Economic History of Japan and Korea: Industrialization and Crisis

The Meiji Restoration and Early Japanese Industrialization

The Meiji Restoration is a critical period in Japanese history in several respects — economic, industrial, technological, and cultural. It is not a single event but rather a series of transitions out of several key cultural and social structures. "Meiji" is the Japanese word for "enlightened rule." The goal of the Meiji period, beginning in 1868, was to combine "western advances" with "eastern values" — a goal that continues to shape Japanese culture today.

Japan, both geographically and culturally isolated, was stunned by the advances of the West when Commodore Matthew C. Perry arrived seeking to negotiate a treaty. Rather than racing simply to catch up with Western technology, Japan's leaders made a far more effective decision: they would absorb advanced foreign technology and adapt it to Japanese values and practices. Perry's arrival signaled the end of the Shogunate and the return of the Emperor. An Imperial Army was established and there was no longer a place for the Samurai. War broke out and eventually ceased. These were massive shifts in Japanese culture and political structure compressed into a short period of time.

These cultural and political shifts produced a corresponding shift in perspective — Japan was rethinking its own place in the world and how the world perceived it. The result was an industrial boom, particularly in technology and military production. By embracing foreign advances while filtering them through Japanese sensibilities, the Meiji period laid the foundation for Japan's early and sustained industrialization.

Japan's Postwar Growth and Its Conjunctural Foundations, 1950–1973

There were specific conditions that contributed to Japan's unprecedented economic growth between 1950 and 1973. Makoto Itoh identifies several key conditions that made this growth possible, while also explaining why it could not be sustained indefinitely. For Itoh, those conditions were: a favorable international market, relatively cheap and docile labor, the availability of new technologies, and favorable terms of trade. Together, these conditions characterized the atmosphere of the 1950s and 1960s, during which Japan achieved average annual growth of nearly 8%. These factors created short-term stability in the Japanese economy. By the mid-1970s, however, the economy destabilized more than once and experienced significant fluctuations, with inflation emerging as a central concern.

Before those fluctuations, the 1950–1973 period represented Japan's era as an economic star. There was an abundance of new technology from America to import and improve upon. The United States experienced a prolonged economic expansion after World War II and into the Vietnam War era, generating a surplus of goods available for Japanese import and improvement. Domestic consumption in Japan increased, and low oil prices kept this expansion affordable. Growth in industrial employment drew workers away from agriculture, and a surplus of labor sustained the workforce needed to drive Japan's expansion. The widespread adoption of lifetime employment further stabilized this workforce. The combination of these elements, and their particular timing, set the stage for Japan's period of super-growth from 1950 to 1973, as described by Makoto Itoh.

As the growth period of 1950–1973 in Japan was linked to growth in the United States, so too were the patterns of growth between 1975 and 1985 connected across both countries. The bond between the two economies had been forged — or at least significantly deepened — through their interactions during and after World War II.

According to Makoto Itoh, Japan experienced substantial economic recovery and growth during this period due to a surge in exports to the United States. In the 1970s and 1980s, American consumers developed a growing fascination with Japanese culture and commodities. This interest manifested in product consumption and cultural references. As the United States recovered from the economic pressures of Reaganomics in the early and mid-1980s, Japan's economy boomed again in response to an exponential rise in exports. The relationship was highly symmetrical: when the U.S. economy receded, Japan's receded; when the U.S. surged, Japan surged.

Japan's Economic Stagnation and Deflation After 1991

"Late industrializers" are the people and countries that participate in what is called "late industrialization." This term describes a specific type of cultural and economic expansion experienced by countries including South Korea, Japan, Taiwan, Brazil, and India. Late industrialization can be thought of as a form of piggyback industrialization, in which the focus of manufacturing and industry is built upon borrowed or foreign technology. Countries engaged in late industrialization take technology developed elsewhere, then incrementally improve both the quality and efficiency of that technology and the processes used to produce it. The resulting products are guaranteed a broad consumer base because demand has already been established by earlier global leaders. Consumers are likely to adopt a newer, improved version of a product they already prefer and, in turn, are more likely to purchase other products from the company that improved their favorites. In this way, late industrializers deepen existing markets — increasing competition and profit — and eventually expand into new markets through innovation.

Maintaining low wages is an important component of the success of late industrialization. When labor costs in industry rise, those industries become vulnerable to competition from countries with even lower wages. South Korea underwent late industrialization following a political shift, just as Japan did. Political transformation is frequently a precondition for late industrialization. The process unfolds slowly in some countries and more rapidly in others; Japan's path has been longer, while South Korea's transformation has been more compressed and dramatic.

Korea's rapid development and industrialization came during and after a period of profound political change. Following the Korean War, the government sought to revitalize the economy and build domestic industry. Several key policy changes were enacted to give selected firms a strong start in targeted industries. Two crucial policies during this period were import-substitution industrialization (ISI) and export promotion (EP). ISI allowed government-selected firms in targeted industries to borrow foreign currency and access domestic funds at preferential rates — effectively enabling them to import advanced technologies, improve upon them, and produce them domestically for export. EP gave firms access to low-interest loans and broadened their relationships with global markets. Efficiency increased, production rose, and South Korea achieved extraordinary economic leaps within a few decades.