility = High loyalty to organization Too decentralized decision-making process (bureau

pluralism, QC circle, etc.)

The way to strengthen the institution is to utilize the context of the country and the Institution.

Thank you for attention!