(International Political Economy Series) Xiaoming Huang (Eds.) - Modern Economic Development in Japan and China_ Developmentalism, Capitalism, And the World Economic System-Palgrave Macmillan UK (2013

International Political Economy Series
Series Editor: Timothy M. Shaw, Visiting Professor, University of Massachusetts

Boston, USA and Emeritus Professor, University of London, UK
The global political economy is in flux as a series of cumulative crises impacts its
organization and governance. The IPE series has tracked its development in both
analysis and structure over the last three decades. It has always had a concentra-
tion on the global South. Now the South increasingly challenges the North as the
centre of development, also reflected in a growing number of submissions and
publications on indebted Eurozone economies in Southern Europe.
An indispensable resource for scholars and researchers, the series examines a variety
of capitalisms and connections by focusing on emerging economies, companies
and sectors, debates and policies. It informs diverse policy communities as the
established trans-Atlantic North declines and ‘the rest’, especially the BRICS, rise.
Titles include:
Xiaoming Huang (editor)
MODERN ECONOMIC DEVELOPMENT IN JAPAN AND CHINA
Developmentalism, Capitalism and the World Economic System
Bonnie K. Campbell (editor)
MODES OF GOVERNANCE AND REVENUE FLOWS OF AFRICAN MINING
Gopinath Pillai (editor)
THE POLITICAL ECONOMY OF SOUTH ASIAN DIASPORA
Patterns of Socio-Economic Influence
Rachel K. Brickner (editor)
MIGRATION, GLOBALIZATION AND THE STATE
Juanita Elias and Samanthi Gunawardana (editors)
THE GLOBAL POLITICAL ECONOMY OF THE HOUSEHOLD IN ASIA
Tony Heron
PATHWAYS FROM PREFERENTIAL TRADE
The Politics of Trade Adjustment in Africa, the Caribbean and Pacific
David J. Hornsby
RISK REGULATION, SCIENCE AND INTERESTS IN TRANSATLANTIC TRADE
CONFLICTS
Yang Jiang
CHINA’S POLICYMAKING FOR REGIONAL ECONOMIC COOPERATION
Martin Geiger, Antoine Pécoud (editors)
DISCIPLINING THE TRANSNATIONAL MOBILITY OF PEOPLE
Michael Breen
THE POLITICS OF IMF LENDING
Laura Carsten Mahrenbach
THE TRADE POLICY OF EMERGING POWERS
Strategic Choices of Brazil and India
Vassilis K. Fouskas and Constantine Dimoulas
GREECE, FINANCIALIZATION AND THE EU
The Political Economy of Debt and Destruction
Hany Besada and Shannon Kindornay (editors)
MULTILATERAL DEVELOPMENT COOPERATION IN A CHANGING GLOBAL
ORDER
Caroline Kuzemko
THE ENERGY- SECURITY CLIMATE NEXUS
Hans Löfgren and Owain David Williams (editors)
THE NEW POLITICAL ECONOMY OF PHARMACEUTICALS
Production, Innnovation and TRIPS in the Global South
Timothy Cadman (editor)
CLIMATE CHANGE AND GLOBAL POLICY REGIMES
Towards Institutional Legitimacy
Ian Hudson, Mark Hudson and Mara Fridell
FAIR TRADE, SUSTAINABILITY AND SOCIAL CHANGE
Andrés Rivarola Puntigliano and José Briceño-Ruiz (editors)
RESILIENCE OF REGIONALISM IN LATIN AMERICA AND THE CARIBBEAN
Development and Autonomy
Godfrey Baldacchino (editor)
THE POLITICAL ECONOMY OF DIVIDED ISLANDS
Unified Geographies, Multiple Polities
Mark Findlay
CONTEMPORARY CHALLENGES IN REGULATING GLOBAL CRISES
Helen Hawthorne
LEAST DEVELOPED COUNTRIES AND THE WTO
Special Treatment in Trade
Nir Kshetri
CYBERCRIME AND CYBERSECURITY IN THE GLOBAL SOUTH
Kristian Stokke and Olle Törnquist (editors)
DEMOCRATIZATION IN THE GLOBAL SOUTH
The Importance of Transformative Politics
Jeffrey D. Wilson
GOVERNING GLOBAL PRODUCTION
Resource Networks in the Asia-Pacific Steel Industry
International Political Economy Series

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Modern Economic
Development in
Japan and China
Developmentalism, Capitalism, and the
World Economic System
Edited by
Xiaoming Huang
Victoria University of Wellington, New Zealand
palgrave
macmillan
Editorial matter, selection, introduction and conclusion © Xiaoming Huang
2013
Remaining chapters © Respective authors 2013
Softcover reprint of the hardcover 1st edition 2013 978-1-137-32307-1
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Contents
List of Illustrations viii
Notes on Contributors xi
List of Abbreviations xv
1 Modern Economic Development in Time and Place:

Why Japan and China? 1
Xiaoming Huang
2 Mapping Japan and China in the World Economic System 10

Xiaoming Huang
1 Japan and China 11
2 The shaping of modern world capitalism 26
3 Japan, China, and the East Asian model 29
4 Mapping Japan and China in the world economic system 34
3 Dynamic Comparative Advantage and the Evolution of the

Capitalist World System 37
Nobuharu Yokokawa
1 Introduction 37
2 Dynamic comparative advantage 38
3 Minsky’s ﬁnancial instability hypothesis and
super Minsky cycle 46
4 The rise and fall of the golden age and catching-up
industrialization 47
5 The structural crisis of bureaucratic capitalism 51
6 Diversiﬁcation of bureaucratic capitalism 55
7 The fall of the neoliberal capital accumulation regime 61
8 Conclusion 65
4 Neoliberal and Classical Developmentalism: A Comparative

Analysis of the Chinese and Japanese Models of Economic
Development 68
Bai Gao
1 Japan’s classical developmentalism 69
2 China’s neoliberal developmentalism 72
v
vi Contents
3 Comparative analysis of the two development models 75

4 The global conditions of time and place for the classical
and neoliberal development models 84
5 The historical origins of China’s neoliberal
development model 91
6 Challenges in transformation of China’s economic model 94
7 Conclusion 97
5 Chinese Developmentalism: Beyond the Japanese Model 98

Marc Lanteigne
1 China considers globalization 98
2 Models for Chinese growth 100
3 China adapts to developmentalism 103
4 Beyond developmentalism: The Beijing consensus 110
5 The challenges ahead for China 114
6 Japan’s FDI and the Development of the Automobile Industry

in China: Firms, Production Structure, and Government 118
Katsuhiro Sasuga
1 Introduction 118
2 The global shift of automobile production 119
3 Chinese automobile industrial policy 122
4 Automobile FDI and the Chinese government 126
5 Japanese automobile FDI and Chinese local government 130
6 The Japanese automobile industry and China’s trade 135
7 Japanese suppliers in the Chinese automobile industry 137
8 Conclusion 141
7 Development Models and External Constraints: From the

Structural Impediments Initiative to Global Imbalances 145
Ben Thirkell-White
1 Global imbalances and the international political
economy of “Asian Capitalism” 147
2 Foreign pressure and adjustment in Japan 153
3 China, the United States, and global imbalances 159
4 Conclusion 170
8 Rural–Urban Divide and the Lewisian Turning Point in

Japan and China 172
Katsuji Nakagane
1 Introduction 172
Contents vii
2 The debate on the Lewis turning point 173

3 The turning point in Japan 176
4 China’s performance in terms of rural–urban comparison 181
5 Shaping of the rural–urban divide in China 185
6 Concluding remarks 189
9 The Forgotten Sector: Institutions, Market Linkages, and

Concurrent Growth in Rural China and Japan 192
Jason Young
1 Introduction 192
2 How does agriculture contribute to economic growth? 193
3 Agriculture and the rural economy in China and Japan 197
4 Institutional arrangements underpinning concurrent
growth 207
5 Agriculture and the rural economy in comparative
perspective 211
10 Beyond Ideological Framing and Structural Description:

Theorizing Japanese and Chinese Economic Models 213
Lei Song and Yanbing Zhang
1 Introduction 213
2 The ambiguous “Chinese Model of
Economic Development” 216
3 Theory-building of the Japanese economic model 220
4 Discussion and conclusion 226
11 Conclusion: China and Japan as Instances of Modern

Economic Development 230
Xiaoming Huang
1 The point of comparison 230
2 Points of comparison 232
3 Findings 235
4 Japan and China as instances of the rise and
expansion of the modern world economy 243
Bibliography 247
Index 267
List of Illustrations
Tables
3.1 Periods of capitalist world systems 43

3.2 Shares in Chinese goods trade 63
4.1 Institutions and mechanisms of Japan’s high-growth
economy 71
4.2 Institutions and mechanisms of China’s economic growth 73
4.3 Strengths and weaknesses of the two development models 75
4.4 Foreign direct investment as a portion of sales and
profits in the Japanese economy 77
4.5 Foreign direct investment as a proportion of the Japanese
economy 77
4.6 Levels of economic openness of China and Japan 79
4.7 Views of world’s most commercially attractive areas 80
4.8 Foreign companies in China’s auto industry 82
4.9 China’s GDP and GNI 83
4.10 The effect of globalization on two types of
development model 85
4.11 Government foreign policy change 89
4.12 Traditions of China’s foreign economic relations 91
4.13 Challenges in transformation of the two development
models 95
6.1 Automobile companies ranked by production 121
6.2 Major markets for the Japanese big three 134
8.1 Engel coefficients in Japan 179
8.2 Holdings of electric appliances in Japan 180
8.3 Infant mortality rates in Japan 180
8.4 Protein intake by Japanese households 181
8.5 Share of primary industry in Japan 181
8.6 Engel coefficients in China 183
8.7 Holdings of electric appliances in China 184
8.8 Infant mortality rates in China 185
8.9 Share of primary industry in China 185
9.1 Origins of Chinese institutional dualism 209
viii
List of Illustrations ix
Figures
2.1 Real GDP and GDP per capita growth: Japan and China 14
2.2 Institutions of market economy: China and Japan 16
2.3 Institutions of market economy: China and
Japan – size of government 17
2.4 Institutions of market economy: China and Japan – legal
structure 17
2.5 Institutions of market economy: China and Japan – access
to good money 18
Japan – freedom to trade internationally 18
Japan – regulation of credit, labor, and business 19
2.8 Labor productivity: Japan and China 20
2.9 Gross capital formation: Japan and China 20
2.10 FDI net outflows as % of GDP: Japan and China 21
2.11 FDI net inflows as % of GDP: Japan and China 21
2.12 Agriculture, value added as % of GDP: Japan and China 22
2.13 Manufacturing, value added as % of GDP: Japan and China 23
2.14 Services, value added as % of GDP: Japan and China 23
2.15 Trade as % of GDP: Japan and China 24
2.16 Government effectiveness: Japan and China 25
2.17 Regulatory quality: Japan and China 26
2.18 Voice and accountability: Japan and China 26
2.19 Political stability and no violence: Japan and China 27
2.20 Rule of law: Japan and China 27
2.21 Control of corruption: Japan and China 28
2.22 Real GDP and GDP per capita growth:
Japan, China, and Europe 28
2.23 Real GDP growth: Japan, China, Asia 30
2.24 Level of marketization and quality of market institutions:
Japan and China 31
2.25 Voice and accountability: Japan and China 31
2.26 Political stability and no violence: Japan and China 32
2.27 Government effectiveness: Japan and China 32
2.28 Regulatory quality: Japan and China 33
2.29 Rule of law: Japan and China 33
2.30 Control of corruption: Japan and China 34
3.1 Dynamic industries and VAL 39
3.2 Basic Minsky cycle 46
x List of Illustrations
3.3 Super Minsky cycle 47

3.4 Export competitiveness of Japanese industries 48
3.5 Yuan exchange rate 61
3.6 Trade shares in Chinese goods trade 64
4.1 FDI net inflows to China 78
4.2 China imports and exports 78
4.3 Current foreign locations of R&D in the UNCTAD survey 81
4.4 Most attractive locations for future foreign R&D in the
UNCTAD survey 81
4.5 The institutional progress of globalization 84
4.6 TNC’s perception of the global investment climate 90
4.7 Investment policy measures to attract FDI: responses by IPAs 90
8.1 Surplus ratio of agricultural labor by province 175
8.2 Income disparities between rural and urban
households in Japan 177
8.3 Urban–rural income ratio in China 182
9.1 Relative decline of agriculture in China and Japan 199
9.2 Japan total, urban and rural population 200
9.3 China total, urban and rural population 201
9.4 Percentage of population rural in China and Japan 201
9.5 Percentage of total employed in agriculture 202
9.6 Percentage of each type of tax to total tax intake in Japan 204
Notes on Contributors
Bai Gao is Professor of Sociology at Duke University. He received his BA

in Japanese Language and Literature in 1983, and MA in Comparative
Higher Education in 1986 from Peking University. He received an MA in
1990 and a PhD in Sociology in 1994 from Princeton University. Before
leaving for the United States, he worked as a research fellow at Peking
University. He has also worked as visiting scholar at the University of
Tokyo, Hitotsubashi University, the Yokohama National University, and
the Max Planck Institute for Studies of Societies, Cologne. He has served
as a guest professor at the University of Tokyo, Meiji University, Shanghai
University of Finance and Economics, and Shanghai University. His
areas of research interest are economic sociology, globalization, compar-
ative historical sociology, comparative political economy, and interna-
tional political economy. He is the author of Japan’s Economic Dilemma:
The Institutional Origins of Prosperity and Stagnation (2001), and Economic
Ideology and Japanese Industrial Policy: Developmentalism from 1931 to
1965 (2002).
Xiaoming Huang is Professor of International Relations at the Victoria

University of Wellington, New Zealand, and Director of the New Zealand
Contemporary China Research Centre. Professor Huang received his PhD
in International Relations from the University of Southern California,
and BA and MA in International Relations from Peking University.
Professor Huang teaches international relations at Victoria University. He
researches and publishes on East Asia’s political economy, modern devel-
opment of China, and international relations of East Asia. His publica-
tions have appeared in journals such as International Studies Quarterly,
Journal of International Relations and Development, Journal of the Asia-Pacific
Economy. He is the author of The Political and Economic Transition in East
Asia: Strong Market and Weakening State (2001); The Rise and Fall of the
East Asian Growth System: Institutional Competitiveness and Rapid Economic
Growth (2005); Politics in Pacific Asia (2009); China and India: The End of
Development Models (2011), and China and the International System (2013).
Professor Huang is Editor of International Studies Perspectives.
Marc Lanteigne is Senior Lecturer at the School of History, Philosophy,
and Political Science and International Relations, Victoria University
xi
xii Notes on Contributors
of Wellington. He is also a Senior Research Fellow at the New Zealand

Contemporary China Research Centre at the University. Originally
from Montréal, he taught at McGill University and assumed the posi-
tion of Assistant Professor at Dalhousie University in Halifax and subse-
quently Lecturer at the School of International Relations, University
of St Andrews, Scotland, before coming to Victoria University in 2010.
His research focuses on the rise of China as a strategic and economic
power as well as its evolving interactions and engagements with inter-
national organizations and regimes. His regional interests currently lie
in Northeast Asia and South Pacific regional and international relations.
He is the author of China and International Institutions: Alternate Paths
to Global Power and Chinese Foreign Policy as well as several articles on
Chinese and Asian international relations.
Sasuga Katsuhiro is Associate Professor in the Department of International

Studies, School of Humanities and Cultures, Tokai University (Kanagawa,
Japan). His research interests are broadly in the study of international
political economy, with a focus on globalization and regionalization in
East Asia, theories of new regionalism, issues of governance and links
between political economy and economic sociology, and cross-border
production networks in East Asia. Professor Sasuga obtained his BA
in Economics from the School of Political Science and Economics at
Waseda University, and holds an MA in International Relations from
the University of Kent at Canterbury. He obtained his PhD in Politics
and International Studies from the University of Warwick in 2002. He
was a visiting research fellow at Keio Institute of East Asian Studies,
Keio University and a visiting research fellow at the CSGR, University of
Warwick. He is the author of Microregionalism and Governance in East Asia
(2004). His current research focuses on the globalization of automobile
industries in relation to government–business relations in China and
India.
Katsuji Nakagane is Emeritus Professor at the University of Tokyo,

Lecturer at the School of International Politics, Economics, and
Communication at Aoyama Gakuin University, and Research Fellow
at Toyo Bunko (Oriental Library), a specially invited professor at Meiji
University, and President of the Japanese Association for Chinese
Economic Studies. Professor Nakagane received his PhD in Economics
from the University of Tokyo, and has been a research fellow at the
Institute of Developing Economies (Tokyo), an associate professor at
Hitotsubashi University, a full professor at Hitotsubashi University, a full
professor at the University of Tokyo, and a professor at Aoyama Gakuin
Notes on Contributors xiii
University. Professor Nakagane is a leading scholar in Japan on Chinese

economy. He is the author of Chinese Economy – The Political Economy
of Agricultural–Industrial Relations (1992), Economic Development of China
(1999), Economic Development and Transition (2002), The Modern Chinese
Economy – A Historical Perspective (2010), and The Political Economy of
Institutional Transition (2010).
Lei Song is Associate Professor and Head of the Department of Political

Economy of the School of Government at Peking University. Dr. Song
holds a PhD in Economics from Nagoya University. Before returning
to Beijing, he was a postdoctoral research fellow at Kyoto University
from 2002 to 2004. His research interests include Japanese economy,
political economy of China’s growth, and industrial strategy. Dr. Song
is currently working on two book-length projects on Japanese economy
and developmental strategy.
Ben Thirkell-White is Associate Professor at the School of History,

Philosophy, Political Science and International Relations, Victoria
University of Wellington. His undergraduate degree was in Social and
Political Sciences. He then qualified as a commercial solicitor before
leaving to gain his PhD at the University of Leeds in 2002. He has
since taught at the universities of Bristol, Sheffield, and St Andrews. His
primary interest is in the politics of global finance, particularly the IMF’s
relationship with emerging market countries. He is also more broadly
interested in the global governance of development and the compara-
tive political economy of East and Southeast Asia.
Nobuharu Yokokawa is Professor of Economics at Musashi University,

Tokyo. He was educated at Shiga University (BA), the University of Tokyo
(MSc), and Cambridge University (PhD). His publications include Value,
Employment and Crisis. He coedited Capitalism in Evolution The Crisis of
2008 and the Future of Capitalism and Industrialization of China and India
and Its Impact on World Economy. Since 2007, he has been editor of the
Uno Theory Newsletter.
Jason Young is Lecturer in the Department of Political Science and

International Relations, Victoria University of Wellington, and Research
Fellow at the New Zealand Contemporary China Research Centre. After
four years of language training at Fujen and Tunghai universities in
Taiwan, Jason returned to New Zealand and completed his Doctorate in
Political Science at Victoria University on China’s hukou system in 2010.
His research interests include Chinese political economy, in particular
urbanization and rural development, the international relations of
xiv Notes on Contributors
East Asia, and the New Zealand–China relationship. Jason is currently

working on a book about China’s hukou system and a research project on
the impact of two-way bilateral investment in China and New Zealand
post signing of the 2008 Free Trade Agreement. Jason is the author of
China’s Hukou System: Markets, Migrants and Institutional Change (2013).
Yanbing Zhang is Lecturer at the School of Public Policy and

Management, Tsinghua University, Beijing. He is also the executive
director of the Master’s in International Development program, which is
one of the Global Master’s in Development Practice Programs launched
in recent years. Dr. Zhang finished his BA degree from Beijing University
and received his Master’s and PhD degrees from the University of
Sheffield, in the United Kingdom. Currently, his main research field
includes China’s political economy and international relations.
List of Abbreviations
ACEA European Automobile Manufacturers’ Association

AIP Automotive Industrial Policy
APT ASEAN-plus-three
ASEAN Association of Southeast Asian Nations
BAIRs Bureaucratic-Authoritarian Industrializing Regimes
CPPCC Chinese People’s Political Consultative Conference
CKD complete knocked down
COMECON Council for Mutual Economic Assistance
CPC Communist Party of China
EAS East Asian Summit
ECFA Economic Cooperation Framework Agreement
EFW Economic Freedom of the World
FDI foreign direct investment
FDIEs foreign direct invested enterprises
FOP factors of production
GATT General Agreement on Tariffs and Trade
GDI gross domestic income
GDP gross domestic product
GNI gross national income
GNP gross national product
GVC global value chain
IPR intellectual property rights
IMF International Monetary Fund
IPA investment promotion agency
ISI import-substitution industrialization
ITT industrial, technical, and trade policies
JV joint venture
LDP Liberal Democratic Party
M&A merger and acquisition
METI Ministry of Economy, Trade and Industry
MII Ministry of Information Industry
MIIT Ministry of Industry and Information Technology
MITI Ministry of International Trade and Industry
MNC multinational corporation
MoF Ministry of Finance
xv
xvi List of Abbreviations
MOFTEC Ministry of Foreign Trade and Economic Cooperation

MOFCOM Ministry of Commerce
NDRC National Development and Reform Commission
NPC National People’s Congress
NIEs newly industrializing economies
OICA International Organization of Motor Vehicle
Manufacturers
OECD Organization of Economic Cooperation and Development
PPP purchasing power parity
PWT Penn World Tables
RIETY-TID Research Institute of Economy, Trade and Industry, Trade
Information Database
RMB renminbi
R&D research and development
SBJ Statistical Bureau of Japan
SETC State Economic and Trade Commission
SEZs special economic zones
SOEs state-owned enterprises
SPC State Planning Commission
TVEs township and village enterprises
UNCTAD United Nations Conference on Trade and Development
UNDP United Nations Development Programme
USTR US Trade Representative
VAL value added per labor
WDI World Development Indicators
WEO World Economic Outlook
WGI World Governance Indicators
WTO World Trade Organization
1
Modern Economic Development in
Time and Place: Why Japan
and China?
Xiaoming Huang
China and Japan are two countries that have been related in critically
different ways at various historical points. China dominated the region
until the nineteenth century. The Meiji Restoration in late nineteenth-
century Japan and chaos, decay, political turmoil, and the collapse of
the Qing Dynasty in China around the same time set the two coun-
tries onto distinct paths of modern development. Japan’s leadership in
East Asia’s high-speed economic growth in the early post–World War II
decades further set it apart from China. When China embarked on its
economic reform and opening over 30 years ago, the two countries were
so divergent in so many ways that not many would think they were
even comparable.
Yet, more than 30 years later, there is increasing evidence that China
is facing a turning point in its economic growth and social develop-
ment today similar to that of Japan in the 1980s: pressure for continual
high-speed growth; greater availability of capital; skyrocketing real
estate prices; the largest banks and corporations in the world; inter-
national pressure on the exchange rate and for a “balanced” interna-
tional economic structure; and growing tensions between increasingly
competitive economic and pluralistic social forces and interests on the
one hand, and the statist and corporatist political structure and outdated
institutions on the other.
Some find similarities between China today and Japan in the
1960s: the need for industrial restructuring and upgrading away from
labor-intensive industries; rising demands on wage and labor condi-
tions; closing of the rural–urban gap; and so on. Still, while Japan has
clearly become a post-industrial society, one can find in China a mixture
of material development, industrial organizations, institutional arrange-
ments, policies and strategies, and values and attitudes that can only be
1
2 Xiaoming Huang
understood through the vastly different historical periods of the early

developers.
There are different possible explanations as to whether the challenge
China faces today is fundamentally the same as Japan and indeed many
major early developed economies experienced before. One obvious
argument is that this is the modern market economy, one that is driven
primarily by timely profits, and shaped by worldwide resources and
opportunities, information and access, prices and purchasing power,
technology and geographic conditions, and mass media and commu-
nication. The contingent and dynamic interplay of these forces creates
a level of risk and uncertainty that encourages speculative and hedging
behavior. The modern market economy therefore operates on “business
cycles” that allow the collective dynamism of economic activities to run
their full course, whether one likes or not. From this perspective, China
today, Japan in the 1980s, and perhaps the United States in the 1930s
can be seen as instances of a market economy at a similar critical point
in the cycle.
The challenge is also seen as uniquely that of the East Asian
model economies (Johnson 1982; Wade 1990; Amsden 1989; Bowie
1991; Fields 1995; Hill 1996; Chiu, Ho, and Lui 1997; Huang 2005;
Woo-Cumings 1999). Japan’s bubble and burst came after 30 years
of high-speed economic growth following World War II. The model
relies on the state as the primary organizer and facilitator of national
economic activity; exports and international markets as a principal
generator of economic activities and thus income and profit; and
advantages in institutional and organizational arrangements and
human resources for the economy’s competitiveness. Such a model
can continue to generate economic activities to sustain growth for a
considerably longer period than the traditional market economy. At
the same time, it builds up tensions among key elements of growth to
a point where either the economy upgrades, restructures, and grows
out of the model, or the bubble bursts and the economy collapses, or
somewhere in between. While Japan’s lost decade in the 1990s seems
an instance of the last scenario, China is yet to be presented with clear
options as to how to respond to this challenge of “growing pains”. It
is debated whether China has reached the endpoint of the East Asian
model growth, or in fact whether China has been a real East Asian
model economy.
The approaches that use a shared growth and development model
to provide a unified framework to explain development experiences,
however, seem to face significant theoretical and empirical challenges.
Modern Economic Development in Time and Place 3
Theories of late development (Gerschenkron 1962; Amsden 1989), for

example, argue that material, institutional, and international conditions
were different for the late developers. China has increasingly grown
out of the East Asian model as the separation of domestic and interna-
tional markets and use of industrial policy to promote exports across the
markets are no longer tenable in the China of the 2000s as they were in
Japan in the 1960s. These conditions have led late-developing econo-
mies to take different paths to grow and develop.
Advocates of compressed development (Whittaker et al. 2010), on
the other hand, not only recognize the different conditions facing
development of different countries in different historical periods, but,
more importantly, argue that the history of modern economic devel-
opment at the national level is an accelerated process of compression
of the conditions and dynamics for growth and development into an
increasingly shorter time frame. This has led to the late late develop-
ment, which is significantly different from the early and late-develop-
ment experiences. The debate over whether China has passed the Lewis
turning point in the transformation of industrial structure and labor
market, for example, seems to present a case in point. It took Japan
30 years to move from the time it crossed the turning point in the early
1960s to the time when it reached the stage of the bubble economy in
the 1990s, while in China these two developments seem to be occurring
at the same time today.
Here we have a small problem: looking at the two very successful
stories of modern economic growth and development of the twentieth
century, we see striking similarities: industrial structure, growth stages,
organization of economic activities, international structure and envi-
ronment. And yet we seem to be unable to make sense of the similari-
ties. For each of these similarities, one can make a good case that they
are not really similar: China’s overheating and overcapacity is not that
of Japan in the 1980s because China is only approaching its Lewisian
turning point now, which makes China as Japan was in the 1960s when
there was no bubble economy. To give another example, the problems
China is facing today in the international economic system, exchange
rates, trade practices, investment barriers, and so forth are not the same
as those Japan experienced in the 1980s, as the international economic
order then was more “facilitating.” It can be argued otherwise that
today’s international economic order is more open, fair, and transparent.
For yet another example, China’s Lewis turning point is different from
Japan’s as whether China has the conditions for the Lewis transition is
questionable.1
4 Xiaoming Huang
Moreover, one set of similarities allows China and Japan to be seen as

historically paralleling: similar stages of economic growth and develop-
ment, although decades apart. Another set of similarities see China and
Japan as structurally paralleling: similar positions in the international
economic system where similar ways of economic organization and
promotion led to the transformation of their economies and societies
and the international economic system itself. There is not much intel-
lectual understanding in this framing of the two development experi-
ences. Scholars and policy analysts were interested in comparing Japan
and China, and expected the comparison could yield useful information
on how China can avoid similar errors and mistakes that Japan made in
the past: its 1980s surrender to U.S. financial and trade hegemony and
the “lost decade” burst in the 1990s.
The development experiences of Japan and China, however, are more
profound than this. At a more fundamental level, China and Japan have
been two major non-Western countries that have embarked on modern
economic and social development and they are the second and third
largest economies in the world today. The comparison between China
and Japan is significant not only for the century-long race between the
two in catching up, modernization, and the ability to achieve a high
status among similar nations. It is also significant as the two countries
are rich embodiments of the world experience in modern economic
growth and development. The experiences of China and Japan point to
the fundamental challenge nations have faced in organizing economic
and political activities under modern conditions. With mass popula-
tions, greater mobility, and limited resources and opportunities in any
given boundaries, market, technology, and institutions have become
key forces in rendering efficiency and fairness in a modern economy
and indeed in a modern society.
The experiences of China and Japan can demonstrate how these forces
have played out in a given national setting and how they have shaped
the emergence of modern economy and society at a given historical
point. More importantly, their experiences are comparable to other
experiences of modern economic growth and development in time and
place, particularly earlier ones, from those of the Anglo-Saxon model to
the Rhine model, and from the Soviet model to the East Asian model.
Comparing China and Japan raises profound questions that allow us
to develop a broad perspective on the growth and development of the
modern economy, and the modern economic system: Are the experiences
of China and Japan global extensions of the early experiences of modern
economic growth and development? Are they part of the historical
progression of the world economic system where the later economies

are an improvement over the earlier ones? Are they, rather, different
ways of organizing economic activities, shaped by different interplays of
the forces of market, technology, and institutions in response to modern
conditions?
In what ways are China’s problems in its economic growth and devel-
opment today similar to or different from those of Japan in the early
decades? Are they similar because of the modern market nature of their
economies? Are they similar because they are both instances of the East
Asian model? Or are they different because of the changing material,
institutional, and international conditions? Can different strategies in
response make a difference? Can growth economics and development
theories explain the differences? What do all of these mean for the inter-
national economic structure, global economic governance, regional
economic cooperation and integration, and sustainable growth and
development in the two countries?
This book brings together some leading China and Japan scholars
of political economy, growth and development economics, and other
social sciences to examine these issues, to make sense of the seemingly
ambiguous and contradictory evidence from analyzing the Chinese
and Japanese experiences, using largely those convenient, though
contending, frameworks. The chapters in Part I, much in conversation
with the literature of “varieties of capitalism” and the world economic
system, provide an understanding of the world economic system and
the rise and global expansion of the modern capitalist economy in the
system in which the Japanese and Chinese growth and development
experiences can be historically located.
Nobuharu Yokokawa in Chapter 3 searches for a fundamental logic
that has driven the succession of different economic regimes and there-
fore the evolution of the world economic system of which Japan and
China are manifestations. Xiaoming Huang’s Chapter 2 advances the
thesis that Japan and China are instances of the global expansion of the
modern economy. Huang uses the latest data on marketization, market
institutions, and modern institutions to determine the level of market
economy and quality of modern institutions in Japan and China, to see
how they compare to the early developers of modern economy, and the
East Asian model economies. The analysis allows us to see how Japan
and China relate to the global development of the modern capitalist
economy.
Chapters in Part II engage the debate on the development models of
Japan and China, particularly from the perspective of the most dominant
6 Xiaoming Huang
one: the East Asian developmental state model, and aim to ascertain the
nature of the forces, conditions, and arrangements in the institutions
and society, and policy and the international environment that have
shaped these two growth and development experiences. Chapter 4 by
Bai Gao looks at the world economic order in the 1960s and 2000s,
and consequently the domestic patterns of economic growth, organiza-
tion, and promotion in Japan and China at the time, and investigates
whether China’s development model differs significantly from Japan’s
development model, and what that means for our understanding of
the role of the international economic order and domestic structure in
the shaping of development models, and indeed developmentalism in
general.
Marc Lanteigne in Chapter 5 investigates how the patterns of the
developmentalist state were shaped by their individual domestic struc-
ture and conditions. Lanteigne traces the political and policy process
of China’s adoption of developmentalism and asks whether China’s
developmentalism is different from Japanese developmentalism. While
Gao approaches the shaping of developmentalism in Japan and China
more from the perspective of the international order as structuring
constraints, Lanteigne looks at the political economic dynamics inside
Japan and China as the force shaping their similar but different devel-
opmentalist models.
Discussions in Part I and Part II on the fundamental nature of the
world economic system and the East Asian model, and how Japan and
China relate to them, lead to a view that there are both similarities and
differences between Japan and China; such similarities and differences
were shaped through the development of modern economic growth at
different historical times where conditions, forces, and arrangements for
them were significantly different. Chapters in Part III and Part IV turn to
empirical investigation for evidence in two significant areas of the two
countries’ economic growth and development: industrial development
and industrial policy, and rural and agricultural growth and develop-
ment, and seek to understand whether the industrial structure and trans-
formation in these two development experiences are shaped by similar
forces and factors and whether they can be comfortably explained by a
development and growth model.
Chapter 6 by Katsuhiro Sasuga takes the role of Japan’s FDI in the
development of China’s auto industry as a case study, and investigates
whether the shifting global production structure, supply and value
chains, and the global distribution of capital, markets, production, and
the dynamic international firm and local government interaction have a
great impact on the direction and scope of the growth of an industry in

China. The same approach is taken by Ben Thirkell-White. His chapter
looks at how broad economic performance at micro-economic levels
in China today and Japan in the 1980s and 1990s are shaped by the
effective global economic structure and “international pressures”; how
China and Japan responded to them; and how the effectiveness of inter-
national pressure and the patterns of responses of Japan and China are
related.
On rural and agricultural growth and development, Chapters 8 and
9 are designed to probe the same puzzle informed by conventional
frameworks and debates in explaining growth patterns and develop-
ment trajectories; whether the trajectories in rural and agricultural
growth and development in Japan and China are explainable by the
Lewisian theory: when economic development rises to a point when
surplus labor is no longer available, wages in the industrial sector rise
with the shortage of labor supply from the rural sector, and gradually
the rural–urban divide will disappear and economic development move
into a new and more advanced stage – a point often referred to as the
“Lewis turning point.” When and whether the economy has passed over
this turning point seems to be a critical indicator of the process and
stage of modern economic growth. Katsuji Nakagane in Chapter 8 uses
a sophisticated range of indicators to measure how the trajectory has
turned out in Japan in the 1960s and China in the 2000s. Jason Young in
Chapter 9 investigates how institutions shape the development of rural–
urban linkages. In both comparative analyzes, analytical interests are to
see whether and how domestic conditions and arrangements explain
the different development outcomes in the two seemingly very similar
processes of modern economic growth.
Part V looks at the comparing of Japan and China and analyzing
of their patterns of modern economic development as an intellectual
exercise and as a problem of scholarly research itself. Lei Song and
Yanbing Zhang’s Chapter 10 documents and compares the evolution
of scholarship on the development model of Japan in the 1970s and
1980s, and on China more recently, in our efforts to conceptualize
and theorize the patterns of modern economic growth of Japan and
China through analyzing the development of scholarship on their
development experiences. Scholarly thinking and debate over their
development experiences are not only shaped by the development
experiences themselves, but also the dominant ideologies of the time
and the way we describe, analyze, and explain them. In a way the
chapter points to two parallel research programs in response to the
8 Xiaoming Huang
two parallel experiences of modern economic development, and inves-

tigates whether and how this may structure the shaping of our knowl-
edge about these experiences.
Chapter 11, in lieu of a conclusion, puts in perspective the discus-
sions and findings in this volume and seeks to ascertain whether
there is a consensus emerging from the chapters that would support a
useful framework for us to explain the modern economic growth and
development of Japan and China that would be comfortable with the
existing evidence and patterns, speak with existing literature on modern
economic growth and development, and enhance the analytical, schol-
arly, and policy value of comparative analysis of modern economic
development of Japan and China, as originally sought in the develop-
ment of this research project.
This final chapter centers on a curiosity as to whether there is perhaps a
fundamental logic that has driven modern economic growth and devel-
opment the same way for England, the United States, and Germany as
for Japan and China. The “high-speed” economic growth of Japan and
China took place at different historical times and under very different
national conditions. This allowed the varied forms of generation and
organization of modern economic growth and development, even
within the same narrow developmental state model. More importantly,
the world economic system in the 2000s was fundamentally different
from that in the 1960s, with the former being more open, globalized,
and integrated, and the latter being relatively closed and protected
along national boundaries. This determined the sources, methods, and
strategy of economic growth in these two countries and therefore the
organization of their economic growth.
The final chapter develops a concept of the modern conditions and
modern economy, and seeks to build the thesis of this book that time
and place allows or even forces variation in human, organizational,
and institutional behavior. What is constant and generative is not the
ways – institutions and structures – we organize our economic activity.
They are consequential and secondary, and therefore dependent vari-
ables. It is the human interests and modern conditions that drive, shape,
and therefore define the modern economy. It is on this foundation that
the modern economy is universal. However, economic growth and
development has to take place in a relevant environment or context.
The way we respond to the conditions and organize economic activities
therefore allows context-specific, effective institutions, culture, organi-
zation, and structure to develop, emerge, and accumulate over time. The
chapter attempts to draw insights from the contributions here to see if
we can make even a “preliminary” case that Japan and China are two
instances of modern economic development.
Note
1. See more in Chapters 8 and 9 in this volume.
2
Mapping Japan and China in the
World Economic System
Xiaoming Huang
The intellectual challenge of understanding the modern development

experiences of Japan and China is immediately evident. In this chapter
I’ll try to place the modern economic growth and development of Japan
and China in the broad historical context of the global evolution of
modern economy at the national level, particularly in relation to the first
wave of development of modern economy in Europe and its “offshoots”
(Maddison 2006: 29), and the more recent wave in Asia since World War
II, from Korea to Indonesia and from Thailand to India.
Given the historical debates and controversies over different models
of modern economy – capitalist economy, market economy, socialist
economy, and East Asian model economy – and indeed their significant
experiences in the modern economy that this chapter uses to frame our
discussion of economic activities and outcomes under the contempo-
rary global conditions, driven fundamentally by efficiency and interests
of individual participants and their collectivities. These economic activi-
ties are structured and organized in various institutions and practices.
What makes the modern economy “modern” are the modern condi-
tions where: (1) economic activities concern masses of un-“ascribed”
individuals (Weber 1978), be they consumers, investors, traders, manu-
facturers, accountants, or other participants in economic activities, not
confined to the traditional lines of geographic location, social class,
community, ethnicity, nationality, and religion; (2) there is an increas-
ingly large, and continually expanding scope, from national to global,
where resources, markets, and opportunities are available and accessible
for economic activity; and (3) institutions, practices, and technology
develop to shape economic activities under the conditions for efficient
outputs and their fair distribution. Capitalism and, more specifically
in recent times, market economy,1 have prevailed. The framework of
10
Mapping Japan and China 11
modern economy I provide here for our analysis centers around the two
key elements of the capitalist market economy: economic activity driven
by individual interests, and market institutions necessary for exchange
and transactions in economic activity of an increasingly large scope and
scale, beyond the conventional boundaries.
To get a sense of the historical and global significance of the modern
economic development of Japan and China, I first describe their modern
economic growth and development with key indicators of modern
economic development along the historical lines of the early develop-
ment in Europe and beyond and subsequent waves of modern economic
development in the twentieth century. I examine the historical patterns
of GDP and GDP Per Capita growth to indicate whether and when effi-
ciency is achieved,2 the level of marketization of the economies,3 and
the level of institutionalization in broad institutions for modern econ-
omy.4 But before we see how Japan and China relate and compare to
early developers in Europe and beyond, and to later developers in East
Asia, we will examine and compare Japan and China themselves first.
1 Japan and China
Modern economic development of Japan and China has been looked

at in various frameworks. One framework is a broad historical Asian
perspective that sees Japan and China as two competitors in the modern
transformation of their economies, societies, and polities (Fairbank,
Reischauer, and Craig 1965; Yoda 1996; Moulder 1977). The framework
spanned thousands years of the evolution of regional international
order. Debates are seen surrounding what moved the two countries to
seek modern reform and transformation; whether China’s early efforts
failed while Japan’s succeeded; and how this affected the path and
historical trajectories of their modern development from the nineteenth
century onward.
In this framework, China is seen as the dominant empire in Asia for
much of the pre-modern era, with Japan influenced by China in the
ordering and organizing of society, incorporating Chinese institutions
of government, politics, economy, and society. It was only in the mid-
nineteenth century, when China was increasingly unable to sustain itself
as a viable polity and economy, that Japan started to look farther “West,”
and learned and adapted modern institutions and practices from Western
countries that produced a “rich country and strong army.” The recent
debate on the rise of China and its impact on the region tends to revisit
the debate (Acharya 2003; Friedberg 2011; Kang 2007; Chan 2010).
12 Xiaoming Huang
A second framework looks at Europe, or the West, as a point of refer-

ence, locating Japan and China in the process of the rise and global
expansion of Europe-originated international society (Watson 1992;
Zhang 1998; Gong 1984; Buzan 2010). Before Europe’s expansion into
Northeast Asia from the mid-nineteenth century, Japan and China were
very similar as societies with an official “closed door” policy. The arrival
of America’s “Black Ships” forced the door open in Japan but created
increasing resistance and internal chaos in China. The success of Japan’s
opening and reform with the Meiji Restoration from 1864 led to reform
and transformation of Japan in constitutional order, political institu-
tions (parliament, party politics, etc.), and economic institutions and
social relations. These reforms were not able to take place in China until
the late 1970s. Even then the reforms in China have been partial, selec-
tive, and piecemeal. Profound changes in Japan implemented through
the Meiji Restoration not only led to the modern transformation of
Japan, but also to a Japan with a rapidly growing economy and strong
army. Japan was accepted into the international society (Gong 1984) and
quickly joined the ranks of world imperialist and expansionist powers in
the first half of the twentieth century.
A third framework looks at Japan and China as two countries of very
different natural endowment and civilization. China is a large land
mass-based country, which tends to be conservative, internally hier-
archical, and inward-looking. Japan, on the other hand, is an oceanic
country, and as many oceanic countries have also demonstrated, it is
more progressive, open, outward-looking, and competitive.
In the fourth framework, Japan and China are both seen by many as
perfect instances of the East Asian model of modern economic devel-
opment. Chalmers Johnson was among the first in the early 1980s to
establish Japan as a unique developmental state (Johnson 1982). In the
following decades, the same pattern was found in Taiwan (Wade 1990),
Korea (Amsden 1989), as well as in other countries in East Asia, such
as Thailand, Indonesia, and Singapore. They are collectively referenced
as Asian model economies. When China started to take steps to open
up and reform in the late 1970s, East Asian model economies were well
established. There are two strong forces running against China being seen
as an Asian model economy. First, China itself, particularly at the very
beginning of its reforms, appeared unsure of the direction of its political
and economic development.5 The East Asian model was seen as vindi-
cating economic success in countries surrounding China, which, during
much of the Cold War period, were anti-China ideologically and geopo-
litically, and many of them were in actual armed conflict with China.
Another force running against China being seen as an East Asian model
economy is that by the time China embarked on modern economic
growth and development, conditions for national economy were signifi-
cantly different from the time when Japan and others had their time of
postwar miracle economic growth. We no longer have the same global as
well as national conditions which “nurtured” or allowed the East Asian
model. Multinational corporations and foreign direct investment in
China, as Gao and Sasuga show elsewhere in this volume, for example,
have been so intertwined with the Chinese economy inside China, it
would be hard for the government to continue the old industrial policy
of promoting, protecting, and coordinating a particular industry – an
element that featured in the early East Asian model economies.
These different frameworks allow slightly different stories of modern
economic growth and development of Japan and China to be told. They
are useful for us to understand how Japan and China fit together in
the broader historical context of modern development. What is often
missing, as in many other cases of comparative analysis of modern
economic development involving non-Western countries, is actually the
description of their growth performance and development trajectories
in a more comparable and measurable fashion before we debate their
interpretation and explanation. We could not do this before as macro
political economic “data” were generally not available.
Today, with computer technologies, global integration and accessi-
bility of information and data, and a great deal of research in developing
large-scale, long historical data on macro political economic indicators,6
we are much better equipped to develop solid descriptions of the histor-
ical patterns of national modern economic development. In this section,
I use these datasets to present a comparative description of the modern
economic development of Japan and China with time series, measur-
able data, and to see (1) the level of modern economic development and
the quality of associated institutions, and (2) if there is a meaningful
pattern between Japan and China standing out from their experiences of
modern economic development, how their experiences connected and
interacted, and how these relate to the shaping of the global patterns of
modern economic development.
I start with the historical overview of the economic performance of
Japan and China, assuming that a sustained period of higher-than-usual
economic growth rates would indicate attainment of efficiency in
the economy, which in turn indicates the level of modern economy.
Figure 2.1 shows the movement of GDP per capita level for the
period between 1870 and 2008. For much of the period from the
14 Xiaoming Huang
10
8
Annual Change%
6
1
4
3
2
0
1870
7
70 1890 1910 1930 1950
19
9 1970 1990 2010
–2 2
–4
–6
–8
China Japan
–10
Figure 2.1 Real GDP and GDP per capita growth: Japan and China (1870–2008)
Source: Maddison (2010).
mid-nineteenth century when Japan started to “open up and reform,”

to the mid-twentieth century when Japan’s economy collapsed at the
end of World War II, Japan’s economic growth was close to 2 percent
in average, while for a similar period, from 1870 to 1949, China’s GDP
growth was –0.24 percent (Box 1 in Figure 2.1). Over the period, the per
capita GDP growth in China had been in fact in decline. In almost three
decades after World War II from the mid-1940s to the early 1970s, Japan
had its miracle economy, with the average annual growth of GDP per
capita at 7.82 percent, while China’s GDP per capita for approximately
the same period, from the 1950s to 1977, grew at 2.35 percent (Box 2).
This pattern reversed significantly in the following period (Box 3) when
China’s GDP per capita level rose at 6.25 percent annually, while Japan
had it at 2.15 percent.
China’s economic growth started after World War II at a moderate
rate. It became comparatively significant only from the late 1970s.
Japan’s modern economy started in the late nineteenth century,
though much stronger growth and development happened in the
first three decades after World War II. Can we say modern economic
growth and development of Japan started much earlier than in China?
This can be very significant for us in understanding the debate over
capitalism, market economy, and the East Asian model between Japan
and China.
The movements of the GDP per capita levels of the two countries
say a lot about the overall economic performance and the scope and
quality of “economic growth,” as North and Thomas defined. Efficiency
must have been achieved with such a prolonged, high-speed rise in GDP
per capita. To define “modern” economic growth as discussed above,
however, we shall look further into the institutions and practices that
generate economic growth under “modern conditions.” For this I specif-
ically look at two sets of data for a comparative measuring of modern
economic development of Japan and China: the level of marketization
for large-scale deployment of economic factors, and the quality of broad
institutions in shaping economic activities for efficiency and fairness.
The time spans of the data on these indicators are shorter than that
provided in the Maddison data, but they are sufficient for comparing
Japan and China for a considerable significant period of time for our
purpose.
For the data on the level of marketization, I use the Economic Freedom
of the World Index (EFW Index) which provides an overall measurement
of how “free” an economy is (from 0 to 10, with 10 being the most free),
on the basis of the size of government expenditure, taxes, and enter-
prises; legal structure and security of property rights; access to sound
money; freedom to trade internationally; and regulation of credit, labor,
and business (Gwartney, Lawson, and Hall 2011) – key ingredients of
the liberal reform and market economy movement of the 1990s that can
serve as indicators of the level of marketization. The data is not precisely
about how “free” an economy is labeled, as this may be a too simplistic
or perhaps ideological description for what the data measures. In terms
of the substantive indicators, sub- and further sub-indicators it uses, the
data are indeed about the broad institutions for the development and
the function of market economy. The level of institutionalization that
the EFW data in fact provides is used here as an indicator of the extent
and level of marketization.
Figure 2.27 reflects the overall level of marketization, summarizing
indicators from the next six sub-indicators for the period from 1970 to
2010. The figure shows that in the early 1970s there was a significant gap
between Japan and China in the levels of marketization and the quality
of broad institutions for market economy. Japan was close to 8 on a scale
of 0 to 10 while China was below 4. While Japan has not changed much
over the last 40 years, and indeed it has moved to a slightly lower level,
China has significantly improved in its level of marketization and the
quality of institutions for market economy. The gap between the two
has been drastically closed.
16 Xiaoming Huang
0: lowest level, 10:highest level

10
9
8
7
6
5
4
3
2
1
0
1970 1980 1990 2000 2002 2004 2006 2008 2010
Japan China
Figure 2.2 Institutions of market economy: China and Japan (1970–2010)

In the late 2000s they are very close, converging at around 6. In a larger
picture, this suggests China’s economic growth and industrial develop-
ment from the 1950s through the 1970s were not under a significant level
of market economy and the rapid economic growth in the following four
decades has been associated with the steady increase in the level of marketi-
zation and the quality of institutions for market economy. If the data further
breaks down into individual indicators, we can see a more detailed picture.
On the size of government in terms of expenditure, taxes, and enterprises
(Figure 2.3), government’s engagement, involvement in, and promotion
of business and private sector is higher in China (steady between 3 and
4) than in Japan (moving around 7 and 8). On legal structure and security
of property rights (Figure 2.4), the gap between Japan and China is steady
and moderate, with China moving around 5 and 6, and Japan 7 and 8.
On access to sound money, in terms of money supply, inflation, banking,
and so forth (Figure 2.5). Japan has kept a steady 1-point level higher
than China. As for freedom to trade internationally, for example tariffs,
barriers, exchange rate, restrictions, control of ownership, and movement
of capital, products, and people, Japan and China gradually closed their
gap by the mid-2000s. In the case of access to sound money and freedom
to trade internationally, the extent and quality of market institutions in
the two countries is drastically different, with a wide gap in the early years,
and China catching up to close the gap with Japan in the later years.
Finally, on regulation of credit, labor, and business, the pattern is even
more clear that Japan and China started in the 1970s when Japan’s level
of marketization and quality of institutions for market economy was

much higher than that of China (6 versus 2.5); China has shown rapid

10
2
Japan China
1
0
1970 1980 1990 2000 2002 2004 2006 2008 2010
Figure 2.3 Institutions of market economy: China and Japan (1970–2010) – size
of government
Source: Gwartney and Lawson (2012).

10
8
7
2
Japan China
1
0
1970 1980 1990 2000 2002 2004 2006 2008 2010
Figure 2.4 Institutions of market economy: China and Japan (1970–2010) – legal
structure
18 Xiaoming Huang

10
8
7
2
Japan China
1
0
1970 1980 1990 2000 2002 2004 2006 2008 2010
Figure 2.5 Institutions of market economy: China and Japan (1970–2010) –

access to good money

10
8
7
2
Japan China
1
0
1970 1980 1990 2000 2002 2004 2006 2008 2010

freedom to trade Internationally
and significant improvement, and closed the gap to within 1 point gap
in recent years.
In summary, it is clear that Japan has an overall steady higher level
of marketization and quality of institutions for market economy than

10
8
7
2
Japan China
1
0
1970 1980 1990 2000 2002 2004 2006 2008 2010

regulation of credit, labor, and business
China. There has been a significant rise in China’s level and quality. Japan
and China started the period with a much larger gap between them. The
gap has been largely closed up toward the end of the period. These obser-
vations seem to match with the expectation that Japan and China have
moved into a similar type of modern economy, though in different time
frames. As Figure 2.1 suggests, this happened in Japan much earlier, in the
late nineteenth century, while in China, significant transformation to the
modern economy did not happen until the late 1970s and early 1980s.
Here we speak of one key element of that, the level of marketization
and the development of institutions of the market economy. There is
the broad institutional setting for the market economy to function and
operate, institutions that would be expected to further shape the economy
as modern economy. We now turn to this aspect of the modern economy
to further compare Japan and China. I use two sets of data to measure
the level and quality of institutions that shape, facilitate, and direct
modern economic activities in the two countries. One set of data, largely
from World Bank’s World Development Indicators (WDI), centers on the
driving variables found in conventional growth accounting frameworks
explaining modern economic growth and establishing patterns or struc-
tures of factor inputs to growth outcomes. These factors often conven-
tionally include land, capital, labor, and total factor productivity (TFP). A
much larger range of different studies in the second category are interested
20 Xiaoming Huang
in “noneconomic” factors, forces, and arrangements that enable or shape

the structure of the factor inputs and thus growth outcomes.
On the first data set, I include capital investment, labor productivity,
and industrial structure, economic openness as indicators of the general
50
I$ Thousand
45
40
35
30
25
20
China Japan
15
10
0
1960 1970 1980 1990 2000 2010
Figure 2.8 Labor productivity: Japan and China (1960–2010)

Source: World Bank (2013).
% of GDP
60
China Japan
50
40
30
20
10
0
1960 1970 1980 1990 2000 2010
Figure 2.9 Gross capital formation: Japan and China (1960–2010)

% of GDP
3.0
2.5
China Japan
2.0
1.5
1.0
0.5
0.0
1960 1970 1980 1990 2000 2010
-0.5
Figure 2.10 FDI net outflows as % of GDP: Japan and China (1960–2010)
% of GDP
7.0
China Japan
6.0
5.0
4.0
3.0
2.0
1.0
0.0
1960
9 1970 1980 1990 2000 2010
–1.0
Figure 2.11 FDI net inflows as % of GDP: Japan and China (1960–2010)
22 Xiaoming Huang
growth pattern and factor structure. Figures 2.8–2.11 show gross fixed
capital formation and labor productivity measured in real GDP per
person employed for the 50 years from 1960 to 2010. There is a signifi-
cant and persistent gap in labor productivity between Japan and China
for the whole period. In gross capital formation as a percentage of GDP,
China has been constantly moving up while Japan has been in decline
from the 1970s. They cross each other in the late 1970s. This seems also
to be reflected in FDI net inflows as a percentage of GDP. China has been
widening the gap with Japan in FDI net inflow since the 1980s. Japan
and China are not too different in the level of FDI net outflows as a
percentage of GDP and their movements have been parallel.
Figures 2.12–2.14 are contributions of the three sectors in Japan
and China to their real GDP: agriculture (Figure 2.12), manufacturing
(Figure 2.13), and services (Figure 2.14), also from 1960 to 2010. These
industrial structure figures show the agricultural weight in total GDP in
China has come down significantly over time while Japan’s level has been
steady with a slow further decline. It also shows China’s level reached
Japan’s level of agricultural contributions to GDP presumably in the 1960s
only in recent years. In accordance, China’s manufacturing has always
been high and above that of Japan. The structure and trend in service is
in reverse. The structure clearly shows Japan and China are at different
stages of modern economic development as seen in change in industrial
% of GDP
45
40
China Japan
35
30
25
20
15
10
0
1960 1970 1980 1990 2000 2010
Figure 2.12 Agriculture, value added as % of GDP: Japan and China

(1960–2010)
Source: World Bank 2013
% of GDP
45
40
35
30
25
20
15
10
Japan China
5
0
1960 1970 1980 1990 2000 2010
Figure 2.13 Manufacturing, value added as % of GDP: Japan and China

(1960–2010)
Source: World Bank 2013
% of GDP
80
70
60
50
40
30
20
Japan China
10
0
1960 1970 1980 1990 2000 2010
Figure 2.14 Services, value added as % of GDP: Japan and China (1960–2010)
structure. Finally, Figure 2.15 shows trade as a percentage of GDP, meas-

uring economic openness for the two countries from 1960 to 2010.
These figures give rather a clear picture of the cascading movement of
China and Japan in their modern economic development. All these indi-
cators suggest that the level of Japan’s modern economic development
24 Xiaoming Huang
% of GDP
80
70
China Japan
60
50
40
30
20
10
0
1960 1970 1980 1990 2000 2010
Figure 2.15 Trade as % of GDP: Japan and China (1960–2008)

is higher than that of China at a given historical point, but the histor-
ical movement in these indicators seem similarly paralleled, with Japan
ahead of China. On some indicators, China is historically higher than
Japan. On many others, China has significantly closed gaps with Japan,
so the movements are not constantly in parallel with Japan leading.
Finally, we look at and compare Japan and China on a set of factors
that are often seen as providing the broad institutional environment for
modern economic growth and development. Factors, forces, and arrange-
ments in the second category are the usual suspects in broad growth
analysis and the attribution for causes of economic growth. They featured
prominently in the last round of debates on the East Asian model. Japan
and China are both seen as principal instances of the East Asian model
economy. As these indicators have also been used to make the case
that the Asian model economies are different from Western advanced
economies in their institutional setting, and organizational and norma-
tive values in economic activity, it would be particularly interesting to
see how Japan and China weigh on these indicators. When we discuss
the rise and expansion of modern economy in these two countries, it is
natural to see how these two compare on these broad indicators.
I use the World Bank’s World Governance Indicators (WGI).8 The set of
six indicators indeed reflects the principal values of modern institutions,
and, in a way, provides a way of measuring the extent of the moder-
nity of the institutional environment for these economies. Figures 2.16
through 2.21 show that in all these indicators, Japan is considerably

above China in terms of the quality of modern institutions. This clearly
supports an understanding that Japan is at a more advanced level of
modern economic development.
Comparing Japan and China on these three sets of indicators, we can
arrive at a conclusion that Japan started modern economic development
much earlier, in the nineteenth century, and China started after World
War II. While there is a considerable gap between Japan and China in
the extent and quality of modern institutions for the market economy,
China has been significantly closing the gap with Japan in growth and
development performance, level of marketization, and quality of insti-
tutions of market economy, as well as in industrial structure, production
factor efficiency, and growth stage. In some key indicators, China is in
a much more favorable position. That data does point in the direction
that Japan and China are different in terms of the level and quality
of economic development at any given historical point. But they are
meaningfully comparable if they are placed along a dynamic time frame
where there is a similar pattern of development of modern economy in
Japan and China, with Japan starting the process a hundred years or so
earlier. To test this interpretation, I will place in the next two sections
Japan and China with two large groups of countries of experience of
modern economic growth and development, European and East Asian
countries, to see how Japan and China fit into the experiences of the
early developers and East Asian model economies, and indeed the global
pattern of the development of modern economy.
higher the value, the better quality governance outcomes

2.5
1.5
0.5
–0.5
–1.5
Japan China
–2.5
1996 2000 2003 2005 2007 2009 2011
Figure 2.16 Government effectiveness: Japan and China (1960–2010)

Source: Kaufmann, Kraay and Mastruzzi (2012).
26 Xiaoming Huang
higher the values, the better quality governance outcomes

2.5
1.5
0.5
–0.5
Japan China
–1.5
–2.5
1996 2000 2003 2005 2007 2009 2011
Figure 2.17 Regulatory quality: Japan and China (1960–2010)

higher the value, the better governance outcomes

2.5
1.5
0.5
–0.5
Japan China
–1.5
–2.5
1996 2000 2003 2005 2007 2009 2011
Figure 2.18 Voice and accountability: Japan and China (1996–2011)

2 The shaping of modern world capitalism
I first place Japan and China among the early developers of modern
economy. In Figure 2.22, I show how Japan and China sit with repre-
sentative countries of earlier modern development.9
higher the values, the better governance outcomes

2.5
1.5
0.5
–0.5
–1.5
Japan China
–2.5
1996 2000 2003 2005 2007 2009 2011
Figure 2.19 Political stability and no violence: Japan and China (1960–2010)
Source: Kaufmann, Kraay and Mastruzzi (2012)
2.5
1.5
0.5
–0.5
–1.5
Japan China
–2.5
1996 2000 2003 2005 2007 2009 2011
Figure 2.20 Rule of law: Japan and China (1960–2010)

In PPP-converted GDP per capita as in Figure 2.22, Japan’s efficiency

level started to move up to similar levels of the early developers from
the 1870s (Box 1 in Figure 2.22) and it stayed this way until World War
28 Xiaoming Huang

2.5
1.5
0.5
–0.5
–1.5
Japan China
–2.5
1996 2000 2003 2005 2007 2009 2011
Figure 2.21 Control of corruption: Japan and China (1960–2010)

20
0
Annual Change %
China
a France 3
15
5
Germ
many Italy
Japa
an Netherland
10
0 UK USA
0
1500 1833 1849 1865 1881 189
97 1913
13 1929 5 1961
192 1945 61 19
9777 1991 2009
9
–5
5 1 2
4
–10
0
–15
5
Figure 2.22 Real GDP and GDP per capita growth: Japan, China, and Europe
(1500–2008)
II (Box 2). There was an unusual high (higher than other early devel-
opers) after World War II to the mid-1970s (Box 3). After the 1970s,
Japan returned to the same level as the other earlier developers (Box 4).
As for China, there was not much growth in GDP per capita until the
1930s (Box 1 and Box 2). In the early post–World War II period until the
late 1970s (Box 3), China stood reasonably well along with many others.
The real jump, to the same scale and magnitude as the one for Japan in
the early postwar period, happened in the last 30 years (Box 4). The early
developers had a quite steady growth rate until World War I (Box 1 and
Box 2). Japan joined the same growth fashion from the late 1870s. The
early postwar period (Box 3) witnessed recovery and catch up for most
countries. Even early developers enjoyed higher than prewar economic
growth. China was under a different economic model. China did have a
30-year high-speed economic growth similar to Japan’s, but in terms of
timing only followed Japan’s 30-year miracle in the early postwar period.
There seems to be a view that the growth of modern economy in
Japan and China was later than that of the early developers. Japan is
also earlier than China. The average growth rate in the middle of the
range between 0 and 5 seems to be a norm for most economies, except
that Japan and China also each had a distinct period of “high-speed
growth” that was significantly higher than the normal growth speed.
High-speed growth of such scale and duration is not found among the
early developers over the long historical period. Were these added effects
of an “East Asian model” economy?
3 Japan, China, and the East Asian model
Given the timing of modern economic growth of Japan and China in

comparison with the early developers, and, in particular, the period of
high-speed growth in the postwar years, it would be interesting to see
how Japan and China compare with another group of modern economic
experiences, those of the East Asian model economies where post–World
War II high-speed economic growth has widely spread, and whether Japan
and China are more part of that group in terms of the level and quality of
modern economy (Kuznets 1988; Lee, Hahn, and Lin 2002; Baek 2005).
Figure 2.23 reflects data on the first part of the question, comparing
Japan and China with other Asian countries. Same as in the analysis with
the early developers group, I have selected six representative countries
in this Asian group: Indonesia, Thailand, South Korea, Taiwan, India,
and the Philippines. Figure 2.23 shows there was economic growth
comparable with Japan in the other Asian countries up until World War
30 Xiaoming Huang
20
0
Annual Change %
China India
15
5 2
Indonesiaia Japan
Philippinees S Korea 3
Thailand T
Taiwan
10
0
5 1
0
1870 0 1920 1930 194
70 1880 1890 1900 1910 40 195
50 196
960 1970 1980
980 1990 2000 2010
4
–5
5
–10
Figure 2.23 Real GDP growth: Japan and China, Asia (1870–2008)
Source: Maddison 2010
II (Box 1). In the early post–World War II years, the other Asian model
economies grew more along with China, with Japan singularly standing
out above the rest (Box 2).
The other Asian economies, except India and the Philippines, started to
show similar high-speed growth from the mid-1960s to the mid-1990s (Box
3). When China started its high-speed growth in the early 1980s, Japan had
already started to slow down, with the other Asian countries to follow suit
from the late 1990s (Box 4). There is a parallel trapezoidal movement of
high-speed economic development among the groups of Asian countries,
often referred to as a “flying geese” pattern in terms of similar high-speed
economic growth of groups of countries that have occurred in sequence.
The evidence shows that there is something unique about these
Asian countries that helped shape their post–World War II high-speed
economic growth. It would be particularly interesting, as the second
part of the question, to see if the level of marketization and quality of
modern institutions are relevant for their distinct growth performance
and indeed the development of their modern economies. To look into
this, I take the same data used earlier on the Japan and China compar-
ison, along with the other Asian countries. Figure 2.24 shows the level
of marketization and the quality of market institutions in these Asian
countries. Figures 2.25 and 2.26 are data plotting on the quality of
modern institutions in these countries.
0:lowest 10:highest
10
2
China Japan
1
0
1970 1980 1990 2000 2002 2004 2006 2008 2010
Figure 2.24 Level of marketization and quality of market institutions: Japan and
China (1970–2010)
Source: Gwartney and Lawson (2012)
2.5 Highest level, –2.5 Lowest level

2.5
1.5
0.5
–0.5
–1.5
–2.5
5
1996 2000 2003 2005 2007 2009 2011
China Japan
India Indonesia
Korea, S Philippines
T
Taiwan Thailand
Figure 2.25 Voice and accountability: Japan and China (1996–2011)

32 Xiaoming Huang
2.5: Highest level, –2.5 Lowest Level

2.5
1.5
0.5
–0.5
–1.5
–2.5
5
1996 2000 2003 2005 2007 2009 2011
China Japan
India Indonesia
Korea, S Philippines
T
Taiwan Thailand
Figure 2.26 Political stability and no violence: Japan and China (1996–2011)
2.5: Highest level, –2.5 Lowest level

2.5
1.5
0.5
–0.5
China Japan
India Indonesia
–1.5 Korea,S Philippines
T
Taiwan Thailand
–2.5
1996 2000 2003 2005 2007 2009 2011
Figure 2.27 Government effectiveness: Japan and China (1996–2011)

2.5:Highest level, –2.5 Lowest level

2.5
1.5
0.5
–0.5
China Japan
India Indonesia
Korea,S Philippines
–1.5
T
Taiwan Thailand
–2.5
1996 2000 2003 2005 2007 2009 2011
Figure 2.28 Regulatory quality: Japan and China (1996–2011)


2.5
1.5
0.5
–0.5
–1.5
China Japan
p
India Indonesia
Korea,S Philippines
T
Taiwan Thailand
–2.5
1996 2000 2003 2005 2007 2009 2011
Figure 2.29 Rule of law: Japan and China (1996–2011)

There seems a clear pattern from all these figures that their levels and
quality vary across the gap between Japan and China, except on one
indicator, “political stability and no violence” (Figure 2.26), where China
is in the middle of the range. Moreover, the positions of the countries on
the spectrum of variation on each indicator have been largely consistent
34 Xiaoming Huang

2.5
1.5
0.5
–0.5
China Japan
–1.5 India Indonesia
Korea,S Philippines
T
Taiwan Thailand
–2.5
1996 2000 2003 2005 2007 2009 2011
Figure 2.30 Control of corruption: Japan and China (1996–2011)

and stable. On the overall quality of modern institutions as measured on

average across the indicators: Taiwan (1.01) and Korea (0.76) are up close
to Japan (1.17). Indonesia (–0.47), the Philippines (–0.49), India (–0.30),
and Thailand (–0.29, 6.62) are down close to China (5.54).
On the extent of marketization and quality of market economy insti-
tutions (Figure 2.24), these countries are relatively close and scored
high: in 2010, they are all situated in the narrow range of 6 to 7, while
in 1980 the gap between them ranged from 3 to 8. These data match
the pattern of the development of their modern economies as discussed
earlier: along with the parallel trapezoidal movement of these countries
in their modern economic growth and development, there is associated
dynamic development of modern institutions.
Beyond that, the notion that these countries share an Asian develop-
ment model for their prolonged high-speed economic growth requires a
more sophisticated explanation. There have been significant differences
among these countries in modern institutions during their high-speed
economic growth. The use of “an Asian model” as a distinct set of institu-
tions, cultures, and values to explain the high-specific growth, and modern
economic development in general, in these countries seems problematic.
There is however a conversion process where the gap between them closed
up at higher levels, particularly in the level and quality of market economy, a
process which clearly has taken its own dynamism in individual countries.
4 Mapping Japan and China in the world

economic system
The above analysis and discussion leads us to suspect that modern

economic development is a worldwide phenomenon that transcends
national boundaries. Elsewhere I have outlined a general framework
for interpreting evidence from political economic analysis of modern
economic development of various different groups of countries.10
This framework includes several propositions. First, there have been
persistent efforts to frame the early modern economic development
of Europe and its “offshore” countries, and the modern economic
development of the rest of the world, as capitalism versus socialism,
developed versus developing economies, and liberal model versus East
Asian model economies. Even among countries within the “West,”11
there are tensions and debate over the “varieties of capitalism” (Streeck
and Yamamura 2001; Miller 2005; Albert 1993; Hall and Soskice 2001;
Hollingsworth and Boyer 1997; Shonfield 1965). Perhaps if we relax
the ideological and cultural connotations, and see different patterns,
experiences, or models of economic growth and development in our
modern time all as instances of the modern economy, we might have
less difficulty understanding the dynamic conditions and historical
context for each of these models or experiences. Seen as instances of
the modern economy, there is less theoretical and methodological
pressure to force Japan and China into a solid group of experiences
and models of economic growth and development as conventionally
framed.
The research above also allows us to map the historical and global
evolution of the modern economy; the rise and expansion of modern
economy at the national level; and the development, adoption, and
consolidation of the broad institutions of modern economy at the
global level. It is in this global process and structure that the rise and
development of modern economics in Japan and China can be much
better understood. Their connections with different types of modern
economic development can be better seen. The experiences of modern
economic growth and development and their associated institutions
and practices are indeed the basis of the world economic system.
Notes
1. Notwithstanding the difference between capitalism and market economy, as
put forth by Giovanni Arrighi (2007).
36 Xiaoming Huang
2. Douglas North and Robert Thomas suggest using “a per capita long-run rise
in income” to measure economic efficiency (1973: 1). There are debates over
the different use of GDP and GDI (Greenaway-McGrevy 2011). There is no
comparable historical GDI data available for the period our analysis requires
and for which good GDP data from the Maddison project is now available.
GDP and GDI can be different for shorter measurement (quarter on quarter,
year on year for example). For the long historical period concerned here that
uses hundreds of years and decades as a unit, with a 5-year moving average,
the differences can be insignificant.
3. I use Economic Freedom of the World Index (Gwartney, Lawson, and Hall 2011
here to measure the level of marketization. The EFW Index have data on six
sets of indicators, ranging from size of government: expenditures, taxes, and
enterprises; legal structure and security of property rights; access to sound
money; freedom to trade internationally; and regulation of credit, labor, and
business. If one looks further at the sub-indicators used under each category,
this Index is really about the quality of market institutions and the level of
marketization of the national economy.
4. I use World Bank’s World Governance Indicators (World Bank 2013) here to
measure the quality of modern institutions of the two economies. WGI
measures voice and accountability, political stability and absence of violence,
government effectiveness, regulatory quality, rule of law and control of
corruption. While indicators are based largely on perceptions through surveys
from different sources, they reflect the effectiveness of the large institutional
environment for the modern economy.
5. See discussion on this in this volume, Chapter 5.
6. From World Bank’s World Development Indicators (WDI) to Global Governance
Indicators (GGI), from IMF’s World Economic Outlook (WEO), to the Maddison
Project, and Penn World Tables (PWT).
7. This set of pattern descriptions for Figure 1.2 to Figure 1.5 is based on data
from The Economic Freedom of the World Index (Gwartney, Lawson, and Hall
2011).
8. This set of pattern descriptions in Figures 23 to 28 is based on data from the
World Bank’s Worldwide Governance Indicators (WGI, Kaufmann, Kraay, and
Mastruzzi 2012). WGI uses broadly sourced subcategory data to map levels of
good governance on countries. It estimates the perceptions of the “traditions
and institutions by which authority in a country is exercised. This includes
the process by which governments are selected, monitored and replaced; the
capacity of the government to effectively formulate and implement sound
policies; and the respect of citizens and the state for the institutions that
govern economic and social interactions among them.” http://info.world-
bank.org/governance/wgi/resources.htm.
9. I selected six representative European and its “off-shore” countries: Italy,
Germany, France, Netherlands, United Kingdom, and the United States,
using data from Angus Maddison’s Historical Statistics of the World Economy:
1–2008 AD (Maddison 2010).
10. See Huang 2012: 1–31 and the discussion built on the early framework.
11. I have tried to avoid the use of “Western,” but this seems something for
which there is no appropriate substitute.
3
Dynamic Comparative Advantage
and the Evolution of the Capitalist
World System
Nobuharu Yokokawa
1 Introduction
This chapter attempts to build a framework of the capitalist world

system so that modern economic development in Japan and China
can be better explained and understood. I consider that a conceptual
“marriage” between historical and theoretical political economy, on the
one hand, and institutional and evolutionary economics, on the other,
is possible and necessary for such a framework. Such a framework is
effective and most promising for explaining different types of modern
political economy.1 In this chapter I propose a new framework for
historical and theoretical political economy: an institutional political
economy, which consists of a basic theory of modern capitalist economy
and intermediate theory of specific types of capitalist world systems,
and use the framework to explain the rise and fall of the different world
economic systems, and how the modern economic development of
Japan and China relate to the evolution of the world economic system.
I introduce two new concepts into institutional political economy
which will allow us to investigate and demonstrate the evolution of
the capitalist world system: “dynamic comparative advantage” and the
“super Minsky cycle.” I build a dynamic theory of comparative advan-
tage, introducing concepts of “dynamic industries” and “value added per
labor” (VAL). In dynamic industries, VAL increases with the increase in
productivity and then eventually decreases, since the volume of produc-
tion increases with productivity growth, but value added per product will
eventually decrease with the spread of technology. Dynamic compara-
tive advantage is gained and maintained on the difference between VAL
and wages in strategic industries, such as textile, machinery, heavy and
chemical industries, and so forth.
37
38 Nobuharu Yokokawa
Under a dynamic comparative advantage, there develops a capital

accumulation regime such as mercantilism, or neoliberalism. Historically,
wages tend to increase in proportion to productivity growth. Dynamic
comparative advantage does not last forever because of the eventual
decrease of VAL and increases in wages. Countries have to upgrade their
industrial structures. Hyman P. Minsky’s original financial instability
theory does not explain changes in the accumulation regime (Minsky
1982). I build a theory of a super Minsky cycle that works over a period
of several business cycles.
I use this framework to investigate the evolution of the capitalist world
system after World War II, paying special attention to the industrializa-
tion of East Asia, reindustrialization of Europe and Japan in catching
up with the United States in productivity, and the cyclical crises in the
golden age. I will explain the structural crisis that changed the accumu-
lation regime in the 1970s; the “flying geese” pattern of development
in East Asia; and compressed pseudo Lewis-type industrialization in
China under the neoliberal accumulation regime. Comparative expla-
nation of Japanese and Chinese experience of modern economic growth
is provided in this historical framework of institutional evolution of the
capitalist world system. I argue that all these different accumulation
regimes and different national experiences of modern economic devel-
opment are manifestations of the capitalist world system, and different
phases of the evolution of it, driven by changes in dynamic comparative
advantage and further in capital accumulation regime, punctuated by
business, cyclical, and structural crises.
2 Dynamic comparative advantage
2.1 Dynamic industries and value added per labor hour

A dynamic industry is an industry where productivity growth is the most
rapid. It is also a leading industry and an engine of economic growth.
Historically, dynamic comparative advantage changed from agriculture
and wool, the most dynamic industries in the eighteenth century, to the
cotton industry between the late-eighteenth and mid-nineteenth centu-
ries, heavy and chemical industries from the late-nineteenth to the early
twentieth century, the machinery and electronics industries from the
1920s to the 1970s, and to IT and knowledge-intensive industries since
the 1980s (Figure 3.1).
Value added per labor hour (VAL) is the amount of value added which
is produced by one hour’s labor. It can be broken down into the value
added per unit of product and the number or volume of commodities
Machinery IT
Heavy
VAL)
chemical
Value added per labour hour (V
Cotton
Wool Wages
V
1700 1800 1850 1900 1950 2000 Historical

timeline
Figure 3.1 Dynamic industries and VAL
produced by one hour’s labor. In dynamic industries, VAL increases

with the increase in productivity, and eventually decreases, since the
volume of product increases with productivity growth, but value added
per product will eventually decrease with the spread of technology
(Figure 3.1).
2.2 Dynamic comparative advantage and wages

The dynamic comparative advantage is gained and maintained on
the difference between VAL and wages. Historically, real wages have
increased in proportion to productivity growth. In the early phase of
a new industry, wages may be higher than VAL. In such a case, capital
cannot obtain profit. It requires promotion of infant industry protection
for capital to invest in this dynamic industry.
When a dynamic industry takes off, its VAL becomes higher than
wages, and the higher growth rate of VAL than that of wages increases
profits, and then the dynamic industry successfully becomes a leading
industry. With the spread of production, domestic and international
competition reduces the price of the product, and eventually reduce
VAL, while wages continue to rise. When wages become higher than
the VAL, capital cannot obtain profit and production in the industry
decreases.
Let us examine the mechanism by which real wages increase in
proportion to productivity growth. For example, capital accumulation
in mid-nineteenth century England was dominated by the existing

dynamic industry, the cotton industry. When capital accumulation
increased in the cotton industry, capital accumulation in other sectors
also increased. With the progress of prosperity, employment increased.
Some types of labor in the dynamic industries became scarce, and so
wages rose more than productivity growth, which reduced the rate of
profits and eventually caused a crisis.
In dynamic industries, productivity continuously increased with new
methods of production, which were introduced in the replacing of old
fixed capital with new and more productive fixed capital. The new and
more productive machinery created relative surplus labor and reduced
wages to grow less than productivity growth. It increased VAL and the
dynamic comparative advantage. Then the accumulation of capital
recommenced under the conditions of structured labor–capital rela-
tions and abundant supply of surplus labor. Thus the conflict between
capital and labor over the distribution of income was solved through a
cyclical crisis, and wages were kept within productivity growth. I call
this a cyclical crisis, which reinforces the self-regulating nature of the
capitalist economy.
With the progress of capital accumulations through business cycles,
the available labor from the industrial reserve army was eventually
absorbed. The creation of relative surplus labor by introduction of new
and more productive machinery reduced the speed at which the indus-
trial reserve army was absorbed, but it did not reverse this trend.
In order to secure workers, wages in lagging sectors had to be
increased even though these sectors failed to match the fast produc-
tivity growth observed in dynamic sectors. Large wage increases in the
dynamic sectors spilled over into the lagging sectors, and were mostly
passed on to consumers in the form of higher prices (Rowthorn 1982).
This is Baumol’s cost disease (Baumol 1967). Once Baumol’s cost disease
starts, the ratchet effect of wage rises occurs. Wages that rise in times of
prosperity do not decrease in periods of depression. Unlike wage rises
in dynamic sectors, they are not compensated by productivity growth,
and therefore they decrease profits and the dynamic comparative
advantage.
2.3 Structural crisis, and linear and non-linear development

Through the repetition of business cycles, the dynamic comparative
advantage starts to decline with decreasing VAL and rising wages. This
causes serious structural crises, as those seen at the end of the nineteenth
century and in the 1970s. These crises destroyed the existing capital
accumulation regime. I call this type of crisis a “structural crisis” of the

capital accumulation regime.
There are two strategies to escape losing in the dynamic comparative
advantage. The first strategy is the development of industrial structures
by shifting leading industries to new dynamic industries. The second
strategy is to consolidate the comparative advantage by specializing in
the industry where one has comparative advantage, and push removing
protective industrial policy, so-called “kicking away the ladder” (Chang
2002) of industrial, technical and trade policies (ITT), and force free trade
and market policies to other countries so that they cannot catch up.
It is relatively easy for catching-up countries to adopt the first strategy
if new dynamic industries have already been well developed by advanced
countries and are readily available. When catching-up countries adopt
this strategy, they follow a linear development path. For example, the
East Asian countries did so after World War II and formed a “flying
geese” pattern of industrialization.
It is more difficult for the most advanced countries to adopt the first
strategy because of the high risk and cost involved in developing a new
dynamic industry. As can be seen in Figure 3.1, there is the possibility
that the VAL of a new dynamic industry may be lower than that of the
existing dynamic industry until the new dynamic industry takes off. For
example, in the mid-nineteenth century the VAL of heavy and chem-
ical industries was lower than that of the cotton industry (Figure 3.1).
Generally, if the VAL of a new dynamic industry is lower than that of the
current dynamic industry, its rate of profit will be lower than that of the
existing dynamic industry. Furthermore, there is a possibility that the
VAL of the new industry is lower than wages in the beginning. There is
a conflict between social benefit and private benefit. If the choice is left
to the market, less capital is invested in the new dynamic industry than
would be socially preferable.
Britain adopted the second strategy in the latter half of the nineteenth
century. In the late nineteenth century the VAL in the cotton industry
started to fall, and the VAL in the heavy and chemical industries started to
increase. Britain left the choice of capital investment to the market. The
result of this market selection was to choose the current dynamic indus-
tries that had the higher rate of profit at the time, and face the uncer-
tainty of a changing industrial structure to keep capital in a liquid form.
The result was insufficient fixed capital investment in the new dynamic
industries. Instead, Britain increased capital investment in such countries
as the United States and other British offshoots, where the rates of profit
were higher than in Britain, thereby promoting the first globalization.
It might be easier for ambitious catching-up countries to develop

a new dynamic industry. First, the difference between the VAL of the
existing and new dynamic industries is less than that of the most
advanced countries. Second, their wages are lower than that of the most
advanced countries. Third, they usually favor interventionist ITT poli-
cies in catching up with and challenging leading countries. When catch-
ing-up countries take this strategy, they follow a nonlinear development
path. It was the United States and Germany that took this strategy at the
end of the nineteenth century and aggressively used ITT policies and
created complementary institutions such as limited liability companies
and improved financial institutions to concentrate latent money capital
in society to promote heavy and chemical industries.
Consequently, productivity growth in these two countries became
much higher in the new dynamic industries at the beginning of the
twentieth century, and they replaced Britain as the leading industrial
countries. Historically there were two successful cases of nonlinear
development: Britain in the eighteenth century when it developed a
new dynamic industry (cotton), and the United States and Germany at
the end of the nineteenth century.
If Britain intended to maintain its dominance, it had to socialize risk
and cost and develop new dynamic industries through suitable ITT
policies, and new institutions to promote investment in new dynamic
industries. If a country does not upgrade its industry when a dynamic
comparative advantage is lost, its international status will be degraded.
Therefore, applying interventionist ITT policies and building comple-
mentary institutions are necessary for all countries, including advanced,
catching-up, and developing countries. The effectiveness of interven-
tionist ITT policies and the new institutions depends on a country’s
ability to socialize cost and risks to develop new dynamic industries in a
changing economic and political environment.
This lesson was well learned by the United States, the next leading
country in the capitalist world system. The United States became the
top industrial country in the heavy and chemical industries, and in
the next dynamic industries (automobiles and electrical machinery).
However, it still adopted protectionist policies in ITT, building comple-
mentary financial, legal, and bureaucratic institutions even in the
1930s (Chang 2002). When the US dynamic comparative advantage
was lost in the 1970s with the rapid catching up of Germany and
Japan, it adopted a more neoliberal policy, “kicked away the ladders,”
and promoted the second phase of globalization by increasing foreign
direct investment, as Britain had done in the early twentieth century.
However, it protected and promoted its IT industries by massive mili-

tary spending. IT industries successfully became the next dynamic
industries in the 1990s, and the United States recovered its dynamic
comparative advantage.
2.4 Dynamic comparative advantage and the capitalist

world system
In the world history of the development of capitalism, various different
types of capitalist economies have appeared. While most of them have
failed to become the basis of a new world economic system, the British
model in the nineteenth century, and the US model in the twentieth
century have been able to build their model-centered capitalist world
system. I list these different models, their capital accumulation regimes,
complementary institutions, and time lines in Table 3.1.
Each of these capitalist world systems, market capitalism centered
on the British system and bureaucratic capitalism underpinned by the
US system, has had stages of their development, each with a distinct
set of complementary institutions: mercantilism, liberalism, imperi-
alism, welfare state, neoliberalism. Each stage has its dynamic indus-
tries: the agriculture and wool industries in the stage of mercantilism,
cotton and railways in liberalism, heavy and chemical in imperialism,
machinery in interregnum, machinery in welfare state, and IT in
neoliberalism.
A capitalist world system was first established when British capitalism
created complementary institutions, Liberalism, with cotton and railway
industries as the dynamic industries. I call this “market capitalism”
because it was characterized by the coordination of the economy through
market forces and institutions, such as free trade and the gold standard.
Dynamic comparative advantages of the cotton and railway industries
were fully developed in this capital accumulation regime, with foreign
demand as the engine of demand growth. It created the first golden
age of capitalism. Cyclical crises reinforced the self-regulating nature of
Table 3.1 Periods of capitalist world systems
Establishment Diversification Systemic

Formation (Golden age) (Globalization) crisis
Market Mercantilism Liberalism Imperialism Interregnum
capitalism (1750s–1810s) (1820s–70s) (1870s–1910s) (1920s–40s)
Bureaucratic Interregnum Welfare State Neo-Liberalism 2000–

capitalism (1920s–40s) (1950s–70s) (1980s–90s)
capitalist economy, solving conflicts between workers and capital over

income distribution.
After the structural crisis of capital accumulation regime of liberalism
in the late nineteenth century, dynamic industries shifted to heavy and
chemical industries and the centers of economic growth shifted from
the United Kingdom to the United States and Germany. A new capital
accumulation regime, imperialism, was created with two challengers
and one old hegemon. The dynamic advantage of heavy and chemical
industries was not fully developed under imperialism due to demand
side constraints. Market capitalism finally collapsed in the systemic
crisis, the Great Depression in the 1930s, and was replaced by bureau-
cratic capitalism after World War II.
The second capitalist world system emerged when the United States
created the welfare state and the system of mass production and mass
consumption as complementary institutions, and machinery indus-
tries as the dynamic industries. A dynamic comparative advantage in
machinery industries was fully developed under this capital accumu-
lation regime. It successfully replaced foreign demand with domestic
demand, with wages as the engine of demand growth. It created the
second golden age of capitalism. I call it “bureaucratic capitalism,”
because it was characterized by the coordination of economic activi-
ties through the well-structured bureaucratic systems of oligopolistic
corporations, big government, and the Bretton Woods international
institutions. Mild business cycles reinforced the self-regulating nature of
capitalist economy, solving conflicts between workers and capital over
income distribution.
After the structural crisis in the capital accumulation regime in the
1970s, a new capital accumulation regime, neoliberalism, emerged.
This destroyed the link between wages and productivity growth. The
dynamic advantage of IT has not fully developed under this neoliberal
accumulation regime, largely because of demand-side constraints.
2.5 Dynamic comparative advantage and the flying geese theory

Industrialization in East Asia has been studied in the framework of
Kaname Akamatsu’s flying geese theory, which is the most original
framework for the analysis of East Asian industrialization. The first
thesis of the flying geese theory is that development moved away from
the import of foreign goods, substituting locally produced goods, to
exports. The second thesis is that successful developers moved on to
new dynamic industries. The third thesis explains regional economic
development in East Asia, with declining industries in the leading geese,

particularly Japan, picked up sequentially by following geese, such as
South Korea and Taiwan.
There are two criticisms over Akamatsu’s linear development theory.
First, Gerschenkron’s theory of benefits of backwardness suggests the
possibility of nonlinear development. He emphasizes that developing
countries introduce the most advanced technology available in their
industrialization (Gerschenkron 1962: 9, 26). He also emphasizes the
importance of an infant industry protection policy and other interven-
tionist ITT policies, as well as complementary institutions such as finan-
cial institutions and the state, in order for the benefits of backwardness
to materialize.
Second, compressed development literature (Whittaker et al. 2010)
argues that for countries such as China and India, which are industrial-
izing today, the most advanced technologies are available for all matured
industries, and they can have the same dynamic comparative advantage
in all industries. They may be able to start industrialization with the help
of FDI and global value chains (GVC) in all industries at once, as was done
by China, or they may be able to choose the most suitable industries, such
as IT, and leapfrog some industries, as India has done.
The theory of dynamic comparative advantage is complementary
with the flying geese theory. It provides some remedy to these problems
and therefore complements Akamatsu’s original theory in the following
three respects:
According to Akamatsu, the flying geese pattern of development is,
on the one hand, a catching-up process, where differences in produc-
tivity are reduced by conversion on the one hand, and diversion on the
other, where advanced countries try to improve productivity further by
upgrading their industries and introducing new production methods.
In its original form, the flying geese theory does not cover the possi-
bility of change in the leader. In our theory, change in the hegemon of
the capitalist world system, such as from Britain to the United States,
is explained by the strategies adopted by the countries when they face
structural crises in a capital accumulation regime.
Second, in its original form, the flying geese theory is applied to indus-
trialization in East Asia in the post–World War II period. Our theory is
applicable to both linear and nonliner a industrializations in any coun-
tries including advanced, catching-up, and developing countries and in
any capitalist world system. Third, our theory emphasizes the impor-
tance of ITT policies and complementary institutions.
3 Minsky’s financial instability hypothesis and

super Minsky cycle
3.1 The basic Minsky cycle

Hyman Minsky’s financial instability hypothesis (Minsky 1982) may
be reconstructed by paying closer attention to the accumulation of real
capital as follows (Figure 3.2). The demand price of investment is deter-
mined by expected profit flows from the investment divided by the
current interest rate (demand price curve 1). The supply price of investment
is determined by the prices of the production of capital goods (supply
price curve 1). As long as the demand prices of investment are expected
to exceed the supply prices of investment, investment continues (A–B).
With the increase in profit flows, both borrowers’ and lenders’ expecta-
tions become progressively more optimistic, and investment overshoots
(B–C). The demand price curve shifts from 1 to 2, and then from 2 to
3. Financial arrangements change from hedge finance in times of pros-
perity, when borrowers expect revenues to cover the repayment of both
interest and principal, to speculative finance in boom times, when reve-
nues cover only interest, and then to Ponzi finance, when revenues are
insufficient to cover interest. When monetary authorities tighten credit
due to inflation (supply curve 2), the boom collapses.
3.2 Super Minsky cycle

Minsky’s original theory does not explain change in a capital accumula-
tion regime. I introduce the concept of a super Minsky cycle that works
over a period of several business cycles (Palley 2010).
Supply price 2
Supply Price1
Price of investment
Demand price 3
Demand price 2
A
Demand price 1
Investment
Figure 3.2 Basic Minsky cycle

In the period of increasing dynamic comparative advantage, the

supply price curve shifts downward with higher productivity (supply
price curve 2 to 1 in Figure 3.3), and the demand price curve shifts
upward with higher expectation of profits (demand price curve 1 to
2), and the theoretical equilibrium shifts from I1 to I2. The economy
becomes very dynamic. In the period of decreasing dynamic produc-
tivity, the supply price curve eventually shifts upward with a higher cost
of production (supply price curve 1 to 2) and with a lower expectation of
profits, the demand price shifts downward (demand price curve 2 to 1),
and the theoretical equilibrium shifts from I2 to I1. Then the economy
loses dynamism.
When the supply price curve shifts further upward (supply price curve
2 to 3), the demand price of investment (demand price curve 1) is lower
than the supply price of investment at any investment level. If this
occurs, capital ceases to invest, since they cannot expect profit from
their investment. Minsky (1982: 108) called this “present value reversal.”
It is a reinterpretation of John Keynes’s “liquidity trap,” where monetary
stimulation through lower interest rates becomes impossible.
4 The rise and fall of the golden age and catching-up

industrialization
I shall now investigate the evolution of the capitalist world system after
World War II, paying special attention to the industrialization of East
Asia.
Supply price 3
Supply price 2
Price of investment
Supply price 1
E2
Demand price 2
Demand price 1
Investment
I1 I2
Figure 3.3 Super Minsky cycle

4.1 The capital accumulation regime in the (second) golden age

After World War II, competition between capitalism and socialism became
systemic, and the two systems sought superiority in both economic
and military power. The economic systems under both capitalism and
socialism were designed to maximize economic performance. The capi-
talist countries reindustrialized with the strong support of the United
States and well-designed international and domestic institutions.
The leading industries shifted from heavy and chemical industries to
the machinery and electronics industries in the 1920s and 1930s in the
United States. US mass production systems in the machinery and elec-
tronics industries were introduced into Europe in the 1950s and 1960s.
In Japan the leading industries shifted from light industries to heavy
and chemical ones in the 1950s and 1960s, and then to the machinery
and electronics industries in the 1970s (Figure 3.4). In this golden age,
all countries except the United States benefited from catching-up effects,
rapidly increasing their productivity.
Postwar states had powerful institutions, such as fiscal and mone-
tary policies, to maximize economic performance, and the sheer size
of government stabilized economic fluctuations. In the new managed
currency system, the central banks could create currency to meet the
liquidity needs of the expanding domestic economy. They also had
40%
30%
20%
10%
0%
6
65 68 71 74 77 80 83 86 68 92 95 98
–10%
–20%
Machinery Heavy chemical Textile
Figure 3.4 Export competitiveness of Japanese industries (1965–98)

Note: Export competitiveness = (Production/Domestic demand).
Source: MITI (2000).
institutions for more direct intervention. Some countries, such as Japan

and Germany, favored more direct government intervention and devel-
oped their ITT policies and supporting institutions in order to catch up
with the United States.
Welfare state policy was the result of the requirements of bureaucratic,
or oligopolistic, firms and states. First, bureaucratic firms could not rely
upon foreign demand, and domestic demand had to replace it. Second, it
was also the result of state policy. The success of socialist planned econo-
mies undermined the superiority of capitalist economies. Bureaucratic
governments had to achieve full employment and higher living stand-
ards. For these reasons, although there were huge surplus labor supplies
in many developed countries in the 1950s and early 1960s, wage rates
increased in proportion to productivity.
The Bretton Woods system was designed to reduce the external
constraints imposed on national economies by the gold exchange standard.
To accelerate reindustrialization of the capitalist economies, the United
States adopted a liberal trade policy. This US policy shift to liberalism
helped reindustrialization of capitalist economies, rather than “kicking
away the ladder,” since it opened up its markets to capitalist countries,
and enhanced technological transfer, while tolerating catching-up coun-
tries’ protectionist ITT policies. The United States also controlled supplies
and prices of raw materials and fuel so that market economies would not
suffer from supply constraints. The smooth expansion of international
trade under the multilateral, free-trade regime, GATT, and the abundant
availability of international reserve, accelerated the growth of interna-
tional trade, which in turn accelerated the catching-up and GNP growth
of the capitalist countries.
With strong support from the state and international institutions,
bureaucratic capitalism successfully reversed the pattern of capital accu-
mulation from dependence on foreign demand to domestic demand,
with wages as the engine of demand growth, and established a mutu-
ally reinforcing mechanism between productivity growth and domestic
economic growth, leading to the long-lasting prosperity of the 1950s
and 1960s.
4.2 Cyclical crises and the dynamic comparative advantage

With these complimentary institutions dealing with constraints on both
supply and demand, dynamic comparative advantage was fully devel-
oped. Capitalism recovered its self-regulating nature.
(1) Prosperity
Prosperity began mainly with the increase in investment and consump-
tion, which raised both employment and profit rates. Accumulation of
capital increased both wages and profit, and, therefore, consumption
and investment demand.2 As prosperity continued, firms maximized
investment, utilizing credit to take advantage of the economy of scale.
These further increased profits and investment demand. At full capacity
utilization, a Kaldorian profit-led accumulation mechanism worked.
The increase in investment raised the price level, which increased profits
with sticky money wages.3 Labor unions tolerated higher prices because
the increase in investment contributed to demand for labor, increase in
productivity, and eventually in real wages.
(2) Boom
As capital accumulation accelerated through credit expansion, the
boom collapsed because the tightening of credit took different forms,
depending on the levels of savings. Minsky’s financial instability
hypothesis (Minsky 1982) explains, in money market psychology, the
boom and bust in countries with current account surplus. As long as the
demand prices of investment are expected to exceed the supply prices
of investment, investment continues. With inflation and increases in
profit flow, expectations of both borrowers and lenders become progres-
sively more optimistic, and investment overshoots. In a time of boom,
financial activities shift from hedge finance to speculative finance, and
then to Ponzi finance. When the monetary authority tightens credit
because of inflation, the boom collapses.
In countries with current account deficit, capital accumulation was
restricted by the balance of payments. Full employment was reached
under expansionary monetary policies and capital supply, which tended
to increase inflation. As long as the rate of inflation was kept equal to
or less than US inflation rates, the balance of payments situation would
not deteriorate. Once inflation rose beyond this level, the balance of
payments was degraded, and the exchange rate strained. When the
exchange rate dropped below the predetermined rate, the IMF fixed-rate
system forced the monetary authorities to tighten credit.
(3) Recession
In all countries, the monetary authorities tightened credit before a crisis
actually erupted. This reduced investment, and a recession started.
However, recession was a temporary problem, since the economy cooled
down before the crisis actually began. Once inflation had been reduced,
credit was loosened again.
(4) Depression
In depression, a Kaleckian wage-led accumulation mechanism operated
(Kalecki 1954, 1971; Rowthorn 1982). Sticky money wages and lower
price levels increased real wages. The supply price of investment also
dropped rapidly (supply price curve 2 to 1, and even lower) and then the
demand price curve became higher than the supply price curve again,
and investments started. Increases in real wages together with auto-
matic stabilizers increase aggregate demand. Effects of demand, through
increased real wage, depend on the price level. The more the prices of
wage goods decrease, the more consumption demand increased with the
same amount of money wage.
The productivity growth of wage goods industries allowed a reduction
in the prices of wage goods without reducing average profits during the
Depression in the golden age. Oligopolistic firms responded to increased
demand by increasing output. In an oligopolistic market, investment
increased with higher utilization rates (the acceleration principle). As
the result of the acceleration principle, increases in production exceed
what is compensated for increases in wage. As both profits and utiliza-
tion rate increased, prosperity began again.
(5) Self-regulating nature of capitalist economy

Thus a cyclical crisis dealt with conflicts between workers and capital
over income distribution, and reinforced the self-regulating nature of
capitalist economy, with the help of complimentary international and
domestic institutions.
5 The structural crisis of bureaucratic capitalism
The long-lasting, massive capital accumulation in the 1970s made

further accumulation difficult. The social institutions that supported the
self-regulating nature of capitalist economy in bureaucratic capitalism
became ineffective. With destruction of the supporting social institu-
tions, conflicts between the workers and capital over income distribu-
tion became more severe.
5.1 Structural change

(1) Uneven development and its disorganizing influences on international
relations
The long boom of the 1950s and 1960s was much stronger in Japan and
Europe than in the United States. The rapid growth of capital stock,
encouraged by plentiful supplies of relatively cheap labor, and the use
of the new technologies and management practices that developed in

the United States over the previous decades, closed the productivity gap
in manufacturing between Europe and Japan on the one hand, and the
United States on the other.
The first disturbing influence of uneven development on international
economic relations consisted of changes in international competitive-
ness. Higher productivity growth and lower wage levels kept the exports
of European and Japanese manufactured goods highly competitive. It
increased competition in international trade, and decreased the relative
strength of US trade, placing a high degree of stress on the free trade
regime of the GATT.
The second disturbing impact on international economic relations
was the loss of confidence in the US dollar. In spite of the decline in
its current account surplus, the United States could not decrease either
capital exports or government deficit to maintain its dominant status
in the world economy, and stabilize the domestic economy. The result
was an increased US deficit, with an increased supply of US dollars,
which undermined confidence in the dollar and heightened concern
about US gold reserves. As a result, the United States had to stop conver-
sion in 1971.
The third destabilizing effect was the abandonment of the fixed
exchange rate system. The combination of divergent productivity
growth and inflation rates generated persistent payment imbalances,
which undermined the fixed exchange rate system. As the result of the
second and third destabilizing effects, the Bretton Woods system was
abandoned.
The fourth disturbing effect was the rise in the costs of raw materials,
food, and energy. High demand for energy and other materials put pres-
sure on available supplies. The rise in food and raw materials prices in
the early 1970s was a response to high demand and was exacerbated by
speculations. Along with these domestic inflationary pressures was the
more ominous fourfold increase in oil prices at the end of 1973. This was
made possible by the decline in US control over oil and the formation
of OPEC.
(2) Productivity growth slowdown and its destabilizing effect on domestic

economic relations
The long-lasting, massive high capital accumulation eventually led to
slowdown in productivity growth. First, the mass production system,
known as “fordism,” had reached the saturation stage in many advanced
economies by the early 1970s. One aspect of these limits was the erosion
of factory discipline. Second, part of the productivity slowdown came

from a slower output growth in industries. Decline in capital accumula-
tion reflected business anxieties about the decline in profitability, rise in
inflation, and other signs of instability. Third, the scope for Europe and
Japan to catch up with the United States in productivity had become
smaller. Fourth, the relative lagging behind in productivity growth
in the service sector forced de-industrialization (Rowthorn and Wells
1987). Productivity growth in the service sector was difficult with the
technology available.
The first destabilizing effect of productivity growth slowdown on
domestic economic relations was the reduction of VAL. The spread of
technology increased competition both domestically and internation-
ally, and reduced the price of products and value added. The decrease
in value added per product was not offset by an increase in the number
or volume of commodities produced by one hour’s labor, due largely to
reduced productivity growth. As a result, VAL was reduced.
The second destabilizing impact was Baumol’s disease. Long-lasting,
massive capital accumulation eventually exhausted industrial labor
reserves. Large wage increases in the dynamic sectors spilled over
into the lagging sectors, and were mostly passed on to consumers in
the form of higher prices, which further increased wages. Increases
in wages under a declining VAL reduced the dynamic comparative
advantage.
The third destabilizing effect was tensions and conflicts in industrial
relations. With over-accumulation of capital with respect to available
labor, labor unions became militant, and wage bargaining shifted from
being Keynesian on sticky money wage to being Marxist on sticky real
wage (Epstein and Schor 1990: 130). When demand for higher real wages
surpassed stumbling productivity growth, wage pressure contributed to
a squeeze on profitability, since increased competition both interna-
tionally and domestically made it difficult to transfer wage increases
to the prices of products. Thus tensions over income distribution trans-
formed coordinated capital–labor relations into conflictual capital–labor
relations.
The fourth destabilizing effect was the paralysis of the Keynesian
policy. Keynesian policy relied on sticky money wage. Keynes envis-
aged that the boost in government spending would increase demand
and price levels, and push private investment by increasing profits.
However, if money wages increased in proportion to price levels, higher
price levels would not increase profits. Government spending became
less efficient with sticky real wages and caused stagflation.
5.2 Structural crisis

With these structural changes and the loss of the dynamic comparative
advantage, the structural crisis of bureaucratic capitalism started with
the Nixon shock in 1971, followed by the first oil shock in 1974, and five
years of depression, and the second oil shock in 1979. In this structural
crisis, the capital accumulation regime of the golden age collapsed.
The 1970s started with stagflation. The Keynesian effective demand
policies only worsened inflation without reducing unemployment. The
effect of abandonment of the Bretton Woods system was similar to that
of the gold exchange standard in the 1930s. The new floating exchange
regime increased the uncertainty of the world economy. It removed
balance of payment fetters, and enabled an aggressive monetary and
fiscal policy. This shifted the demand price curve upward, and invest-
ment began again.
As the economies recovered, the oil shock attacked which accelerated
inflation and shifted the supply curve further upward. Governments
tightened both monetary and fiscal policies. Then the demand price
curve shifted downward. Investment prices were reversed, and the struc-
tural crisis started.
With the start of the severe crisis, monetary and fiscal policies were
relaxed. But even with the aggressive monetary and fiscal policies, the
economy did not recover for the next five years. In this environment,
neither the wage-led nor profit-led accumulation mechanisms of the
golden age worked.
The Kaleckian wage-led accumulation mechanism did not work. First,
slower productivity growth in wage goods industries, high cost of raw
materials and fuels, and Baumol’s “cost disease,” did not allow reduc-
tion in the prices of wage goods as much as previously. If prices of wage
goods rise in a time of depression, the Kaleckian wage-led effect will
be lost completely. Second, increased competition under slow demand
growth forced fixed capital to be kept to a minimum, and the accelera-
tion dynamics stopped working. Thus, the Kaleckian wage-led accumu-
lation mechanism was totally ineffective.
Neither did a Kaldorian profit-led accumulation mechanism work.
First, when firms increased investment and the prices of products rose,
the sticky real wages soon squeezed profits, and firms lost the incentive
to invest further. Second, business anxiety reduced investment in fixed
capital. Slower accumulation of fixed capital further reduced produc-
tivity growth. Third, tension and conflicts in capital–labor relations
made capital cautious about increasing employment. Investments were
mainly labor saving, which did not increase employment.
The US and Japanese economies bottomed out in 1975, while European

economies finally bottomed out in 1977. Then the second oil shock
attacked OECD countries, and a new wave of tight fiscal and monetary
policies caused a new structural crisis.
6 Diversification of bureaucratic capitalism
If industrial relations and production methods are not working, capital

accumulation cannot restart. There were three successful attempts to
reestablish labor discipline and to reshape capital accumulation regime
in the 1980s. Centralized bargaining in corporatist nations rebuilt indus-
trial relations, and workers agreed to reduce wages for secure employ-
ment. Japanese mini-corporatism combined labor loyalty and a flexible
production system. The Anglo-American neoliberal economies signifi-
cantly limited the power of labor unions. In these countries, the conflict
between workers and capital on income distribution was thus solved,
and distributional conflict between capital and labor ceased playing a
major role in business cycles.
6.1 East Asia’s flying geese pattern of development

Japan was among the countries that most rapidly bottomed out from the
serious structural crisis in the 1970s. As discussed, there are two strategies
for avoiding a loss of dynamic comparative advantage. Japan adopted
the first strategy: shifting leading industries to new dynamic industries
and following a linear development path. Japan was one of the most
backward countries among the catching-up countries in the golden
age. It shifted its dynamic industry from light industry to heavy and
chemical industries in the golden age. When it lost dynamic compara-
tive advantage in the heavy and chemical industries, it was able to shift
toward more sophisticated machinery industries, such as automobiles
and electrical machinery, from the mid-1970s onward (Figure 3.4).
Japan was able to recover a dynamic comparative advantage, as
Japanese productivity in manufacturing was about 70 percent of the US
level, while its wages were about 50 percent of the US level in the 1970s
(Glyn 2006). Once the link between productivity growth and wages was
lost, a new source of effective demand had to be found. Japan adopted
an export-led industrialization strategy, increasing its trade depend-
ency from 10 percent of GDP in the golden age to 15 percent from the
mid-1970s to mid-1985. The development of Japanese industries left
room for less-developed East Asian countries to industrialize following
Japan. This is reflected in the East Asian export-led flying-geese industri-
alization pattern as follows.
Industrialization in labor-intensive sectors started in NIES in the

1960s. The US companies started to shift labor-intensive processes such
as assembly lines for electrical equipment to NIES. This was followed by
Japanese FDI. The main exports from NIES were labor-intensive products,
such as clothing, textiles, groceries, and electrical and electronic equip-
ment. Most of them were produced by subsidiaries of companies from
advanced countries. National strategies in NIES promoted industrializa-
tion in heavy and chemical industries from the mid-1970s onward. In
the 1970s, Japan started to export replica factories, including know-how
and skills, to East Asian countries, a process which made the introduc-
tion of heavy industries much easier and significantly increased produc-
tivity in NIES.4 These developments formed a “flying geese” pattern in
terms of their timing and level of development, their different position
in industries, production networks and value chains, and different roles
in the regional flows of products, materials, capital, and technology.
6.2 The neoliberal accumulation regime

It was the Anglo-American neoliberal accumulation regime that reshaped
the capitalist world system after the structural crisis. The decisive policy
shift from welfare state to neoliberalism came in 1979. The UK govern-
ment and the US Federal Reserve pushed up interest rates to unprec-
edented heights to cut inflation, which increased unemployment. At
the same time, they further limited the power of labor unions. This rees-
tablished an optimal type of industrial relations by reducing wages and
creating a relative surplus labor supply in the United States and Britain.
The neoliberal accumulation regime may be summarized as follows.
It faced two demand-side constraints. First, when an economy is in a
“liquidity trap” or “present value reversal,” increase in money supply
does not reduce interest rate and stimulate investment. Secondly, the
link between wages and productivity growth was largely lost. Wages
are both costs of production and a source of demand. If wages do not
increase in proportion to productivity, a new source of effective demand
is required. Neoliberal financial relaxation solved these constraints. It
includes “regulatory capture,” such as Wall Street’s lobbying efforts to
reduce regulations; “regulatory relapse,” such as memory loss in forget-
ting the lessons of the past and culture change; and “regulatory escape,”
such as financial innovation.5
Neoliberal financial relaxation increased asset prices, and reduced
the expected rate of interest, which worked on both consumption
demand and investment demand. It increased consumption demand by
increasing income from capital gains and the availability of many kinds
of loans. At the same time, lower interest rates increased investment
demand by increasing the demand price of investment, which shifted
the demand price of investment curve upward in our Minsky model.
The neoliberal accumulation regime worked well, especially in the
1990s, when new dynamic industries recovered their dynamic compara-
tive advantage. IT in the United States and finance in Britain, for example,
were dynamic industries and engines of growth in this period.
6.3 Globalization
Facing the structural crisis after the 1980s, the United States took the second
strategy as Britain did in the late nineteenth century, and shifted its inter-
national policy to a more neoliberal orientation and forced catching-up
countries to adopt this policy. The United States also promoted the second
phase of globalization by increasing foreign direct investment. The United
States monetary authorities adopted a strong dollar policy to encourage
capital inflow as Britain did in the 1920s.The Bretton Woods system was
effectively replaced by a market-led international financial system, namely
the Eurodollar markets. This neoliberal international monetary regime
made economies extremely vulnerable to short-term capital flows, both in
the advanced and developing economies, as in the 1920s.
However, US strategy was different from the British strategy in two
important respects. First, US companies aggressively did away with
manufacturing. That lost their dynamic comparative advantage.
They transferred production capacities to countries with low wages,
and still enjoyed dynamic comparative advantage. The US globaliza-
tion model also encouraged investment in, and transfer of manufac-
turing know-how, to developing countries through global value chain
(GVC). Developing countries accepted this model and it allowed them
to pursue export-led growth policies (Palley 2010). Second, the United
States protected and promoted IT industries through massive military
spending. These became the next dynamic industries in the 1990s.
6.4 Business cycles after structural crises

Under the neoliberal accumulation regime, prosperity started with
neoliberal financial relaxation. Borrowing and asset price inflation
became the engines of aggregate demand growth, in place of the wage
growth of the golden age. In times of prosperity, a profit-led accumula-
tion mechanism operated. Increases in investment raised price levels,
which increased profits with money wage remaining constant. With
the increase in profit flows, both borrowers’ and lenders’ expectations
became progressively more optimistic. The demand price of investment

curve shifted upward, and financial arrangements changed from hedge
finance to speculative finance, and then to Ponzi finance. When the
monetary authorities tightened credit to curb asset price bubble, the
boom collapsed.
A tight monetary policy stopped investment, and the crisis began. Both
investment and consumption had been heavily dependent on credit,
and the tight monetary policy made many borrowers bankrupt. In this
process, banking crises often started, and then it turned into an indus-
trial crisis. Once depression began, the economy did not recover auto-
matically, as the Kaleckian wage-led accumulation mechanism would
not work. The economy fell into a liquidity trap again or a present-value
reversal in our Minsky model. It required further neoliberal financial
relaxation to set prosperity in motion again. Thus policy-led boom and
bust replaced the self-regulating nature of capitalist economy under the
neoliberal capital accumulation regime.
6.5 Current account surplus reversal in Japan, Korea, and

Taiwan, and GVC-led industrialization in ASEAN and China
In the first half of the 1980s, the US dollar was hugely overvalued. The
IMF calculated that the Japanese, Korean, and Taiwanese currencies
were undervalued by 40 percent, 35 percent, and 25 percent respec-
tively against the US dollar in the mid-1980s (IMF 2010). Their current
account surplus shares of the world’s combined surplus in peak years
were 42 percent, 6 percent, and 8 percent respectively. After the Plaza
accord of 1985, these currencies appreciated rapidly. The Japanese yen
had appreciated by 46 percent against the dollar by the end of 1986, and
the Taiwanese dollar appreciated by 57 percent against the US dollar in
four years (ibid.). After the current account surplus reversal, Japanese
trade dependency reduced to 10 percent between 1985 and 2003. These
economies had to replace foreign demand by domestic demand. They
did not restore the link between wages and productivity growth, but
adopted the neoliberal accumulation regime.
These economies adopted the following strategies: First, they increased
outflow foreign direct investment initially to ASEAN and then to China
to reallocate lower value-added sectors of the value chain. They restruc-
tured domestic production toward higher value-added sectors where
they still had a dynamic comparative advantage. Second, they covered
the reduction of domestic production of tradable by increasing domestic
production of non-tradable, such as services and construction. Third,
they, especially Japan, chose neoliberal financial relaxation to increase
investment and consumption demand. Japan’s bubble in the late 1980s

and bust in the early 1990s was a typical and most serious bubble and
bust in the neoliberal accumulation regime.6
The Japanese share of world commodity exports peaked in 1990,
and was overtaken by the East Asian NIES in 1991 (Glyn 2006). In this
period, Japan built a Pacific Rim triangle trade regime whereby Japan
exported capital goods to the ASEAN and China, and the ASEAN and
China exported completed products to the United States. Japanese FDI
went to the ASEAN4 and China for cheap wages, followed by Korean
and Taiwan FDI, accelerated industrialization in the ASEAN4 and China.
However, their industrialization processes did not follow the original
flying geese pattern.
These industries were transplanted for export. They thus skipped the
first two processes of the first flying geese pattern, namely imports and
domestic production. Hence the first aspect of the flying geese pattern
was lost.
The development of IT technology enabled them to separate the value
chain of production, and only labor-intensive processes were transferred
to countries with low wages in the 1980s. Although the most advanced
technologies were imported, this was a part of the production process,
and it became difficult for many developing countries to upgrade indus-
tries independently of FDI. In this way the second aspect of the flying
geese pattern was also lost.
6.6 Compressed and pseudo Lewis-type

industrialization in China
The term “compressed industrialization” is used to explain faster
economic development among catching-up economies. For example,
Japan achieved industrial development by following advanced coun-
tries step by step in less than 100 years, when it had taken more than
200 years in Britain, and while Korea achieved similar development in
an even shorter period of 30 years. The term is now also used to describe
nonlinear development and the simultaneous development of industries
with different levels of sophistication. China promoted industrialization
in many sectors at once in this period. The international competitive-
ness of Chinese light industries, heavy industries, and machinery were
simultaneously improved.
The Chinese type of compressed industrialization was made possible
by three exceptional conditions. It is an exceptional case rather than
being generally adaptable to all late industrialization. China’s multiple
and ample production factors enable industrialization in many sectors
with necessary scales of production. China has also become the most
attractive country as a vast mass market, since it achieved 40 percent of
total East Asian growth in 1999.
China has a number of social institutions for materializing the advan-
tage of backwardness: an enormous population and historical economic
achievement in the socialist plan economy give China production
factors equivalent to those of the whole of East Asia. Moreover, unlike
the ASEAN and NIES, China is politically integrated. These conditions
give China massive bargaining power over inflow foreign direct invest-
ment. China can negotiate for the transplant of entire value chains of
production instead of labor-intensive production processes alone.
These two conditions are also beneficial to the development of the
more advanced industries, such as aerospace, computer software, and
biotechnology. It is still possible for China to plan industrialization
systematically and independently, using interventionist ITT policies and
building complementary institutions.
It was made possible by pseudo Lewis-type industrialization. Lewis
(1965) explained low wage levels in developing countries and the defla-
tion effect of their industrialization on the world economy by his theory
of “industrialization with unlimited supply of labor.” In the industriali-
zation of a less-developed economy, if supply of labor is available with
surplus labor in agriculture, wage levels are kept at subsistence levels.
The lack of domestic demand drives exports of products at the lowest
price levels, which depresses international price levels.
Chinese wage levels were kept at 5 percent of the US level from 1980
to 2000 (Glyn 2006). There are two reasons for this. First, Chinese agri-
cultural employment is still 50 percent, which gives a vast amount of
relative surplus labor. Second, Chinese wages have been increasing
dramatically in yuan, but the devaluation of the yuan from 1.5 yuan to
a US dollar in 1980 to 8.6 yuan to a US dollar in 1994 has kept Chinese
wage levels at 5 percent of US levels for the 20 years of its catching-up
process (Figure 3.5). I call this “pseudo Lewis-type industrialization,”
since wage increases were concealed by devaluation of the currency.
China’s compressed and pseudo Lewis-type industrialization had
the following effects on Chinese dynamic comparative advantage and
on the world economy. In the catching-up process, increases in wages
decreases dynamic comparative advantage, which forces growth to shift
dynamic industries to more sophisticated industries. China did not
lose its dynamic comparative advantage in less sophisticated industries
until the mid-1990s. Therefore, the Chinese industrial structure was
10
0
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Per US dollar
Figure 3.5 Yuan exchange rate

not upgraded sufficiently in the 1990s. It blocked the flying geese–type

industrialization process of less-developed countries, and brought defla-
tion pressure on the world economy.
7 The fall of the neoliberal capital

accumulation regime
7.1 Structural change

While the success of the golden age accumulation regime itself under-
mined the institutions that supported it, and caused a structural crisis,
the long-lasting neoliberal accumulation regime itself has undermined
its complementary institutions.
The effect of neoliberal financial relaxation is losing momentum.
While aggregate demand depends on higher risk-taking by borrowers,
unprecedented levels of household debt make further increases diffi-
cult. Moreover, neoliberal financial relaxation has destroyed the robust
financial structure. Further relaxation undermines the safety of the
financial system. Also, the neoliberal monetary policy to decrease
interest rates has reached its limit at the level of zero interest rate.
Further reduction is difficult. Finally, unprecedented levels of govern-
ment debt and increasing social spending have made further tax cuts
difficult. These factors make shifting the demand price curve upward
difficult.
Neoliberal globalization has shifted the center of capital accumula-

tion to developing economies in East Asia. Their industrialization proc-
esses have been very successful. However, this has increased demand for
raw materials, energy, and food. Higher international commodity prices
have raised the supply price of investment. These factors shift the supply
price of investment upward.
The engine of demand growth under the neoliberal accumulation
regime since the Asian economic crisis of 1997–8 has shifted from
domestic financial relaxation to foreign debt, increasing international
imbalance. This is most significant in the Chinese and German current
balance surpluses, which have increased significantly since 2002,
surpassing Japan in 2005 and 2006 respectively. The total surplus of the
three countries peaked at 837 billion dollars in 2007.
On the other hand, the current balance deficit of the United States,
Britain, and southern EU countries increased rapidly after the 2000s,
and the US deficit peaked at 788 billion dollars in 2006. Prosperity
in the United States, Britain, and southern EU countries in the early
2000s was made possible by borrowing from foreign countries. This
borrowed money was spent on the consumption of imported goods
and residential fixed investment, rather than on nonresidential fixed
investment.
7.2 US foreign debt-led growth and China-led capital

accumulation regime in East Asia
Table 3.2 shows that Japan’s influence on the Chinese economy peaked
in the early 1990s. This was also the peak of the Japan-led Pacific Rim
triangle trade. After China became a member of the WTO, its share of
international trade skyrocketed. Chinese goods exports increased four-
fold, from 394.5 billion US dollars in 2000 to 1512.6 billion US dollars
in 2008, and its goods imports increased fivefold, from 195.2 billion
US dollars in 2000 to 982.6 billion US dollars in 2008. Japanese goods
exports to China and imports from China increased dramatically, raising
Japanese trade dependency to 15 percent again between 2002 and 2007.
It enabled Japan to adopt export-led growth strategy again and to recover
from the decade long depression.
However, Japan could not keep pace with China, and its share of
Chinese trade was reduced both in exports and imports (Table 3.2). Now
China imports capital goods from Japan, Korea, and Taiwan, food and
raw material from less developed countries, and exports a full range
of products to the European Union, the United States, Asia, and other
areas. The cross-border division of work and trade in East Asia has been
completely rebuilt by China, and the Japan-led Pacific Rim triangle trade
regime has been replaced by a China-led global trade regime in East Asia
(Figure 3.6).
In this process, Chinese pseudo Lewis-type industrialization finally
ended. Its market exchange rate and real effective exchange rate had
been stable since the mid-1990s (Figure 3.5). Its rapid wage rise was
reflected in its dynamic comparative advantage. Specialization in light
industries such as textiles, toys, and electrical appliances peaked in
the late 1990s, and specialization in electrical and general machinery
increased rapidly from the mid-1990s onward. Production and domestic
demand in heavy and chemical industries also increased rapidly from
the mid-1990s (RIETY-TID 2010).
7.3 The subprime loan crisis and the future of capitalism

The subprime loan crisis is the most severe world crisis since the structural
crisis in the 1970s. The historical process of the crisis can be summarized
as follows: A housing market bubble began in the late 1990s, and accel-
erated in the early 2000s. Banks earned large fees by securitizing mort-
gages and selling them to capital markets. Institutional investors all over
the world bought these securities because they had higher returns than
equivalently rated corporate bonds. Banks began to offer mortgages to
those who could not afford them when the housing price bubble evapo-
rated and/or interest rates rose. Home sales peaked in late 2005, and
housing prices peaked in early 2006. Then the subprime mortgage crisis
erupted in mid-2007. The crisis began in the United States, and spread
all over the world.
The question is what kind of crisis it is. Is it a cyclical crisis, or a struc-
tural crisis, or an even more serious crisis, which will destroy the present
capitalist world system as did the 1929 world crisis and the following
great depression – that is, a systemic crisis? We have three scenarios.
Table 3.2 Shares in Chinese goods trade
Exports from China (%) Imports to China (%)
Korea & Korea &

Japan Taiwan ASEAN5 USA EU27 Japan Taiwan ASEAN5 USA EU27
1991 13.1 3.4 4.8 18.5 16.7 18.1 1.7 6.1 15.6 17.5
1995 16.1 4.7 4.4 21.6 14.9 24.8 9.2 8.1 13.8 18.6
2009 9.1 6.1 6.0 22.6 23.7 14.6 17.8 11.1 8.7 14.5
Note: ASEAN5 = Indonesia, Malaysia, Philippines, Singapore and Thailand.

Source: RIETY-TID 2010.
80%
70% EU27
60%
USA
50%
40% ASEAN5
30%
T
Taiwan
20%
10% Korea
0% Japan
1990 1993 1996 1999 2002 2005 2008
Figure 3.6 Trade shares in Chinese goods trade

Source: RIETY-TID (2010) http://www.rieti.go.jp/jp/projects/rieti-tid/index.html
First Scenario. It is not a structural crisis in a capital accumulation

regime but a cyclical crisis. Minskyans argue that financial excess was
the only problem, and normal growth with cyclical crises will return
once the problem has been remedied (Kregel 2008: 20).
Second Scenario. It is a structural crisis in the neoliberal capital accu-
mulation regime, but not a systemic crisis of bureaucratic capitalism.
Structural Keynesians argue that the ultimate cause of the crisis is the
destruction of the link between wages and productivity growth. A
reversal from neoliberalism and restoration of the link between wages
and productivity growth are needed to solve the problem (Palley 2010).
This requires reconstruction of the Bretton Woods regime internation-
ally, and of the welfare state domestically. Without the overwhelming
economic power of the 1950s, international cooperation is required
to rebuild the international monetary system. It should be more tran-
snational and public than the US dollar standard system. Keynes’s
International Clearing Union may be rehabilitated, which would
complete a managed currency system, both domestically and interna-
tionally. The reconstruction of the welfare society requires productivity
growth and an egalitarian income distribution mechanism. The recon-
struction of an egalitarian income distribution mechanism seems to be
more possible now than it was in 1980s, since productivity growth has
recovered due to the takeoff of new dynamic industries, namely IT and
knowledge-intensive industries.
Third Scenario. It is the beginning of a systemic crisis of bureaucratic
capitalism that will destroy bureaucratic capitalism. Let us examine the
scenario in detail. The prosperity enjoyed by the United States (and

other countries directly or indirectly) in the 2000s was made possible by
US demand with foreign debt as the engine of demand growth. The situ-
ation is similar to the latter part of the 1920s, when temporal European
economic stabilization was made possible by capital inflows from the
United States. Once this capital inflow stopped in 1929, the European
economy fell into deep depression, and the British-led capitalist world
system finally collapsed.
On the other hand, we see the possibility that the further industri-
alization of China may reestablish the flying geese pattern of develop-
ment on a global level. In the face of the collapse of the US neoliberal
capital accumulation regime by the subprime loan crisis, the pressure
to reverse the Chinese current account surplus has increased. Since
2008, China has changed its policy from an export-led industrializa-
tion to a domestic demand-led industrialization, which may reestab-
lish the link between wages and production growth. This will increase
Chinese wage rates and real exchange rates, and reduce China’s
competitiveness in less sophisticated labor-intensive industries. It
will allow less-developed countries to industrialize in a flying geese
pattern. The further industrialization of China may reestablish the
flying geese pattern of development at a global level, with China as
the engine of growth.
I agree with the third scenario. However, I believe that these three
scenarios are all attractive and necessary for recovery from this
most serious crisis of the capitalist world system, and that they are
interrelated.
8 Conclusion
I have laid out in this chapter a general framework of the evolution

of the capitalist world system and the fundamental logic of dynamic
comparative advantage and capital accumulation regime that shape the
cyclic and structural nature of the modern capitalist economy. In this
general framework, we have seen the rise, expansion, and fall/ diver-
sification of the two dominant world capitalism systems, market capi-
talism dominated by the British political economy for the eighteenth
and nineteenth centuries and bureaucratic capitalism dominated by the
American political economy for much of the twentieth century. Each
world capitalist system has moved from one dominant capital accumu-
lation regime to another on the basis of the changing dynamic compara-
tive advantage in key industries.
Development of modern capitalist economy in East Asia is seen as

a major part of the diversification of bureaucratic capitalism. It was
spearheaded by Japan, followed by NIES and China. The development
of capitalist economy in these countries is part of the evolution of the
world capitalist system, and the pattern and structure of the develop-
ment are fundamentally shaped by the same logic of dynamic compara-
tive advantage and dominant capital accumulation regime. But in this
process these economies also formed an integrated relationship among
themselves in the region, a pattern best captured by the theory of the
flying geese pattern of modern economic growth and development in
the region.
It is in this framework that the modern economic development
of Japan and China is understood. Japan in many ways has been an
important part of bureaucratic capitalism. Because of the history of the
early half of the twentieth century, Japan’s postwar economic miracle
is seen more as an instance of the Asian model. Moreover, there were
developments in the 1970s and 1980s suggesting that Japan could lead
the development of a new capital accumulation regime or even a new
type of capitalist world system. The relationship of Japan’s experience
of modern economic development to American-led bureaucratic capi-
talism therefore is ambiguous.
China is probably a case of more than just diversification of bureau-
cratic capitalism. China’s role in the flying geese pattern in the region
leads to a possible China-dominant regional trade and economic rela-
tions in the region. Compressed and pseudo Lewis-type industrializa-
tion has seen China cultivating a different type of capital accumulation
regime. The model that China organizes economic activities sets contrast
to the neoliberal regime. We are not sure whether the current crises are
cyclical, structural, or systemic in nature. But China has the potential
to instigate structural change, and probably systems change. There is a
possibility that the further industrialization of China may reestablish
the flying geese pattern of development on a global level, a basis for a
new world capitalist system.
Notes
1. For a contrasting view, see Hodgson (2001) and Hodgson et al. (2001).
2. Palley (2010) summarized the golden age accumulation structure as follows:
“Pre-1980, economic policy was committed to full employment and wages
grew with productivity. This configuration created a virtuous circle of growth.
Wage growth tied to productivity meant robust aggregate demand that
contributed to full employment. Full employment provided an incentive to

invest, which in turn raised productivity, supporting higher wages.”
3. Kaldor (1960) and Rowthorn (1982).
4. Posco (Pohang Iron and Steel Company) in Korea is a very significant example.
It is now the world’s third-largest, and Asia’s most profitable, steelmaker.
5. Financial innovation includes shadow banking system, derivatives, options,
home equity loans, and securitization and tranching of securities (Palley
2010).
6. The current account surplus reversal was more successful in Taiwan and
Korea than in Japan.
4
Neoliberal and Classical
Developmentalism: A Comparative
Analysis of the Chinese and
Japanese Models of Economic
Development
Bai Gao
In the past few years China’s development model experienced a major

transformation. After 30 years of opening and reform, China’s devel-
opment has achieved astonishing results. In 2012, China’s per capita
GDP exceeded 6,094 USD (IMF WEO 2013). At the same time, however,
there are problems with the developmental model, and with changes
in the international conditions and the domestic environment, these
problems have become more prominent.
In this chapter I will compare basic features of the Chinese develop-
ment model with the Japanese development model, and analyze the
different historical conditions that gave rise to these two unique models.
The two models differ in their approach toward the market and related
institutional arrangements. China’s model reflects neoliberalism, while
Japan’s model represents classical liberalism. The emergence of these two
models reflects not only the impact that various stages of globalization
had on the countryies’ economic development, but also reveals the lega-
cies of differing strategies nations adopt to respond to the challenges of
globalization, and how these affect their present economic structures.
The Japanese model formed in response to the reversal of the first wave of
globalization and the emergence of the second wave of globalization after
World War II. It has a strong focus of protecting society from the impact of
market competition. The Chinese model has developed in response to the
second wave of globalization and reflected the need to release the power
of market forces. The efforts to release the power of market forces have
exerted great pressure on the existing domestic and international political
68
Neoliberal and Classical Developmentalism 69
economic order. If the advance of globalization is arrested, the Chinese

model faces a much more dire challenge than the Japanese model.
1 Japan’s classical developmentalism
Mainstream social science literature began to take notice of East Asia’s

development in the early 1980s. After 20 years of research, the classical
developmentalism represented by Japan’s and South Korea’s experiences
of modern economic development is now well understood by scholars.
This classical development model is often characterized as follows:
First, Japan had a government that used industrial policy to protect

infant industries and restrict foreign capital’s access to the domestic
market, while actively cultivating strategic industries for export to
foreign markets.
Second, Japan had a mode of production that relied on nonmarket
institutions or mechanisms, such as industry guilds and enterprise
groups, to coordinate market activities of economic agents.
Third, Japan made efforts to establish endogenous innovation mecha-
nisms to carry out independent research and development, create inde-
pendent brands, and promote rapid industrial upgrading in order to
produce high-value-added products.
Fourth, rather than relying on the government to select winning
enterprises, the Japanese model fostered the competitiveness of enter-
prises through “oligopolistic competition.” Oligopoly and monopoly
are two opposite economic phenomena: monopoly means there is only
one large enterprise that dominates the market of a product. Oligopoly,
on the other hand, means there are several large enterprises of similar
capacity that compete in the market of a product.
Fifth, since the 1950s, Japan paid special attention to the balance
between economic development and political stability. In the early
post–World War II years, there were significantly high tensions in
industrial relations. Union activities often led to large-scale strikes.
From the mid-1950s, the government began to solve labor tensions and
conflicts. The Japanese enterprise management established the “three
magic weapons” in the early 1960s: lifetime employment, seniority-
based wages, and enterprise-organized trade unions. Such institutional
arrangements significantly reduced the tension between labor and
management.
Sixth, the Japanese model placed more emphasis on coordinating
than monitoring in corporate governance. Coordination between
70 Bai Gao
individual enterprises, and between banks and enterprises can be

very effective, and transaction costs involved are low. At the same
time, however, the cost of agents for Japanese enterprise governance
became particularly high. Because the relationship between enterprises
and banks was particularly close, shareholders were largely unable to
monitor the managers and banks were unable to effectively oversee
the enterprises.
Seventh, the Japanese model often sacrificed the upgrading of economic
structure to pursue political stability. Although Japan achieved interna-
tional competitiveness, especially in industries such as automobiles and
home appliances, it continued to maintain extremely inefficient sectors
that could provided large numbers of jobs. Japanese cities are populated
with many so-called family businesses; they account for one-third of
all jobs. Unlike the United States, Japan’s economic structure does not
value creative destruction, but is satisfied that the new builds on the old
in order to guarantee employment.1
What is the institutional basis of Japan’s classic developmentalist
model? As shown in Table 4.1, the Japanese model emerged between
the early postwar period and 1960s, under the Bretton Woods inter-
national financial system and the General Agreement on Tariffs and
Trade (GATT) international trade system. In this particular international
economic order, the Japanese government used expansionary mone-
tary policy to promote economic development, tightening fiscal policy
to curb inflation. It created a bureaucracy to implement protectionist
policies favoring its various industries and ensured the smooth growth
of the private sector. In the treatment of a bank’s investment risk, the
US government pays attention to the incident (ex post). It provides
$100,000 of insurance for each bank account, but does not interfere in
the daily affairs of private banking. In contrast, the Japanese govern-
ment pays attention to the incident (ex ante) and favors prevention.
Therefore, the Ministry of Finance of Japan regularly interfered with the
day-to-day operation of private banking. It implemented the convoy
policy in order to reduce the banking industry and also strictly control
the generation of new banks.
The Japanese government was very active in implementing a variety
of industrial policies to promote exports. To promote international trade
and industry, the state attached great importance to the international
competitiveness of large enterprises in strategic industries. To foster a
number of enterprises rather than one or two large enterprises, it opened
windows of competition for competitive oligopolies to emerge and to
strengthen the competitiveness of enterprises.
Table 4.1 Institutions and mechanisms of Japan’s high-growth economy
International The role of Intermediate Corporate

economic order government policies governance
Bretton Woods Expansionary Indirect finance Permanent
System fiscal policy employment
system
Fixed exchange rate Aggregate Mobilization of Stable labor
resources by national savings relations and
limiting which improved product
banks could open quality
branch offices
Control free Central banking Escort Strong
movement of management cooperation
capital between banks
and partners
GATT Assist bankrupt Guarantee Continuous
banks to maintain industrial capital innovation
stability
Asymmetry between Provide steady Strengthen
US–Japan stream of credit cooperation
cooperation to banks in major
cities
Export Development of
promotion enterprise groups
Aggregate Cross-
resources by shareholdings
allocating foreign
exchange quotas
based on firm size
Source: Gao (2004b).
In the middle of the system level, the Japanese model relies on indi-
rect finance to provide financing to enterprises, a practice different
from the United States. In the United States, companies raise capital by
issuing bonds and shares in the stock market, but Japanese companies
borrowed from banks. For an international comparison, the share of
corporate bank loans in the 1950s was 5.8 percent in the United States,
4.3 percent in the United Kingdom, 18.8 percent in West Germany, and
12.4 percent in Italy.
72 Bai Gao
In contrast, Japanese corporate bank loans in the period from 1958

to 1974 increased from 68.4 percent to 83.3 percent (Morozimi 1963).
Japanese companies are serviced by have a main bank. The main bank is
a bank that provides large loans to the enterprise. The main bank often
holds the shares of the company and in theory provides “delegate moni-
toring” on the company on behalf of the other banks that lend money
to the company. Another mechanism is “cross-shareholding” as a way to
shield listed companies from the malicious effects of the stock market.
In 1950, 60.3 percent of shareholders of listed companies were Japanese
individuals and 23.7 percent were held by institutions. However, by 1973
the portion of individual shareholders of had decreased to 32.7 percent
while the share held by institutions increased to 60.4 percent.
The last mechanism is that during the high-speed growth period,
large enterprise groups adopted a grand, comprehensive “one-set invest-
ment strategy” that invested in all newly emerging strategic industries
in order to occupy the commanding heights of market competition.
At the enterprise level, it relied on the lifetime employment system to
support the strategy. An important effect of lifetime employment on
enterprise management is it prioritizes aims in enterprise management
from more profit for the shareholders to the survival of all members of
the company. Overall, coordination was the strength of the Japanese
model, but monitoring was a particular weakness (Gao 2004).
2 China’s neoliberal developmentalism
China’s neoliberal development model differed from Japan’s classical

development in its bold introduction of market forces. China’s develop-
ment was more neoliberal than Japan’s by a variety of measures. First,
China boldly attracted foreign direct investment. Since 1993 China has
become the largest recipient of foreign direct investment among devel-
oping countries and the second largest recipient of FDI after the United
States. Since opening and reform, China has attracted $560 billion in
foreign investment. In 2003 alone China attracted FDI to equal all FDI
received by Japan in the entire postwar period. Second, China’s domestic
market is far more open than Japan’s. In 2011, China is the world’s
second largest importer, while Japan is only the fourth largest importer.
Third, the Chinese economy did not have as many nonmarket govern-
ance mechanisms as Japan. Although inertia from the plan economy still
persists in varying degrees, the market has become the most important
driver of the Chinese economy. Fourth, China’s cheap labor allowed it
to participate in large-scale international production while Japan did
Table 4.2 Institutions and mechanisms of China’s economic growth
International Corporate Economic

financial order Public policy governance consequences
Simulation of the Attract foreign Participate in the Rise of world
Bretton Woods system investment global division factory
(using dollar peg of labor through
to maintain stable processing trade
exchange rate, open
capital accounts)
Encourage Debt default Export-led
exports (triangular debt) growth
Local activism Excessive Large scale
Deepening of competition infrastructure and
reform real estate, driven
by growth
not. Until 2011, the establishment of mechanisms for indigenous inno-

vation to achieve value-added production was not a focus of the govern-
ment policy in China.
Fifth, there is an excessive competition in Chinese economy.
Enterprises compete at any cost. At the same time, in particular indus-
tries, monopoly remains a serious problem in China. Sixth, China’s level
of corporate governance is comparable to Japan’s. While the respective
institutional arrangements are different, they share emphasis on coordi-
nation over monitoring. Seventh, the Chinese model was often willing to
bear the risk of social instability in its pursuit of upgrading in economic
structure, something that the Japanese model was loath to do.
As seen in Table 4.2, there are similarities and differences between China
and Japan in the operation of their respective development models. I call
the international economic order upon which the Chinese model has
relied a “simulated Bretton Woods system.” Two features of the Bretton
Woods system were the fixed exchange rate and the initial restrictions of
free movement of capital. The renminbi has been fixed, although Chinese
officials call it a managed floating exchange rate. This “floating exchange
rate” is qualitatively different from the floating exchange rate commonly
used. Floating exchange rate in China’s current exchange rate regime
emphasizes the fact that renminbi value is allowed to change within a
very limited band, while that in the broad international use emphasizes
the mechanism of exchange rate formation: a floating exchange rate
74 Bai Gao
refers to the fact that the market demand directly determines the value of
the currency in international financial markets.
Seen from here, the international economic order the Chinese
economy faces is very similar to the one Japan found itself in during
the high days of its classic developmentalism. So far China has not
liberalized its capital accounts. Short-term capital still cannot legally
enter China’s financial markets. Japan had the same problem under the
Bretton Woods system in the early postwar years.
The Chinese government actively attracted foreign investment and
relied on that to generate exports, and further economic growth. Local
governments are willing to compete for investment. Unlike Japan during
its years of high-speed growth, the Chinese government used active fiscal
policy to promote economic growth. This was apparent when China
faced deflation, and especially after the Asian financial crisis in 1997–8.
One critical difference from the Japanese model is that China is
willing to allow market forces to drive economic activities. Japan placed
greater emphasis on social stability in economic development, while
in China, to move economic reform and structural change along, the
government tolerated the risks of social instability. Large-scale layoffs
of employees seen in China would have been a difficult thing in Japan.
After the economic bubble burst in the 1990s, Japanese companies still
did not lay off large numbers of workers, but kept them on even though
this meant a much slower process of industrial upgrading.
The Chinese and Japanese models also differ in the basis upon
which they participate in global division of labor. China participates
in a largely factors-of-production–based global division of labor, in the
labor-intensive manufacturing part of the global value chains. Data
show that in 2004 China’s processing trade accounted for 53 percent of
its total trade, meaning that over half of its trade is in Chinese compa-
nies manufacturing parts for foreign companies or using imported parts
to assemble final products for foreign companies. The part that China
occupies in the global division of labor is largely labor-intensive manu-
facturing. This is very different from the Japanese model that focused
on mechanisms of endogenous innovation, developing independent
brandings, and producing high-value-added products.
On corporate governance, however, China and Japan are actually quite
similar. In both countries, for example, monitoring is a big problem
for state-owned enterprises (SOEs). The resulting chain of debt is very
serious. There was the similar problem of “overcompetition” in both
China and Japan. In Japan the problem arose because of the close rela-
tionship between banks and enterprises. In China this concerned the
problem of property rights as well as government policy. For example,
in the early 1990s, China had the so-called “stability and unity loan.”
To prevent state-owned enterprises from trouble, the government often
provides loans to state-owned enterprises to keep them afloat, not
considering the financial health of these enterprises. The result of the
Chinese neoliberal model of development was China’s emergence as a
world factory.
3 Comparative analysis of the two development models
Table 4.3 shows the strengths and weaknesses of the classical and neolib-
eral development model. In capital formation, the Japanese model was
totally dependent on endogenous capital. The Chinese model was
dependent on a combination of endogenous and foreign capital. In
2004, foreign investment contributed to about 17 percent of China’s
total capital formation (Huang 2003:7). In Japan that accounted for less
than 1 percent in that same year. Japan relied mainly on the country’s
relatively sound financial system, turning effectively domestic savings
into industrial capital to finance growth. The Chinese financial system
is very fragile. While rapid economic growth has accumulated a lot of
wealth, this wealth has not been effectively turned into industrial capital
and China must rely on investment of foreign capital.
In terms of approach to and relations with the international market,
the Japanese model focused on developing their own brands while China
became part of global value chains, bearing the labor intensive part of
production. In the development of new technology, China relied more
heavily on the introduction of foreign-produced technology while Japan
Table 4.3 Strengths and weaknesses of the two development models
Classical Neoliberal
developmentalism developmentalism
Capital formation Endogenous Endogenous and foreign
simultaneously
International market National ownership of Service for global value
brands chain
New technology Dependent on intellectual Introduction of foreign
property–based R&D production technology
Trade/GDP dependence Low High
Resource dependence High/low High/low
Resilience to changes in High Low
external environmental
changes
76 Bai Gao
emphasized research and development (R&D), based on independent

intellectual property (IP). In terms of the ratio of trade and GDP, China’s
GDP growth is much more heavily dependent on foreign trade than
Japan’s was. At the highest level, Japan’s trade was 35.2 percent of its
GDP in 2008.
In China, trade represented 70.6 percent of its GDP in 2006. China and
Japan are comparable in their resource dependency. Japan is a country
severely lacking natural resources and highly dependent on imports. At
the same time, Japan learned to use resources very efficiently. After the
first oil crisis in the early 1970s, the Japanese government implemented
an energy conservation policy. Japan is now far ahead of the rest of the
world in energy efficiency. China uses resources inefficiently. According
to statistics, in 2004 China contributed 6 percent to global GDP but used
33 percent of world’s steel and cement.
Under a changing external environment, the viability of Chinese and
Japanese models would be quite different. It is very likely that Japan’s
model can survive better. This is because of its capacity for independent
technological innovation. Even as Japan’s exports faced greater chal-
lenges after the mid-1980s with the appreciation of the yen, Japan still
relied on its brand products to remain one of the largest exporting econ-
omies in the world. While the Japanese economic bubble burst and it
experienced a “lost decade,” Japan has managed the challenge of trans-
formation of industrial structure in advanced industrial countries, with
its competitive products such as flat-screen TVs, hybrid electric cars, and
digital cameras.
As a point of comparison, Germany has been a crafting state, with
strong manufacturing. But in the latest transformation, Germany has
not been able to adjust to change in industrial structure, outsourcing
a large number of production lines to Eastern Europe. Today, Japan
can still maintain its ability in technological innovation while keeping
much of its production processes within the country to support its
economy of scale. The ability of the Chinese model to sustain changing
external conditions and survive is much weaker. Its cheap-labor-based
comparative advantage can quickly vanish with the appreciation of
the yuan.
The different economic effects of the two different development
models are significant. This can be seen, for example, from the role of
foreign capital in the economies. Table 4.4 shows that in 1984 the total
sales of foreign direct-invested enterprises in all industries, as well as the
specific industries of manufacturing and petroleum, are much high than
Table 4.4 Foreign direct investment as a portion of sales and profits in the
Japanese economy
Foreign direct
invested enterprises* All enterprises
Total sales All industries 14,548 523
Manufacturing 23,903 688
Petroleum 669,790 23,059
After-tax profits All industries 250 6

Manufacturing 470 12
Petroleum 7,170 149
Note: *Mean value of the company; unit: 1 million yen.

Source: Weekly Diamond (1984a: 30).
Table 4.5 Foreign direct investment as a proportion of the Japanese economy

Japan (%)
Proportion of sales accounted 2.20
by foreign invested
enterprises
Manufacturing: proportion 4.70

of sales accounted by foreign
invested enterprises
Oil industry: proportion of 38.10

sales accounted by foreign
International Domestic
market (%) market (%)
Market share of foreign 7.30 92.70
Source of raw materials 60 40
Source: Weekly Diamond (1984a: 30, 1984b: 33)
Japanese enterprises. In overall performance, after-tax profits of foreign

enterprises in Japan are much higher.
At the same time, as seen in Table 4.5, 92.4 percent of the products of
foreign direct-invested enterprises are in Japanese domestic markets. Only
7.3 percent of them went to international markets. By contrast, foreign
direct-invested enterprises (FDIEs) in China sold the majority of prod-
ucts on international markets. Imports and exports of FDIEs accounted
78 Bai Gao
300
200
100
0
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Figure 4.1 FDI net inflows to China, 1982–2011

Note: Unit: billion USD.
Source: World Bank (2013), World Development Indicators.
2,500
2,000
1,500
1,000
500
0
1986
1982
2010
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
1993
1994
1995
1996
1997
1979
1980
1981
1984
1985
1989
1990
1991
1992
1988
1983
2011
1989
Exports of goods and services (current billion US$)

imports of goods and services (current billion US$)
Figure 4.2 China imports and exports, 1979–2011

Note: Unit: billion USD.
Source: World Bank (2013), World Development Indicators.
for 57 percent of China’s total trade. This means that foreign investment
went to Japan with the goal of occupying the Japanese domestic market.
While in China, in addition to occupying the domestic market, FDIEs
are largely aimed to participate in global value chains. Manufacturing
of parts and components or assembling of goods by FDIEs in China are
ultimately for international markets.
Compared with the Japanese model, what are the strengths of the
Chinese model? Figure 4.1 shows China’s foreign investment and foreign
trade development since 1970. It can be seen that since Deng Xiaoping’s
southern tour, China undertook bold steps to liberalize foreign invest-
ment. As a result, foreign investment in China has developed very
rapidly. The momentum became more apparent after China’s accession
Table 4.6 Levels of economic openness of China and Japan
Japan
China (Billion USD)
GNI (rank) 6643.2(2) 5739.5(3)
2011 trade in goods (USD billion)
Export 1903.8(1) 787.0(4)
Import 1660.3(2) 807.6(4)
2011 trade in Services (USD billion)
Export 0.183(4) 0.145(7)
Import 0.238(3) 0.168(5)
Trade as % of GDP (Year) 32.5(1990) 17.1(1990)
58.7(2011) 31.4(2011)
Export as % of GDP (Year) 31.4(2011) 15.2(2011)
Sources: World Bank (2013) World Development Indicators; MOFCOM (2012).
to the WTO. Along with the rapid development of foreign investment,

China’s foreign trade also developed quickly (Figure 4.2). FDIEs have
made significant contributions to the growth of China’s international
trade. In 2012, 48 percent of China’s trade, whether imports or exports,
were from FDIEs in China. At the same time, trade dependence of
China’s economy has also risen rapidly, reaching above 70 percent in
2004. These facts show that China’s economic development, especially
since the 1990s, has been supported largely by foreign trade driven by
foreign investment.
China’s neoliberal model of development has transformed China into
a highly open market economy. As Table 4.6 shows, the dependence of
China’s GDP in its trade was up to 58.7 percent in 2011, while in Japan
this was only 31.4 percent. Measured in exports as a share of GDP, Japan
was only 15.2 percent in 2011 and China 31.4 percent. This means that
China’s economy is much more open than Japan’s. China has become
the world’s largest exporter since 2010 and is currently the second
largest importer after the United States, while Japan remains fourth in
the ranking of both importing and exporting countries. The table also
shows that the Japanese economy relies on its huge domestic consump-
tion while the role of China’s domestic demand is much smaller in
generating economic growth.
According to the UNCTAD survey conducted in 2004 on the inter-
nationalization of R&D (Table 4.7), for experts on foreign direct invest-
ment, or multinational corporations, China was the first choice for
80 Bai Gao
Table 4.7 Views of world’s most commercially attractive areas, 2005–6
Experts (%) Multinational corporations (%)

1 China 85 1 China 87 87
2 USA 59 2 India 51 51
3 India 42 3 USA 51 51
4 Brazil 24 4 Russia 33 33
5 Russia 21 5 Brazil 20 20
6 UK 21 6 Mexico 16 16
Source: UNCTAD (2005), World Investment Report
foreign direct investment in 2005–6, 20 percentage points over the

second best destination country. This indicates that the Chinese model
is very successful in attracting foreign investment, utilization of foreign
capital, and using factors of production and foreign capital together in
generating economic growth. Continued foreign capital inflows means
there will continue to be pressure for China’s economic growth.
Even in terms of industrial upgrading, the openness of the Chinese
model has clear advantage. Figures 4.3 and 4.4 show that China had
become the third choice for multinational companies to do global
R&D, after the United States and United Kingdom (the findings of the
UNCTAD 2005). Looking at future trends, 61.8 percent of multinational
companies say that their first choice for global R&D will be China. The
main reason is that China can provide a large number of well-trained
but low-cost engineers to engage in R&D work. Second, China will
become one of the world’s largest commodity markets. An important
task of global R&D work is to develop products catering to local market
conditions and preferences. This part of the R&D can be best done in
large consumer markets. Now nearly 700 multinational companies have
established R&D centers in China.
In waves of globalization, globalization of production has already
advanced. Globalization of R&D has also started. Accompanied with that
is globalization of logistics, that is, global procurement. Centered around
Shanghai, for example, more than a dozen cities in China have devel-
oped plans to turn themselves into a large-scale global logistics center.
While China’s share in multinationals’ total global procurement is less
than 1 percent, many experts believe that China has already become
the world’s largest manufacturing center but in China the multinational
corporations’ share of global sourcing is only 5 percent. China’s role as
the global factory is still far from reaching its maximum potential. These
0 20 40 60 8
United States 58.8
United Kindom 47.1
China 35.3
.
France 35.3
Japan 29.4
India 25
Canada 19.1
Germany 19.1
Singapore 17.6
Italy 14.7
7
Figure 4.3 Current foreign locations of R&D in the UNCTAD survey, 2004
Note: Unit: Percent of responses.
Source: UNCTAD (2005: 133).
0 20 40 60 80
China
United States
India
Japan
United Kindom
Russian Federation
France
Germany
The Netherlands
Canada
Figure 4.4 Most attractive locations for future foreign R&D in the UNCTAD
survey, 2005–9
Note: Unit: Percent of responses.
Source: UNCTAD, World Investment Report (2005: 153).
facts indicate that compared to Japan’s classical development model,

China’s neoliberal development model displays great advantage in this
new environment of globalization. It relies on an open economic system
to improve the economic structure and enhance China’s economic
competitiveness.
One key weakness of the Chinese model is mainly reflected in the
large share of foreign investment in the Chinese market. Taking the
example of the Chinese automobile market in 2003, we can see that
foreign brands in China’s automobile market share add up to 90 percent.
82 Bai Gao
Table 4.8 Foreign companies in China’s auto industry
Planned
production in
Year of Major local 2003 Market thousands/
market entry partner share % year
Volkswagen 1985 Shanghai 37 1600/2007
Automotive
Industry
Corporation
First Auto Works
(FAW) Group
Co.
GM 1997 Shanghai 10 766/2006
Automotive
Industry
Corporation
First Auto Works
(FAW) Group
Co.
Toyota 2000 Guangzhou 9 650/2010
Automobile
Group Co.
Suzuki 1993 Chongqing 8 Unknown
Changan
Automobile
Group Co.
Honda 1999 Guangzhou 7 Unknown
Automobile
Group Co.
Peugeot 1985 Dongfeng Motor 6 300/2006
Group Co.
Ford/Mazda 2001 Chongqing 5 150/unknown
Changan
Automobile
Group Co.
Renault/ 2001 Dongfeng Motor 4 900/2010
Nissan Group Co.
Hyundai 2002 Beijing 3 650/2007
Automotive
Investment
Co.
Source: Li (2004); Jia and Chun (2001).

Table 4.9 China’s GDP and GNI
GDP GNI
Year (Billion USD) (Billion USD) GDP–GNI
1981 194.11 193.99 0.12
1982 203.18 203.56 –0.38
1983 228.46 229.61 –1.16
1984 257.43 258.97 –1.53
1985 306.67 307.51 –0.84
1986 297.83 297.81 0.02
1987 270.37 270.16 0.22
1988 309.52 309.36 0.16
1989 343.97 344.20 –0.23
1990 356.94 357.99 –1.05
1991 379.47 380.31 –0.84
1992 422.66 422.91 –0.25
1993 440.50 439.22 1.28
1994 559.22 558.19 1.04
1995 728.01 716.23 11.77
1996 856.08 843.65 12.44
1997 952.65 941.65 11.00
1998 1019.46 1002.81 16.64
1999 1083.28 1065.30 17.97
2000 1198.47 1183.81 14.67
2001 1324.81 1305.63 19.17
2002 1453.83 1438.88 14.95
2003 1640.96 1633.12 7.84
2004 1931.64 1928.12 3.52
2005 2256.90 2240.80 16.10
2006 2712.95 2707.55 5.40
2007 3494.06 3501.86 –7.80
2008 4521.83 4539.53 –17.70
2009 4991.26 4998.56 –7.30
2010 5930.53 5903.56 26.97
2011 7318.50 7305.44 13.06
Source: World Bank WDI (2013).
Domestic Chinese car brands account for less than 10 percent of the
market (see Table 4.8).
Another major weakness of the Chinese model is the distribution
of wealth. As the basis of China’s participation in global production is
mainly of the factors of production, that is, primarily cheap labor, multi-
national corporations control intellectual property rights and own the
brands. They take most of the profits. According to statistics, capital
from multinational companies accounted for about 30 percent of total
84 Bai Gao
capital in China in 2004. However, they controlled 50 percent of the

shares and took away 70 percent of the profits (H. Gao 2005).
A Ministry of Commerce Multinational Research Center study shows
(Table 4.9) that since the comprehensive liberalization started in 1992,
the gap between China’s gross national income and gross national
product has widened. The value of GDP includes all production activi-
ties carried out in China, including those by multinational companies,
but GNI only includes what is retained domestically. This means that
although China’s economy developed rapidly in the 1990s, a significant
part of the wealth generated in China went to multinational corpora-
tions. GNI grew at rates far below GDP.
Why did China adopt such a development model? There are both
international and domestic forces shaping the model.
4 The global conditions of time and place for the classical

and neoliberal development models
On the international conditions, we see the profound impact of globali-

zation on the neoliberal development model of China and classical
development model of Japan. Figure 4.5 depicts the long-term move-
ment of globalization. The curve in the figure is the ratio of global GDP
and global trade. Mainstream literature seems to have a consensus that
25
Percentage (%)
1939–1945: 1971 onwards:

20 WWII Bilateral trade
1944: The setup agreements
1914: The breakup of of Bretton Wood
15 the gold
g standard and system
y
WWI
1929–1933: 1953:
Great GATT
A
depression 1971: The
10 collapse of
Bretton Wood
system
5
0
1900 1925 1950 1975 Year 2000
Figure 4.5 The institutional progress of globalization

Source: Gao (2004a: 33).
the first wave of globalization occurred from 1870 to 1913. The trend
started to reverse in 1914 when the gold standard system collapsed and
the First World War broke out.
Globalization further retracted and the world experienced the Great
Depression and two world wars before the United States and the United
Kingdom realized that there can be no economic development without
a stable international financial order and trade order. Driven by the
United States and the United Kingdom, the Bretton Woods system and
the General Agreement of Tariff and Trade (GATT) were established.
Under the international economic order built on these two core financial
and trade systems, the global GDP and trade began to rise. The Bretton
Woods system collapsed in the early 1970s. From then, developed coun-
tries all adopted the floating exchange rate regime and started financial
liberalization. Large-scale international capital could flow across borders
and foreign investment increased rapidly. This led to the second wave of
globalization (Gao 2005).
Table 4.10 The effect of globalization on two types of development model
Classical development New development

model in Japan model in China
Economic theorem and German Historical School, Neoclassical economics
ideology The Theory of Total War,
Marxism, Schumpeter,
Keynesianism
The stage of Recession period in the 1st Fast expansion period
globalization stage of globalization and in the 2nd stage of
early expansion period in the globalization
2nd stage of globalization
Fundamentals of global International division of labor International division of
trade mainly for final products labor mainly for factors
of production
Driving force for Life cycle of products, market, Production efficiency,
foreign investment resource economics of division,
of multinational value chain
corporations
Relationship between Substitution Promotion
foreign investment and
trade
Policy paradigm of Import substitution Encouraging exports,
developing countries investment liberalization
86 Bai Gao
We can see that Japan’s classical development model formed between

the late 1930s and the early 1960s during the reversal of the first wave
of globalization and the emergence of the second wave of globalization.
China’s neoliberal development model formed at the rise of the second
wave of globalization from the end of the 1970s.
These different conditions of time and place had profound impact on
the shaping of the two development models. As shown in Table 4.10,
and reflected in the dominant economic theories and ideologies at the
time, the international environment had significantly changed when the
Chinese and Japanese models emerged. Popular in Japan in the period of
the 1930s to 1960s were the German historical school, Germany’s total
war theory, Marx’s economic thought, Schumpeter’s theory of innova-
tion, and the Keynesian effective demand theory (Gao 1997). The fact
that these economic theories became very popular reflected the widely
held skepticism at the time toward the role of the market as the invisible
hand when the reversal of the first wave of globalization and capitalist
markets faced hard times.
Toward the end of the 1970s, however, globalization made a new
wave around the globe and along with it came more respect and high
expectations for the market to be the primary force driving and shaping
economic growth and economic order. Corresponding to that, neoclas-
sical economic theories that emphasized efficiency in resource alloca-
tion not only became popular in advanced economies, but also gained
great influence in mainstream discourse and policy debate in developing
countries (Badb 2001).
From this we can see that there is a clear relationship between the rise
or fall of economic theories and ideologies on the one hand and the
cycles in the movement of globalization. The retreat of the globalization
movement came with a series of economic crises. This is when market
forces were seen as evil and economic theories were more interested in
how to constrain rather than release the force of the market. In the early
postwar years, when the forces of globalization moved up again, coun-
tries were still building up institutions and mechanisms to regulate and
restrain markets.
Japan’s classical model therefore reflected the conditions and economic
thinking at the time that the challenge was how to utilize nonmarket
systems and mechanisms to coordinate activities of economic agents,
rather than how to use market forces and release the force of the market.
In contrast, China’s neoliberal development model formed at the time of
the rapid resurgence of globalization. The profound interest at this time
was how to unleash the force of the market and use market forces to
solve economic problems. This was the profound historical background

for the popularity of neoliberal economics in China.
To understand the difference between the Chinese and Japanese
models, we must analyze the enormous changes in the nature of divi-
sion of labor in international trade in the past 30 years. When Japan
and South Korea had their high-speed growth, international division of
labor was formed around final products. A country would not be able
to participate in international trade if its enterprises were unable to
produce international competitive final products. The Japanese realized
then that with international trade Japan’s economy would not be able
to grow. Japan therefore made all efforts to develop their own innova-
tion system. Various institutional arrangements in the Japanese model
emerged from these efforts to strengthen coordination in innovation.
The environment for China when it began its reform and opening
from the late 1970s was entirely different. Today, international division
of labor is shaped largely around factors of production (FOP): labor,
resources, technology, capital, and so forth. This new international
environment made it much easier for developing nations to participate
in international trade without having to develope their own national
innovation system. Developing countries can now participate in global
production by providing cheap labor for labor-intensive parts of produc-
tion. This was simply impossible in the past before the invention of the
global supply chain.
This new structure of international division of labor led to the rapid
development of the volume of trade within multinational companies. It
is estimated that in the late 1990s, intra-firm trade inside multinational
corporations (between their subsidiaries in different countries) already
accounted for more than 50 percent of total world trade. This form of
international division of labor also allowed China to participate in inter-
national division of labor with its cheap labor. This was almost impos-
sible for the Japanese model in the 1950s and 1960s.
The FOP-based international division of labor emerged with change in
the forces shaping foreign investment of multinational corporations. In the
1950s and 1960s, foreign investment of multinational corporations was
influenced largely by product cycles. The evolution of a product has its
cycles. Multinational corporations with strong innovation capacity do
not usually want to invest in other countries when they first develop a
product. They can make monopoly profits through international trade.
When the technology is standardized for this product, enterprises of
other countries can also make this product as standardized technology
is easy to adopt and utilize. This is when enterprises of cheap labor
88 Bai Gao
countries can also produce this product. They can produce the product
more competitively and therefore pose a threat to the original company
that invented the product. The original enterprise would have a great
incentive now to invest in the place where the market and potential
competitors are to control the local market and prevent the emergence
of international competitors (Vernon 1971).
In the 1950s and 1960s, there was a large amount of foreign invest-
ment in Latin America largely for access to natural resources. This was
a cause for developing dependency in Latin America. With this type of
foreign investment in Latin America, the economic structure of Latin
American countries was “forced to lock in,” that is, to be locked into the
low-value-added part of the global division of labor.
By the time China’s development model started to take shape, the
incentives and motivations for multinational corporations’ foreign
investment had undergone a profound change. Productivity and effi-
ciency, division of labor, and value chains became the primary purpose
of foreign investment. Through foreign investment China can partici-
pate in international production using cheap labor, promoting exports,
and generating economic growth, before an effective system of endog-
enous innovation mechanism is established. This is the profound histor-
ical background of the Chinese model.
In this era of globalization, the relationship between foreign investment
and international trade has also undergone a deep change. This is another
source of the differences between the Chinese and Japanese models.
At the time when the Japanese model formed, foreign investment and
foreign trade could be a substitute for one another. If you have foreign
investment, you would not have international trade. Once foreign
investors enter a market and they produce and distribute locally, there
was no need for trade. At the time when the Chinese model developed,
foreign investment and foreign trade had become mutually reinforcing.
When foreign investors come in, they take advantage of cheap labor for
the production of a component or to assemble a product. The remaining
parts of the product will need to be imported from other countries. So
foreign investment facilitates international trade.
A further difference between the two models is the profound change in
development policy of developing countries. In the era of the Japanese
model, most developing countries were engaged in import substitution
and protection of domestic market. It is no surprise that nonmarket
mechanisms were widely employed in the Japanese model. In the
Chinese model that formed in the last 20 years, developing countries
encouraged exports and liberalized foreign investment. As Table 4.11
Table 4.11 Government foreign policy change, 1991–2004
Project 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Countries changing 35 43 57 49 64 65 76 60 63 69 71 70 82 102
investment policy
Number of countries 82 79 102 110 112 114 151 145 140 150 208 248 244 271
in control
Tend to attract FDIa 80 79 101 108 106 98 135 136 131 147 194 236 220 235
Tend to exclude 2 – 1 2 6 16 16 8 8 3 14 12 24 36
FDIb
Source: UNCTAD WIR (2005)

90 Bai Gao
120
100 62
11.7
29.4
80
40.4
46.9
60
50.9
40
53.4
20
44.4
19.6
0
2012 2013 2014
Pessimistic and very pessimistic Neutral Optimistic and optimistic
Figure 4.6 TNC’s perception of the global investment climate, 2012–14

Source: UNCTAD (2012: 18)
0 10 20 30 40 50 60 70 80 90
Greater targeting
Other promotion measures
Additional incentives
Futher liberalization
No new measures
2005–2006 2004
Figure 4.7 Investment policy measures to attract FDI: responses by IPAs

Source: UNCTAD (2005: 35)
shows, since the early 1990s the number of countries adopting poli-
cies that encourage foreign investment has far exceeded those that limit
foreign investment. In other words, attracting foreign investment has
become a global trend in recent decades.
According to the same UNCTAD survey (Figure 4.6), it is the
consensus among multinational corporations’ CEOs and foreign invest-
ment specialists, and institutions that attract foreign investment, that
foreign investment will further increase internationally. Moreover, more
governments around the world are committed to make greater efforts to

attract foreign investment (Figure 4.7).
This suggests that promoting economic growth through attracting
foreign investment and then advancing foreign trade has become a
common policy direction or development strategy around the world.
Among developing countries, China has so far attracted more foreign
investment than any other country. However, as previously discussed,
the Chinese model has its weakness in the share of foreign investment
in domestic market and in the distribution of wealth created. It is a
model that cannot be long sustained.
5 The historical origins of China’s neoliberal

development model
Closely related to international conditions and dynamics, the rise of the

neoliberal development model in China also has deep domestic roots. I
have argued elsewhere that there is a level of synchronicity in the historical
movement of the globalization wave and modern Chinese history (B. Gao
2005). From the First Opium War in the mid-nineteenth century to the end
of the Cultural Revolution in the mid-1970s, along with the rise and fall of
globalization waves, there developed two last-impacting schools of thought,
policy and social movements in China toward the world economy.
Table 4.12 Traditions of China’s foreign economic relations
Mao Zedong
Yangwu yungdong thought Dynamics today
Markets Abundant commerce Closed Opening starting
with SEZs
Foreign capital Open, became Closed One of the largest
dominant recipients of FDI
Technology Guns & Cannons Bombs & Foreign brands
Satellite dominating
domestic brands
Government Emphasis on Nationalization Great importance
attitude bureaucratic capital of SOEs at
expense of private
enterprises
Industrial Buying is better than Self-reliance Develop own
policy building own brands brands rather than
buying foreign
brands
92 Bai Gao
The first formed during the latter half of the nineteenth century at
the rise of the first wave of globalization. Yangwu yundong represented
this tradition of opening to the outside world, and reform, industrializa-
tion, and modernization in China. The other emerged after the 1930s
with the reversal of the first wave of globalization. Socialism gained
sway in China in response to the Great Depression and the failure of the
capitalist market economy, and in this process self-determination and
self-reliance developed into a dominant tradition that largely framed
the official thinking and policy of Mao’s era. My discussion here will
not dwell on an ethnic judgment of these two profound traditions, but
rather it will focus on how these two differ at a more functional level.
Seen in the general relationship between the Chinese economy and
the international market, Yangwu yundong represents the tradition of
opening to the capitalist world economic system, even though such
opening was forced under the pressure of external forces led by major
powers. During Mao Zedong’s time, China’s foreign trade was limited
to the Soviet Union and East European socialist camp and closed to
the capitalist world economic system, except for the small window of
Hong Kong in limited trade with capitalist countries. The majority of its
economy was closed off to the capitalist world economy.
Seen in this perspective, today’s reform and opening up continues
the tradition of Yangwu yundong. Interestingly, the views of academics
in China toward Yangwu yundong has changed a lot since reform and
opening up. Prior to 1978, they were generally negative. Since then,
however, they have become overall positive (Jiang 2004).
The role of foreign investment in the Chinese economy has also
changed since the time of Yangwu yundong. Foreign capital began to
enter China during Yangwu Yundong years. Following China’s defeat
in the Sino–Japanese war and signing of the Treaty of Shimonoseki in
1895, foreign investment into China was formally allowed. There was a
lot of foreign investment before but the Qing government never legally
recognized it. The Treaty of Shimonoseki formally recognized the legal
status of foreign capital in China. The position of foreign capital in
the Chinese economy has been improving from the late Qing to the
Republican period. According to 1936 statistic, the shares of foreign
investment in several key industries, such as shipping, coal, and iron
production, ranged from 66 percent to 99 percent (Hou 1965).
In the Mao era, foreign investment disappeared in China. One can
argue that today’s opening up is a continuation of the trend that began
during Yangwu yundong. Needless to say, the portion of foreign invest-
ment in China’s national economy then is not comparable with that of
today. Now China is a strong and sovereign state which is different from
China in the 1920s and 1930s. However, in terms of the treatment of
foreign capital, China today is closer to the Yangwu yundong era than to
the Mao Zedong era.
In term of the role of technology and innovation, Yangwu yundong was
to “buy foreign guns and cannons.” Modernization, especially mili-
tary modernization, was largely a matter of buying new hardware and
machinery from the West. During the Mao Zedong era, China relied
on independent innovation for research and development. Nuclear and
hydrogen bombs and satellites were exemplary products of this indig-
enous innovation system. With the reform and opening, foreign brands
became dominant in the Chinese domestic market. We seemed to return
to the time of Yangwu yundong. In recent years, China has become more
aware of its need for indigenous national brands. There has been a series
of efforts by the government to develop China’s own system of innova-
tion. There are signs that China is swinging back from Yangwu yundong
tradition to the tradition of independent innovation. Independent
innovation will become a core component of China’s industrial policy
in the future.
In government’s approach toward different types of enterprises, we can
also see the differences between the traditions. Under Yangwu yundong,
state capital and foreign capital were treated more highly than domestic
private enterprises. In the Mao Zedong era, there was full-scale national-
ization, and domestic private capital was subject to discrimination. State
centralism continued from the time of Yangwu yundong. Many private
enterprises in China are still subject to discriminatory policies. Foreign
capital enterprises are often treated much better than domestic private
enterprises. However, as shown by Huawei, ZTE, and many others enter-
prises, private enterprises are often an important source of independent
research and innovation capacity. But because private enterprises are not
given due rights, many choose to become foreign registered companies
and then enter China again as foreign businesses.
On the relationship between industrial capital and government procure-
ment, the policy of the Qing government at the time of Yangwu yundong
was always “buying is better than making.” In the Mao Zedong era, this
completely reversed. Recent debates on industrial policy have shown,
however, that many government departments today take government
procumbent more from the government as a consumer rather than from
the perspective of industrial policy. For example, for high-speed rail
locomotives for Beijing–Shanghai lines, China already had developed
the China Star, but the government chose instead to buy the German
94 Bai Gao
Maglev and Japanese Shinkansen instead. Manufacture of these high-

speed locomotives can benefit the development of many associated
industrial sectors. It is hard to imagine that the governments of Japan
or Korea would do the same thing – buy foreign products although their
own enterprises could produce them.
Y-10 is another example. When Nixon’s Boeing 707 arrived in Beijing,
Mao allegedly ordered that China must also build a large commercial
aircraft. The start of the Y-10 project was only two years later than the
start of the Airbus project in Europe. In 1979, China made a prototype
that flew successfully to Lhasa six times. In 1986, because of the problem
of a RMB 30 million budget, the project was abolished. China chose to
work with McDonnell Douglas, which promised to help China make its
own large commercial aircraft in 20 years. Today, China is doing very
limited part of manufacturing and use huge foreign exchange reserves
to buy foreign products. This is not really possible under the classical
developmental models of Japan and South Korea.
One can argue from the above analysis that there are significant
elements of Yangwu yundong tradition in China’s neoliberal development
model. I would further argue that China is currently facing a dilemma.
The opening tradition of Yangwu yundong is not all that problematic. We
should avoid moralizing the discussion of the indigenous innovation
system. China’s neoliberal development has many shortcomings, but it
has also played a positive role in the following areas: first, foreign invest-
ment has brought jobs and production technology;. second, the model
mixed Chinese economic interests with that of other countries and thus
has reduced the risk of confrontations with them. It has allowed achieve-
ment of high-speed economic growth before the endogenous system of
innovation has been fully developed.
6 Challenges in transformation of China’s economic model
Both the Japanese classical development model and the Chinese

neoclassical development model were products of their specific histor-
ical environment. When major changes take place in such an environ-
ment, these models will inevitably face the challenge of responding
and subsequently adjusting and transforming themselves. The Japanese
model arose in the declining stage of the first wave of globalization and
the beginning of the second wave. The Japanese model proved to be
highly resilient. However, as the second wave of globalization surged
ahead, the Japanese model appeared to become increasingly incompat-
ible with the changing environment and experienced a painful process

of transformation, which has still not ended.
The Chinese model emerged at the time of the rapid rise and expan-
sion of the second wave of globalization. This wave has not receded and
the Chinese model shows great competitiveness. However, signs show
that the rapid rise and expansion of globalization may be reaching its
turning point: developed countries are increasingly facing great pres-
sure from developing countries in employment and wage levels. Many
economies see housing market bubbles with signs of bursting, increase
of trade protectionism, and the rising influence of right-wing political
forces in some countries. There are growing imbalances in the interna-
tional economy.
If we compare the challenges faced by the Chinese development
model today and by the Japanese development model in the 1980s (see
Table 4.13), we will find that China’s challenges are more severe. Let
me show this first in the relations of the two countries with the hegem-
onic United States. Both the Japanese and Chinese economies have high
dependence on US domestic consumption. This results in their huge
trade surpluses with the United States. This will inevitably lead the two
Table 4.13 Challenges in transformation of the two development models
Japan China
Relationship with US ally in Cold Regarded as main
hegemonic powers War, asymmetrical challenge to US
collaboration within hegemony, constraints
GATT framework of the WTO framework
Temporal and spatial Trade friction of the Post-Cold War
conditions of conflict Cold War, bubble burst economic, political, and
with hegemonic power at end of the Cold War strategic friction
Level of dependence on High degree of High degree of
market of hegemonic dependence, high trade dependence, high trade
power surplus surplus
Cost of trade patterns Lower resource and Higher resource and
energy dependence, energy dependence, very
high value added low value added
Impact of exchange rate Caused the bubble to Losing comparative
changes burst, still maintained advantage in cheap
comparative advantage labor, double risk of
in technical aspects bubble and deflation
96 Bai Gao
countries to experience political and economic friction with the United

States and resulting political pressures from the United States.
However, there is one key difference. While Japan had huge trade
surpluses with the United States in the 1980s, it was a Cold War ally
of the United States. When the former Soviet Union collapsed in 1990,
Japan’s economic bubble also burst. Therefore, Japan never experienced
the situation China is facing: since the end of the Cold War, China
is often treated as the potential challenger or opponent in the same
way the United States saw the Soviet Union during the Cold War. Both
development models posted a similar challenge to the United States, but
Japan is a democratic ally, with a market economy.
Because of this, hardliners in the United States had a harder time
persuading the American people to take a tough stand against Japan.
China, on the other hand, is more likely to face this potential conflict
with the United States, because, for one thing, it has a different political
system. The Chinese model does have one advantage in balancing these
unfavorable conditions. Its markets are highly integrated with global
production, and it takes only a small part of profits from global value
chains. US interests and China’s interests are closely tied together. This
in a way can help neutralize the voices of hardliners.
The transformation of the Chinese model faces a more severe chal-
lenge than that of the Japanese model also because of the emerging new
global challenges. Resources, energy, and exchange rate are just a few
of them. A development model can have great impact on a country’s
ability to adjust to the changing external environment driven by the
changing relations between energy resources in trade and the value
added. The Japanese model emphasizes creative and original work of
high-value-added products, using less resources and energy to create
higher added value.
The Chinese model, however, uses a lot of resources and energy but
produces low-value-added goods. For example, in 2004 China used
33 percent of the world’s cement and steel to produce only 6 percent
of the world total GNP. When the exchange rate changes, such a devel-
opment model is much more exposed to ticks in the exchange rate
change. In the late 1980s, Japan experienced a bursting of its economic
bubble but it was still able to rely on innovation to maintain competi-
tive advantage in the global economy. If the renminbi appreciated to 1:4
or even 1:5 against the US dollar, one can imagine that many multina-
tional corporations would relocate their production to places with lower
labor costs. In face of similar challenges, therefore, the Chinese model
may face far more dire consequences than even the Japanese model.
7 Conclusion
Different from the classical East Asian developmentalism represented

by Japan that has emphasized the protection of domestic markets and
making value-added products with self-owned brands, China’s new
developmentalism has actively opened up domestic markets for inter-
national capital, relying on cheaper labor to participate in the global
production system and stimulating economic growth by promoting
exports of manufactured goods.
This chapter argues that these differences reflect the very different
historical conditions under which the two different types of develop-
mentalism operated and the state’s attitude toward market forces. In
particular, the Japanese classical developmentalism from the 1930s to
1970s suited well to the transitional period between the first and second
stages of globalization where the classical thinking of competiveness of
national products and social stability prevailed. In the second period of
globalization, Chinese developmentalism began to take shape in the late
1970s during the rapid development of the second wave of globalization
when the ideas of free market, efficiency, and international division of
labor dominated. A particular development model, the author argues, is
a product of historical conditions.
Note
1. Summary and discussion of Japan’s neoliberal developmentalism are seen
in Gao (1997), Gerlach (1992), Johnson (1982), Murakami (1996), Tilton
(1996), and Uriu (1997).
5
Chinese Developmentalism:
Beyond the Japanese Model
Marc Lanteigne
1 China considers globalization
As a developing state, China’s methods of economic growth have been

very distinct during the past three decades, both because of the size of
its market and the speed and effectiveness by which it has implemented
market reforms thus far. Not long after the concept of “globalization”
was accepted into Chinese policy statements under then-President
Jiang Zemin in the early 1990s, globalization as a source of essential
economic goods and its great socio-economic risks was acknowledged
by Chinese policymakers. In comparison with many other countries,
the components of globalization were introduced at a much slower pace
in Chinese policymaking and academic discourse, and in a very conserv-
ative fashion.
There was recognition under the Jiang government that China could
ill afford to eschew a further deepening of its engagement with the
global economic system, despite its ongoing domination by Western
market powers. As well, China in the 1990s had neither the means nor
the desire to establish, or even promote, a separate system of economic
networks to better suit its needs, as the Soviet Union had attempted
to do a generation earlier when it established the Council for Mutual
Economic Assistance (Comecon) during the Cold War with its Eastern
European and Asian socialist satellite states (Kim 2006: 279–84). Instead,
Beijing had to pursue globalization through direct engagement with
Western-dominated rules, norms, and organizations.
China continues to be faced with the same questions about globali-
zation as many other states, including how to maximize its social and
economic potential while avoiding an unacceptable erosion of state
power. Beijing has approached some aspects of globalization differently
98
Chinese Developmentalism 99
from the West, and this schism has grown as a result of the post-2008
global recession and growing Western wariness of Chinese economic
policies. At the same time, China’s economic growth and resilience
has placed the country in a unique position to purchase and invest in
European, American, and other assets to a much greater degree (SMH
2011: December 3). Crucial to this understanding of China’s approach
to the global economy has been its domestic economic policies of modi-
fied “developmentalism,” borrowing extensively from Japanese and,
by extension, other East Asian economic growth models, beginning in
the 1990s. This growth model has allowed for an ongoing strong state
presence in key Chinese economic sectors while continuing to promote
openness and enhanced engagement in international markets and was
largely responsible for the expansion of the Chinese economy to the
point where it was acknowledged in 2011 to have become the second
largest in the world.
The ongoing adjustment of the Chinese economy to market forces
and globalization currently takes place under the twin problems of
what Zheng Bijian, author of the initial views on the concept of China’s
“peaceful rise” (heping jueqi) in the international system, termed the
“mathematical propositions.” First, any socio-economic issue related to
development, no matter how minor, has the potential to be multiplied
exponentially by China’s population of 1.3 billion. Second, the country’s
financial and material resources must be viewed as being divided among
this great population (Zheng 2005: 38). This level of economic distor-
tion caused by the population factor raises the country’s sensitivity and
vulnerability to the potential problems of globalization significantly, in
proportion to other emerging markets.
At the same time the population factor both underscores and helps
to explain the cautious approach the Chinese government has taken
toward maximizing the benefits of its international opening while
seeking to minimize the risks. These size restrictions had previously
impeded Beijing from engaging in developmental policies more identical
to those which were credited for the economic development of Japan
after the war and subsequently the East Asian “newly industrializing
economies” (NIEs) of Hong Kong, Singapore, South Korea, and Taiwan
in the 1970s and 1980s. Nevertheless, Chinese developmentalism acted
as a first stage in the creation of a Chinese economic model which has
been increasingly examined as an alternative method not only to the
Japanese/NIE model of economic development but also to the faltering
liberal approaches of the United States and Europe as a result of the post-
2008 global credit crunch and subsequent recession.
100 Marc Lanteigne
2 Models for Chinese growth
In seeking to entrench Chinese reform policies, Deng Xiaoping looked

closely at Japan and the growing “tiger” economies of East Asia, and
opted to develop a modified “developmental” economy as it emerged
from the no – longer viable Maoist command system (Z. Li 2004: 1–6).
The post-1978 opening of the Chinese economy has been described as
implementing export-oriented policies designed to take advantage of the
country’s strong position in both labor and manufacturing, while still
retaining degrees of important substitution industrialization (ISI) left over
from the late Maoist/transition period (1972–8). It was during this period
that a tentative reopening to the global economy was attempted, and
the removal of radical elements within the Communist Party of China
(CPC) assisted with the stabilization policies of Zhou Enlai and later
Deng, upon his return from political exile (Naughton 2007: 76–7). An
ISI system involves the widespread blocking of imported industrial goods
into a country, thus favoring and protecting domestic companies while
strongly encouraging consumers to purchase local goods and services.
This was a common practice among newly independent developing
states in the last century, especially in Latin America, as a means of
protecting infant industries. These policies were also practiced in other
East Asian states, including South Korea, before being abandoned in
favor of export-oriented economic reforms (Brawley 1998: 279–85). In
order for China to successfully open to international markets and be
accepted into the global economy, however, its command system and
ISI policies needed to be scaled back to permit foreign goods and serv-
ices to be offered to Chinese consumers, and Chinese companies had to
prepare for competition or run the risk of bankruptcy. Thus a major facet
of the Dengist economic reforms was a turn toward export orientation
but in a manner much different from that of the West.
True “developmental” states have been rare in the international
economic system, and the debate concerning the degree of develop-
mentalism contributing to the rise of Asia as a strong economic region
remains a subject of ongoing analysis. The Asian developmental model,
as seen in Japan as well as South Korea and Taiwan after World War II,
along with other economies in East Asia, is defined by its observance
and respect for market economics and private property, in contrast to
command economies which abhor such concepts. At the same time,
there is acknowledgment of the importance of competition both in and
from international markets, with growth and stability being considered
the primary goals.
However, unlike the traditional neoliberal economic models, markets

in the developmentalist model are largely guided by a small group
of highly skilled and educated elites. There are commonly strong
links, including information sharing between government and major
economic actors, (firms, factories, and unions, for example), which
allow for mutual consensus building on the direction development
should take. Under developmentalism, internal political debates over
methods of growth are kept to a minimum even at the expense of social
equality and, in some cases, labor rights. The state bureaucracy therefore
has a commanding role in overseeing development, or “politicians reign
while bureaucrats rule” (Öniş 1991: 109–10).
Moreover, in a regulatory state such as those found in the West,
governments concern themselves with whether businesses and indus-
tries are following rules and laws of conduct but do not normally delve
further into which economic sectors should be promoted and which
are obsolete. In a developmentalist model, the state is much more inva-
sive and often does directly intervene in deciding which industries and
sectors need to be promoted, internationalized, or discarded. Often
there is also a “pilot agency” in the form of a ministry with broad and
overreaching policymaking powers and influence, such as the former
Ministry of International Trade and Industry (MITI)1 in Japan, to coordi-
nate policymaking and the implementation of new schemes, and links
are strengthened between governments and firms. In the case of Japan,
many firms arranged themselves into conglomerates known as keiretsu,
and governmental connections were maintained through a variety of
means, including the practice of amakudari, or “descent from heaven,”
whereby firms would hire early retired bureaucrats to fill senior manage-
ment positions (Johnson 1982: 2–23, 1995: 142–6). These practices
greatly improved information flow between states and firms and allowed
governments to more efficiently accumulate necessary knowledge about
which sectors required attention and occasionally intervention.
In other Asian developmental states, similar corporate structures, along
with close government–industry ties, were created in order to facilitate
economic planning and modernization, including the chaebol system in
South Korea and the development of conglomerates in Taiwan, known
as “caifa” (Wu 2007: 986). Both economies, along with other newly
industrializing East Asian states, also benefited from the overspill not
only of Japanese economic ideas but also, in many cases, the importing
of offshore Japanese firms and factories, a process which was commonly
referred to in Japanese policy circles since the 1930s as the “flying geese”
effect.
102 Marc Lanteigne
Under this process, leading countries at the forefront of technological

innovation begin to move secondary industries to other more-developing
economies, and then when those developing economies accumulate
enough capital, said industries are moved to less-developing economies,
creating a chain reaction, which eventually improves the economic
well-being of an entire region (Akamatsu 1962: 3–25; Korhonen 1994:
93–108). This process was used to describe Japan as the lead goose, with
the NIEs close behind, and eventually other Asian economies catching
up. However, in the initial calculations, China was not seen as a major
participant in this process given that, until the 1970s, the country was
isolated and mired in economic destitution. After the turn of the twen-
ty-first century, Japan’s role as the lead goose began to be eclipsed by the
flying panda. Nevertheless, Japan’s developmental model did begin to
be adopted by several other Asian economies before being incorporated
by China.
Developmentalism also has a visible political component. In the case
of Japan, the post–World War II developmental system was constructed
during a period of one-party dominance by the Liberal Democratic
Party (LDP), which maintained a near monopoly on power for almost
four decades. In the case of the equivalent systems in South Korea and
Taiwan, they were developed under authoritarian regimes: the military
rule of Park Chong-hee in Korea and Chiang Kai-shek’s Kuomintang
party-state in Taiwan. The combination of an authoritarian government
and economic policies dominated by market economy and export-led
economic growth led to the dominance in these countries of bureau-
cratic-authoritarian industrializing regimes, or “BAIRs,” a term used to
describe the Korean and Taiwanese variants of the developmental model
(Cumings 1987: 69–78) .
The fact that South Korea and Taiwan were also forced to deal with
direct threats to their very existence at times, in the form of North Korea
and mainland China respectively during their high-speed economic
growth period, further contributed to the urgency in ensuring no serious
errors were committed in the economic development process. There was,
therefore, little opposition to the sweeping reforms which punctuated
the developmental systems. With opposition forces either marginalized
or banned, these systems could undertake selective economic activism,
meaning the frequent practice of the state in engaging in the manage-
ment and guidance of national-level economic activities (Huang 2009:
105–6), with little disruption either from other political actors or other
groups such as unions. The models created by Japan and the BAIRs,
therefore, offered much to Beijing at a time when it was searching for an
economic alternative to the Maoist system while avoiding an outright

variation of the Western capitalist model.
3 China adapts to developmentalism
During the 1980s and 1990s, when the Dengist economic reforms in
China were still very much in the experimental stage, it was under-
stood that economic modernization should be undertaken carefully and
slowly, in keeping with Deng’s idea of “crossing the river by feeling the
stones” (mozhe shitou guohe). The gradualist approach, although criti-
cized for permitting excessive rent-seeking behavior as well as encour-
aging corruption by those within the government able to manipulate
the rules to enrich themselves,2 was nonetheless seen as a more viable
alternative than practicing “shock therapy” by liberalizing too much of
the economy in a short space of time. The example of Russia in the years
immediately following the fall of the Soviet Union, when attempts were
made by the Yeltsin regime to “de-communize” the economy, resulting
in widespread economic chaos and corruption, seemed to vindicate
Beijing’s “go slow” approach to economic reform.
There was, however, great urgency to stimulate external trade. With
so many economic sectors crushed flat during the late Maoist Cultural
Revolution period of the 1960s and early 70s, there was plenty of avail-
able capacity and labor in China which could be redirected toward
stimulating trade along the lines of classical economist Adam Smith’s
ideas of “venting for surplus” (Meier 1984: 489–92), to allow excessive
capacity to be channeled into providing goods and services for inter-
national trade. However, because China was very much a newcomer to
global market behavior, such reforms had to be undertaken in a conserv-
ative fashion which did not challenge the primacy of the Chinese party-
state or Deng’s “four cardinal principles” which included keeping China
on the socialist path.
At the same time, Deng had to convince a skeptical party apparatus
that the Chinese people, who not too long before had been described
by Mao as “poor and blank” (yiqiong erbai) (Schoenhals 1986: 108), were
now ready to be exposed to the international market. Deng’s justifica-
tion for opening China to the outside economy was the need for both
higher technology and knowledge of business management, as well as
the fact that “the world is open” and that maintaining a closed economic
system would only perpetuate the backwardness into which China had
descended and prevent the country from achieving modernization levels
seen in the advanced economies (Deng 1993: 90, 1994: 127).
104 Marc Lanteigne
Unlike Mao, who was unwilling to consider economic models which

strayed too far from Marxist-Leninist forms, Deng, at the start of the
reform era, was more than willing to examine and, if necessary, adapt the
development models of other states. The success of Japan and other East
Asian economies on China’s periphery caught the attention of Beijing in
short order, especially since the developmental states in Asia were deliv-
ering high growth rates at that time, while maintaining the dominant
role of the state. At the same time, the developmentalist idea fit well
with the traditional Chinese thinking of “all under heaven” (tianxia), a
classical Chinese sociopolitical theory which stresses the need for inclu-
siveness coupled with garnering mass support from the people via good
governance (Zhao 2011: 21–36).
Moreover, as So noted in his study of Chinese developmentalism,
Beijing did have the advantage of a highly centralized state which
was constructed during the Maoist era that facilitated the “top-down”
reforms needed for a developmentalist state to take root (So 2002: 6). As
well, the recently ended Cultural Revolution (1966–76) and the discred-
iting of leftist radicalism within China also facilitated Deng’s policy of
finding a different path to Chinese economic development.
However, the Chinese economy differed greatly from those of Japan
and the NIEs for three major reasons. First, China has a much larger
population than the traditional developmental economies, along with
an economy which was still very much dominated by the agricul-
tural sector and by state-owned enterprises. These had to be carefully
reformed so as not to spark widespread unemployment and discord. The
process of SOE reform continues to be a sensitive area of the Chinese
economic reform process. At the same time, in contrast to that of many
other parts of East Asia, China’s population was overwhelmingly rural at
the start of the Dengist reforms, a situation that was only reversed well
after the reforms were under way. It was announced that China’s urban
population finally became a majority in 2011, standing at 51.27 percent
(Xinhua 2012: January 17).
However, even taking into account the country’s growing urbaniza-
tion levels, there is also the question of how much of China’s city popu-
lations are a result of government-engineered urbanization, designed to
bolster local revenues but contributing little to the overall economy, a
process seen as “pseudo urbanization,” or “urban sprawl” (Yew 2012:
281–98). This situation stands in marked contrast to the heavily urban-
based economies found in Japan and other areas of the Pacific Rim.
Moreover, the shape of the urban versus rural economies became mark-
edly different as a result of the Dengist reforms, and one study suggested
that much of the reform era was marked by a seesaw competition between
the more entrepreneurial rural sectors and the state-controlled urban
sectors, with the state expanding its presence in the Chinese economy
in the 1990s (Huang 2008).
Second, unlike Japan and the NIEs, China was still in the process of
reforming what used to be a staunch command economy developed
after the Soviet model, a difficult and extremely risky process especially
during the first stages of the Dengist “opening up” process. A corner-
stone of the developmentalist idea was that the ruling elites had to be
economically knowledgeable (and sufficiently savvy) in order to under-
stand which sectors were and were not relevant in the global market and
to predict economic trends in order to “pick winners.” Misreading the
market or not being able to address global economic shocks would be
disastrous for a Chinese government which was staking more and more
of its reputation, both under Deng and Jiang Zemin, on consistently
improving domestic living standards.
The case of Indonesia in 1998 was a warning bell for Beijing. The
Suharto government collapsed after being unable to forestall the coun-
try’s economic collapse, which included mass bank closures, a harsh
International Monetary Fund (IMF) austerity plan, and a rapid drop in the
country’s currency value during the Asian Crisis. When the Indonesian
economy began to collapse, the Suharto regime’s own experimentation
with economic developmentalism came to an abrupt halt when the citi-
zenry, having no outlet for holding the government accountable due
to a compromised electoral system, instead erupted into protests which
eventually forced Suharto’s resignation (Rodrik 1999; Haggard 2000:
65–70; Thompson 2004: 1079–95). There is the concern in China that a
similar economic slowdown might lead to a similar result, and therefore
maintaining high growth rates remains a key policy for Beijing.
Third, Japan and, to a lesser degree, other NIEs also had the added
benefit of constructing a developmentalist, state-guided economic
system while having their security concerns largely overseen by the
United States throughout much of the Cold War era. The American secu-
rity umbrella meant that funds which would otherwise have been used
for military expansion were instead channeled to other economic areas,
and as a result Tokyo, in particular, chose to pursue what had been called
“mercantile realism,” meaning the pursuit of “techno-economic” secu-
rity and to ensure that domestic economic growth was protected and
remained a paramount concern of the state (Heginbotham and Samuels
1998: 171–203). South Korea, Taiwan, and, to a degree, other parts of
Southeast Asia also benefited from the American security presence.
106 Marc Lanteigne
China, however, had no such umbrella and therefore had to begin

its economic development program in the late 1970s and early 1980s
with one eye fixed on hard security concerns, including border tensions
with the Soviet Union and a brief frontier skirmish with Vietnam. Even
in the 1990s, when China experienced a much more congenial security
atmosphere around the Pacific Rim with the disappearance of the Soviet
Union and the warming of Sino–Southeast Asian relations, the military
continued to play a strong role in both Chinese politics and economics,
and remains a factor in Beijing’s economic planning, as evidenced by the
steady annual rise in military spending which reached US$106 billion
by the beginning of 2012 (New York Times 2012: March 4).
China’s developmental ambitions had to be tempered by political
realities, including the oftentimes vicious 1980s internal CCP debates
over the depth and breadth of the general reform process, to the point
where one scholar referred to China’s attempts to adapt the develop-
mentalist model as “dysfunctional” (Breslin 1996: 689–706). While it
was not possible for Beijing to completely duplicate the developmen-
talist models of Japan and the NIEs for the reasons noted above, many
facets of the later Dengist economic reforms, and those continued by
Jiang Zemin in the 1990s and Hu Jintao in the 2000s, followed liber-
ally developmentalist ideas, especially the idea of state-led develop-
ment under what one Chinese economist referred to as “competitive
advantage-following.”
The government of a developing country seeking to modernize, it was
argued, should act as an information collector as well as a coordinator
of economic activities. Under certain circumstances, the state should
play the role of protector of Chinese firms which suffer from unforeseen
“externalities” or do not succeed despite following government guid-
ance. Since a developing state, compared to advanced states, already has
the advantage of being a latecomer to economic modernization, there
is somewhat more predictability, but at the same time the state must
ensure that developing firms are given a comfortable degree of state
support (Lin 2012: 128–31).
As well, unlike Japan, China did not seek to develop an overreaching
pilot agency or “super-ministry” along the lines of MITI, providing one of
the reasons why its model of developmentalism has also evolved differ-
ently from those seen elsewhere in East Asia. When the government of
Jiang Zemin sought to accelerate economic reform and expand foreign
trade and investment, the focus was on addressing outdated ministries
and excessive bureaucratization of the Chinese economic system. In
the 1990s, there were attempts to pare down the number of ministries
overseeing economic affairs in China, one of the most ambitious being

the widespread 1998 party-state restructuring overseen by then-Premier
Zhu Rongji. The overall number of ministries was reduced and some
were absorbed into the State Economic and Trade Commission (SETC)
which was overseen by Zhu himself and given widespread coordination
of regulatory powers (Yang 2004: 25–64).
At the same time, other ministries seen as useful for developing a
fledgling e-commerce dimension of the Chinese economy were rolled
into the newly created Ministry of Information Industry (MII), which
oversaw Internet development until 2008 when MII was reordered into
the Ministry of Industry and Information Technology (MIIT) in 2008
(Lanteigne 2005: 45; Xinhua 2008: June 27). Despite this consolida-
tion, it cannot be said that China developed an equivalent of MITI or
its successor in Japan, the Ministry of Economy, Trade and Industry,
although China’s Ministry of Commerce, or MOFCOM, created in 2003,
does have considerable oversight powers in the areas of imports and
exports, trade and investment.
In China, the line between state-owned and non-state-owned indus-
tries is less defined, and there is more emphasis on “bottom-up devel-
opment,” encouraging the development of small businesses at very
local levels as well as larger firms, but with more risk of corruption and
gaps between rich and poor (So 2003: 18–19). This has affected both
internal economic reform and the development of trade in the country.
While the CPC, since the Dengist era, recognized that the market would
need to be freed in order to promote faster development, a threshold
level of control over large economic sectors and especially those which
would become more fully internationalized was required to prevent a
nightmare scenario similar to that which befell the Soviet Union during
the last years of the “perestroika” reforms by Mikhail Gorbachev in the
late 1980s.
From the time of the initial Dengist reforms to the economic restruc-
turing under Jiang Zemin and Zhu Rongji to the more current policies of
Hu Jintao and Wen Jaibao, there had always been the emphasis on reform
while keeping the integrity of the party-state in China intact. Therefore
foreign interests and the non-state economy have been considered by
Beijing as important but not as much as those economic actors supported
by the state, known collectively as the “in the system” (tizhinei) economy
(Walter and Howie 2011: 8). Moreover, several sectors were opened to
competition by the end of the 1990s while attention was refocused on
key industries in a similar fashion to the Japanese model. Thus the catch-
phrase in Chinese governmental circles became “grasp the big, let go of
108 Marc Lanteigne
the small” (zhuada fangxiao). This meant that Beijing had to let smaller,
local firms be free of governmental control or support while focusing on
large enterprises in key industries (Ho and Lin 2003: 686).
China’s views on economic liberalization as well as a deepening of
the engagement with the global economy became much more favorable
as the country grew in economic power. Beijing remains a supporter
of both the World Trade Organization and of a satisfactory resolution
to the moribund Doha Round of WTO global trade talks, while at the
same time often siding with those demanding more equitable treat-
ment of developing states. The latter stages of the WTO negotiations
in the 1990s were very difficult, especially the direct negotiations with
Washington, and, as a result, two separate schools of thought on these
issues emerged. On the one side are liberalists who have supported
greater economic opening, and on the other is the so-called “New Left
Movement” (xinzuopai). The latter emerged over the past decade and has
been highly critical of Beijing’s rush to join economic institutions which
are Western-dominated as well as unquestionably embracing of Western
economic practices and globalization (Wang 2009).
Their argument, which has manifested itself in scholarly articles and
commentaries, was that China’s rush to join international economic
institutions and to rapidly liberalize the Chinese economy has been
inherently destabilizing and has resulted in an overabundance of
Western control over China’s development (Fewsmith 2008: 221–4).
The debate had flared up with the publication of the book, China Can
Say No, in 1996 and resurfaced with the publication of the controversial
2009 study Unhappy China (Song et al. 2009). This deliberation between
economic liberalists and “new leftists” further underlines how the
domestic and international economies in China have become increas-
ingly blurred, as well as whether the Chinese developmental model can
continue to successfully resist both internal and external pressures.
China, although not adapting all aspects of the developmental model,
has created a modified version to account for the still-embryonic and
debated private property laws, a very large agricultural sector, and a
considerable percentage of the Chinese economy which remains directly
state-owned. The number of SOEs, along with their financial contri-
bution to the Chinese economy, has been dropping since the acceler-
ated reforms of the 1990s, but many are still kept in business through
government and bank support. Then there is the simple fact that China
is much larger, geographically and demographically, than the other
developmental states of the past, presenting a different set of govern-
ance concerns for the party-state and accentuating the need to avoid
economic chaos which could spark domestic crises. China today is on

a much different economic footing from the East Asian developmental
states of the 1960s and 1970s, when they first adopted such policies.
Nevertheless, there are many points of comparison between Japanese
developmentalism and the modified Chinese version which continues
to take shape. As with previous developmental systems, the Chinese
state was insulated to a sufficient degree for it to implement develop-
mental policies without facing strong domestic opposition, and also had
the ability to make changes or repairs during the process, again without
significant barriers.
Also, the dominant role of the Chinese Communist Party in govern-
ment allowed for the implementation of developmentalist policies
as well as to “capture” emerging economic actors, especially business
sectors, using economic incentives, a process commonly associated with
what is studied in comparative politics theory as “state corporatism”
or neo-corporatism (Schmitter 1974: 82–131). In the case of China, the
often complicated division between SOEs and private and semi-private
industries, as well as Chinese enterprises and the government, further
allowed state oversight of major economic “players” and the sharing of
information.
There is also the widespread practice in China of newly developing
private companies registering themselves as “collective enterprises”
and further disguising their true nature in the hopes of receiving better
treatment from state agencies and greater access to loans and start-up
funding, a practice known as “wearing a red hat” (dai hongmaozi).
Former CPC members have also gone into business at various levels,
becoming so-called “xiahai entrepreneurs” who often maintain their
previous governmental connections.
The term xiahai, or “jump into the sea,” comes from the popular
Chinese euphemism for entering the world of private business with
all of the associated risks compared to the relatively more predictable
public sector (Tsai 2007: 53–4). These trends have further blurred the line
between public and private enterprise in China and presented an added
challenge for foreign investors and analysts seeking to better understand
the country’s economic landscape. Therefore one central tenet of the
developmentalist model, namely the close association between govern-
ment and business, is being echoed in China today, albeit through
different means.
It has been argued that bona -fide developmental states are not only
rare but also appear in very specific cases, namely when state leaders
perceive distinct and potentially very harmful economic challenges to
110 Marc Lanteigne
governance, the process of “systemic vulnerability.” A state may seek

developmentalist policies if it is facing the threat of economic insta-
bility precipitating mass unrest, an increased need for foreign exchange,
the wherewithal to fight wars based on national-level insecurity, and
constraints on budgets caused by a lack of easily accessible sources of
revenue (Doner, Titchie, and Slatre 2005: 327–61). It can be argued that
China falls into all three categories to varying degrees, and this would
explain why Beijing would wish to retain developmental features even
under globalization pressures. As well, although China does not share the
same issues as Japan and other East Asian economies regarding limited
natural resources, the rate at which China is seeking raw materials in
order to sustain continuous growth is becoming of greater concern to
Beijing, particularly in the area of energy.
As China’s economy continues to modernize, its level of engagement
with the global economy has also, by necessity, expanded. The country’s
first few steps into the global market were tentative, but as a member of
the WTO and as a recognized large emerging market, China is demon-
strating more confidence in its dealings with outside economic actors,
even with giants like the United States, the European Union, and Japan.
However, as China adapts to the changed global economic system,
which has seen a variety of power shifts in a very short time, many
new questions about China’s economic maturation and developing
power have appeared. While China’s economic development has moved
further away from the traditional Japanese model, it is likely that several
vestiges of Japanese-style developmentalism will be retained after the
2012 leadership transition in Beijing has been completed.
4 Beyond developmentalism: the Beijing consensus
As China continues to deepen its economic reforms and expand its

economic reach well beyond the Asia-Pacific region, the term “Beijing
Consensus,” which has its origins in the Chinese developmental model,
has evolved over the past decade from a theoretical idea to one which is
increasingly taken seriously in analyzes of China’s foreign policy as well
as its growing economic footprint on a global level. The question of how
an alternative “Chinese” path to development is taking shape is directly
linked to whether such a “consensus” actually exists.
Moreover, these ideas also coincide with the growing debate over
whether China has developed a threshold degree of “soft power,”
meaning the ability to influence via attraction rather than coercion, as
a result of its economic successes (Gill and Huang 2006: 17–36). The
Beijing Consensus idea, first coined by Joshua Cooper Ramo of the

Foreign Policy Centre in London in a 2004 paper (Ramo 2004), suggested
an alternative theory of development to the standard Washington
Consensus model. The Washington Consensus model was omnipresent
in the 1990s and formed the cornerstone of loan and assistance policies
issued by international financial regimes such as the World Bank and
International Monetary Fund, as well as the United States in its financial
dealings with the developing world.
The Washington Consensus was first articulated by economist John
Williamson in 1989 (Williamson 1993: 1329–36), and stressed neoliberal
economic policies including the reduction of the public sector, open-
ness to foreign economic competition, fiscal discipline, the sale of state
enterprises, and liberalized trade. Under this view, the state was to inter-
vene as little as possible in favor of allowing “trickle-down economics”
both within states and among them. These ideas were routinely used by
developed states and regions in their financial engagement of developing
states in the name of improving the economic status of the latter.
However, this approach soon came under harsh criticism in developing
states, especially in the wake of economic crises in Latin America, Russia,
and East Asia during the 1990s, for perpetuating “neo-mercantilism”
and entrenching divides between rich and poor both within developing
states and between the developing and developed countries. The back-
lash against the neoliberal policies of the Washington Consensus was
keenly felt at the turn of the century in many developing states in Africa
and Latin America. The onset of the global recession, which was largely
blamed on too little state intervention in banks and financial institu-
tions and the accumulation of an excess of debt, seemed to further call
into question the wisdom of the neoliberal economic model.
The Beijing Consensus, by contrast, rejected many aspects of the
neoliberalist approach as well as the uniform approach to helping coun-
tries develop and prosper in the international economy. According to
Ramo, “China is in the process of building the largest asymmetric super-
power in history,” one which thus far has not been built on Western
concepts of hard power and rigid policy ideas but rather coming up with
alternative development ideas and adhering to a strong Westphalian
view of the primacy of state sovereignty. It can therefore be argued that
while it is agreed that China’s status as a great power and that questions
over whether China will continue to dominate international discourse
for the longer term have largely been answered, China as a great power
is considerably different from like powers of the past, including when
measuring its economic capabilities.
112 Marc Lanteigne
The Consensus itself rests on three assumptions. First, the idea that
innovation is the key to swift and steady economic development, and
that the old model of starting with simpler technologies and then
working one’s way to more complex ones should not be viewed as the
only method of successful development. Certainly China’s growth has
upended the aforementioned flying geese model of Asian economic
growth, whereby the lead goose, Japan, continuously transferred older
technologies to geese further back (the NIEs) as it developed new ones
(Kojima 2000: 375–401). However, Beijing by the 1990s had refused
to remain at the back of the flock, and the center of economic gravity
in Asia began an inexorable move from Tokyo to Beijing during that
decade. The pivotal event that caused this change in thinking was
widely regarded to be the 1997–8 Asian financial crisis, which saw
China largely immune from its effects due to the fact that its currency
was still tightly government controlled.
However, Beijing was affected peripherally as the Hong Kong stock
market dropped suddenly in October 1997, and as surrounding states
experienced currency crashes, Beijing was under intense pressure to
devalue the renminbi to remain competitive. Not only did Beijing opt
not to do so but China also provided emergency loans to some affected
states (Moore and Yang 2001: 203–6). These events, plus the growing
reputation of the Chinese economy as categorized by conservatism and
strong state oversight, created the impression of the PRC as a safe haven
in a sea of economic chaos in Asia, which Beijing encouraged by calling
for regional organizations like the ASEAN-plus-three (APT) and later the
East Asian Summit (EAS) to prevent a further economic meltdown in the
Asia-Pacific (Malik 2006: 207–11). The eclipse of the flying geese model
appeared to be complete with the overtaking of Japan by China as the
second-largest economy in the world, as well as Tokyo’s focusing on the
recovery from the March 2011 Tohoku earthquake and tsunami coupled
with the Fukushima nuclear accident (Matsumura 2011: 19–25).
Innovation is still an area in which China required much new
thinking. A major priority for the current Chinese economy is the devel-
opment of global brands, which can successfully compete with interna-
tional counterparts. After two decades of developing an “inviting in”
policy of encouraging foreign firms to invest in China and develop joint
ventures with domestic corporations, the catchphrase for the past two
decades has been “going out,” a policy which calls upon Chinese firms,
once they have developed global-level products and gained the neces-
sary expertise, to venture out into international markets and prepare
themselves accordingly for intensified international competition with a
necessary degree of government support (Hong and Sun 2006: 610–34;

Li 2004: 134–6).
So far results have been mixed. Although many products sold around
the world are made in China, the number of truly international brands
developed in China remains very low, with possible exceptions such as
Lenovo, Huawei, and Haier (Deng 2009: 74–84), compared to the United
States and Europe as well as the developmental states of East Asia, where
firms such as Toyota and Mitsubishi in Japan, Samsung and LG in South
Korea, and Acer and HTC in Taiwan were built up as global brands.
The second assumption of the Beijing Consensus is that chaos is a
constant in economic development but should nevertheless be mini-
mized using state supervision and measurements beyond traditional
ones such as per capita GDP, and instead greater attention should be paid
to quality of life standards via sustainability and improving equality.
Chaos management, therefore, becomes of paramount concern during
the development process. As well, the idea that a single economic reform
approach can solve every developing country’s ills is rejected, along with
the idea of shock therapy to push a given economy from command to
liberal economies. Beijing had been critical of such approaches by the
West, both during the 1997–8 Asian Crisis and during the global reces-
sion. Since 2008 there had been the view within the Chinese govern-
ment that the West bore much responsibility for the banking crisis and
subsequent economic downturn.
China has consistently favored a gradualist approach to economic
reform to minimize potential disruptions, and the effect on China of
the global recession appeared to bear out the wisdom of that approach.
However, despite China’s impressive economic growth, it still faces
many challenges in addition to riding out the current recession which,
if not properly addressed, have the potential to slow or even reverse
the country’s economic gains. Deng Xiaoping spoke of the color of a
cat, black or white, as being not important as long as it caught mice
(Chen 1995: 22–34). In his report Ramo argued that China needed to
pay greater attention to the “green cat,” namely environmental prob-
lems as a result of unchecked growth, and the “transparent cat,” the
need to make economic institutions more open, accountable, and free
from corruption.
Both these “cats” have been perceived as considerable drawbacks to
the Chinese model. From an environmental viewpoint, concerns have
been raised that unchecked growth is creating considerable damage not
only to health but also to future Chinese economic gains. Meanwhile,
the transparency issue is now being looked at more seriously by Beijing
114 Marc Lanteigne
and has taken on many facets, including the desire to strengthen the rule
of law while keeping the primacy of the CPC intact, and in addressing
economic inequalities which were seen as major contributors to the
social unrest and political tensions around China.
Third, the Consensus suggests that there is the need for states to
develop using their own methods, free from unwelcome international
interference. Self-determination should be a right of all states in the
development process, a direct challenge to the Washington Consensus
ideas of interventionism and an extension of China’s traditionally
strong Westphalian view of state sovereignty. These views were first
elucidated in the late 1950s with the development of the “Five Principles
of Peaceful Coexistence” (heping gongchu wuxiang yuanze), tenets which
would become the focus of Chinese foreign-policy thinking until well
after the Maoist era.
The principles, which borrowed heavily from China’s traditional
views of state supremacy and sovereignty, were the mutual respect for
territory and sovereignty, mutual nonaggression, mutual noninterfer-
ence in other states’ domestic affairs, the equality of states and mutually
beneficial exchanges, and peaceful coexistence. These ideas were revived
in the 1990s out of concern for unchecked American unilateralism and
interventionism, as the Consensus suggests, and received much greater
notice from other developing states seeking to modernize their own
economies via alternative methods to those held by the United States
(Kennedy 2010: 468–9). Since then these principles have been folded
into the Beijing Consensus, which tends to view all states as equal and
deserving of noninterference.
The debate over the Beijing Consensus remains in its infancy, and
there will continue to be much discussion over how “distinct” China’s
growth model actually is and whether its components can readily be
transferred to other developing states successfully. What can be said,
however, is that the existence of the Beijing Consensus, even as a source
of debate, is proof that China is now creating its own economic growth
patterns which are becoming more distinct from their developmental
origins, and that as long as Chinese economic growth remains at an
appreciable level, the question of how much the state should retain a
commanding role in the country’s development will also persist.
5 The challenges ahead for China
In examining Chinese economic strategies and policies during the

initial stages of Dengist economic reform, an argument can be made
that the economic system being created was not solely a mix of import-
substitution and export-guided policies, but rather a modified develop-
mental system, resembling considerably the Japanese post–World War II
economic model, designed to expand China’s economic presence while
keeping its economic mechanisms under a threshold degree of party-
state control.
The question here, however, is whether developmentalism will be a
transitory process in Beijing’s shift from a closed economy to a liberal-
ized one, or will the political and social pressures of globalization, the
free market, and the aftershocks of the global recession assist in the
perpetuation of some degree of developmental economics in China for
the near term? This “conundrum” (Lanteigne 2008: 162–83). became
more pressing for Beijing due to economic troubles in the United States
and European Union and China’s increased exposure to economic conta-
gion from the West. On one hand, as the recession deepened, China
found itself one of the few areas of stability and growth, but on the other
hand, the Chinese economy faces growing scrutiny from the West over
its currency and trade policies.
The requirement for Beijing to maintain economic growth and stability
in the face of international financial uncertainty began to contribute,
according to some critics, to a retrenchment of the Chinese state in the
economy, as evidenced by post-2008 Chinese policies which included
interest rate controls, manipulation of price rates including energy
costs, and consistent monitoring of the value of the renminbi. Even
before the recession took hold, it was argued, Beijing had been scaling
back the privatization of state assets either directly or tacitly (Scissors
2009: 24–39).
Moreover, the post-2008 drop in demand for Chinese goods, especially
in the West, and concerns that China began to pass the Lewis turning
point, meaning the falloff of surplus labor leading to worker shortages in
key industries, has also prompted much more attention from the state due
to worries about a longer-term erosion of Chinese growth rates (Zhang
Yang, and Wang 2011: 542–54). These trends would seem to suggest that
China’s distinct brand of developmental economics is reasserting itself,
and to quote an increasingly visible phrase in Chinese blogs, “the state
capital is advancing while private capital is retreating” (guojin mintui).
The post-2008 global recession prompted a great deal of economic stock-
taking within Beijing and in the period 2011–2, during the preparations
for the leadership succession, significant divisions appeared to be opening
up as to how Beijing should respond to the financial crises as well as which
paths the country should take in continuing the economic modernization
116 Marc Lanteigne
process. For example, an internal debate which flared up in late 2011 and
early 2012 was centered on the degree to which the Chinese government
should continue to play a central role in economic growth.
On one side of the debate was the “Guangdong model” of enhanced
economic liberalization advocated by Wang Yang, CPC Secretary of
Guangdong, which calls for a decreased role of government and the
enhancement of both private enterprise and civil society. Wang had also
won much respect in higher party circles after his provincial government’s
delicate and moderately peaceful handling of the September 2011 Wukan
protests by farmers angered over land seizures without compensation.
On the other side of the debate there is the developing of “Chongqing
model,” a populist, party-state-dominated development approach,
which includes a revival of Maoist ideas of collectivism, put forward by
the CPC Chongqing Party Committee Secretary and “red princeling,”
Bo Xilai (WSJ 2012: March 2). This dichotomy was only one manifesta-
tion of the differences over economic direction which appeared in the
lead-up to the 18th Communist Party Congress at the end of 2012.
Further contributing to the Chinese internal debate over the future
of state-led economic growth was the February 2012 release by the
World Bank, but also significantly in partnership with the Chinese
Ministry of Finance (MoF), and the Development Research Centre of
the Chinese State Council (DRC), of a report, China 2030: Building a
Modern, Harmonious, and Creative High-Income Society (World Bank 2012).
The publication recommended a series of reforms designed to further
liberalize the Chinese economy, including creating a more independent
financial sector and banking system, adapting further environmental
initiatives, enhanced land reform and education systems, and encour-
aging greater innovation, especially in the private sector.
With these changes China could look forward to becoming an advanced
economy by 2030. Although the report’s recommendations were greeted
with suspicion by more conservative elements within the CPC, the fact
that the coordination of the World Bank and the two Chinese agencies
was assisted by Chinese Deputy Prime Minister Li Keqiang, slated to
become prime minister in March 2013, coupled with an editorial in the
People’s Daily during the same month as the report’s release which called
upon the economic reform process to continue and that there would be
some with “vested interests” seeking to hamper needed change, appeared
to suggest that the report did have its supporters in Beijing (World Bank
2012: People’s Daily 2012: February 23; Economist 2012: February 28).
As well, the sensitivity of the Chinese economy to exports and foreign
investment also became a political issue during the global recession. As
Beeson noted, another difference between Chinese and Japanese devel-

opmentalist approaches is that the former was much more dependent
on foreign investment as a means to develop its exports, and that many
Chinese exports are heavily reliant upon imported raw materials and
components often with low value added (Beeson 2009: 27–8). Signs began
to appear at the onset of the global economic slowdown that China was
seeking to boost its domestic economy and reduce its dependence upon
exports, starting with the injection of a 4 trillion renminbi (US$586
billion) stimulus package into the Chinese economy in November 2008,
which was primarily designed to improve domestic infrastructure (Cai,
Wang, and Zhang 2010: 33–46).
The announcement of the stimulus package came on the heels of
several warnings issued by Premier Wen Jiabao beginning in 1997 that
the Chinese economy was showing expanding signs of unsteadiness and
imbalance, concerns which began to be echoed by Hu Jintao by the
middle of 2011 (Lardy 2012: 44). There was also an announcement by
Premier Wen in March 2012 that China was only expected to attain
a GDP growth rate of 7.5 percent that year in order to “increase the
quality” of Chinese economic development (China Daily 2012: March
10). This was an unusual prediction given the preference of the Chinese
government to seek growth rates of 8 percent or higher in order to main-
tain economic stability, and was viewed as further evidence that China
is seeking to turn its priorities toward developing its domestic economy
even at the risk of slower growth rates.
The further internationalization of the Chinese economy, the growing
debate about a Beijing Consensus growth model, and the country’s
response to the global recession have all indicated that China is moving
away economically from its developmentalist policies and experiments
of the previous decades. While it is likely that the Chinese state will
continue to maintain significant control over the economy for the fore-
seeable future, both internal and external pressures to attempt greater
liberalization will continue to factor into Beijing’s attempts to modernize
its fast-changing economy.
Notes
1. MITI existed between 1949 and 2001, when it was restructured and renamed
the Ministry of Economy, Trade and Industry (METI).
2. For example, see Pei (2006).
6
Japan’s FDI and the Development
of the Automobile Industry in
China: Firms, Production Structure,
and Government
Katsuhiro Sasuga
1 Introduction
One of the most dramatic changes in overall economic relationships

in East Asia in the past two decades has been the shift in the relative
economic positions of Japan and China. For the past three decades,
China’s economy has grown at an average annual rate of 10.09 percent
and its foreign trade has expanded at a rate of 17.28 percent a year.1
One of the emerging characteristics of Japan–China trade is that intra-
industry or intra-firm trade has significantly increased, especially in
electronics and machinery parts. The evolution of production networks
across the two countries, mainly promoted by Japanese foreign direct
investment (FDI) in China, has greatly contributed to the development
of bilateral trade.
The emergence of China as a major recipient of FDI has had a significant
impact, not only on China’s pattern of economic development but also
on the pattern of its deepening linkages with the rest of the world. The
expansion of trade and FDI flows with Japan has generated great bene-
fits for both countries, but at the same time it has raised bilateral issues
involving sensitive political and economic frictions such as custom clear-
ances related to rare natural materials and the food trade.2 This phenom-
enon is not simply one within discrete national economies or limited to
bilateral relations, but one that concerns the roles of multinational corpo-
rations (MNCs) and those of central and local governments that establish
specific policies to regulate and build networks with foreign investment.
118
Firms, Production Structure and Government 119
The case of the automobile industry therefore can tell us about the broad
pattern of changing economic relationships between the two countries.
The purpose of this chapter is to develop a framework for a better
understanding of the shifting pattern of production structures and the
strategic relationships between firms and governments, and the devel-
opment and structure of the national automobile industry in China.
The chapter focuses on the role of Japanese automobile FDI in the devel-
opment of the Chinese automobile industry, especially the production
networks. One notable feature of the Chinese automobile industry is
the dynamics of local-national-global relations involving loose proc-
esses of influence and negotiation between public and private sectors.
Empirical studies of the impact of Japanese investment and evolving
production networks are helpful in explaining both the pattern of rapid
growth in the Chinese automobile industry and understanding the roles
of non-state actors, for example, Japanese FDI and the central and local
government in developing multilevel forms of governance. In a broader
context, this chapter aims to help explain the diversified patterns of
Chinese development and whether they are correlated with the develop-
ment paths of other East Asian countries.
2 The global shift of automobile production
For many years, the bulk of automobile production remained largely

in three major regions: North America, Europe, and Japan. These three
regions used to account for around 90 percent of total world production.
Recently, the remarkable growth of the Chinese automobile industry
has changed the geographical picture of automobile production. In
2010, China produced 18.26 million units, which is 23.5 percent of total
world production, and its domestic sales recorded 18.06 million units.
In comparison, the figure for the United States and Japan together,
which accounted for more than 40 percent of the world production in
1997, fell to 22.4 percent in 2010 (Ferrazzi and Goldstein 2011: 2). What
the 2008 financial crisis highlights is the importance of the emerging
economies, notably Brazil, India, and especially China. The geography
of automobile production is clearly shifting from the advanced to the
emerging economies.
The role of the automobile industry in the economy is very impor-
tant. It is estimated that about nine million people, representing more
than 5 percent of total world manufacturing employment, are directly
involved in automobile manufacturing processes (ibid.). In Japan, the
auto sector is estimated to have accounted for 22.1 percent of its total
120 Katsuhiro Sasuga
exports in 2007 and 7.9 percent of its employed workforce in 2006

(Nikkei Sangyo Shimbun 2009: February 12). Peter Dicken, in his mapping
of global shifts in the world economy (2011: 336), notes that Japan’s
automobile trade surplus was almost US$160 billion, while the United
States had an automobile trade deficit of US$112 billion. The automo-
bile industry is a barometer of a national economy and its significance
lies both in its scale and in its linkages to many other manufacturing
industries and services. Because of the levels of investment, trade, and
employment, it significantly affects broad economic growth and social
development. As we have seen in the 2008 crisis, many central govern-
ments worldwide made efforts to inject massive financial assistance into
the automobile sector within their territories.
Understanding shifting trends in the automobile industry requires
company-level perspectives. Global automobile production is now
concentrated in the hands of a small number of MNCs. In 2010, the
production of the top five automobile companies together accounted for
about 45 percent of the total world production. By home country–based
analysis, the eight Japanese automakers together produced 22.6 million
vehicles in 2010, accounting for 29 percent of total world produc-
tion.3 There has been growing interest from the automobile industry in
sourcing production globally and relocating to more efficient produc-
tion facilities abroad. This is not surprising, as economies of scale have
always been critical for a firm’s competitiveness in the automobile
industry.
The consolidation of a large number of automobile producers into
a smaller number of large MNCs has taken place through merger and
acquisition (M&A). During the 1990s, GM (General Motors) acquired
Saab, Ford acquired Jaguar and Land Rover, and BMW bought Rover.
In 1999, Renault acquired a 44 percent share of Nissan and also bought
Samsung (South Korea). In 2000, Daimler Chrysler acquired 34 percent
of Mitsubishi Motors. In 2002, GM acquired Daewoo. However, these
consolidations were dramatically restructured as a result of the 2008
crisis. GM sold Saab to a Swedish auto company, Swedish Automobiles,
Ford sold Jaguar and Land Rover to the Indian company Tata and Volvo
to the Chinese firm Geely. The movement toward M&A in the auto-
mobile industry has continued globally and automobile firms from
emerging economies are becoming critical players. This continuing
trend has further clouded the real picture between company-level and
home country–based analyses.
As a single company, GM has long been the largest producer, but has been
challenged by Europe (VW) and Japan (Toyota, Nissan, and Honda), and
Table 6.1 Automobile companies ranked by production, 2010
Units of
Country of production
Rank Company headquarters (thousands)
1 Toyota Japan 8,557
2 General Motors United States 8,476
3 Volkswagen Germany 7,341
4 Hyundai South Korea 5,764
5 Ford United States 4,988
6 Nissan Japan 3,982
7 Honda Japan 3,643
8 PSA France 3,605
9 Suzuki Japan 2,892
10 Renault France 2,716
11 Fiat Italy 2,410
12 Daimler Germany 1,940
13 Chrysler United States 1,578
14 BMW Germany 1,481
15 Mazda Japan 1,307
16 Mitsubishi Japan 1,174
17 China Automotive China 1,102
18 Tata India 1,011
19 FAW China 896
20 Geely China 802
Source: OICA (2011).
recently by South Korea (Hyundai). Among these, Toyota was extremely

competitive, not through pursuing M&A with foreign automobile makers,
but rather by concentrating on Japanese firms such as Daihatsu (Toyota
holds 51.66 percent of its equity share), Hino (50.57 percent), Isuzu
(5.89 percent) and Fuji (16.48 percent).4 Toyota has continued to move
up in the production rankings, from fourteenth in 1960, sixth in 1970,
third in 1982, second in 2003, to number one in 2008.
The trend toward the consolidation of the large automobile manu-
facturers has significantly increased pressure on parts and components
suppliers. Automobile production is now a very complex process with a
number of unique features estimated to be composed of 20,000 to 30,000
separate parts, which cannot all be produced by even the largest manu-
facturer. Pressure comes from the demand for quality and quick, just
in time, delivery at a lower cost, and the need to locate geographically
closer to assembly plants. The automobile industry has long-developed
hierarchical tiers. First-tier suppliers provide complex components to the
leading assemblers; second-tier suppliers produce parts for assemblers or

first-tier suppliers; and third-tier suppliers make components that are
more basic. As the automobile industry has become more globalized,
parts suppliers have inevitably been under pressure to provide delivery at
lower cost, to improve the quality of components, and to relocate their
component manufacturing operations closer to those of the assemblers.
A recent significant change in the supply chain is the development of
modular production systems composed of multiple parts, which has led
to a decrease in the overall number of parts for final assembly. Suppliers
of these parts play a mediating role in connecting the first tier and
the assembler, the so-called “tier 0.5.” This raises the need for first-tier
suppliers of complex modules and systems to locate geographically close
to customers (Dicken 2011: 347–9). Indeed, over the last two decades
there has been a massive restructuring in parts and components sectors.
For example, the number of suppliers in North America has continued to
decline from 30,000 in 1990 to 10,000 in 2000, and between 3,000 and
4,000 in 2010 (Dicken 2011: 347). These modularization and outsourcing
activities have not yet ensured quality and safety, as seen in 2009 when
Toyota had a problem with a braking system in the United States.
3 Chinese automobile industrial policy
Since entry into the WTO in 2001, the Chinese automobile industry has
accelerated its pace of development to become the world’s largest in terms
of automobile production and sales. China has seen the fastest growth
in production, and overall production in China surpassed Germany in
2006, the United States in 2008, and Japan in 2009. Chinese automobile
sales grew at an average annual rate of 24.5 percent between 2001 and
2010 (Zhou 2011: 23). Production and sales figures are nearly equal in
China as almost all vehicles produced there are targeted for the domestic
market. The main category of sales is passenger cars, which accounted
for 76 percent of total vehicle sales in 2010, or 13.75 million units.
The impressive increase in Chinese production in the last decades,
however, owes much to foreign automobile investment made by leading
companies, such as GM, VW, Ford, Toyota, Nissan, Honda, and Hyundai,
as well as to the growth of state-owned automobile enterprises and local
Chinese independent companies. In sales, foreign automakers account
for around 70 percent of the new passenger car sales, showing an espe-
cially strong performance in the middle and upper segments. Among
foreign automakers, VW and GM have been the most successful in the
Chinese automobile market.
On the other hand, Chinese firms have performed strongly in the

commercial vehicle and low-end domestic passenger car markets. In
particular, owing to a long history of truck production, Chinese auto-
mobile makers dominate the production of commercial vehicles,
accounting for 95 percent of the domestic light trucks and buses market
(Marukawa 2011b: 65). Of this, the five largest state-owned enterprises
(SOEs), Dongfeng, Beijing Automobile, FAW, Changan, and SAIC have a
combined total of almost 90 percent share.
Despite its rapid development, the Chinese automobile industry is
often seen to have the following problems: too many automakers, frag-
mented production sites, overproduction, small-scale production, and
low levels of technology. According to OICA data, which avoids double
counting of vehicles made by joint ventures (JVs) and state-owned
enterprises (SOEs), only one SOE, Changan Automotive, produced more
than 1.1 million units in 2010. The number of vehicles produced by
SAIC (Shanghai Automotive Industrial Corporation), the largest Chinese
automobile SOE, was reported to have been 3.62 million units in 2010.
However, 63.3 percent of this production was carried out through a
JV with GM and 28.1 percent of the total was produced in a JV with
VW (Marukawa 2011a). Such double-counted figures raise the question
of the production capability of Chinese automobile SOEs, especially
relating to the development of “indigenous brands.” The dependence of
the SOEs on foreign JVs is also clear in sales. For example, 90 percent of
Guangzhou Automotive Corporation’s (GAC) sales come from JVs with
Toyota and Honda.
How did policy factors impact upon patterns of development of
the Chinese automobile industry? When China introduced economic
reform in the late 1970s, the Chinese automobile industry – especially
passenger car production – was a backward industry. As of 1981, 904,000
employees in the Chinese automobile industry produced only 176,000
four-wheeled vehicles. In contrast, the Japanese automobile industry
produced 11 million vehicles employing only 683,000 people (Thun
2006: 55). During the era of the “plan economy” in China, the produc-
tion, distribution, and consumption of automobiles was under central
government control.
The fragmentation of production sites – influenced by the strategic
concerns of Chairman Mao – as well as the small scale of operation,
failed to create efficiency of production. The automobile industry was
fragmented, with over 120 automobile makers and 2,500 to 3,000 supply
companies (Chin 2010: 79). They mostly produced trucks and buses by
copying other models, as copying designs was not seen as morally wrong
in China and was even seen as reasonable under central planning. These
companies were far behind in terms of technology and management,
but there was no competition and they were able to survive by receiving
local government support. Chinese leaders recognized that the main
problems with Chinese industry were outdated technology, dispersed
production, and low quality.
For much of the reform period in China since the late 1970s, the
role of government has remained critical. China started to pursue the
acquisition of advanced technology from foreign automobile firms by
offering the potential of the Chinese market in exchange. The party –
the highest authority is the Standing Committee of the Politburo – effec-
tively governs the country and the State Council represents the highest
administrative body. In theory, the State Council is accountable to the
National People’s Congress (NPC) and its Standing Committee. It is able
to submit proposals on laws to the NPC or its Standing Committee,
formulate administrative measures in accordance with the laws, and
exert leadership over non-central levels of administration as well as
ministries and commissions (Saich 2011: 159). The State Council has a
decision, discussion, and approval authority over the automobile indus-
trial policy.
There are various ministries and commissions under the control of
the State Council. In terms of automobile industrial policy, there are
more than 10 state agencies that relate to the industry, including road
construction, energy efficiency, tariffs, finance, and trade. The State
Planning Commission (SPC, now the National Development and Reform
Commission: NDRC)5 has played an important leadership role for line
ministries and other state economic agencies. Through the SPC, party
elites and government leaders exercised their leadership over plan-
ning and coordination of the national economy, and hence influenced
patterns of investment (Chin 2010: 129).
The central government carefully selects industries to lead the coun-
try’s economic development. In the sixth Five-Year Plan (1981–5), the
automobile industry was not selected as one such “pillar industry.” In
the seventh Five-Year Plan (1986–90), however, the automobile industry
was listed as one. The central government implemented an import
substitution strategy based on regulating imports of complete vehicles
and requiring foreign automobile investment to form JVs with Chinese
SOEs. This plan emphasized the development of passenger cars as a core
of the automobile industry. The central government proposed the “Big
Three, Little Three” scheme in 1988. FVW, Dongfeng Peugeot Citroen
Automobile, and SVW were selected as the “big three,” which were to be
under the direct control of the central government. As the “little three,”
Beijing Jeep, Guangzhou Peugeot, and Tianjin Automotive Industrial
Corporation-Daihatsu were under the control of local governments.
This was a strong move to restrict the entry of new automakers and
provide support for selected SOEs.
The 1994 “Automotive Industrial Policy” (AIP) by the SPC declared a
transformation of the industry into a modern one which would be an
engine of growth for the entire national economy. During the review
and formulation of the 1994 AIP, Chin points out the importance of
close cooperation between the Ministry of Foreign Trade and Economic
Cooperation (MOFTEC) and the SPC (Chin 2010: 137–8). The 1994 AIP
demonstrated the will of the Chinese authorities to pursue “national
indigenous brands” as a long-term goal. This idea forced new entrants to
include a localization plan, which required more than 40 percent local
content. The AIP also pursued economies of scale by consolidating the
fragmented automobile industry, regulating domestic content, deregu-
lating inward investment, and regulating imports. These protective
measures effectively prevented competition from imports of foreign
automakers until China’s entry into the WTO in 2001.
When it entered the WTO, China agreed to implement a domestic
policy, which would allow foreign firms greater access to its market. The
central government announced the reduction of tariffs, the relaxation
of import restrictions, and deregulation of the types and models of car
products produced in China. Tax rates on imports of complete vehi-
cles were reduced to 25 percent by 2006. The relaxation of regulations
on automobile investment caused an inward rush of foreign automo-
bile industries and local auto firms also began to enter the car produc-
tion business in China, resulting in the rise of competition. Indeed,
the number of companies producing automobiles in China increased
from 127 in 1999 to 144 in 2004, and the number of foreign affiliated
firms also increased from 21 to 48 (Liu and Zhao 2006). The competi-
tion became severe and seven firms from among the 15 new entrants
between 1997 and 2008 have already retreated from the automobile
industry (Re 2011: 112).
When the NDRC announced the “2004 AIP,” it clearly emphasized the
importance of developing “indigenous brands” with intellectual prop-
erty rights (IPR) held by Chinese companies. In the eleventh Five-Year
Plan (2006–11), the target market share for indigenous brands was set
at more than 50 percent. This trend for support of indigenous brands
has continued. In 2009, the central government announced guide-
lines devised by the NDRC for the automobile industry in which it was
emphasized that rearrangements and mergers in the Chinese automo-

bile industry were to promote a strong national automotive sector. One
priority in the guidelines was that the largest SOEs would have a leading
role in consolidating the automobile industry into a small number of
groups: the “Four Big” (FAW, Shanghai, Dongfeng, Changan) and the
“Four Little” (Beijing, Guangzhou, Chery, Sinotruck). As well as the
SOEs, Chery (Chery Automobile Co., Ltd.), the local independent entre-
preneurial automaker based in Anhui, successfully gained the support of
Chinese leaders.
With the full support of central and local governments, some SOEs
emerged as large automobile producers by monopolizing the transfer of
foreign technology through JVs. Although the SOEs retain a monopoly
in the commercial vehicle market, the leaders of the Chinese passenger
car market emerged from outside the government-command guide-
lines. These included Chery and Geely who became known as mavericks
(Chin 2010: 185). They started small passenger car production in the
late 1990s or at the beginning of the 2000s by copying existing models
and employing experienced engineers. Chery was established in 1997 by
engineers working for FAW, but as the Chinese central government did
not allow the establishment of automakers through private capital, they
sought support from the Anhui provincial government and Wuhu city
government. Through self-reliance and self-improvement, they increased
production numbers rapidly. By 2010, the total sales of Chery brands
were 3 million, including both domestic sales and exports, and Chery
is now the leading exporter of passenger cars. On the other hand, JV
projects with large automobile SOEs have been profitable and this might
have discouraged the development of “indigenous brands,” although
the central government has repeatedly announced the importance of
and its support for the development of Chinese indigenous brands.
4 Automobile FDI and the Chinese government
Until the introduction of economic reform, foreign automobile invest-

ment was not allowed in China. Specific investment policy measures
designed to gain the benefits of FDI included technology transfer, capital
inflow, and job creation, and these policies were implemented through
the decentralization of economic management, regional development
policies, and the establishment of special economic zones (SEZs) and
open cities. China gradually opened up to economic liberalization with
the aim of export-oriented industrialization while avoiding any negative
impact on China’s political authorities. Most FDI in China in the early
1980s came from overseas Chinese in Hong Kong, Macau, Taiwan, and
elsewhere in Southeast Asia, and was mainly directed at small-scale and
labor-intensive export-processing industries. Most of this FDI had been
motivated to move to China as an export platform. Regarding automo-
bile investment, as the rules governing FDI were uncertain, the world’s
leading MNCs did not rush into China in the early 1980s. In addition,
the establishment of the first three SEZs in Guangdong, which were in
an economically backward agricultural area, did not attract capital-in-
tensive industries.
The Chinese automobile industry retained the character of the plan
economy. In order to gain entry into China, foreign automobile firms
were obliged to establish JVs with Chinese SOEs. One notable feature of
the development of the Chinese automobile industry is seen in the forms
of JV projects between SOEs and foreign firms. While China introduced
market mechanisms, the SOEs have remained as a primary mechanism
to govern the country’s economy. Tensions between the central and
local governments, and between the government and corporate leaders
were managed through the party system. Indeed, the party holds power
over the appointment of many enterprise managers, particularly in the
SOEs (Naughton 2007: 317).
Thus, even in negotiations over the establishment of JVs, the Chinese
authorities took a “command and control” approach toward foreign
investment concerning selection of SOEs for foreign firms and the types
of production they needed, even though the Chinese side suffered a
number of coordination failures (Chin 2010: 56). The proportion of
foreign ownership was restricted to less than 50 percent. Though foreign
investors have demanded the relaxation of this regulation,6 Chinese
leaders did not want the automobile industry to be controlled by foreign
firms. On the other hand, this restriction has allowed the monopoly of
China’s SOEs in automobile production while gaining the use of foreign
technology.
In the early period of reform, the Chinese authorities were very eager
to attract Japanese automobile investment. When China introduced
economic reforms, the Japanese automobile industry was already mature.
In 1980, Japan surpassed the United States in automobile production
for the first time. In the late 1970s and early 1980s, there was a strong
demand in China for Japanese quality passenger cars as the Chinese
automobile industry had produced mostly trucks and buses. By the early
1980s, the Japanese automobile industry had already established its
presence as an exporter of passenger cars from Japan as well as a supplier
of complete knocked down (CKD) parts. In the 1980s, medium-sized
small car producers such as Daihatsu and Suzuki showed their interest
in manufacturing in China. Isuzu started to produce light trucks in
Chongqing in 1985 and by 2000 had established five JVs producing
light trucks, bodies, and small and large buses.
However, Japan’s leading automobile firms, such as Toyota, Nissan, and
Honda, the so-called “Japanese Big Three,” decided not to invest in China.
Partly this was from a fear of the unpredictability of Chinese politics, and
rules and restrictions on ownership for the leaders of the Japanese compa-
nies, and partly due to the problems of foreign exchange in China and the
rise of trade friction with the United States. In fact, in 1983 Honda and
Nissan started car production in the United States. Thus, for the Chinese
market, Japan’s leading automobile firms’ more favored strategy was to
export completed vehicles rather than invest in China.
For example, in the 1980s Toyota was able to export more than 10,000
high-quality passenger cars to China, mainly for official vehicles and
taxis. Negotiations between Toyota and Chinese authorities over invest-
ment in passenger cars in China ended in failure, and Toyota decided
to establish the KD production factory for vans in China. Nissan also
took a negative stance toward business in China. The leading foreign
automobile makers had their own global business strategy and the
United States was the primary market for Japanese automobile makers
at that time. But the decisions of the Japanese Big Three not to invest
in China cooled Japan–China bilateral relations. The Chinese authori-
ties suspended or adjusted numerous contracts for massive industrial
purchases that China had signed with Japanese suppliers.
At the same time, the Chinese authorities tried to attract GM and
Ford, which were very suitable candidates in terms of scale of produc-
tion and internationalized management. However, they were faced with
the challenge from Japanese automakers in their home market, and
they also regarded China as not yet being ready to provide adequate
production facilities or workmanship and lacking in logistics systems
and infrastructure (Chin 2010: 65). The lure of the potential market
that China offered was not enough to attract the leading automobile
makers into China. However, AMC (American Motor Corporation,
later merged with Chrysler) quickly decided to invest in China in 1983
and established a JV with Beijing Automotive Works (BAW), but AMC
had serious financial problems and the JV did not result in any of the
expected outcomes.
VW’s decision to invest in China largely came from the rise of severe
competition in the global market, especially from Japanese auto-
makers in the US and European markets. Negotiations were difficult,
taking seven years, but VW finally agreed with the Chinese authori-
ties to begin investing in China, establishing JVs with two large SOEs:
SAIC (Shanghai Automotive Industry Corporation) and FAW (First Auto
Works). VW was then faced with sustained pressure from the central
authorities on decision-making, especially related to the localization
of modern parts supplies and foreign exchange controls. VW, however,
with its pioneer status, received full support from both the central and
municipal governments.
The central government offered tax advantages and preferen-
tial treatment in terms of foreign currency and supply of materials.
The Shanghai municipal government also offered many supportive
institutional measures including the establishment of the Santana
Localization Small Group and the Automobile Industry Leading Group.
Coordination between the central and local government depends on
ad hoc measures often tied to individuals and party politics. In the case
of Shanghai VW, the former municipal mayor, Zhu Rongji, later the
country’s premier, actively supported the project from the beginning.
Also the mayor, Huang Ju, later vice premier, supported the JV project.
VW, in turn, contributed to the localization of modern parts supplies
and increased the local content rate as the Chinese authorities required
(Chin 2010: 79–80). Chinese local parts suppliers also played a key role
in building supplier networks and the bureaucratic apparatus of the
Shanghai municipal government provided coordination and institu-
tional support (Thun 2006).
As a result of this privileged treatment, VW’s share of the auto market
in China exceeded 50 percent by 1996, and it became the top passenger
car maker in China. Many foreign parts and components suppliers have
invested in Shanghai. By 2008, the number of suppliers for Shanghai
VW was estimated to have reached 423 (Gendai Bunka Kenkyusho 2009:
28). For VW, China has become a critical market, selling 1.92 million
units in 2010 compared to its domestic sales of 1.04 million.7 GM,
another successful example, gained a foothold in 1997 by establishing
a JV with SAIC (Shanghai-GM) and has made an effort to modify and
upgrade its vehicles to produce better cars with higher performance.
GM actively invested in China by setting up a technical center in
keeping with the guidelines of China’s policy target. Shanghai-GM is
GM’s flagship, selling 2.35 million units in China in 2010 (including
commercial vehicles), surpassing its home sales in the United States.
Thus the success of JVs in the case of VW and GM has been a deci-
sive factor in the pattern of development of the Chinese automobile
industry centered on SOEs.
5 Japanese automobile FDI and Chinese local government
The establishment of overseas production facilities by Japanese auto-

makers started in the 1980s. Before then, Toyota had no production
facilities outside Japan and Nissan’s share of overseas production against
total production was less than 3 percent (Dicken 2011: 351). Japanese
automobile FDI went mainly to North America until the middle of the
1990s. The overseas production ratio of Japanese transport machine
industry has continued to increase, reaching 56.4 percent by 2009
(Mizuho Report 2011). Honda has been the most aggressive among the
Japanese Big Three, with its proportion of overseas production of vehicles
in 1989 being 28 percent and 83 percent in 2010. Today, Honda’s vehicle
sale profits outside Japan account for 80 percent of its total profits.8
During the period of economic reform, China promoted the devo-
lution of economic management authority to local governments
and consequently became a highly decentralized country in terms of
fiscal policies. Local governments have increasingly gained regulatory
authority over taxation, planning, and other consents. In terms of
economic management, local governments have more responsibility for
direct interaction with foreign investors and many local governments
favored development of the automobile industry. The political centrali-
zation of personnel management within the party-state system encour-
ages local cadres to achieve successful development and the automobile
industry is a favorite target. The huge scale of FDI injection supports
local economic development.
However, these rewarding deals often cause local protectionism and
over-exploitation. Indeed, there was a warning from the State Council
regarding overcapacity of car production in 2006. Nevertheless, owing to
competition between local authorities, preferential treatment over land
and taxation, the provision of energy and infrastructure, and market
building for foreign investors have been offered by local authorities. In
the case of VW in Shanghai, for example, the Shanghai city taxi market
was reserved for SVW with a request from the local authority to purchase
SVW’s models (Sun, Mellahi, and Thun, 2010).
The rise of local competition has given an opportunity to Japanese
automobile makers to reenter the Chinese market – an opportunity that
would not have been there if early investors had been able to domi-
nate the national market as a whole. Guangzhou is the prime example
in which to consider the concentration of Japanese automobile FDI.
Guangzhou is the capital of Guangdong Province in the southern part
of China, and until the introduction of economic reform agricultural
production had predominated. Traditionally, the automobile industry

did not exist in the southern part of China. When Shanghai VW was
established, the Guangzhou Peugeot Automobile Corporation JV (GAC)
was also established in Guangzhou. Peugeot (PSA) was the second
foreign automaker to enter into a JV project, but the French automaker’s
share was only 22 percent, which made it difficult for it to control the
JV. In addition, the Guangzhou municipal government failed to build
an organizational structure to develop the manufacturing capability of
local supply networks.
The different capabilities of local governments to manage foreign
investments produced different results from those in Shanghai. Peugeot’s
withdrawal in 1997 caused the Guangdong and Guangzhou govern-
ments to announce that the automobile industry was no longer a pillar
industry, although they searched for foreign automakers to be a partner
for GAC. The Japanese were not initially strong candidates compared
to GM, Ford, Hyundai, Daimler, and BMW. However, due to political
considerations regarding the dominance of the US and European auto-
mobile industry, the central government decided to approach Japanese
automakers, particularly targeting Honda. In 1997, Premier Li Peng
visited Honda’s headquarters to persuade them to become involved.
Despite reservations on the Honda side, an agreement to establish a JV
with GAC was signed in November 1997 (Mizuho Report, 2006: 5). At the
same time, Honda established an engine plant JV with the large SOE,
Dongfeng.
Before Honda started production, automobile production in
Guangzhou had stagnated; the number of vehicles produced in 1998
was only 10,530, which was far behind that of Shanghai (236,000).
In order to avoid a repetition of the failure of the previous JV project,
the Guangzhou municipal government repeatedly announced strong
support for Honda. Some notable features of Guangzhou’s industrial
policy included: (1) the establishment and management of six indus-
trial zones in Guangzhou and surrounding cities; (2) support for the
Guangzhou Industry Automobile Group, which now operates 14 JVs
including Guangzhou Honda, Guangzhou Toyota, and Guangzhou
Automobile Group Competition; and, (3) active promotion of JVs
between SOEs and foreign investors by granting foreign investors pref-
erential tax treatment and providing an efficient, one-stop service at the
government office (Kuchiki 2007: 23–7).
Problems that often occurred in Honda’s China business operations
were due to a shortage of roads, railways, electrical power, and other
infrastructure issues as well as taxation concerns and a lack of Japanese
interpreters. The Guangzhou municipal government has made a great

effort to work with Honda to solve these problems. When Honda
started production, it required its Japanese parts suppliers to locate
in Guangzhou to maintain quality and raise the local content rate.
Automakers in general undertake a full model change every four or five
years and make frequent minor changes after shorter periods in order
to attract the interest of the market. Related parts suppliers, or so-called
keiretsu, need to be involved in these processes of development. In
particular, Japanese automakers favor a single sourcing system in which
they offer a special deal to parts makers involved in the development of
a new model (Marukawa 2006: 12). Most of Honda’s first-, second-, and
third-tier keiretsu suppliers moved into Guangzhou from 2001 to 2005.
Honda itself had some advantage as it had been developing a motor-
cycle business in China since 1981. Honda utilized the experience of its
motorcycle business and extended its supply system to the production of
parts for passenger car production. Honda was thus able to produce the
latest models from the early stages of the project. In 2006, high-ranking
officials of the NDRC required Honda to promote indigenous brands
based on JVs (Gendai Bunka Kenkyusho 2009: 29) which Honda duly did.
In 2007, Guangzhou-Honda (GH) established the first JV R&D center to
develop JV brands. The IPRs developed at this R&D center belong to the
JV and cars produced from JV brands are regarded as Chinese “indig-
enous brands.”
This effort by Honda was approved by NDRC officials (Gendai Bunka
Kenkyusho 2009: 100), as these collaborative experiences with JVs are
decisive factors in whether they can develop indigenous brands based
on technology with IPRs owned by the JV. In 2011, GH started to sell the
first indigenous brand from a JV to Chinese customers, named “Linan
S1.” However, indigenous brands are now produced by SOEs, local
independent companies, and JVs. The distinction between foreign and
national brands has become blurred and raises the question of national
policy goals and which are real Chinese national brands. Honda’s
advancement and its success immediately caused a rush of Japanese
automobile investment in Guangzhou. Soon after Honda’s arrival,
Isuzu established a JV with GAC in 2000, Nissan came to Guangzhou
as a JV partner with Dongfeng, and Toyota also decided to invest in
Guangzhou.
Toyota is a latecomer to China, having once rejected an offer to invest
from the Chinese authorities in the 1980s. As the number of JV projects
is limited to less than two for each foreign automaker, the choice of a
partner for Toyota was fairly limited. The large SOEs had already started
JVs with US and European partners as well as Japanese rivals. From the
Chinese side, small and fuel-efficient family cars were high in demand
owing to the rise of environmental concerns, and Toyota’s technology
met the goals of the SETC and the SDPC (Chin 2010: 195). Toyota was
allowed to establish an engine plant JV with the medium-sized auto-
maker, Tianjin Automotive Group (TAG) in 1996, but had to wait until
2000 for approval for passenger car production. Toyota was able to
develop the car production facility by utilizing its subsidiary’s JV project
in Tianjin where Daihatsu, a Toyota affiliate, had a JV project with TAG
to produce the Tianjin-Xiali. Toyota took quick action to invest in the
western interior areas, closely cooperating with the western regional
development strategy directed by the Chinese authorities. For example,
Toyota started to produce buses and SUVs at Sichuan Toyota in 2000.
Subsequently, the Chinese partner, TAG, merged with FAW in 2003
and in turn Toyota concluded a comprehensive agreement with FAW.
This helped Toyota to increase its production capability and presence
in China.
On the other hand, the Chinese authorities had concerns about
intense competition with foreign makers after China’s entry into the
WTO, but the central government pressured local authorities to pursue
M&A in the automobile sector. In 2003, Toyota established factories in
Changchun to produce SUVs and further advanced in Guangzhou in
2004 by establishing a JV with GAC, which is a partner of Honda. Despite
the expansion of Toyota’s production locations in China, GAC-Toyota
announced that they would not cooperate with FAW-Toyota, reflecting
rising competition between local authorities in China. Since moving into
China, Toyota has started close cooperation with the Chinese authori-
ties, introducing advanced technology such as hybrid technologies into
the country and establishing R&D centers. These efforts have made it
possible for Toyota to increase its sales share in China.
Nissan is also a latecomer to China. It was in financial trouble in
the 1990s and was aided by Renault taking a 44 percent share. Carlos
Ghosn, the new CEO, quickly reformed its troubled organizational and
business strategies and Nissan started to invest in China more aggres-
sively. In 2001, Ghosn met with Vice Premier Wu Bangguo, later ranking
second after Hu Jintao in the Standing Committee of the Politburo,
who was responsible for the pillar industries and SOE reform. They
agreed on Nissan’s vehicle production in China and Nissan concluded a
comprehensive collaborative agreement with the large SOE, Dongfeng
Motors. Such top-down decision-making allowed Nissan to be the first
foreign automobile company to obtain approval for full-line vehicle
Table 6.2 Major markets for the Japanese big three, 2010
China Japan US
Toyota 846 1,566 1,760
Nissan 1,024 645 909
Honda 652 647 1,230
Source: Based on JETRO (2011b); unit: thousands.
production operation for commercial production in 2002. Nissan had

the opportunity to expand its production capability by investing in
Dongfeng’s production facilities; this collaboration with Dongfeng
developed Nissan into a leading foreign company in commercial vehicle
production.
Why did automobile industrial agglomeration occur in Guangzhou?
First, the eagerness of the Guangzhou municipal government and its
support were necessary preconditions. Secondly, China’s uneven regional
growth strategies greatly benefited coastal areas far more than the inner
provinces. Being geographically close to Hong Kong and its ports and
hinterland were a huge advantage for Guangzhou in attracting FDI.
Thirdly, the expansion of automobile production was largely attribut-
able to the investment of Japanese automobile parts suppliers. Japanese
automakers were latecomers and their interest in the Chinese market
matched with the interest of Guangzhou in attracting automobile FDI.
Over the last decade Japanese automobile FDI has continued to increase.
In 2001, the number of Japanese automobile affiliates in China was 278,
and this had increased to 1,204 by 2008.
Fourthly, the earlier investment of parts suppliers in turn attracted
parent assemblers. For example, Toyota’s first-tier suppliers such as Denso
and Aishin had already established factories in 1994, some years before
Toyota started to invest in China. Consequently, the concentration of
Japanese parts suppliers contributed to the sharp growth of Japanese
automobile sales in the Chinese market. The total sales of Japanese
brands, produced by JVs and imports from Japan, surpassed German
rivals in 2005. After the Japanese Big Three stepped up car production in
China, Japan became the top foreign auto sales country, accounting for
19.8 percent of the Chinese passenger car market in 2010. As a result,
Guangzhou has become a center for the Japanese automobile industry,
demonstrating a variety of development paths taken by the three leading
Japanese automakers. By 2010, Guangdong had become one of the major
automobile production provinces in China with vehicle production
units in Guangdong alone reaching 1.5 million, which surpassed those

of the United Kingdom (1.4 million).
6 The Japanese automobile industry and China’s trade
One of the major motivations for FDI in China has been to use China as
an export platform. The substantial value of China’s exports and imports
is conducted by affiliates of MNCs in China. In 2010, for example,
almost 55 percentof China’s exports were conducted by foreign affiliates
in China. Japanese manufacturing FDI has been a major driving force
to develop trade.9 In simple terms, Japanese affiliates in China produce
finished goods for the Chinese market, or for third countries including
Japan, by importing materials or parts from Japan.
In this case, FDI is likely to reduce China’s finished product imports
and increase China’s parts imports from Japan. Alternatively, Japanese
affiliates produce finished goods by using intermediate Chinese prod-
ucts which reduce the intermediate parts trade but increase China’s
exports. According to Yu and Zhao (2008), Japanese FDI contributes to a
decrease in the proportion of finished goods in Japan’s exports to China,
while the proportion of key parts and production equipment continues
to increase in Japan–China trade.
In the case of the automobile industry, it has some mixed character-
istics. China imported 253,000 completed automobiles from Japan in
2010, accounting for around one-third of China’s completed automo-
bile imports. In auto parts trade, for Japanese affiliates in China, one of
the most important issues is to import core parts from Japan. Indeed,
Japan’s share of auto parts and components remains high (33.6 percent
of China’s total auto parts imports in 2010). In particular, some high-
performance components such as transmissions and antilock brake
systems remain highly dependent on imports from Japan. For example,
more than half of the transmission imports to China in 2010 were from
Japan (JETRO 2011a: December: 51).
On the other hand, Japan’s imports of auto parts from China
accounted for 27 percent of Japan’s total auto parts imports in 2009.
Such trends are inevitably affected by the conditions of regulations,
tariffs, and foreign exchange rates. For example, the ECFA (Economic
Cooperation Framework Agreement) between China and Taiwan that
started in 2010 has already increased China’s auto parts imports from
Taiwan. Technological development and modular supply systems have
made such production networks more complicated across countries and
regions.
With the development of its automobile industry, China has now

entered into the global car export market. In 2010, China exported
544,900 vehicles, which accounted for only 3 percent of its total domestic
production. The majority of vehicles currently exported from China are
light trucks and commercial vehicles destined mainly for developing
countries in Asia and the Middle East, Africa, and Russia. Chinese auto-
mobile exports target low-cost vehicles in emerging economies where
automobile production is not yet well developed. The Chinese govern-
ment has supported car exports from China and, in 2006, selected
44 Chinese companies as “national vehicle export base enterprises,”
offering a variety of support.
The Chinese authorities expected car exports to be the next leading
export product from China and, in 2009, announced sustained support
for auto exports. In February 2009, Chinese leader Hu Jintao visited the
Chinese bus JV project in Senegal, demonstrating the central govern-
ment’s firm support for overseas operations by the Chinese automobile
industry. Among Chinese automakers, Chery, Geely, and Changan have
performed strongly. In particular, Chery started car exports in 2001 and
grew rapidly by adopting a “going out” strategy to expand foreign busi-
ness. Since 2010, Chery has been the top Chinese exporter, shipping to
more than 60 countries, including Taiwan. Chery also established nine
overseas assembly plants by 2009.
Japanese automakers have also become key players in Chinese
exports. Honda, for example, which has actively undertaken car exports
from overseas production facilities, has also carried out car exports
from Guangzhou. In 2003, Honda was allowed to establish the first
exclusively export-focused JV, Honda Automobile, and held an excep-
tional 65 percent of the ownership, with the remainder held by GAC,
25 percent, and Dongfeng, 10. In 2005, Honda started to produce a
small car to export to Europe (under the brand name Jazz in Europe, and
Fit in Japan, China, and the United States). By 2008, its total number
of exports reached 100,000 units, almost all of which were shipped to
Europe.
In the first half of 2008, Honda’s exports accounted for 18 percent of
China’s total car exports and 29 percent of China’s total car export value.
According to Honda’s global strategy, Thailand is a critical hub for car
exports in utilizing the FTA agreement for operations such as car ship-
ping to Australia, as Japan does not have an FTA with Australia. Honda
supplies medium-sized passenger cars to the Chinese market from its
production sites in Canada. Overall, Japanese car exports from China
have continued to the increase, accounting for 19 percent of China’s
total vehicle exports (units) in 2009 (Fourin 2010b: 31). Honda was
allowed to establish parts production factories such as those for trans-
missions with 100 percent ownership in 2005; the high rate of local
content and high quality contributed to reducing production costs in
China.
Why have Japanese automobile makers received such privileged treat-
ment? In fact, the success of Japanese automakers has led to an increase
in tax revenue for the Chinese government. According to data on tax
payments per worker, foreign JVs are much more profitable than local
independent firms. For example, the per capita tax payment of Nissan’s
JV (Dongfeng Nissan) in 2006 was 2,520,091 yuan, which was more than
14 times that of Geely and 16 times that of Chery. Other Japanese JVs are
also profitable favorites of the Chinese authorities. For example, also in
2006, GAC-Honda’s per capita tax payment was 1,779,796 yuan, which
ranked second after Nissan’s JV. GAC-Toyota’s figure was 1,222,157
yuan, which ranked fourth, following Shanghai-GM. Figures for local
independent companies were much less than those of Geely and Chery,
and some of them were not even able to make a profit (Gendai Bunka
Kenkyusho 2009: 127).
7 Japanese suppliers in the Chinese automobile industry
Less clear are the characteristics of Japanese subsidiaries, and first- and
second-tier suppliers in China, in their relations to other foreign-owned
and domestic local Chinese firms. Japanese automobile FDI has played a
role not only as a partner in JVs for car production, but also as suppliers
of key components for the parent, and other foreign and Chinese
automakers.
For example, FAW have placed a priority on procuring parts and
components from its JVs (FAW-VW and FAW-Toyota) and their keiretsu
suppliers. Japanese parts suppliers invested in China earlier than parent
assemblers and supplied to other foreign JVs. For example, Koito, which
is Toyota’s main large-scale supplier, entered China in 1989 to supply car
lamps for VW, even though at this time Toyota itself hesitated to invest
in China. Koito even established a JV with SAIC in 1989, which was not
Toyota’s partner in China.
In contrast to the position regarding investment in car production,
these parts and components suppliers were able to become established
as affiliates with 100 percent foreign ownership. Although the parent
company’s requirement for their parts suppliers to build overseas
plants is a main factor in their strategies, the parent company does not
necessarily take responsibility for the business activities of suppliers in

foreign sites. As a result, Japanese parts suppliers have played a signifi-
cant role in providing parts to other foreign JVs.
For example, Koito’s JV with SAIC has provided lamps to almost all
the leading automakers in China, including Shanghai VW, Shanghai
GM, Dongfeng-Nissan, Changan-Ford, Changan, SAIC, Chery, and
other Japanese automakers. The rate of share in auto lamp production
by foreign makers, including JVs, continued to increase, accounting
for almost 70 percent of the total production in China in 2008 (Fourin
2010a: 152). Considering the maintenance of keiretsu, Koito estab-
lished 100 percent affiliates in the same area when Toyota arrived in
Guangzhou.
The rise of the Japanese yen is likely to further decrease suppliers’
competitiveness when producing parts in Japan, and China is becoming
a place to find new business partners. As long as the yen remains strong,
parent companies in Japan are likely to increase the procurement of parts
from foreign sites such as China. Thus the Japanese keiretsu system has
inevitably been restructured in response to parent companies’ decisions
to relocate operations abroad. This trend has impacted more severely on
second- and third-tier suppliers which do not have the capabilities to
establish foreign production sites.
Even some parent assemblers have decided to become first-tier
suppliers in China. Mitsubishi Motors, which experienced losses in
foreign ventures in Malaysia, had a significant impact on the devel-
opment of local Chinese automakers. It was initially not allowed to
establish a vehicle assembly plant but instead was allowed to establish
two engine plants: in Shenyang in 1997 and in Harbin in 1998. These
contributed to the development of an open engine market for local
Chinese automakers seeking engines that are more reliable.
In China there has been the development of a “quasi-open modular”
in procuring auto parts and components (Wang and Kimble 2010).
Mitsubishi’s technology has complemented the lack of technological
capability of many Chinese car makers, especially independent firms.
Nevertheless, these local automakers have even appealed to customers by
labeling their engines as offering Japanese quality made by Mitsubishi.
With the increase of Japanese automobile FDI in China, local content
rates of Japanese affiliates in China have continued to increase. For
example, BMW’s local content rates in 2008 were 40 percent compared
to Honda’s which were more than 90 percent, and in the case of the
Accord reached 99 percent (Fourin 2010a: 60–3). With a revised procure-
ment strategy, Nissan’s local content rates in China also reached
90 percent in 2010. Nissan’s procurement expansion in China also

aimed to supply low-cost parts to factories in Japan in order to utilize
exchange rates. Nissan began to reduce the volume of production in
Japan and its number of car exports. The production of a small car, the
Micra, moved completely from Japan to Thailand in 2010. Dongfeng,
Nissan’s partner, agreed to expand the scale of production in China and
in the KD production sites in Angola and Kazakhstan.
The relationship between local Chinese automakers and Japanese parts
suppliers and local independent automakers is more complicated than
in the case of JVs. Geely Automobile, a successful independent private
automaker, began car production in 1998. The company originated as a
producer of refrigerators and motorcycles and did not have any experi-
ence with car production. As there were already around 120 carmakers
at that time, the Chinese authorities radically consolidated the industry
into a small number of SOEs and competition to obtain approval for
car production was very severe. Geely entered car manufacturing using
unusual practices such as listing their first cars in the less regulated “bus
category” (Wang and Kimble 2010).
They also used reverse engineering and copied best-selling foreign
cars. The first model, called the “Haoqing,” was produced in 1998 and
was based on the Japanese maker Daihatsu’s small passenger car, the
Charade. This model was produced by FAW under the name Xiali. Geely
utilized a copy of the product platform of the Xiali. Geely’s recent model,
the Panda, was also developed on the lines of the Aygo, a passenger
car produced by Toyota’s JV in the Czech Republic, and they purchased
engines from Tianjin Toyota and transmissions from Tianjin Aishin
(Toyota’s first-tier supplier) (Marukawa 2011b). Thus Toyota’s keiretsu
suppliers in Tianjin have concurrently an important role as suppliers
for FAW’s Xiali.
Geely has changed its outsourcing strategy by procuring 70 percent of
components from outside, of which around 60 percent of components
come directly from FAW Xiali; copied components account for another
10 percent of the total (Wang and Kimble 2010). Geely has performed
strongly with low-cost products, but as competition has intensified,
Geely’s low-cost strategy faces a severe challenge and so Geely has
started to emphasize quality and improve its product image. This led to
its purchase of Volvo in 2010 in order to obtain foreign brands and tech-
nology. The pace of Geely’s development is remarkable. However, owing
to its heavy reliance on foreign purchasing and outsourcing activities,
technology acquisition in terms of self-reliance or indigenous brands
remains questionable.
Chery’s first model was based on Seat’s chassis (Toledo) and Ford’s
secondhand engine plant facilities from the United Kingdom. In 2004,
Chery QQ was sued by GM and Daewoo for infringing upon their IPRs.
Chery, like Geely, had also used reverse engineering and copying and
procured many auto parts from foreign suppliers located in China, such
as Delphi, Federal-Mogul, GKN, TRW, and Mitsubishi Motors. Chery
competes with low-cost passenger cars such as its popular small car QQ,
which sells at half the price of Honda’s small car. Chery also procures
key components from outside and is estimated to outsource around
75 percent of parts and components (Re 2011: 117). It has utilized a
foreign design house, Pinifarina of Italy, and AVL engines from Australia,
and benefited from automobile investment in China. Chery was able to
purchase 2.0 and 2.4 liter engines from Mitsubishi’s JV in China together
with transmissions from Japanese transmission manufacturers, JATCO
(Marukawa, 2011b: 70).
One reason for the low cost of production in China is attributable
to the locations of automobile production facilities. Geely and Chery
located their facilities near Shanghai, where automobile industrial
agglomeration had already developed, mainly through the presence of
VW and GM’s parts suppliers. They employed experienced engineers
from foreign automobile companies. Chery, for example, invited a
retired engineer from Mitsubishi Motors to work as the vice-director of
its Production Management Division in order to design a car assembly
line for Chery (Marukawa 2011b: 70). Chery received full support from
local authorities. With an increase in production, it attracted the Chinese
central authorities who selected it as one of the “Four Little.”
BYD, which originally started as a battery manufacturer, has the ability
to produce electric and hybrid cars at low cost. However, its car production
relies heavily on foreign suppliers for the chassis, engines, and assembly.
It procured Mitsubishi engines together with a set of JATCO transmis-
sions and its car design F0 is seen as a virtual copy of Toyota’s Aygo (Wall
Street Journal 2011: September 15). All of these independent Chinese
automakers have tried to acquire core technology in-house and recent
developments in digitalization have helped latecomers to improve their
design capabilities. However, in order to penetrate a difficult market,
procuring activities that depend on foreign technology remains critical.
This has resulted in invitations to a number of Japanese parts suppliers
to become involved in development and to retired Japanese engineers to
move to Chinese local independent automakers. Such interlocked rela-
tions now involve more individual human resources.
This growing interdependence, however, reflects the continuing tech-

nological weakness of Chinese parts and component suppliers. Although
some Chinese parts suppliers have become involved in supply networks
with foreign JVs, Japanese suppliers have played a significant role in
supporting the rise of independent local automakers. Nevertheless,
further collaboration is likely to relate to the issue of IPRs. Even in major
local companies, an awareness that they are violating IPRs is lacking in
large parts of the Chinese automobile industry.
8 Conclusion
This chapter has sought to explain key factors in the rise of the Chinese
automobile industry, with particular reference to the role of Japanese
automobile investment in China. The way in which the Chinese auto-
mobile industry has become the largest in production and sales illus-
trates its correlation with the shift of global automobile production and
how this has impacted on patterns of development of the Chinese auto-
mobile industry. The empirical case of the automobile industry in China
demonstrates that there is no single model of development.
Although the decline of Japan and the rise of China as national econo-
mies are obvious, Japanese automobile investment in China has helped
to generate the growth of the Chinese automobile industry, not only
as partners for SOEs but also as suppliers of core parts. These inter-firm
linkages have had a significant impact on the pattern of development of
the Chinese automobile industry. In particular, Japanese parts suppliers
have impacted on Chinese firms’ procuring activities. In an institutional
context, economic reform and China’s entry into the WTO were step-
ping stones for both sides to cultivate economic gains by deregulating
the industry and promoting collaboration. Now, Japan–China economic
dynamics are more complex and involve a more diverse set of political
and economic actors than many observers initially assume.
First, the role of the Chinese government has been changing in response
to the global shift of the automobile industry. China’s highly centralized
authority has continued to play a determinant role in selecting major
players, regulating investment, and carefully controlling the degree
of interaction with the world economy. The central government has
encouraged industrial upgrading by permitting Chinese automobile
SOEs to monopolize the opportunity for technology transfer through
foreign JV projects. For the time being, the market result is complex and
is reflected in the growth of SOEs, especially in commercial vehicles, and
by the rise of JVs and local independent automakers, in passenger cars.
The political goal to achieve indigenous brands is still questionable as

these are now produced by SOEs, local automakers and JVs.
Second, local governments have increasingly become key agents by
directly communicating with foreign firms to promote local industrial
transformation, often through industrial agglomeration. As seen in
the cases of initial JV projects in the automobile industry, there were,
however, some diverse results of coordination among these participants.
The leadership role of local governments is important but it is closely
linked to the national political structure, especially the party-state
apparatus which gives local leaders crucial incentives to improve local
institutional arrangements. The dynamics that are seen in the Chinese
automobile industry are largely attributable to the growing influence of
competition among local governments. This trend may be unavoidable
in China’s political structure and might further escalate to attract FDI
as an economic engine as long as alternative management systems are
not offered.
Third, in addition to political factors in China, changes in production
structure are important. China’s technological dependence on foreign
manufacturers, the small scale of production, and the fragmentation of
production sites show that China has not yet achieved its political goal
of building a consolidated automobile industry and making it a national
champion. The primary political aim to absorb highly advanced tech-
nology from foreign automobile industries has not fully materialized
despite the remarkable development of the automobile industry in
China.
The evolution of production networks promoted by automobile FDI
has greatly impacted on the pattern of development of production
networks in China. Except for some parts suppliers and a few automakers,
the major motivation of automobile FDI in China has been to target the
domestic market rather than using China as an export platform. The
patterns of the initial engagement of VW and of the affiliates of Japanese
suppliers have also influenced patterns of development of production
networks. Foreign suppliers have helped to generate the sharp growth of
JVs and local Chinese automakers and Japanese suppliers have supplied
essential key parts to Chinese automakers.
Fourth, automobile industry regulations have been affected by govern-
ment–business relations. Firms’ strategies have been strongly affected by
the intervention of the Chinese government as China has often taken a
command approach toward FDI. Honda’s entry in Guangzhou derived
from China’s political and economic strategy for solving its domestic
problems.
In return, Honda gained the full support of the central and local
Chinese authorities to expand its global strategy to use China for its
domestic market and for exports. Other leading Japanese automakers
such as Toyota and Nissan have pursued their own global strategies, but
negotiations with Chinese authorities are intricate when politics are
heavily involved. Nevertheless, most Japanese JVs have contributed to
tax revenues, job creation, and to local economies as a whole, and the
expansion of Japanese production facilities in China has further induced
a number of Japanese suppliers to move in. These Japanese suppliers
have played a significant role in expanding production networks in the
Chinese automobile industry beyond keiretsu as they can no longer only
rely on their parent firms.
Finally, the Chinese automobile industry has become a place where
global and local competition takes place at the same time with various
cooperative and competitive, and political and economic, factors being
involved. Such a development of cross-border production networks has
increasingly integrated Japan–China economic relations and the two
economies are now much more interconnected than ever before. This
suggests that the dynamics of automobile industrial development across
Japan–China – involving a restructuring of the keiretsu system – demands
a focus on shared interests among economic participant actors going
beyond a traditional viewpoint based on state-to-state relations.
More generally, in fundamental conflicts of interest over questions of
sovereignty, disputes themselves cannot be settled only within a strategic
bilateral framework. Emerging challenges in the automobile industry
suggest the limitations of traditional approaches to the management
of the two countries’ relations based on state-market dichotomous and
state–centered frameworks, which remain influential among policy-
makers in the two countries. The key is to find an innovative way of
governance to conduct deepening interdependence between the two
countries, which increasingly share risks and benefits.
Notes
1. The figure is calculated by the author using data from China Statistical Year
2010.
2. As of 1978, there was almost no Japanese FDI in China, but by the end of
2010 accumulated Japanese FDI in China reached US$66.47 billion which
accounted for 8 percent of total Japanese outward FDI. China has become the
largest host country of Japanese FDI in Asia since 2001, and in 2010 alone
it received US$7.25 billion, accounting for 12.7 percent of total Japanese
outward FDI that year. For the Chinese side, the average share of Japanese
FDI between 2001 and 2005 reached 9.3 percent. Japanese FDI has accounted
for around 7 percent of China’s total inward FDI since 2001 and Japan was
the fourth largest foreign investing nation in 2010.
3. The figure is calculated by the author using OICA data.
4. The figure is as of the end of March 2009.
5. In 1998, the SPC was renamed the State Development Planning Commission
(SDPC) and in 2003 it was merged with the State Economic and Trade
Commission (SETC) and was renamed as the National Development and
Reform Commission (NDRC).
6. For example, the request from ACEA.
7. The figure is taken from Fourin (2011). For other makers such as GM, Hyundai,
Honda, and Nissan, the number of sales in China in 2010 far exceeded those
in their home countries.
8. The figure is calculated by the author using the Honda Annual Report (http://
www.honda.co.jp/investors/library/annual_report/2011/honda2011ar-all.
pdf, accessed on November 19, 2011).
9. One of the notable features of Japanese FDI in East Asia is an export platform.
According to a survey by METI (Ministry of Economy, Trade and Industry),
21.5 percent of industrial goods produced by Japanese affiliates in Asia were
exported to Japan, and 31.5 percent of the inputs of Japanese affiliates were
from Japan (Yu and Zhao 2008: 189).
7
Development Models and External
Constraints: From the Structural
Impediments Initiative to Global
Imbalances
Ben Thirkell-White
There are striking similarities between the pressure Japan faced from the
United States during the “Japan bashing” period from the mid-1980s
to the mid-1990s and growing US activism over China’s role in “global
imbalances.” In both cases, a rising Asian power has come to be seen
as centrally implicated in twin US budget and trade deficits. This has
led to increasingly strained relationships as US administrations attempt
to influence the “offender’s” monetary and trade policy. This chapter
explores the period of tense relations between the United States and
Japan as a way of analyzing the factors that are likely to shape Chinese
responses to current US pressure, and, in doing so, analyzes the external
conditions that shaped the development models of Japan and China
and how these conditions translate effects on development policy.
The core similarities between Japan’s development policy before the
1990s and contemporary China’s development policy revolve around a
strong preference for mobilizing capital for investment in technological
upgrading for the export-manufacturing sector. This policy is a violation
of orthodox economic norms as it attempts to override the “natural”
market allocation of capital. However, its advocates argue that this bias
is necessary to avoid market failures and has payoffs over the medium
to long term.
While one can argue about the internal efficacy of this kind of policy,
emphasis on export manufacturing does disadvantage foreign producers
(even if it has advantages for consumers) and places reliance on finding
economies elsewhere that are willing to consume the products that are
145
146 Ben Thirkell-White
created. It is therefore vulnerable to allegations of “unfair trading” or

“currency manipulation.” In both cases, US administrations that were
suffering from rising balance of payments and budget deficits have
looked to use pressure on their high-savings, exporting Asian counter-
parts in order to ease or avoid the costs of US adjustment.
At one level, the Japanese experience shows us just how heated the
arguments can become and how long the United States is willing to
continue to use its political power to try to force change through inter-
national diplomacy. The US–Japan relationship clearly was a power
struggle between one nation and another and the US–China relation-
ship will be too. A classic international relations approach can tell us
something about these power dynamics.
The degree of pressure exerted on Japan varied over time in response
to the changing bilateral economic and security relationship, a range of
factors springing from the domestic politics of US foreign policy, and
the international normative environment. While there are broad simi-
larities in the overall economic relationship between the two dyads,
China’s position is slightly different along all these dimensions. In both
cases, US trade and budget deficits created pressure in Congress to “do
something” about bilateral trade relationships. This pressure, combined
with domestic public opinion, then put pressure on administrations to
respond, though they have generally been more inclined to orthodox,
liberal macroeconomic policy than Congress.
In the Japanese case, the importance of the security relationship
between the two countries created some countervailing pressure from
the State Department to ensure that the bilateral relationship was not
harmed, particularly during the 1980s. By the 1990s, though, “revi-
sionists” had articulated a vision of the US national interest that was
economically focused and largely overrode this kind of restraint. China
doesn’t benefit from the status of Cold War ally and this creates greater
vulnerability, particularly in popular debate. On the other hand, its
status as a more significant potential military threat can play toward US
restraint. Economic thinking around the relationship is currently prob-
ably more orthodox, though, and a stronger WTO regime has so far
tended to direct US pressure through multilateral channels rather than
the unilateral Super 301 threats of the 1980s. In the monetary sphere,
rules are weaker, creating fewer normative restraints but also a weaker
normative expectation that countries will alter their domestic macr-
oeconomic policies in the international interest.
Beyond these international relations concerns, though, a closer look
at the Japanese experience also suggests that the results of US pressure
Development Models and External Constraints 147
were more strongly shaped by domestic Japanese politics than they

were by the balance of formal international economic power. First,
since export- and investment-oriented policies do favor some groups
over others, there are likely to be groups within Asian countries that are
sympathetic to some of the policies that US policymakers want to advo-
cate. Secondly, domestic economic interests and institutional structures
will mean that support varies across issue areas. Responses to US pres-
sure will bear the imprint of domestic-path dependence and US policy-
makers would be advised to make tactical decisions about where they
can have most impact.
Thirdly, the more deeply rooted economic structures are in social
arrangements, the more difficult they are likely to be to change – this
is one of the key lessons of the varieties of capitalism literature, which
emphasizes the way a series of complementary institutions create
economic patterns that are slow to evolve. Overcoming deeply rooted
patterns of economic structure is best done by stealth, finding specific
aspects of the overall economic structure that are broadly unpopular. In
the Japanese case, exchange-rate appreciation and reforms of the banking
sector appear to have been the most effective levers for reform. However,
the kind of adjustment involved was extremely painful for Japan and
reform-minded Chinese policymakers should be very cautious about
moving too quickly in this direction without a sophisticated awareness
of the difficulties involved.
1 Global imbalances and the international political

economy of “Asian Capitalism”
The debate about global imbalances sometimes sees things in terms of

a radically opposed US and Chinese interest in which the two nations
will fight over who has to bear the largest cost of adjustment to reduce
imbalances. Alternatively, it is sometimes described in terms of “unfair,”
“irrational,” or “inefficient” Chinese policy that is sustained by vested
interests that need to be overcome in the interests of “reform.” In this
section I unpack the nature of debate between orthodox and a variety of
heterodox Asian approaches to economic growth in a way that paints a
more complex and nuanced picture.
Opinion is likely to be mixed in Asia, with some weight on status
quo practices but also pockets of opposition that favor liberalization. US
interests and ideology both favor a more orthodox approach but, despite
the hegemony of this view in the West, the intellectual case for it is far
from watertight.1 US pressure for change will always be inconvenient
and create economic costs. But it is only likely to promote significant

change where it can boost the domestic forces that favor liberalization
sufficiently to create a critical mass in the domestic political arena.
Within these broad parameters, there is also significant variation
within “revisionist” approaches and a second purpose of this section is
to explore some of the broad similarities and differences within Asian
economic practice to lay the groundwork for an understanding of the
differences between Chinese and Japanese political economy as well as
the similarities.
China’s contribution to global imbalances comes from an economic
policy that revolves around mobilizing capital for investment in export-
oriented manufacturing. From an orthodox economic perspective, this
deliberate emphasis is distortionary. Government policy has actively
promoted exports at the expense of domestically oriented business, and
savings and investment at the expense of consumption. Government
has distorted the “natural” functioning of the market economy and is
therefore misallocating resources (Yu 2007). From a liberal perspective,
the most obvious explanation for this distortion is that “vested inter-
ests” are distorting the policy process in ways that benefit them but are
harmful to overall Chinese economic welfare. It is therefore in China’s
interest to comply with American demands for adjustment for policy
that will reorient Chinese policy in a way that boosts domestic demand
and investment in domestic services industries.
This view makes a great deal of sense from a liberal economic perspec-
tive. However, there is another way of looking at things that is partic-
ularly relevant to the experience of post–war Asian economic growth
including that of Japan and China. This revisionist perspective empha-
sizes the positive impact of government actively promoting manufac-
turing investment. This heterodox approach is still rooted in similar
understandings of market economics but it places more emphasis on a
series of market failures that, it is argued, need to be overcome if manu-
facturing growth is to take off (Chang 1999). The enormous success
of catch-up growth in a range of North and Southeast Asian countries
provides the empirical underpinning of this position.
Advocates of the heterodox position would not deny government bias
toward particular sectors of domestic business but would argue that this
bias is necessary in order to promote overall economic growth, producing
superior overall results to “neutral” liberal practice. If “neutral” policy is
not guaranteed to produce superior results, the normative preference for
market allocation also becomes weaker. The choice to allocate resources
through markets produces a particular set of distributional outcomes of
its own. Liberals’ overwhelming tendency to see market allocation as

inherently “fairer” is based on the idea that the market neutrally chooses
between more and less efficient producers, diverting resources to the
former. The “revisionist” perspective specifically denies that is the case.
Market allocation may involve making less obviously partisan choices
about resource allocation but that is only because it is more opaque than
political decision-making, rather than inherently fairer.
It is important to make this point as the language of debate around
China is often heavily normatively laden. “Reform” means liberaliza-
tion. Opposition to “reform” is assumed to be “conservative” or driven
by “vested interests.” If one accepts the presence of market failures,
resistance to liberalization can look quite different. Ongoing state inter-
vention may be collectively rational as well as favoring some groups’
interests. The assumption that liberalization is progressive, then, may
simply be an ideological refusal to engage with arguments about market
failure. In a political context, it is important to remember that, while
there is room for debate about whether or not revisionist policy is bene-
ficial for Asian populations, it is quite clear that it tends to harm the
interests of US business. As we will see below, revisionist policy aims
to ensure that domestic investment and technological upgrading take
place. At best that regulates foreign firms, removing some possibilities
for profit-making, and at worst excludes them from markets in order to
protect domestic business.
Although liberal economic prescriptions align neatly with US interests,
that does not necessarily mean that all liberal arguments are inherently
suspect. There is scope for debate about how serious market failures are
and about the rationality or otherwise of state interventions. We should
therefore also avoid any tendency to think of revisionist ideas as some
kind of widely held and fundamentally opposed “Asian” ideology in
which state is good and market is bad. The differences are primarily
differences of emphasis. Corruption and vested interests are a risk when
government sets policy, just as short-termism, low-technology traps,
and weak investment are risks of free-market policy.
We should therefore expect differences of opinion in Asia about
specific existing policies that the United States might wish to change and
about the overall economic approach, rather than some homogenous
“Japanese” or “Chinese” approach. These opinions will partly be driven
by intellectual commitments and partly by actors’ economic interests.
In economies that have evolved in particular ways, though, we might
also expect existing institutions and interests to create a certain path-
dependence reinforcing existing ways of doing things. As the varieties of
capitalist literature have shown, successful patterns of political economy

are often built on mutually supporting institutions that are difficult and
costly to unravel (Hall and Soskice 2001).
Conflict over global imbalances, then, springs from a pattern of
growth that is plainly problematic for US producers but more ambig-
uous from the point of view of growth in China or Japan. That helps
us to understand the pattern of negotiations described in the introduc-
tion, in which the United States engages in concerted pressure but its
ability to achieve its ends depends on a varying ability to find allies
in the domestic political process in target countries. These opportuni-
ties will depend on domestic debate that will be driven by a combina-
tion of intellectual arguments around the strengths and weaknesses of
“revisionist” economic approaches and by the direct material interests
at stake in proposed reforms. With this general structure in place, we can
turn to a more detailed discussion of what “revisionist” policies look like
so we can understand the similarities and differences between Japanese
and Chinese patterns of economic intervention.
The broad similarities in the two countries spring from a shared macr-
oeconomic orientation. Governments have promoted the accumulation
of capital and technology for ever-more sophisticated export-oriented
manufacturing (Akyuz et al. 1998). This preference for investment in
economic manufacturing involves a deliberate distortion of market
norms. Manufacturing capacity increases, however savers are denied
the opportunity to seek out the best short-term returns available in
the markets and government often deliberately limits returns in order
to subsidize credit to business. Reduced returns to savers then restrict
domestic consumption, particularly as these systems are also often asso-
ciated with repressed wages.
A low real-exchange rate can be an important support to this kind of
strategy (Rodrik 2008). An undervalued currency ensures export compet-
itiveness and reduces consumption, providing incentives for saving and
easing potential balance of payments constraints. The increased resulting
costs of imported inputs into production processes (raw materials and
intermediate goods) can be offset by selective subsidies or tariff exemp-
tions and these, too, can be used to encourage some forms of production
rather than others.
These distortions can be theoretically justified on the basis that
market failures work against the “natural” development of industrial
capacity under comparative advantage. Coordination problems, econ-
omies of scale, and risk aversion among entrepreneurs can all lead to
reluctance to engage in the high-risk business of developing large-scale
manufacturing. Additionally, endogenous growth theory suggests that

innovation and learning, rather than just capital accumulation, are part
of development, so some short-term economic costs in promoting indus-
trial upgrading may pay off in the long-term through the progressive
accumulation of the knowledge and skills that come with them (Chang
1993). The hope is that, over time, the benefits in terms of increased
productivity and employment will offset restrictions on consumption,
wage growth, and returns to savings.
Within this broad framework, countries in Asia have used different
micro-level techniques to direct capital into investment in continuous
technological upgrading, building on preexisting domestic institutions.
In Japan and Korea, government forged close relationships with large
domestic business groups. Government provided assistance (in the form
of tariff protection or cheap credit) to business groups that were willing
to promote technological advances but withdrew it from those that
failed. Competition was deliberately managed (controls on entry into
new business lines, tolerance of cartels) so that firms had some space to
invest in R&D and competed on the basis of product innovation, rather
than price.
Nonetheless, competition did exist in new sectors so that no firm
could fully capture government patronage and there remained incen-
tives to innovate. Domestic profits were boosted by protection and
government assistance to provide a pool of capital for reinvestment but
export targets were used to ensure firms kept in touch with interna-
tional competition. In both countries, financial repression channeled
high domestic savings into the banking system and the banking system
funneled patient capital into large business groups through a combina-
tion of relationship-banking between particular banks and their corpo-
rate groups and, particularly in the early stages, government direction of
credit (Johnson 1982; Amsden 1989; Woo 1991; Singh 1998).
In Japan, the main institutional structures were the keiretsu. Large
corporate groups had their “main banks,” which provided funding.
They operated with high levels of vertical integration, enabling tight
coordination through different parts of the production chain, either
with subsidiaries or through long-standing relationships with subcon-
tractors. Finally, a lifetime employment system helped to limit wage
increases, facilitate personnel management and to capture the benefits
of employee training costs. In return, employees were given consistent
wages and a wide range of employer-provided benefits, taking pressure
off demands for state welfare provision. The government forged close
relationships with these businesses, working in partnership to promote
technological upgrading by providing support and arranging collabora-

tions to capitalize on economies of scale while retaining the ability to
direct investment toward ever more sophisticated industrial technology
(MacIntyre 1994).
In other parts of Asia, particularly Southeast Asia, we find the same
broad macro-level patterns of encouraging savings, repressing consump-
tion and wages, maintaining low real-exchange rates, and active attempts
to encourage export promotion. However, governments relied more
on foreign direct investment than domestic business for technological
innovation. Nonetheless, investment was actively managed to promote
relatively labor-intensive, export-oriented manufacturing and to ensure
ongoing technological upgrading. This pattern reflected a less single-
minded domestic state and less conducive domestic market structures
(Kohli 2004; Grugel et al. 2007). It probably produced more rapid tech-
nological upgrading but with an added level of dependency on external
markets (Beeson 2002; Felker 2004).
In these countries, an export-oriented and largely foreign-owned
external sector tended to coexist with domestic businesses oriented to
the home market that were less efficient and relied more on patronage,
operating in areas where government favor could be profitable, such as
construction contracting, property development, telecommunications,
and utilities (Yoshihara 1988; Robison 1997; Gomez and Jomo 1999). As
we will see, the Chinese case is different again, but shares more with the
Southeast Asian model than its Northeast Asian counterparts.
These systems all required careful political management in order
to maintain their domestic legitimacy. The principal political good
produced by Asian developmentalism was rapid growth; however, that
growth was only relatively equitable and had contested political conse-
quences. In Northeast Asia, government and capital formed close alli-
ances in the context of at best limited political competition. Labor was
repressed and welfare systems were limited. The interests of small busi-
ness were subordinated to big business, creating opposition in Korea and
the need for large “side-payments” in the form of regulatory protection
for small business and agriculture in Japan.
In Southeast Asia, tolerance for foreign investment in export promo-
tion, which created jobs for the masses in the 1980s, was bought
with favors to politically well-connected business groups operating in
protected domestic sectors (Robison 1997; Gomez and Jomo 1999). In
both cases, close state–business relationships concentrated wealth and
tended to dominate the political system, impairing democratic devel-
opment. In the early stages, rapid job creation and side-payments to
agriculture kept incomes relatively equal, but concentration of asset

ownership led to increasing political strains, particularly where incomes
started to diverge as employment creation slowed.
The implicit domestic political bargain was one in which elitist and
sometimes authoritarian politics were tolerated in return for growth
that produced rising living standards. Where this balance could be
maintained, the political basis of the developmental state was secure
but when growth slowed, political tensions tended to reemerge with
reformers challenging state–business relationships. Exclusionary poli-
tics and economic policy that favored producers over consumers created
fertile ground for reformers to work with.
Overall, then, revisionist policy is problematic for foreigners, but the
case is more finely balanced domestically. The strongest case for revi-
sionist policy is its ability to produce growth, technological upgrading,
and jobs in manufacturing. The risk though is that the state–business
relationship it embodies will become dysfunctional and degenerate into
patronage and corruption or, less drastically, that the state will struggle
to maintain just the right amount of competitive pressure, not so
much competition that long-term investment becomes impossible but
not so little that companies aren’t under constant pressure to improve
efficiency.
Equally, populations may simply value political and economic freedom
over the perceived marginal gains of a more statist strategy. The risk of
liberalization, though, is that the strong will be better at navigating a
liberalized polity to serve their interests and “competition” will create a
short-term speculative and renter or monopolistic economy that ceases
to innovate. Exactly how the debate between the two perspectives plays
out will depend on the minutiae of domestic economic structures and
political arrangements.
2 Foreign pressure and adjustment in Japan
The Japanese experience is immediately interesting because of the notable

parallels between the US–Japan relationship in the 1980s and 1990s and
emerging contemporary US attitudes to China. In this section I provide
a brief overview of the bilateral relationship during this period.
I argue that the Japanese experience shows just how dogged US pres-
sure can be (lasting over a decade). However, it also demonstrates that
domestic receptiveness in Japan was more important in producing results
than the aggressiveness of US negotiating tactics. As I explained in the
previous section, the nature of Japan’s export-oriented policies means
there were domestic constituencies in favor of reform and successful

change came when they could bring pressure to bear. If US negotia-
tors want to produce change in China, they will probably also have to
work through persuasion and by building alliances with domestic polit-
ical constituencies. However, “domestic opinion” is not wholly fixed
endogenously.
Changes that the Japanese authorities did agree to, particularly
exchange-rate revaluation and financial-sector liberalization, altered
domestic conditions in Japan in ways that eventually furthered the cause
of reform, paving the way for evolution of the Japanese economy from
the mid-1990s onward. That reform, though, was shaped by domestic
interests and ways of thinking about economics and sought to borrow
more from the orthodox liberal model of political economy without
abandoning a distinctively Japanese vision that was deeply institution-
alized in Japanese politics, economics, and culture.
Perhaps one of the most striking aspects of the “Japan bashing” period
was how intense US pressure became on a country that was tradition-
ally seen as a strong ally in the Cold War. In broad terms, we can track
this development over time from the Reagan administration in the
mid-1980s through to the Clinton period. In the early period, commen-
tators noted Japan’s surprisingly accommodating attitude to US pres-
sure and considerable attempts by the administration to restrain some
of Congress’s more unilateral impulses (Calder 1988; Schoppa 1997). By
the time of the Clinton administration, though, a rhetorical reconfigu-
ration of US interests removed some of these restraints (Uriu 2009).
For the early Clinton administration, national economic success
would be just as important for US medium-term strategic interests as
more traditional security concerns. Economic dominance, particularly
in the high-tech industry, needed to be maintained and the United
States had to outperform Japan in order to maintain its technological
lead (Crawford 1995). This shift diffused pressure for restraint within the
administration and opened the way for a particularly assertive period
(though, even then, a broader set of multilateral relationships acted as
a force for restraint). More overt and less nuanced bilateral pressure,
however, was largely counterproductive, encouraging the Japanese to
dig in their heels (Schoppa 1999; Uriu 2009).
Against this background of the broad bilateral relationship, fluctua-
tions in US economic pressure over time owe more to evolving domestic
conditions in Japan, though these in turn were altered by earlier rounds
of pressure and reform.
US pressure on Japan first began to build during the Reagan adminis-

tration. In the United States, high interest rates and loose fiscal policy,
partly driven by expanding defense spending during the “Second Cold
War,” were producing a strong dollar and a widening trade deficit (James
1996). In the early period, Ronald Reagan and his treasury secretary,
Donald Regan, tended to see the strong dollar as a sign of broader
economic strength and to resist the suggestion that something was
wrong with US macroeconomic policy.
However, through the mid-1980s, the rising US trade deficit created
growing protest from Congress, including an increasingly protectionist
outlook. While Congress was pushing for trade sanctions, the admin-
istration was ideologically committed to free trade. Reagan and his
new treasury secretary, James Baker, decided to concede to negotiations
around macroeconomic policy, by approaching Japan and asking for
a revaluation of the yen, combined with a fiscal stimulus to maintain
Japanese demand (Funabashi 1993; James 1996).
The Japanese response was relatively accommodating. Prime Minister
Nakasone was also inclined to see a strong yen as a way to signal
Japanese strength and even to see some modest Japanese sacrifices in
the interests of international stability as a way of demonstrating Japan’s
growing importance. The Ministry of Finance was more comfortable
with exchange-rate realignment than they were with fiscal spending. An
earlier round of stimulatory fiscal spending in the late 1970s, in response
to US pressure, had created inflationary outcomes that MoF had sworn
to avoid in the future (Funabashi 1993). The most obvious outcome of
negotiations was the Plaza Accord revaluation but this period of debate
in Japan also produced the 1986 Maekawa Committee report, which
called for a rebalancing of the Japanese economy away from exports and
toward domestic-led consumption.
However, despite an unexpectedly large yen revaluation and some
accommodative Japanese action on tariffs, the bilateral trade deficit
was slow to respond (Funabashi 1993), partly because Japanese multi-
nationals began to move production offshore to avoid the effects of
yen revaluation. It became increasingly difficult for the late Reagan and
early Bush administrations to resist growing congressional pressure on
trade. Following the 1987 stock market crash, the Japanese instituted a
fiscal stimulus to stop the yen’s rise and revitalize a flagging economy.
Meanwhile the Americans initiated bilateral “structural impediments
initiative” talks with Japan in a further attempt to rebalance the two
economies.
The structural impediments talks started from the premise that it was
the structure of the Japanese economy, rather than more traditional tariff
barriers, that was impeding adjustment in the trade balance (Funabashi
1993; Uriu 2009). The Americans pushed for two broad sets of measures,
one set designed to ease US market access and the other as an indirect
assault on Japanese macroeconomic policy (a direct assault having been
ruled out by the Japanese Ministry of Finance as a condition for partici-
pation in negotiations) (Schoppa 1997).
On the market-access side, US negotiators were successful in pushing
for a relaxation of restrictions on large retail outlets, partly because they
managed to get the Japanese media on their side by pointing out the
benefits to Japanese consumers. There was some modest movement on
enhancing Japanese competition law but no movement at all in attempts
to attack the keiretsu system directly through limits on cross-shareholding
within corporate groups. On the macroeconomic side, again the Japanese
media and public were won over by pressure to increase fiscal spending
on public works projects, but attempts to alter land taxes in the hope of
reducing property prices and therefore the Japanese tendency to save (to
afford overpriced housing) were far less successful.
Leonard Schoppa’s exhaustive account of the negotiations shows how
successes came when US negotiators were able to mobilize public support
or exploit rivalries between Japanese ministries. The latter approach
is important because of the historical fragmentation of Japanese poli-
cymaking into discrete functional units, which can create gridlock
through fixed policy ideas and connections with relevant interest
groups. Gaiatsu, or foreign pressure, can sometimes alter the domestic
game in ways that return power to entrepreneurial policymakers seeking
significant change. However, it is also clear that, in this period, Japanese
elite and public opinion remained overwhelmingly behind the funda-
mentals of the keiretsu system with its patient capital, stable supplier
relationships, and incentives for skills training, ideally suited to long-
term, investment-driven growth (Schoppa 1997).
Japanese resistance to change may also have been helped by the
booming state of the Japanese economy during this period. However,
with the benefit of hindsight, the boom was distinctly dysfunctional.
Yen revaluation and the 1987 stimulus worked together to produce
problematic incentives for a partially liberalized financial sector (Posen
2003; Okazaki et al. 2011). The financial liberalization of the early 1980s
had given large Japanese corporate groups the opportunity of borrowing
directly on global financial markets, depriving Japanese banks of some
of their most lucrative business. Gradual deregulation of interest rates
in response to savers’ demands for growing yields began to eat into the
rents financial repression had traditionally created for banks.
Meanwhile, offshoring of production in response to the revalued
yen further limited opportunities to finance industrial investment.
Liberalization had not yet proceeded far enough to give banks alterna-
tive ways to profit. Banks fell back on lending to the property market
directly, or by expanding lending to small businesses, which often
used these funds for property or stock market investment. An ongoing
tendency to lend on the basis of collateral, rather than assessments
of business quality and future income stream, left banks particularly
exposed when the bubble eventually burst. In short, attempts to boost
domestic demand while adjusting to a new high yen stimulated a
dysfunctional investment boom, rather than the intended reorientation
of the Japanese economy.
The Clinton administration came to power in the early 1990s and
set about a radicalization of demands on the Japanese, now focused
on attempting to secure quantitative targets for US access to Japanese
markets in auto parts, insurance, telecommunications, and medical
technology. As I explained above, Clinton actively sought to separate
economic concerns from the security relationship in order to exert
tough pressure on Japan in the face of ongoing trade deficits. However,
what is notable about this pressure, in the end, is how little effect it had
on Japanese policy. Japanese policymakers largely dug in their heels and
refused to agree to the quantitative targets for imports and exports that
Clinton officials were demanding, though some important procedural
concessions were made (Schoppa 1999; Uriu 2009).
Instead, the driver for Japanese economic reforms became domestic
self-examination in the aftermath of the collapse of the bubble econ-
omy.2 For some, inclined to blame the bubble economy on policy
errors in banking regulation and monetary policy, the bubble economy
provided few reasons for radically rethinking the Japanese model.
Others, though, also felt that deeper structural problems underpinned
poor policy decisions, primarily a lack of competition and market disci-
pline throughout the system, and were inclined to look to the US model
for possible solutions. What is clear is that the bubble experience under-
mined the legitimacy of existing practices and of the ministries that had
promoted them. Financial liberalization also opened up new opportuni-
ties for some types of firms, particularly in services, leaving them less
wedded to the status quo.
In the end, wide-ranging reforms were introduced which opened spaces
for Japanese firms to embrace new ways of doing business. However,
transformation was partial, with considerable elements of the old model

persisting. Main bank relationships with corporate groups loosened for
the strongest Japanese multinationals, but strengthened for some middle-
ranking firms. Some Japanese firms experimented with less secure employ-
ment contracts and greater shareholder orientation, while others merely
made modest shifts toward larger numbers of temporary workers.
This process built on earlier reforms, so prior liberalization of the
banking and securities sectors encouraged greater shareholder orienta-
tion and the presence of foreign managers or large foreign sharehold-
ings were a predictor of more significant change in corporate practices.
Overall, the relationships underpinning the Japanese model have been
shaken up and moved in a more liberal direction, but the Japanese
system of political economy retains much of its particular character,
including long-term employment relationships, relatively stable ties
between banks and corporate groups, and government enthusiasm for
(somewhat reconfigured) industrial policy.
Overall, we can draw a range of lessons that might be relevant to the
current US relationship with China. It is clear that foreign pressure did
have an impact. Concerns about the consequences of deteriorating trade
relationships, coupled with the threat of Super 301 retaliation are both
frequently mentioned in Japanese policymakers’ accounts of the period.
In strategic imbalance initiative negotiations and during the Clinton
period, both proceeded on the basis that Japanese policymakers would
have to make some concessions to maintain relationships. Japanese
policy-makers talk about ministries competing to ensure that the (inevi-
table) pain was shared among them, in terms of deviation from preferred
policy courses.
In determining exactly what the response would be, pressure was
most successful when it could line up with domestic incentives. The
biases of the export-investment model make some of these sources
of dissent predictable. Japanese citizens’ desire for better returns on
savings, more public as opposed to private investment, reformed
welfare systems, and cheaper consumer goods were all issues that US
negotiators could build on.
On the other hand, while indigenous criticism of the Japanese model
developed during the 1990s, in the early period the fundamental struc-
tures of Japanese economic thinking were both intellectually and insti-
tutionally embedded in ways that were difficult to alter. Formal Japanese
policy concessions were largely peripheral to that model and reactions
to Clinton-era pressures suggest that over-ambitious attacks on deeply
ingrained models can prove counterproductive. Clinton-era demands
were too unilateral, had few resonances with domestic Japanese prefer-
ences, and violated international trade norms, undermining Japanese
receptiveness and creating openings for international criticism in the
context of the broader multilateral trading regime.
Where US pressure did influence the eventual (partial) transformation
in Japanese economic practices in the 1990s and afterward, it was indi-
rectly through the incremental effects of relatively indirect assaults on
aspects of the Japanese model that were becoming increasingly unpop-
ular domestically. It was largely exchange-rate devaluation and banking-
sector liberalization that ultimately created significant momentum for
change within the Japanese model.
3 China, the United States, and global imbalances
The broad similarities between current debates about global imbalances

and the earlier US–Japan relationship are striking. A US government,
suffering from sharp trade and budget deficits and rising government
debt, is starting to feel deeply uneasy about a rising Asian power that
accounts for a large share of the deficit and is also financing a significant
part of US government debt.
The similarities between the two episodes spring from the two econ-
omies’ shared orientation toward mobilizing investment for export-
oriented manufacturing. Like Japan in the 1970s, China has been
channeling high levels of domestic savings through a highly restricted
banking sector to subsidize investment at the expense of consumption.
The Chinese have also reinforced this strategy with an undervalued real
exchange rate. China is coming under pressure to alter its macroeco-
nomic orientation and to further facilitate adjustment by removing
“unfair” trade and investment barriers.
However, the details of microeconomic policy in China are quite
different from those in Japan, leading to important variations in nuance,
particularly when we come to look at the potential sources of domestic
support for the kinds of reforms the United States is seeking. The
Chinese system is far more fragmented than that in Japan, involving
multifaceted interventions driven by different parts of the Chinese state.
This fragmentation will make it more difficult for the United States to
challenge Chinese practices in the trade sphere than it was in Japan as
there are so many different targets to hit. On the other hand, it may
reduce the degree of ideological commitment to the “Chinese model” in
the face of a well-articulated orthodox liberal alternative, particularly as
some of the Chinese state’s interventions are inevitably flawed.
US debate is increasingly concerned with China but, to date, reform

does not seem to have been pressed with the same level of strategy
and concerted efforts as was deployed behind the strategic imbalance
initiative talks with Japan. However, the geostrategic and economic rela-
tionships between the two makes an intensification of pressure almost
inevitable. When pressure that is more concerted does materialize, there
certainly are reformers for US negotiators to seek out. However, the
fragmentation and complexity of relationships within China currently
makes it hard to predict what the outcome of this struggle for change
will be. It may be tempting for Chinese and US reformers to use macr-
oeconomic change, exchange-rate revaluation, and banking liberaliza-
tion as a lever to alter structural conditions, but the Japanese experience
suggests this is a decidedly high-risk strategy.
The next section begins with a very brief sketch of “Chinese” capi-
talism. I then go on to look at the kinds of concerns US policymakers
are currently raising in China and conclude with an overview of the
emerging debate within China over the desirability of reform.
3.1 A Chinese “Model” of capitalism?

Beyond an ongoing significant role for the state and an orientation
toward export-oriented investment, it is difficult to produce a concise
description of a unified “Chinese model” of economic growth. China
is still undergoing a progressive transformation away from the former
state-controlled socialist economy through a gradual shift toward private
ownership of companies and a more rapid shift toward market-deter-
mined prices and resource allocation. Transformation has been tightly
controlled and need not be tending toward an orthodox liberal model.
It has taken place at different rates in different sectors and for different
types of firm and there has been re-regulation as well as deregulation.
That is partly the result of China’s much vaunted “pragmatic” approach
to reform, responding flexibly to changing economic conditions, and
partly a function of the complex political relationships between the
different parts of the Chinese state.
In Japan and Korea, the mobilization of investment and acquisition
of technology were predominantly channeled through large domestic,
privately owned corporate groups in a kind of tense symbiosis with
government agencies. In China, state and foreign direct investment
have both played a larger role in industrialization.
The “urban” state-owned enterprise (SOE) sector, that is, not township
and village enterprises (TVEs) and their descendants, has been steadily
trimmed from around 70 percent of output at the beginning of reform to
around 26 percent in 2009, 15 percent of exports and around 20 percent

of industrial employment (Naughton 2011: 315). Enterprises have been
gradually privatized or closed down. During the early stages, until around
the mid-1990s, this divestment undermined central state revenue collec-
tion and tended to be accompanied by a decline in government activism –
though local government revenues increased with marketization. However,
tax reform in the mid-1990s halted this decline in revenues, allowing
government activism to revive and shift some revenues back from local to
the central government (Naughton 2005; Breslin 2011b).
Since the size of the state-owned enterprise sector began to stabilize in
the early 2000s, government strategy for this sector has solidified around
the creation of “national champions” in capital-intensive areas of the
economy that the government regards as economically or politically
strategic. According to lists produced in 2006, the government currently
plans to exercise “absolute control” in defense, electricity generation and
distribution, petroleum and petrochemicals, telecommunications, coal,
civil aviation, and waterway transport and “somewhat strong” control
in machinery, automobiles, electronics and information technology,
construction, steel, base metals, and chemicals (World Bank 2012). The
government has gradually shifted the governance of these firms toward
more corporate and independent forms in an attempt to boost pres-
sures toward harder budgets and greater commercial orientation. While
significant improvements have been made, there is still some way to
go in this process and SOEs continue to have mixed commercial and
political incentives (Naughton 2011).
Foreign direct investment began alongside the broader liberalization
of non-urban communally owned business in China – the Township
and Village Enterprise (TVE) sector. Early investment was predomi-
nantly from Hong Kong and Taiwan, and involved labor-intensive
manufacturing in textiles and later electronics assembly. This sector has
predominantly come under local government control. The investment,
employment, and revenues these businesses can provide have meant
that they have been broadly welcomed by local government. Since the
mid-1990s, most TVEs have been privatized, though local governments
often maintain some equity stake. Originally foreign investors were
strongly encouraged to enter into joint ventures with Chinese TVE part-
ners in order to maximize transfer of technology and managerial skills.
But there has recently been more willingness to allow wholly foreign-
owned subsidiaries in some sectors (Naughton 2005).
Despite expanding investment in domestic R&D with growing success,
particularly within the government sector, foreign direct investment has
been the primary method of technology acquisition in China. Historically,

China chose to liberalize foreign investment in export manufacturing
but restricted market-seeking FDI designed to increase sales of goods or
services in the Chinese market. FDI is still concentrated in export manu-
facturing, but WTO commitments have also forced a gradual opening of
services sectors from retail to finance and insurance.
In sectors that are relevant to the state’s strategic industrial policy,
foreign direct investment has been affected by overall industrial policy,
either through direct intervention or mode-indirect incentive-based
measures. Local authorities also have particular preferences that have
shaped more informal, local conditions, particularly in terms of the
issue of permits and licenses. These vary widely according to regional
conditions and production structures and it is likely that no ne has a
comprehensive record of what they involve.3
In support of this micro-level intervention in particular kinds of firms,
the Chinese state has also pursued a variety of creative policies to try to
assist particular kinds of business without blatant contradiction of WTO
restrictions, though this “creativity” has led to legal challenges and is
likely to continue to do so. Particularly notable tools include govern-
ment procurement; a system of VAT rebates for export-oriented produc-
tion; restrictions on exports of key raw materials, which reduce prices in
China and boost worldwide prices for competitors; and a series of product
standards developed with a view to assisting domestic innovation, most
notably the TD-SCDMA standard for 3G wireless technology.
Roselyn Hsueh’s recent book provides helpful illustrations of how
these disparate elements of policy currently fit together in particular
sectors (Hsueh 2011). Hsueh notes competing descriptions of the
Chinese economy from different observers. Some who describe a highly
open, free-wheeling entrepreneurial environment while others talk of
ever-present bureaucratic interference. She argues that this reflects a
highly varied reality as different parts of the Chinese economy experi-
ence different levels of interference and as the state’s attitudes change
through cycles of deregulation and re-regulation. She demonstrates this
fluidity through case studies of the telecommunications and textiles
sectors.
Telecommunications is seen as a “strategic sector” and so has gener-
ally experienced high levels of regulation. Mostly regulation has been
far tighter in the provision of basic services and infrastructure such as
cabling, wireless networks, and switching systems than it has been for
value-added or peripheral services such as handsets. Often, rather than
setting tariffs or outright restrictions on foreign investment, the Chinese
government has used forms of licensing, technical standard setting, certi-

fication, or government procurement preferences to manipulate market
structures. The state has sometimes permitted foreign entry, where tech-
nological or capital requirements were too large to be filled locally, while
at other times where domestic capacity is not far off international levels,
it has deliberately frustrated or delayed foreign entry to give domestic
firms time to develop.
In textiles, by contrast, regulation has generally been far less intru-
sive. Liberalization began relatively early. There was a brief period of
re-regulation at the turn of the millennium in response to overcapacity
and concerns about the outcome of the Asian financial crisis. The
broader pattern, though, has increasingly been one of decreasing central
government interference even in retail and distribution, with wholly
owned foreign subsidiaries permitted from the mid-1990s.
Nonetheless, there have been government efforts to encourage increas-
ingly high-technology manufacturing and inputs for technical fabrics
used in construction or by the military. The absence of central govern-
ment legislation has left matters more in the hands of local governments
whose control over licenses to establish businesses, licenses to participate
in export quotas, inspection, land allocation, research funding and parts
of the tax regime have provided them with wide discretion in enforce-
ment. The way these powers have been used in practice has sought to
balance the overall economic interest with the political influence of
domestic firms. It has also sometimes responded to central government
directives on technological upgrading, so government procurement
decisions, technical standards, and even design specification decisions
have sometimes been used to favor domestic business at the margins but
without fully discouraging foreign competition.
Overall, we see a picture both of variations over time in China’s
commitment to industrial policy and a bewildering array of different
tools and relationships for promoting investment and technological
upgrading. Some sectors have been relatively open to foreign investment
while others have been subject to tight restrictions. Regulation operates
at both national and local levels in ways that sometimes conflict.
Along with this variation between sectors and regions, we can also
identify shifting patterns over time. Barry Naughton suggests we think
in terms of three phases (Naughton 2005, 2011). The first phase, from
the late 1970s through the 1980s, was characterized by growing dereg-
ulation, with particular emphasis on developments at the local level.
From the mid-1990s, it was followed by a gradual reassertion of state
control, as the central government began to regain fiscal control, shifted
toward more rule-based forms of regulatory control, and reestablished

investment in public goods such as infrastructure.
Finally, from the early 2000s, there was evidence of a new state
activism. A floor was put under the divestment of state-owned enter-
prises and the “national champion” strategy began to solidify. State
investment in welfare, education, and social services expanded to head
off growing dissatisfaction, and the government identified seven stra-
tegic sectors that are expected to be supported by wide-ranging indus-
trial policy: new-generation information technology, energy-saving and
environmental protection, new energy, biology, high-end equipment
manufacturing, new materials, and new-energy cars.
China’s industrial policy is wide-ranging but also fast-moving and
fragmented. Rather than a single structure or pattern of industrial
policy, there are a diverse range of tools that are used in different ways
in different contexts with considerable variation in the amount of state
direction across different issue areas.
3.2 The emerging US–China relationship

As I noted in the introduction to this section, the broad similarities in
macroeconomic orientation between Japan in the 1980s and China at
present, along with rising budget deficits in the United States, explain
the similarities in the two sets of relationships over time. In 2011, the
US goods trade deficit with China accounted for around 40 percent of
the total US deficit in goods trade, and China currently holds $1.16 tril-
lion of US government debt. US concerns about widening trade deficits
and growing Chinese holdings of US Treasury securities (Morrison and
Labonte 2012) began to attract serious attention in the early years of
the new millennium. Since then the global financial crisis has partially
diverted US attention to the domestic economy, but it has also provided
an additional set of reasons to take global imbalances seriously.
One can debate how far Chinese behavior should be seen as a cause
of global imbalances. Some have argued that a Chinese “savings glut”
kept international interest rates low, while ever cheaper Chinese imports
dampened consumer price inflation, giving the Fed a false sense of secu-
rity (Caballero and Krishnamurthy 2009). However, weak domestic
savings in the United States long predates the crisis, and placing too
much emphasis on credit inflows is too kind to the failures of the US
financial sector. Nonetheless, Chinese economic practices were certainly
part of the picture and any US adjustment will be greatly facilitated
through cooperative policies elsewhere in the world and particularly in
China.
In contrast with the Japanese case, there isn’t a long-standing intensive

alliance relationship to offset economic incentives for bilateral pressure.
The US security community tends to see a rising China as at best a chal-
lenge and at worst a threat (Kristof 1993; Overholt 1994; Mearsheimer
2001). At a more popular level, China’s human rights record and rejec-
tion of liberal democratic norms wins it little sympathy in Congress.
Neither of these views is likely to encourage economic forbearance.
However, that generally more negative relationship is offset to some
extent by perceptions of China’s sheer size, giving it greater long-term
economic and military potential that significantly raises the potential
stakes in bilateral relationships. From a strategic perspective, there is little
point in unnecessarily antagonizing a potential rival. That is particularly
so when growing economic interdependence between the two countries
provides additional reasons for caution. Cheap Chinese imports displace
some US production but they also have significant benefits for consumers.
The United States also makes a large profit on inflows of capital from
China. Inflows largely take the form of low-interest-bearing government
bonds. This capital is recycled through the US financial system into
potentially much more lucrative investments, recent problems with the
US financial system notwithstanding. Finally, although trade with China
is unbalanced, there is a significant section of the US corporate sector with
an interest in avoiding disruption to the relationships that currently exist.
Calls to “contain” China, then, are partially countered by advocates of
“engagement,” who see the potential to gradually socialize China into the
liberal Western order so that it sees little need to use its emerging power to
rock the boat (Johnston and Ross 1999; Ikenberry 2008).
The balance between perceptions of threat on the one hand and a
more liberal emphasis on engagement and potential economic benefits
on the other is nicely illustrated by the final round of US debate on
whether to grant China “permanent normal trading status” in 2000.
The relevant legislation was eventually passed, but it also established
two permanent congressional committees on China: the Congressional
Executive Committee on China, charged with monitoring human rights
compliance and rule-of-law development and the US–China Security
Review Committee, charged with monitoring compatibility between
US–China trade policy and American security interests.
Overall, then, the general character of the bilateral relationship
certainly shouldn’t lead us to expect any more favorable treatment for
China than Japan received in the earlier period.
The contemporary international normative environment, though, is
somewhat different from the earlier period in both the macroeconomic
and trade spheres. In trade, expanded WTO disciplines provide a far

wider range of legal remedies that extend “behind the border” into the
treatment of foreign investment and access for the services industry. On
the other hand, the strengthening of international norms may mitigate
against some of the kinds of assertive unilateralism that characterized
earlier US policy toward Japan.
On the finance side, the scope of “legitimate” international behavior
is less well-defined. During the 1980s, international opinion tended to
see the Americans as in denial over the role expanding fiscal deficits
played in fostering a low dollar. In the present period, there is a lot more
sympathy with the US view that the renminbi has been undervalued,
at least since around 2004 when the Chinese current account surplus
started to balloon. While there is more sympathy for the US position,
particularly in the context of financial crisis, there are still few inter-
national remedies available in the financial sphere, beyond bilateral or
multilateral negotiation.
Starting with the simpler macroeconomic side, pressure on “global
imbalances” began to build well before the current financial crisis struck.
By 2005, they were the subject of an established debate among econo-
mists and the G7 had begun to argue that “more flexibility in exchange
rates is desirable.” In early 2006, “desirable” had become “critical” and
explicit mention was made of China. Between 2004 and 2008, the
Chinese current account surplus rose from around 2 percent of GDP to
over 12 percent. The US administration accused the IMF of being “asleep
at the wheel” in managing global imbalances. The IMF responded by
introducing multilateral surveillance talks to discuss imbalances in
2006–7, involving China, the Eurozone, Japan, Saudi Arabia, and the
United States, which produced limited results. The Fund also revisited
its definition of “currency manipulation,” making it clear that a country
would be in breach of Article IV Section 1 (iii) if it succeeded in poli-
cies designed to undervalue its exchange rate in order to increase net
exports.4
Since then, Congress and US academics have called on the IMF to
label China a “currency manipulator.” A series of bills have also been
introduced to Congress to allow the United States to name countries as
currency manipulators and impose compensatory tariffs on all imports.
The US administration and a variety of business associations active
in China have spoken out publicly against these bills. At present, the
Obama administration sees negotiation with China, backed by sanctions
available through the multilateral system, as a better way to address the
problem, with both the administration and Chinese officials warning of
the dangers of a trade war if tariffs are imposed. The Chinese position,
then, is that choices over the exchange rate are a matter of national
sovereignty and shouldn’t be dictated by outsiders (Walter 2010),
though, as we will see in the next section, that doesn’t necessarily mean
that there aren’t reasons why China might be persuaded to unilaterally
choose revaluation.
On the trade and investment side, the US trade representative has iden-
tified a long list of issues with Chinese trade policy. China is currently
on the US special 301priority watch list because of its intellectual prop-
erty policies. USTR’s “National Trade Estimate Report” and its report to
Congress on issues with China’s WTO compliance run to 30 pages each.
These reports list the majority of industrial policies discussed in the
previous subsection from tangible issues with restrictions on exports of
rare metals or manipulation of the VAT rebate system to more intangible
policy statements such as procurement preferences, local government
licensing disputes, or governments’ stated intention to invest in the
new “strategic sectors.” They also emphasize barriers to entry in services
sectors, particularly financial services, banking, insurance, pensions,
and engineering/architectural consulting.
The sheer range of issues at stake and the slow pace at which inter-
national negotiations take place suggests that it will be difficult for the
United States to exert concerted pressure on all these different fronts,
and US lawyers and negotiators are likely to have to prioritize. In this
sense, the complex and fragmented nature of Chinese industrial inter-
ventions, relative to Japan’s more tightly defined model, may make it
particularly difficult to exert pressure on Chinese industrial policy.
The nature of the bilateral economic relationship and evidence of
recent disputes can give us some idea of where US priorities are likely
to lie. China is less of an immediate threat to American economic and
technological superiority than Japanese firms were during the compa-
rable period. Although the situation is changing rapidly, exports from
China still embody relatively little indigenous Chinese technology.
They are either low-tech labor-intensive products or high-tech prod-
ucts assembled in China with relatively little Chinese design input.
The damage to domestic US industry is more in “sunset” industries like
textiles or steel.
However, assessments of the rate of Chinese technological progress
vary widely. While pessimists point to the ongoing dominance of
“assembly-line production,” some commentators point to the extremely
rapid development of technological capabilities in China even if produc-
tion remains well behind the cutting edge. In any case, technological
advances in China will increase the segments of US industry that will

come under competitive pressure, so there are also forward-looking
concerns that Chinese industrial policy will “artificially” boost Chinese
manufacturers’ ability to compete over time. This could have important
effects for import substitution for US producers that would like to sell to
China, as well as export competition for producers in the US market. In
this vein, the United States has recently brought a dispute to the WTO
over Chinese policies on sourcing wind turbines for electricity genera-
tion. A strong emphasis on intellectual property protection can also be
seen in this light, as US producers seek to prevent Chinese firms from
reverse-engineering their products.
Intellectual property concerns are also important in limiting Chinese
imports from the United States, particularly in potentially large markets
for the entertainment and software industries, which are particularly
vulnerable to cheap counterfeit products. Pressure for market access into
China is particularly intense in service sectors where US firms are far
more sophisticated than their Chinese counterparts. The aim is to open
Chinese markets in service businesses to increase exports and this may
well be a more effective channel through which the United States can
offset the current export balance.
To date, USTR reports list these issues and they have been discussed in
bilateral negotiations through the Strategic and Economic Dialogue and
Joint Commission on Commerce and Trade processes. These processes
are producing incremental change but do not currently appear to be the
priority that US–Japan negotiations were during the earlier period. This
partly reflects the Obama presidency’s understandable preoccupation
with domestic economic issues; there has been remarkably little action
on the international economic front (Destler 2011). However, given the
ongoing size of the trade deficit, China’s very large share of US imports,
and growing congressional activism, pressure is only likely to intensify
over time.
3.3 Likely impact and Chinese response

As we saw with the Japanese case, countries’ existing economic models
are not necessarily universally popular. The biases inherent in the
export-investment growth model are also creating concerns in China.
Emphasis on investment has repressed wages and returns to savings for
the majority of the population, contributing to growing inequality. The
capital-intensive pattern of growth has meant that employment crea-
tion has been surprisingly slow for a rapidly growing labor-abundant
economy (Walter 2010). The banking system has channeled finance to
large government connected projects, leaving SMEs reliant on retained

profits or “informal finance” (World Bank 2012). Environmental prob-
lems are increasingly difficult to ignore. The global economic crisis has
also exposed the vulnerabilities that can spring from over-reliance on
exports and therefore overseas demand, and foreign investment creating
reliance on overseas capital and the risk that technology transfer will
remain “behind the curve.”5
Some Chinese scholars have become notably concerned about China’s
economic dependence on the United States, seeing it as a source of
national vulnerability (Breslin 2011b). From an orthodox economic
perspective, there are also obvious costs in an artificial stimulus to
foreign direct investment and export-led growth. Subsidizing exports
involves the Chinese government artificially reducing the cost of
exports for foreign consumers. Tax breaks for foreign direct investment
when China has a large pool of capital being invested in low-yield over-
seas government bonds also suggests a costly misallocation of overall
resources (Yu 2007).
As we saw at the end of the section on the Chinese model above, the
Chinese government is both aware of these issues and reluctant to let go
of its focus on industrial policy. The policy shift announced at the turn
of the millennium was supposed to both address growing imbalances in
the Chinese economy, through greater welfare spending and so forth,
and help to push forward technological upgrading, so that China can
make the leap from growth through better labor force utilization, to self-
sustaining patterns of innovation. In practice, though, the government
has so far found it difficult to change direction. The new millennium
has seen little change in the overall pattern of Chinese growth and the
global financial crisis has, in practice, tended to reinforce earlier patterns
(Yu 2009; Naughton 2010; Breslin 2011b; Naughton 2011). When a rapid
stimulus was required to combat collapsing global demand in 2008,
the Chinese government responded with a large public infrastructure
campaign and encouragement to state-owned banks to rapidly boost
their lending. Bank lending formed the larger part of the stimulus and
was predominantly channeled into the state sector (Naughton 2011) or
into local government infrastructure projects (Breslin 2011b). Either
way, the overall effect was to provide another round of investment-led
growth, raising further questions about the rest of the world’s ability to
go on providing the demand required to sustain export-led growth in
China (Yu 2009).
The apparent success of China’s response has triggered some self-
congratulatory rhetoric on the part of Chinese elites and leadership
(Qian 2010). However, there are also signs of ongoing interest in reform.
The World Bank’s recent China 2030 report was coauthored by the
Developmental Research Centre of the State Council, with the explicit
support of Premier Li Keqiang. The report sets out a blueprint for a
radical reform of Chinese economic policy toward a broadly orthodox
Anglo-American liberal model, with particular emphasis on liberalizing
the financial sector as a way of removing distortions in the allocation
of capital.
While there appears to be a growing consensus on the need to rebal-
ance the Chinese economy, segments of the Chinese elite also see a
role for the state in this process and wish to ensure that “rebalancing”
does not slow down China’s economic growth. These two tendencies,
though, are somewhat at odds with one another and exactly how they
are balanced remains to be seen. Even if this intellectual debate were
settled, there are also questions about what kinds of change might be
possible in the context of conflicts of interest between central and local
government, different sections of the Chinese bureaucracy, and different
segments of Chinese business.
4 Conclusion
The Japanese experience and rising concerns in the United States suggest
that China is likely to experience ongoing US pressure to “reform” its
economic policies in ways that will ease US adjustment and provide
further opening to foreign investment. To date, congressional pressure
has not been sufficient to influence an administration that is primarily
interested in domestic affairs and inclined toward a negotiated approach
to China, backed up by the threat of ongoing WTO dispute procedures.
However, pressure is only likely to intensify over time.
Pressure on Japan was most successful when negotiations could tap
into domestic concerns about aspects of the Japanese economic model.
There is growing controversy in China over existing patterns, particu-
larly over broad macroeconomic orientation. However, macroeconomic
adjustments need to take place through gradual structural change
within domestic economies. The complexities and fragmented nature
of Chinese industrial policy mean that challenging state intervention
issue by issue will be a long and difficult task for internal reformers and
in terms of external challenges from the United States. On the other
hand, the piecemeal nature of reform and absence of a strong overall
theoretical rationale for intervention means that the intellectual case for
intervention may be vulnerable to challenges from a well-worked-out
liberal framework, particularly given the international dominance of

orthodox liberal approaches to economics.
One option that eventually had a strong impact on reform in Japan
was to work through macroeconomic channels that require less dense
social cooperation in implementation. Exchange-rate appreciation
combined with financial sector liberalization did undermine crucial
parts of the traditional Japanese model, though even here progress was
slow. The links between financial liberalization and crisis in both Japan
and Korea, though, should make Chinese officials distinctly cautious
about this kind of approach.
Notes
1. For some particularly good economically oriented accounts of aspects of
Asian heterodoxy, see Chang (1993), Akyuz et al. 1998, Chang (1999), Rodrik
(2008).
2. This paragraph and the one that follows rely on (Vogel 2006). For an alterna-
tive view, see (Kazuyoshi et al. 2003).
3. In the annual National Trade Estimates Reports and the Report on China’s WTO
Compliance that USTR produces for Congress, it is noted that the Chinese
government has not produced any information on “export subsidies” oper-
ating below central state level.
4. “IMF Surveillance – The 2007 Decision on Bilateral Surveillance,” http://
www.imf.org/external/np/exr/facts/surv07.htm, accessed March 5, 2008.
(See Walter 2010.)
5. For discussions see Yu (2007), Naughton (2010), Breslin (2011a), Breslin
(2011b).
8
Rural–Urban Divide and the
Lewsian Turning Point in Japan
and China
Katsuji Nakagane
1 Introduction
China has been in its high-speed economic growth for the past 30-plus
years since 1978, when its reform and opening-up policy started. Its
annual growth is recorded as high as about 10 percent, and it surpassed
Japan in total GDP volume in 2010, much earlier than previously
predicted by China watchers.
Japan experienced a similar high-speed growth from 1955 to 1973,
called “a period of high-speed economic growth” in Japan and much
celebrated as a success story of post–World War II economic develop-
ment. This is of historical significance for at least two reasons. First, the
long duration of high-speed economic growth was unprecedented in
Japanese or even Asian history.
Second, it was symbolic that an Asian developing country caught up
with advanced and high-income economies after World War II. In 1955,
Japan’s per capita GNP was only a quarter of the United Kingdom’s level.
But it had caught up with and finally surpassed the United Kingdom
in 1975, right after the end of the high-speed growth period. In the
quarter-century since then, other East Asian developing economies
joined high-speed growth in Asia, following Japan, as demonstrated by
the fact that Korea became a member of the OECD in 1996. Japan is
often said to be the first “goose,” leading other countries in waves of
high-speed economic growth in Asia.
In a sense, today’s China looks like Japan in the 1960s from the point of
view of economic development, though the international background,
historical stage of development, and political systems are different
between these two countries. A prolonged period of high-speed growth
led to significant economic, social, and political change. The rural–urban
172
Rural–Urban Divide 173
structure, for example, changed its character in such a process, as seen

in intensified levels of urbanization, along with decreasing numbers
of rural households and declining shares of agricultural production in
the overall economy. This chapter aims to compare the two high-speed
growth economies, today’s China and that of Japan in the 1960s, with a
particular focus on their rural–urban relationships, so that we will have
a better understanding of the overall patterns and character of economic
development of Japan and China and their historical trajectories.
This chapter is organized as follows. The chapter starts with a brief
overview of a debate on the Lewis turning point, more recently in China,
as a way of framing the investigation that follows. Then in Section 2
the chapter demonstrates, with data on how the rural–urban divide
disappeared in Japan as a result of economic growth, that the Japanese
economy reached that point around the beginning of the 1960s. After
that, I cross-examine key indicators of the rural–urban relationships in
China today and in Japan during its high-speed growth in the 1960s,
and show that the rural–urban relations in China exhibit a different
pattern in response to the long period of high-spead economic growth.
Section 4 will analyze why this is the case.
2 The debate on the Lewis turning point
There has been a heated debate both in China and abroad in recent
years as to whether China has reached the turning point anticipated in
Arthur Lewis’s theory of modern economic development. According to
Lewis’s dual-sector theory, a labor-surplus economy reaches a turning
point as a result of industrialization when the surplus labor, accumu-
lated in its traditional or agricultural sector, has been absorbed by the
urban or industrial sector, and the wage rate, which has long been fixed
at the subsistence level, begins to rise as a long-term trend. This turning
point is often referred to as the Lewis turning point. This turning point
is significant as it marks the economy having developed a traditional
economy to a modern one, profound change in economic structure, and
social structure and relations.
In China, the wage of peasant workers,1 or nongmingong, has begun
to increase in the coastal cities since around 2004. This seems to be
surprising since the influx of peasant migrants to the cities had been
virtually unlimited until the early 2000s, with a vast pool of surplus labor
in rural areas. Economics textbooks teach us that the wage is a price of
labor, which is determined by the force of supply and demand like ordi-
nary goods. When labor prices increase continuously, it indicates that
174 Katsuji Nakagane
labor demand would be structurally in excess of supply. In other words,

labor is in shortage.
Citing the increase in wage and insufficient supply of peasant
migrants, or unskilled workers, to coastal cities, Fang Cai, Yang Du, and
others claimed that the Chinese economy had arrived at a stage of labor
shortage, or the Lewis turning point, at the beginning of this century
(Cai 2007). If China has reached such a point, we should expect that
the persistent dual structure dividing the countryside from the cities has
dissolved. Xin Meng and Nansheng Bai, however, challenged this (Meng
and Bai 2007). Their study collected payroll data of seven manufac-
turing factories in Guangdong and concluded that the wage of unskilled
workers had not risen very much over the period 2000–4.
There are many others who also hold different views, pointing out that
China still has a tremendous amount of surplus labor in the rural sector.
Ryoshin Minami and Xinxin Ma, for example, calculated the volume of
surplus labor in agriculture, and concluded that almost a third of China’s
agricultural labor could be counted as surplus because their productivity
is below the subsistence wage rate (Islam and Yokota 2008). Nasrul
Islam and Kazuhiko Yokota also arrived at a similar conclusion, though
their finding is based on provincial data that marginal productivity is
approaching the wage rate from below (Islam and Yokota 2008).
How can we reconcile these two seemingly contradictory facts: while
peasant workers’ wage has been increasing, the surplus labor still exists
in the agricultural sector. There are at least three possible explanations
for this “paradox” or “puzzle”:2
(1) Age structure of peasants and peasant workers. As Cai shows us (Cai
2007), peasants who move to cities are relatively young, often under
30 years old. The peasant workers in shortage are thus of a younger
generation, while those who still remain in the countryside engaging
in agricultural work are relatively old, often more than 40 years old. In
other words, while agricultural labor is in surplus, peasant workers doing
unskilled work in cities are in shortage. Relatively older peasants do not
leave rural homes, partly for cultural reasons, and they cannot get jobs
in cities even if they would want to move.
(2) Interregional differences. China is characterized by significant
regional differences. Wage disparities generated by such differences
could be reduced by a nationwide, well-functioning labor market.
This type of labor market, however, does not exist in China because
of various institutional barriers such as the hukou (household registra-
tion) system. The more developed coastal regions face a more serious
problem of shortage of unskilled labor, while the less developed inland
100
80
60
40
20
Inner Mongolia
Xinjiang
Yunnan
Liaoning
Liaonin
Jilin
Tianjin
Ningxia
Heilongjiang
Shanxi
Chongqing
Tibet
Qinghai
Shanghaii
Shangha
Zh
Zhejiang
Beij
Beijing
Jiangou
Guangxi
Shaanxi
Jiangxi
Gansu
Hainan
Guangdong
Sichuan
Guizhou
Fujia
Fujian
Hubei
Shandong
Henan
Hebei
Hunan
Anhui
-20
-40
Figure 8.1 Surplus ratio of agricultural labor by province, 2008

Note: Unit: %.
Source: Xinxin Ma (2012).
and western regions have a vast stock of surplus labor. Xinxin Ma, for
example, calculates the surplus ratio of agricultural labor for each prov-
ince in China (Figure 8.1).
The figure shows clearly how the levels of surplus labor differ among
provinces. The surplus labor ratio, defined as a portion of agricultural
labor with its marginal productivity of labor below the subsistence wage
rate, is very low or even negative in the coastal provinces, while it is
extremely high in the interior district.3
(3) Increased peasant income and improved agricultural production. The
Chinese government has employed various policies to support peasant
income against the background of widening income gaps between the
rural and urban sectors. For example, the government introduced a
policy of minimum procurement prices in purchasing rice from agri-
cultural households in 2004, and extended this policy even to wheat in
2006. In addition, agricultural tax was abolished in 2002, and miscel-
laneous expenses that peasants had to pay to local government were
cancelled to alleviate their heavy fiscal burdens.
On the other hand, agricultural labor input declined because of inten-
sified mechanization in production. Thus the average revenues per
agricultural labor input have been increasing (Tajima 2008). That is to
say, the “wage rate” in the agricultural sector has actually risen vis-à-vis
the corresponding level of peasant workers’ wage in cities. This further
damps the pull of labor supply from the rural sector. Moreover, the
number of entrants in universities and colleges among rural high school

students has increased since the end of the 1990s, mostly because the
rate of their educational returns in the Mincerian sense has risen and
even peasant workers came to realize that the higher education could
give them better opportunities to earn higher income (Yan 2011). This
has further contributed to the decrease in supply of rural young labor
to cities.
These three explanations, in my view, are not exclusive of each other.
They are rather complementary. More importantly, while these expla-
nations may differ in their account for the labor supply paradox, the
simple fact seems to be confirmed that China has not yet arrived at the
Lewis turning point in the strict sense, though it is approaching that
point. Given the current speed and scale of China’s economic develop-
ment, that point will soon come to pass.
3 The turning point in Japan
The idea of the turning point was first developed by Arthur Lewis in
his seminal work on economic development with unlimited supply of
labor (Lewis 1954). It was then elaborated and extended by John Fei and
Gustav Ranis (1964). They applied their model to Japanese economic
history and concluded that Japan arrived at the turning point around
the end of World War II, since the wage of unskilled labor began to
rise after that time. Ryoshin Minami challenged their viewpoint and
findings, and argued that the wage surge of unskilled labor at that time
was only temporary, not continuous, nor a long-term trend. Minami
found that the wage of agricultural workers rose after the late 1910s but
declined in the late 1920s.
Moreover, Minami was critical of Fei and Ranis’s judgment on labor
surplus, since it was based on a very weak criterion (Minami 1973).
Minami tried to locate the turning point in Japan’s economic develop-
ment, using multi-criteria which are derived directly from the theoret-
ical implications of the Lewis as well as Fei-Ranis models. These criteria
include: (a) an equivalence of marginal productivity of labor with wage
rate in the agricultural sector; (b) a clear correlation between marginal
productivity of labor and wage rate in the agricultural sector; (c) an
upward movement of real wage in the agricultural sector; and (d) closing
up in wage disparities between agricultural and nonagricultural sectors.
His conclusion, which is shared by almost all Japanese economists
today, is that the Japanese economy passed the turning point around
the early 1960s, at the initial stage of its postwar high-speed economic
3.5 income ratio
2.5 Employee’s
salary/peasant income
2 (per capital)
Employee total income/peasant
1.5 income（per household)
1
Employee’s salary/peasant
E
0.5
income (per household)
Y
Year
0
1926 1933 1940 1947 1954 1961 1968 1975 1982 1989 1996 2003
Figure 8.2 Income disparities between rural and urban households in Japan,
1926–2004
Sources: Somusho Tokeikyoku (Statistical Office, Ministry of Internal Affairs and
Communications), Kakei Chosa Houkoku (Household Survey Reports); Norinsuisansho
Tokeijohobu (Statistical Information Office, Ministry of Agriculture, Forestry and Fishery),
Noka Keiza Chosa Houkoku (Agricutural Economic Survey Reports). Various years.
growth. First, the real wage of agricultural labor began to rise clearly
after 1961, meeting Criterion C. This suggests that agricultural labor
became scarce, leading to relative labor shortage in the agricultural
sector. Second, income disparities between the agricultural and non-
agricultural sectors narrowed significantly after the early 1960s, and
finally disappeared in the late 1960s (Figure 8.2). This satisfies Minami’s
Criterion D described above.
Third, a close correlation between wage and marginal productivity
of labor in the agricultural sector appeared in the postwar period, but a
closer relationship between wage and average productivity of labor in
the sector happened after the middle of the 1950s. This satisfies both
Criteria A and B. Fourth, the supply elasticity of agricultural labor to
nonagricultural sector sharply declined during 1958 and 1959, satis-
fying one of his criteria not mentioned above. Taking all these together,
Minami thus concludes that the turning point of the Lewisian type in
Japan’s economic development took place around the early 1960s.
As Lewis pointed out, a society changes its basic structure and char-
acter after it has reached this turning point. First and foremost, as the
economy faces a labor shortage, the cost of labor increases. If the labor
cost rises because of labor shortage, the economy will naturally shift
its industrial structure from labor-intensive to capital-intensive indus-
tries. Consequently, the structure of its comparative advantage will shift
as the factor endowment changes, and its trade structure will change,
exporting more capital-intensive products.
What needs to be stressed here is that the turning point indicates
the end of the rural–urban divide. The two distinct sectors in the dual
structure are therefore “unified” when the economy reaches that point.
More specifically, under the dual structure before the turning point, a
traditional, rather community-based, and relatively egalitarian principle
of economic and social organization prevails in the rural sector, while
a modern, more efficiency-driven, and meritocratic principle works in
the urban sector. Once a society reaches the turning point, such dualism
disappears.
Therefore, even in the rural sector, the market principle of efficiency
begins to govern various spheres of life, not only economic but also
social. In the urban sector, unskilled labor, most of which comes from
the rural sector, tends to be valued more highly than before, because
of the relative labor scarcity. Attitude of urban residents toward rural
people will change to one of more respect. One example is that junior
high school graduates, who came to Tokyo from rural areas to get jobs in
the city, began to be called “golden eggs (kin-no tamago),” though they
were previously treated just as expendable cheap laborers.
Another example, which symbolizes a great social transformation
taking place as the economy passed the turning-point, is how maids in
the cities are addressed. This job was very popular for young rural girls
who were employed very cheaply in rich urban households until the
late 1950s; they were called jochuwhich was used in a slightly deroga-
tory sense. But after their supply became scarce, they began to be called
otetsudaisan (house assistants). Their wage also soared rapidly from that
point on. The persistent rural–urban divide which had characterized the
Japanese social structure over a long period of time, therefore, faded out
as a stage of labor shortage arrived around the beginning of the 1960s.
How Japan transformed itself in terms of rural–urban relationships
during the high-speed growth period, particularly after the turning
point, can be seen in the following areas:
(1) Income disparity. An essential aspect of the rural–urban dual struc-
ture is income disparity between the two sectors. Figure 8.2 above depicts
the long-term movement of income ratio of urban employees over peas-
ants both per capita and per household in Japan for much of the twen-
tieth century. It shows an upward movement of such income levels from
the early 1950s until the early 1960s, then a downward movement. In
the late 1960s, the ratio equalized at close to parity at 1 in income per
capita.
Table 8.1 Engel coefficients in Japan
Year Urban (%) Rural (%)

1951 51.7 57.6
1955 44.5 53.3
1960 38.8 45.4
1965 36.2 38.4
1970 32.2 32.7
1975 30.0 28.1
Source: Same as Figure 7.2.
(2) Engel coefficients. The Engel coefficient is defined as the sum of food
expenses divided by total consumption expenditure in a household. It
is used often as one of the good indicators that show the level of living
standard of households, but it can also be a measure of their consump-
tion behavior. We can find how Engel coefficients in both rural and
urban sectors were converging in the process of high-speed economic
growth in Japan (Table 8.1). In 1951, when the Japanese economy
had not yet started growth acceleration, there was a significant differ-
ence in the coefficients between these two sectors. After the turning
point, around the beginning of the 1960s, those coefficients began to
converge. It is in 1970 when the two coefficients moved into parity, and
after that rural households began to spend less on food in their total
expenditure than their counterparts in the cities. From this perspective,
it may be reasonable to say that the consumption behavior has become
almost indistinguishable between the two types of households by the
late 1960s. Put in another way, rural households became “urbanized” in
consumption behavior by that time.
(3) Use of electric appliances. This is another indicator of the conver-
gence of the two sectors in living standards and lifestyle. Electric appli-
ances such as refrigerators and washing machines became popular first
among urban residents during that period, and then gradually spread to
rural households. As Table 8.2 shows, there was no difference between
rural and urban households in owning those appliances at the end of
the 1960s. It is said that the lifestyle of rural households was “modern-
ized and urbanized” in the 1960s.
(4) Life expectancy. Life expectancy is a significant indicator of people’s
health as well as the level of medical care they receive. Unfortunately,
however, we do not have enough data of life expectancy to allow us to
compare these two sectors. Table 8.3, instead, uses the infant mortality
rates to show how the two sectors converged on this indicator, as evidence
Table 8.2 Holdings of electric appliances in Japan

Refrigerators 1959 11.1 3.4
1964 77.6 57.7
1969 97.5 91.2
Washing 1959 44.2 24.4
machines 1964 85.9 76.5
1969 99.9 97.0
TV sets 1959 42.9 23.5
(black and white) 1964 110.5 101.4
1969 118.1 110.3
Source: Yoshikawa (1992).
Table 8.3 Infant mortality rates in Japan
1960 26.8 37.3

1965 16.4 24.0
1970 12.2 15.9
1975 9.7 11.4
Note: Unit: %.
Source: Koseisho Tokei Chosabu (Statistics and Information Department, Ministry of Health,
Labour and Welfare), Jinko Dotai Tokei (Vital Statistics)
on life expectancy. From there, I suggest that life expectancy of rural

people had caught up with that of their counterparts in the cities by the
middle of the 1970s. One can argue that this came along with income
growth as well as improvement in medical care and people’s nutrition in
the rural sector. If we take the protein intake as an indicator of the level
of people’s nutrition, we can find that the gap between peasants and
urban residents has disappeared by the end of the 1960s (Table 8.4).
(5) Industrial structure. As Petty-Clarke’s law tells us, industrial struc-
ture shifts in accordance with economic development, first from the
primary to the secondary industries, particularly manufacturing, then
to tertiary industry. Japan’s development process has followed this. It
was during the high-speed growth period when its industrial structure
dramatically changed. The share of agricultural production declined,
and its employment dropped too, though less rapidly (Table 8.5). This
suggests that while there was relatively more population in the rural
areas, they engaged less in agricultural production, but did more nona-
gricultural work. On the other hand, during the whole period of the
Table 8.4 Protein intake by Japanese households
Year Total Urban Rural

1964 74.4 74.1 71.1
1966 74.8 75.0 74.1
1968 77.1 77.4 76.2
1970 77.8 77.6 78.1
Note: Unit: g/person/day.

Source: Koseisho Koshu Eiseikyoku Eiyouka (Department of Nourishment, Bureau of Public
Health) (ed.), Kokumin Eiyou-no Genjou (Present Situation of People’s Nourishment).
Table 8.5 Share of primary industry in Japan
Year GDP Employment

1955 19.9 37.6
1960 13.1 30.2
1965 9.8 23.5
1970 6.1 17.4
1975 5.5 12.7
Note: Unit: %.
Source: Som usho Tokeikyoku (Statistical Office, Ministry of Internal Affairs and
Communications).
1960s, the agricultural labor force, particularly the younger generation,

moved to urban areas on a massive scale.
4 China’s performance in terms of Rural–Urban

comparison
China’s growth rates since 1978 are comparable with what Japan
recorded during its high-speed growth era, though over a much longer
period. Along with such growth performance, urbanization, industri-
alization, trade expansion, foreign reserve accumulation, and nation-
wide infrastructural buildup have proceeded rapidly and extensively
throughout the country. Symbolic events of the high-speed growth
period are found in both countries. The Tokyo Olympic Games were
held in 1964, while the Beijing Olympic Games opened in 2008. The
first highway and express railway lines were constructed during these
periods in both countries.
It is during this period that motorization started and ordinary people
were able to buy their private cars. As Japan surpassed the United
3.5
2.5
1.5
0.5
0
1978 1985 1991 1993 1995 1997 1999 2001 2003 2005 2007
Figure 8.3 Urban–rural income ratio in China

Note: Unit: rural income = 1.
Source: National Bureau of Statistics, China Statistical Yearbook (Various years).
Kingdom in 1975 in GDP volume, China overtook Japan in 2010. On

the negative side of economic development, the growth trajectories of
the two countries share a common feature, severe pollution and envi-
ronmental deterioration during their high-speed growth periods. From
this perspective alone, we can say that China has followed Japan’s
development path, though China’s high-speed growth started a quarter
century later.
If we look at the development processes in terms of rural–urban rela-
tionships, the trajectories of these two countries are quite different. Let
us first show that in income disparity between rural and urban sectors,
or peasants and urban residents in China since 1978 (Figure 8.3). The
figure illustrates that peasant income rose rapidly, but urban residents’
income jumped much more rapidly, resulting in the widening of the
income disparity between these two groups.
Moreover, the disparity is quite large, even on the basis of the offi-
cial statistics, which are said to have underestimated the real and true
income gaps in China. The earnings by the richest layer of urban resi-
dents, for example, are not covered by the official income survey statis-
tics (Li 2011). Differences in the quality of living between the two areas
are not reflected in the statistics either. Gaps in medical and educational
facilities between them seem to be larger than what the nominal income
gaps indicate.
What, then, brought about such a huge rural–urban income disparity

in reform China? Why did the disparity continue to widen for so long?
Is it an inevitable consequence of extensive urbanization and industri-
alization? Or is it just a necessary result of market development? Many
scholars have tackled this issue. Yu Cao, Xiaohong Chen, and Yueru Ma,
for example, tried to estimate the impact of urbanization on rural–urban
income disparity (Cao, Chen, and Ma 2010). Their conclusion is that
urbanization has a significant effect on narrowing income disparities.
However, this effect varies across regions and is more significant in less
developed areas such as inland and western regions. Qilin Mao, on the
other hand, finds that opening up and urbanization have an effect in
reducing rural–urban disparities at the national level. But at the regional
level, urbanization is more effective in coastal regions, while opening up
is better for interior regions in narrowing income disparities (Mao 2010).
The findings of Cao, Chen, and Ma, as well as Mao, suggest that
underdevelopment of urban areas played a decisive role in creating and
keeping the serious rural–urban income disparity in China. It goes from
here that further urbanization would naturally solve this issue in China.
But there seems to be political and institutional causes of the income
disparity in addition to low-level urbanization, which we will turn to in
the next section.
Let us take a look at China’s Engel coefficients and their trend in
both sectors (Table 8.6). Clearly, the coefficients have been declining
in keeping with income rise, but there is still a significant gap between
urban and rural sectors.
Since the period of reforms and open door after 1978, the coefficients
of rural households have not leveled with those of urban households.
If the coefficients reflect the level of economic development, then
Table 8.6 seems to indicate that China’s development level in 2008 is
about the same as that of Japan in the early 1960s.
Table 8.6 Engel coefficients in China

1978 57.5 67.7
1985 53.3 57.8
1990 542 58.8
1995 50.1 58.6
2000 39.4 49.1
2008 37.9 43.7

Table 8.7 Holdings of electric appliances in China
` Year Urban (%) Rural (%)

Refrigerators 1990 42.3 1.2
2000 80.1 12.3
2008 93.6 30.2
Washing 1990 78.1 9.1
machines 2000 90.5 28.6
2008 94.7 49.1
Color TV sets 1990 59.0 4.7
2000 116.6 48.7
2008 132.9 99.2
Third, we will look at the holdings rates of basic electric appliances.

It is clear from Table 8.7 that rural households have not matched their
counterparts in the cities in terms of level of possession of electronic
appliances. It is true that rural areas still relatively lag behind, and
electricity is not necessarily available for people to use those electric
appliances, even if they want to do so. However, given a huge disparity
of income, it would be impossible for them to buy these goods to the
extent city dwellers do. Most poor people who cannot buy such electric
appliances are in the countryside in China.
Fourth, we can find the divide continues to exist in the case of
people’s health. According to the fifth population census in 2000, rural
life expectancy is 69.55 years, while the urban one is 75.21 years. This
wide discrepancy reflects a gap not only in income but also in medical
services between rural and urban areas. China has implemented a new
system to improve medical care, xinxing hezuo yiliao (new cooperative
medical care), in the rural areas since 2002. But such a system has not
been integrated yet with that in the cities. Better medical services are
available for city dwellers, which contribute to their longevity. If we look
at infant mortality rates in China, we can find a sharp divide between
these two sectors, partly because rural China is now suffering from a
serious shortage of good medical staff and facilities, except for a few rich
rural areas in the coastal region (Table 8.8).
Fifth, China’s industrial structure is still that of a typical developing
economy, with a higher agricultural share in both employment and
production. Throughout the period of high-speed economic growth,
the agricultural share of GDP has gradually been declining, except for a
short period from 1979 to 1995, but its share of employment has been
Table 8.8 Infant mortality rates in China
Year Total Urban (%) Rural (%)

1991 50.2 17.3 58.0
1995 36.4 14.2 41.6
2000 32.2 11.8 37.0
2005 19.0 9.1 21.6
2009 13.8 6.2 17.0
Source: National Bureau of Statistics, China Statistical Yearbook (2010)
Table 8.9 Share of primary industry in China
Year GDP (%) Employment(%)

1978 28.2 70.5
1985 28.4 62.4
1990 27.1 60.1
1995 19.9 52.2
2000 15.1 50.0
2005 12.2 44.8
2008 11.3 39.6
Source: National Bureau of Statistics, China Statistical Yearbook (2010)
staggering in the 1990s and the early 2000s in particular (Table 8.9).
This seems to suggest that there is a huge volume of surplus labor still
remaining in the agricultural sector. In comparison, Japan’s agricultural
share declined drastically during a shorter period, from 1955 to 1970
(see Table 8.5 above).
5 Shaping of the rural–urban divide in China
Why, then, is China experiencing a development path very different

from Japan in terms of rural–urban relationship? Japan closed up and
finally eliminated the rural–urban divide in its high-speed growth
period, as we have observed above, while such a wide and deep divide
has long persisted in China until today, even with long-term high-speed
economic growth. Is this because of China’s unique initial conditions
when it started reform, opening up and high-speed economic growth,
for example huge population size, extremely underdeveloped structure,
and certain political elements with pro-urban bias under the Maoist
regime? Or this is some historical legacy from the Kuomintang era?
As John Knight and Lina Song point out, “Underlying the urban bias,
often observable in state policies and institutions, was state bias, to be
explained in terms of the concerns and objectives of the Chinese lead-

ership” (Knight and Song 1999: 322). How and when, then, did such a
state bias, or more correctly an urban bias, originate? In our view, the
bias originated from Mao’s policy of heavy industrialization, which he
launched in 1953, when the first Five-Year Plan started and “the general
line for a transition period (guodushiqi zongluxian)” was adopted.4
As peasants were forced to be involved in collectivized agriculture under
this general line, they began to be tied to the land, since their collectives
had to achieve procurement targets of agricultural products, food grains
in particular, for the state. Procured agricultural products were used for
wage goods to provide for industrial workers, who contributed to capital
formation for heavy industries through cheap labor cost.
The situation was still better for peasants in collectives, at least until
1957, when they were integrated into people’s communes. In 1958,
when the Great Leap Forward movement was launched and all peasants
were forced to become members of the communes, a new household
registration system was put into effect so as to bind them more tightly
and rigidly to the villages and agricultural production than before. It
is from that time on that the rural–urban divide was institutionally
fixed in China. Peasants and their family were registered as “peasants
(nongmin),” while urban dwellers and their families were registered as
“residents” or, more correctly, holders of “nonagricultural family register
(fei-nongye hukou).”
Surprisingly enough, this status was passed on to their children.
People were divided into the two groups, according to the registration
status. In reality, one can say peasants have been ranked as “second-
class citizens (erdeng gongmin).” During the Maoist era, people were
not able to live outside this registration system, since almost all
important items of consumption goods were distributed on the basis
of rationing, which was connected with the registers recording every
member of households in the hands of local police stations. Moreover,
once registered at a certain locality, it was extremely hard for them to
change the place of registration. They belonged to a society different
from urban residents, though their nationality is all Chinese. Thus
there emerged a strange system called “one country, two societies”
(F. Wang 2010).
Japan has a household registration system, too. The Japanese version
of household registration system, however, is totally different from
the Chinese one. First, there is no description regarding status, occu-
pation, and class of household members in their registers. There is no
“divide” therefore between peasants and urban residents. Second, there
is no restriction to changing the place of registers issued. It is quite easy

for the Japanese to move his or her place of registration from Tokyo to
Osaka, irrespective of where he or she lives now, if he or she wants to do
so. Third, the office keeping these registers is not a police station, but
a city office where the citizens want to register. The household registra-
tion in Japan is just for the sake of identifying the holder as Japanese,
not controlling and managing the people.
There is also a political background behind this divide in China.
Assume that China is a democratic country, with free elections and a
multiparty system. Then there could be a political party which repre-
sents the interests of peasants. As long as they obtain a majority in
population, they can have a majority in the house of representatives,
if they can succeed in uniting themselves. This would enable them to
form a new cabinet and elect their prime minister to implement policies
for their own interests. Under these circumstances, there could never
be such a rural–urban divide, though there could be a certain level of
income disparity between the residents in the two areas concerned. Rich
capitalists live in the cities, while poor peasants do not necessarily want
to leave the countryside.
Representatives of poor regions would strive to obtain fiscal aids to
develop their electorates. Representatives of rich regions, on the other
hand, would not need to be more active in acquiring fiscal resources
from the central government, because the regions they represent are
rich enough. Representatives of a poor class, for example peasantry
in the countryside and the unemployed in the cities, would make all
possible efforts to raise those people’s income and improve their living
conditions. Representatives of a rich class, on the other hand, would
be relatively less active in raising the earnings of their representative
class. As a result of these asymmetrical behaviors among the representa-
tives, other things being equal, an interregional and interclass economic
disparity would be reduced. In the same vein, the rural–urban income
disparity would also be narrowed further.
How the income disparity between peasants and urban residents in
Japan was narrowed in the 1960s cannot be explained without refer-
ence to the political activities of the Liberal Democratic Party and many
representatives in the Diet from rural electorates. They realized that
to redress the problem of income imbalance between urban and rural
areas, they would need to increase in procurement prices of rice.5 They
also made every effort to implement various policies to give direct subsi-
dies to agricultural as well as public investment projects that benefited
rural areas.
Under an autocratic political regime such as in China, on the other

hand, there is no mechanism equilibrating different interests among
regions and among classes, unless an autocratic leader decides to give
some special aid to poor regions and classes. He or she might be pro-
rural, providing rural areas with more resources. Thus there could be
a tendency toward reducing interregional and rural–urban income
inequality, but this tendency is not institutionally secured. One of the
reasons why Japan has succeeded in reducing interregional and rural–
urban income inequality during the high-growth period lies in its
political structure. The late Prime Minister Kakuei Tanaka, who was a
representative from a poor area in Niigata prefecture, is well known to
have channeled fiscal resources from the central budget to his electorate
in the form of public investment spending. It might be difficult to have
such representatives in China who are keen for development solely in
their own regions for some political objectives of their own.
China has a large “parliament,” called the National People’s Congress,
with as many as three thousand representatives, including those from
31 provinces, special cities, and autonomous regions. But the provincial
representatives do not represent the interests of their own “electorates.”
What is more, there is nobody in this congress who represents the inter-
ests of rural people, and no strong organization that can unite peasants
and reflect their interests, like nokyo (agricultural cooperatives) in Japan.
There has never been any representative, leader, activist, or organizer in
Chinese contemporary history who tries to act for the interests of peas-
ants at the national level. Astonishingly enough, the voting rights of
Chinese peasants in the election of the People’s Congress at local levels
are only a quarter of what urban residents have.6 The election law has
discriminated straightforwardly against peasants’ rights, even though
elections themselves are not necessarily regarded as an effective mecha-
nism for representing and expressing the interests of voters.
The rural–urban divide is certainly linked to the level of economic
development. When rural households become rich enough to earn the
same amount of income as urban ones do, they could then buy and hold
the same level of electric appliances. When income disparities between
rural and urban areas disappear, life expectancy between the two groups
of population will be almost identical. But such a divide is not necessarily
determined by the income level alone. We have to take into account the
importance of institutional arrangements as well as government policies
and political dynamics in shaping income distribution.
For instance, the increase in life expectancy of Japanese rural people
is clearly related to the implementation in 1961 of universal coverage
through a health insurance system that covers the entire population. In

1961, there were still significant differences in average income between
the two groups as shown in Figure 8.2. Under this system, all citizens,
including rural people, paying insurance premiums, can enjoy the same
medical treatment no matter where they live.7 In China, on the other
hand, the government has not set up such an insurance system as the
universal coverage in Japan. Even the new cooperative medical care
system for the rural population is not compulsory, to the extent that
there are many peasants who cannot receive benefit from this service,
let alone high-quality medical treatment at facilities seen in the cities.
Another background to the persistence of the rural–urban divide in
China is limited participation by peasants in village management. As
Shuguang Zhang and Nong Zhao found in their study, Chinese peasants
lack the real right of decision-making or true autonomy in village affairs,
not only during the people’s commune period but even today (Zhang
and Zhao 2005). The so-called “villagers’ autonomy (cunmin zizhi)” is
limited and restricted in reality. They point out that even if villagers
can elect their village head, his or her fiscal right is not determined by
villagers themselves but the government above. In other words, the
government does not see village committees as autonomous organiza-
tions, but as sort of governmental bodies existing just to convey govern-
ment policies to the village level.
Closely related with the lack of autonomy is the lack of unambig-
uous and institutionally protected proprietorship in rural areas. Land as
the most important property for peasants is nominally owned by their
village, which is said to be a “collective” unit. This ownership is quite
vague in nature. Consequently, their land can be sold out to a public or
private estate development company by the village head, irrespective of
whether villagers, that is, collective owners, oppose the transaction.
This is not the case in Japan, where land is privately owned in prin-
ciple. Private land with legally established ownership enables peasants
to have strong bargaining power when they sell land to the government
or other economic organizations such as private estate developers, as
land is generally precious due to limited supply.Chinese peasants are so
weak vis-à-vis the state, not only economically but also politically, that
they have nothing in hand to countervail against the strong state.
6 Concluding remarks
The above analysis has allowed us to conclude that China has had an
inherent mechanism to create and maintain the serious rural–urban
divide. The economy is certainly approaching the economic turning

point in the Lewisian sense, though it has not arrived at the point yet.
After it arrives at that point in the future, will the persistent rural–urban
divide disappear at once, or disappear gradually? At least the economic
divide will have been phased out, as the income levels of both sectors
will converge as was the case with Japan during the 1960s, resulting
in the gaps in living conditions and life expectancy being closed up
between rural and urban sectors.
However, political, social, as well as psychological divides may remain
even after the turning point, as long as the present political and social
institutions remain unchanged.8 Alternatively, if the government decides
to abolish the current household registration system, which reinforces
this divide, and if peasants can be treated equal to urban residents in
various spheres of social life, for example, in access to the same social
welfare as urban residents, then they will come to be integrated with city
dwellers and the deep social chasm dividing China into the two “socie-
ties” will be reduced and eventually eliminated.
Notes
1. In literature in English, they are usually called “migrant workers.” However,
I prefer “peasant workers” to “migrant workers,” because they are peasants,
rather than ordinary migrants, defined by the hukou (registration) system, as
will be discussed later.
2. Ross Garnaut and Yiping Huang give us several other explanations of this
paradox – for example, lack of a nationwide efficient network for labor
supply and demand. See Garnaut and Huang (2006).
3. The subsistence wage is derived from the average annual wage of township
and village enterprise workers. Needless to say, this ratio does not exactly
measure the volume of surplus labor, but it can be a proxy for that amount.
4. In an extended meeting of the Chinese People’s Political Consultative
Conference (CPPCC, Zhengzhi Xieshang Huiyi) held in 1953, Mao accused
Liang Shuming, a famous Confucian and founder of the “Rural Construction
Movement” in the 1930’s, of opposing the general line. Liang had criticized
the pro-urban government policies, saying that “Workers are in heaven,
while peasants are in hell.”
5. Domestic retail prices of rice were not liberalized until 1972 in Japan. The
rice prices during the high-growth period were nominally determined by a
governmental committee, called the Rice Price Council (beika shingikai), but
actually by political pressures from those Diet members, particularly in the
LDP.
6. Previously, the value of votes by peasants was only one eighth of that by
urban residents in terms of the ratio of the number of voters in an electorate
and the number of representatives they elect.
7. While the public social insurance system started in post-war Japan before
1961, about one third of the Japanese population were not covered by any
health insurance when economic growth began in 1955.
8. The Chinese government announced openly the revision, in the near future,
of the present unreasonable election law, but did not take specific steps
to alter the registration system. However, an experiment is proceeding to
revise that system in some localities, for example in Chengdu City, Sichuan
Province.
9
The Forgotten Sector: Institutions,
Market Linkages, and Concurrent
Growth in Rural China and Japan
Jason Young
1 Introduction
The rapid economic growth of China has occurred in tandem with

massive urbanization and labor transfer to urban industries. Urban areas
have been the primary growth arena through the creation of highly
profitable secondary and tertiary employment opportunities, many
involved in export-led development activities. Consequently, the rural
sector is primarily seen as a source of labor or completely forgotten in
the analysis.
This is an unfortunate oversight, considering studies of Japan’s long
century of economic development clearly show the development
of rural areas and the agricultural sector are a crucial component of
overall economic growth in the long term. Such studies suggest long-
term growth requires integrated rural–urban markets and concurrent
growth in order to maintain a balanced growth model. In this sense,
the challenge China now faces is the same as that successfully negoti-
ated by Japan during its long century of development. However, because
contemporary China has inherited a different set of rural institutions
from Japan, and ones that divide rather than integrate rural and urban
economies, Chinese policymakers face a different set of developmental
challenges.
Japanese agricultural and rural development is an important compar-
ison for China because Japan has successfully transformed its economy
from a traditional East Asian economic system to a highly developed
and successful modern economy, and, at the same time, maintained
many small family-based farms. The Japanese case shows this is possible
when rural areas are integrated into the urban economy through insti-
tutional arrangements that allow interdependency, market linkages, and
192
The Forgotten Sector 193
concurrent growth. To achieve this, Japan has consistently utilized a

liberal system of land ownership, agricultural markets, and freedom of
migration.
The Chinese case in comparison is of a different historical era and
Chinese rural institutions have traveled a very different path. The size of
China’s rural population, the ongoing non-market subsistence function
of the rural sector, and most importantly the inheritance of command
economy institutions make the challenge of modernizing the agricultural
sector and developing rural China through concurrent growth signifi-
cantly different. Rural institutions have developed a “socialist-capitalist
hybridity” where markets are restrained by the institutional division of
rural and urban areas. This not only institutionalizes underdevelopment
in rural areas but also threatens overall economic growth. As such, while
lessons gleaned from studies of the role agriculture played in the overall
economic growth of Japan speak directly to China’s current challenges,
the application of those lessons will require innovative thinking from
Chinese policymakers.
This chapter compares how agriculture and rural areas contribute
to the overall economic growth process in Japan and China. The first
section provides a theoretical account of what role agriculture and rural
areas play in economic development, highlighting the most salient
insights for China and Japan. These insights are then used to compare
Japan and China’s experiences over four broad themes: relative decline
of agriculture and the rural economy; labor flows to the urban sector;
interdependency, concurrent growth and market linkages; and institu-
tional arrangements underpinning concurrent growth. While historical
and demographic conditions are found to differ, this chapter argues the
major difference between what role agriculture and rural areas play in
the overall growth of Japan and China is the institutional division of
rural and urban economies in China due to separate land tenure and
residency systems. The Japanese case shows integration of rural–urban
institutions is necessary for China to maintain long-term balanced
growth.
2 How does agriculture contribute to economic growth?
Early in the postwar years, models of economic growth almost exclu-

sively focused on the modern industrial sector. Rural areas and the agri-
cultural sector were viewed as “traditional” and “backward” and largely
ignored. This continued with the development of dual sector models,
which viewed agriculture as the source of labor and agricultural product
194 Jason Young
as needed for development of the modern sector. In the 1970s, a major

revision took place as scholars began to view development of agriculture
and rural areas as crucial to overall economic growth and interdepend-
ency between the agricultural and industrial sectors was identified.
In the 1980s, the failures of plan economies further underscored
the importance of markets to the development process and there was
a growing realization that socialist planning and exploitation of agri-
cultural excess to promote urban development stunted both long-term
rural and overall growth. At the same time scholars began to question a
purely market-based approach arguing it could not account for impor-
tant developmental functions played by agriculture and the rural sector
during transitional development stages. The focus shifted to the institu-
tional arrangements underpinning development.
Early growth models largely overlooked a role for agriculture.
Economic growth was viewed as a linear movement from “traditional” or
“premodern” economic arrangements to “modern” economic arrange-
ments. W. W. Rostow, for example, argued that a “traditional society”
was one where “a ceiling existed on the level of attainable output per
head. This ceiling resulted from the fact that the potentialities which flow
from modern science and technology were either not available or not
regularly and systematically applied” (Rostow 1960: 4). These limitations
required a high devotion of resources and labor to agriculture as reflected
in the politics, social, and economic structure of the “premodern” world.
Rostow’s “traditional society” represented the first stage of his five-stage
theory of economic development, with each stage moving further away
and prioritizing less the role of agriculture and the rural economy in
economic development. Models of economic growth such as this ignored
the role that agriculture and rural areas play in overall growth.
In the early 1960s, Bruce F. Johnston and John W. Mellor put forward
the first attempt to analyze systematically the role of agriculture in
economic development (Johnston and Mellor 1961). They identify and
critique what they describe as a false dichotomy of agriculture versus
industrial development and argue agriculture provides labor and capital
for industrial development as well as agricultural product for increasing
urban demand and export earnings allowing imports. They also iden-
tify three phases: development of agricultural preconditions; expansion
of agricultural production through technological innovations (labor-
intensive and capital saving); and expansion of agricultural production
through capital-intensive, labor-saving techniques.
The land tenure system is identified as crucial to ensuring rural areas
operate under institutional conditions suitable for productivity gains
during the initial stages of development. This is seen as a precondition

for productivity gains and the move through to the second phase of
development. Johnston and Mellor view development as a one-way
rural–urban flow: “rural welfare as well as over-all economic growth
demand a transformation of a country’s economic structure, involving
relative decline of the agricultural sector, and a net flow of capital and
other resources from agriculture to the industrial sector of the economy”
(Johnston and Mellor 1961: 590). The necessary condition for raising
agricultural wages to the level of other sectors is the reduction in the
size of the farm labor force. Insufficient movement out of the agricul-
tural sector will lead to or continue excessively small farms and serious
underemployment of labor.
This view reflects the influence of W. Arthur Lewis who conceptual-
ized development in economies with large rural populations as a process
of transferring “surplus labor” from the agricultural sector to productive
urban industries (Lewis 1954). Lewis argued development entails the
transfer of labor to urban industry until the surplus is exhausted at which
point wages increase in urban and rural areas due to labor scarcity (Lewis
1958). This point is called the Lewis turning point.1 In the mid-1960s, it
was argued that a similar “turning point” can be found in the transition
from agriculture-dependence to a more balanced economy when the
absolute size of the agricultural labor force begins to decline and new
labor-saving techniques are introduced (Cownie 1965; cited in Ohkawa
and Johnston 1970). These dual-sector models of economic growth have
had a lasting impact on how the agricultural sector and rural economy is
treated and remain instructive for understanding development in China
and Japan.
However, in the 1970s, this assessment came under sustained
attack. Erik Thorbecke argued in his The Role of Agriculture in Economic
Development (Thorbecke 1970) that agriculture was viewed as a passive
partner in the development process, but it should be viewed as an active
and coequal partner with the industrial sector because “the functions
which the agricultural and industrial sectors must perform in order for
growth to occur are totally interdependent” (Thorbecke 1970: 4). The
recognition of active interdependence was seen as a large step forward
and opened the way for viewing agriculturalists, farmers, and rural
people as an integral part of the wider economy. Moreover, this work
introduced a more market-based approach. Instead of viewing agricul-
ture as merely a source of labor and capital, the focus shifted to studying
the markets that interlink urban and rural economies through labor
flows, consumption, savings, and investment.
196 Jason Young
C. P. Timmer argues that the work initiated by Thorbecke and his

colleagues opened up an era of thinking in the 1970s and 1980s that
sought a market-oriented balance between the agricultural and industrial
sectors (Timmer 1992). This work explicitly rejected the previously held
view that, in order to promote economic growth in the modern sector,
resources should be extracted from the agricultural sector. Timmer’s
paper argues that this market-oriented focus on the linkages between
the agricultural and nonagricultural sectors has done much to readdress
the urban bias of growth models, but has not gone far enough. Timmer
contends “sensitive interventions” by government are also required
if agriculture is to play its optimal role stimulating economic growth
because a set of important links between agriculture and nonagriculture
“are not well mediated by market forces.”
Timmer identifies three areas that require sensitive interventions by
government. The first is in the area of nonmarket contributions of agri-
culture to economic growth, such as the impact of food price stability
on investment decisions, contribution of agricultural growth to growth
in total factor productivity for the entire economy, and government
learning of their role in the development process. Second, agriculture
has an important role to play in alleviating poverty. Third, agriculture
has an important environmental protection role. These “sensitive inter-
ventions” are particularly important considering the challenges China
currently faces.
Strategies for agricultural development that rely solely on market

forces perform much better than strategies that systematically displace
the market. But to ignore the important non-market contributions of
agriculture is to undervalue significantly the sector’s role in economic
development. (Timmer 1992: 22)
Timmer’s insight into the role of agriculture and the rural sector in overall
economic growth has been instrumental for institutionalist studies. For
example, Ha-Joon Chang’s work with the United Nations rejects purely
theoretical accounts that only prioritize marketization of agriculture
and the rural economy, and argues that “a range of policies and institu-
tions have produced positive outcomes for agricultural development,”
suggesting a pragmatic approach that focuses on institutional innova-
tion is needed (FAO 2009). Chang argues, “Institutional economists
need to pay more attention to the real world, both of the present and
historical” (Chang 2011: 22) to understand both agricultural develop-
ment and the role rural areas play in overall economic growth. Markets
are crucial for growth but a role for the state is evident in the early stages
of development through “sensitive interventions.” The lessons from the
command economies show interventions need to be both “sensitive”
and minimal in order to ensure markets that link rural and urban areas
develop, allowing concurrent growth and structural transformation of
the economy.
3 Agriculture and the rural economy in China and Japan
Using these insights, distinctions between Japan and China can be

made. First, both Japan and China have experienced a relative economic
decline of agriculture, with Chinese agriculture currently having the
same share of overall GDP as Japan did in the early 1960s. Secondly,
labor transfer has been significant for urban growth in both countries.
Japan reached the Lewis turning point sometime in the early 1960s.
While China’s growth and urbanization rates have proceeded rapidly,
the Lewis turning point has yet to occur.
Thirdly, in China there is an ongoing division of the rural and urban
economies and even a growth of the rural–urban economic divide. Post-
1960s Japan on the other hand was characterized by rural–urban inter-
dependency, concurrent growth, and market linkages. Finally, these
linkages were maintained in Japan through secure land tenure and a
uniform system that promoted public and private investment in rural
development and ultimately balanced overall growth. But in China,
markets that interlink urban and rural economies are obstructed and an
urban growth bias is evident through institutional dualism in the land
tenure and residency systems.
3.1 Relative decline of agriculture and the rural economy

As Rostow (1960) and Johnston and Mellor (1961) argue, modern
economic growth occurs through a relative economic decline of the
agricultural and rural sector. This is not an absolute decline in rural and
agricultural productivity but a relative decline compared to the rapid
growth in urban industries and services. This has occurred in both China
and Japan where continual advances in the rural economy are hidden
by growth in urban industries.
For Japan, there has been slow relative economic decline, especially
from the mid-1960s when agriculture already accounted for less than
10 percent of total GDP. The area of cultivated land in Japan has shrunk
consistently since the 1960s. For China, relative economic decline from
a 30 percent to a 10 percent share of GDP has occurred in less than
198 Jason Young
30 years and the level of arable land has already hit the state’s “red line.”
Based on Japan’s experience, relative economic decline will continue for
some time but is likely to slow in the coming years.
The area of cultivated land in Japan grew from a total of just over
5 million hectares in 1904 to 6 million hectares in 1921. It fluctuated
around this number for the next 40 years. Then from 1961 to 2004,
the area of cultivated land dropped 1.37 million hectares, an average
of over 30,000 hectares per annum (SBJ 2012). China’s arable land is
also shrinking. From 1997 to 2009, China lost 8.2 million hectares of
arable land. This has motivated policymakers to set a “red line” to “guar-
antee” China’s arable land does not drop below 120 million hectares. By
2010, China was already close to this number with only 121.73 million
hectares of arable land remaining (Xinhua 2010: October 18).
The relative decline of agriculture means much agricultural land is
transferred to residential or urban industry use. This is understandable
considering the number of people migrating to the cities and the impor-
tance of urban industries for development, but it also creates major
socioeconomic upheaval and decreases the vitality of rural industries
as well as removing a traditional source of subsistence for part of the
population. As will be discussed in the final section, the institutions
underpinning land rights are important during this process to ensure
rural people are properly compensated for land loss.
Figure 9.1 shows that in both the Japanese and Chinese cases agri-
culture has declined as a proportion of the nation’s gross domestic
product. The statistics are limited in the sense that for Japan it is neces-
sary to go back to the start of the Meiji Restoration (1868–1912) for
an idea of the rate of relative decline. However, in the 1870s, agricul-
ture employed 77 percent of all labor (Borton 1955), suggesting the
proportion of the nation’s GDP from agriculture would have been at
least 30 percent. Kazushi Ohkawa and Henry Rosovsky calculate the
real net output by industrial sectors and find the primary sector share
to be above 50 percent from 1882 to 1897, maintaining a more than
40 percent share until 1912 and then sitting in the low 30s in the war
years before hitting a low of between 15 and 20 percent in the 1930s
and early 40s (Ohkawa and Rosovsky 1960).
For China, a degree of urbanization occurred in the early twentieth
century, but it later reversed, with rapid urbanization only beginning in
the late 1970s as the long-term trend of relative agricultural economic
decline became apparent. In both cases, modern economic growth is
characterized by a long-term relative decline in agriculture. Today, the
structural makeup of the Chinese economy is similar to Japan’s in the
40
35
30
25
20
15
10
0
1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007
Percentage share of GDP contributed by agriculture, forestry and fishery in Japan
Percentage share of GDP contributed by Primary Sector in China
Figure 9.1 Relative decline of agriculture in China and Japan

Source: SBJ (2012) and NBS (2008: 33).
1960s, suggesting that there is an ongoing process of structural adjust-

ment occurring. This is complicated by the ongoing role of agriculture
as a means of subsistence and employment.
3.2 Labor flows to the urban sector

Both the Japan and China cases illustrate the overall process of urban-
ization in a developing country. For Japan, this occurred over a long
century and without a major population explosion. Labor transfer from
the 1950s in particular was a major stimulus for urban growth. For
China, an early population explosion (1950s–70s) preceded the urbani-
zation process. Since stringent controls on urbanization were relaxed in
the 1980s as economic growth began to take off, Chinese urbanization
patterns have followed the Japanese model.
However, it is likely that China’s urbanization patterns will differ
as many agricultural workers are leaving agricultural employment but
failing to be integrated into urban society even when engaged in nona-
gricultural employment. A comparison of urbanization and agricultural
employment trends suggests China’s Lewis transition is roughly 60 years
behind that which occurred in Japan.
200 Jason Young
140
120
100
80
60
40
20
0
1898
1898
1908
1913
1918
1920
1947
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
1940
1925
1930
1935
Total population Shi (urban) Gun (rural)
Figure 9.2 Japan total,urban and rural population (1898–2005)

Note: Unit: millions.
Source: SBJ (2012).
Figure 9.2 shows the long century of Japanese urbanization. The

overall trend is clear. Japan’s population consistently grew at a steady
rate but differed widely for rural and urban populations. The rural popu-
lation hit its peak in 1950, when 53 million people lived in rural Japan
and only 31 million lived in urban Japan. By 1955, this was reversed
with 51 million urban and 40 million rural. By 2005, the rural popula-
tion had dropped to 18 million, a real decrease of 35 million, and the
urban population had grown to 110 million, a real increase over the
same period of 79 million. This trend was overall toward greater urbani-
zation even with sustained population growth over the long century.
Figure 9.3 shows that since the mid-1990s the absolute size of China’s
rural population has begun to shrink. The rural population reached a high
of 859 million in 1995 and dropped to 674 million in 2010, an absolute
loss of 185 million. Over the same 15-year period, the urban population
nearly doubled to 314 million (352 to 666 million). This suggests China is
now in the midst of a period of rapid urbanization similar to that of Japan
in the 1950s, characterized by ongoing real decreases in the size of the
rural population and increases in the urban population. Figure 9.4 shows
this trend and the 60-year lag between China and Japan.
1600
1400
1200
1000
800
600
400
200
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Total population Rural Urban
Figure 9.3 China total, urban and rural population (1950–2010)

Note: Unit: millions.
Source: NBS (2010, 2011).
100
90
80
70
60
50
40
30
20
10
0
1898
1903
1908
1913
1918
1920
1925
1930
1935
1940
1947
50/52
55/57
60/62
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Japan percentage of population rural China percentage of population rural
Figure 9.4 Percentage of rural population in China and Japan (1898–2010)

Source: NBS (2008,2 2011) and SBJ (2012).
China’s rate of urbanization in 1952 was the same as that of Japan in

1898. By 1980, 80 percent of the population of China still lived in rural
areas. This is similar to Japan in 1920. The 55 years from 1920 to 1975
saw the percentage of the population living and working in rural Japan
drop from 82 percent to 24 percent. Urbanization began in China in the
1980s dropping from 80 percent to 50 percent rural in 30 years. Even
202 Jason Young
100
80
60
40
20
0
50/52
1872
1820
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2009
Percentage of tatal employed in agriculture and forestry in Japan
Percentage of total employed in primary industry in China
Figure 9.5 Percentage of total employed in agriculture

Source: SBJ (2012), NBS (2008: 18) and Borton (1955)3.
though this is happening 60 years after Japan began rapid urbanization

and a number of economic and in particular technological factors are
now very different, there is remarkable similarity to the Japanese experi-
ence. China’s rate of urbanization is now roughly where Japan’s was in
the 1950s. If this trend continues, the next 20 to 30 years will see the
rural population in China continue to drop and likely plateau at just
over 20 percent. This would mean the movement of 300 to 400 million
Chinese citizens into urban living.
In agricultural employment, China today is comparable with Japan
in the 1950s, with over 35 percent of total employed involved in the
primary sector. In 1872, approximately 77 percent of employed persons
in Japan were agricultural workers. By 1920, this had dropped to
50 percent (Borton 1955). Today less than 40 percent of total employed
are engaged in the primary industry in China, similar to the situation
in Japan in the 1950s. Again, China’s urbanization is running roughly
60 years behind Japan’s, but in this case China is proceeding more
rapidly. It took 60 years for Japan’s agricultural workforce to drop from
80 percent of total employed to 40 percent. This has happened in China
in less than 40 years.
However, even though rural people are moving out of agricultural
industries, many are still living and working in rural areas. In 1952,
88 percent of employed persons were found in rural areas. This dropped

to 75 percent in 1980 and 62 percent in 2007 (NBS 2008: 17), suggesting
that China’s urbanization patterns are not just movement of people to
urban areas but in many cases a movement of people out of agriculture
but remaining in rural areas. “Urbanization (chengzhenhua) from below”
is a policy that encourages rural migrants to “leave the land but not
the village (litu bu lixiang)” or “leave the village but not enter the city
(lixiang bu jincheng).” This makes the goal of concurrent growth difficult
to achieve.
3.3 Interdependency, concurrent growth, and market linkages

“The ‘concurrent’ growth of agriculture and industry is a particular
requirement for countries characterized by economic backwardness.
For these late-developing countries both sectors must grow side by
side” (Ohkawa and Johnston 1970: 291). The relative economic decline
of agriculture and the transfer of labor to the urban sector mask the
ongoing importance of agriculture and the rural economy to overall
economic growth.
This is especially important as the Lewis turning point is reached and
wages and incomes rise in both urban and rural areas due to a constric-
tion of labor supply. This is a point that Japan reached in the 1960s and
that China is rapidly approaching. Key to successful structural transfor-
mation of the economy for Japan was a process of interdependent and
concurrent growth in rural and urban sectors, enabled by markets that
interlink urban and rural economies and allow technology and capital
transfer. For China, the stalling of agricultural reform and relative growth
since the mid-1980s suggests a reversal of the unidirectional rural–urban
capital flows of the initial stages of development has yet to occur.
Seen in the Japanese experience, capital flows from the rural to the
urban sector in the initial stages of development but then changes direc-
tion. Initially the savings rate in rural areas cannot be absorbed into agri-
culture and is shifted to the urban sector by the banking system where
the rapid growth of industry gives a better rate of return.
Likewise, taxation of agriculture and government subsidization of
nonagricultural industries shifts capital out of the agricultural sector
and into the rapidly expanding urban sector. Ohkawa and Rosovsky’s
study of the role of agriculture in the initial stages of Japanese develop-
ment, from the Meiji Restoration to World War II, found the land tax
was one such vehicle for shifting capital into the nonagricultural sector
(see Figure 9.6). Likewise, less than 1 percent of government subsidies
204 Jason Young
100
90
80
70
60
50
40
30
20
10
0
1888–92 1893–7 1898–02 1903–7 1908–12 1913–17 1918–22 1923–7 1928–32 1933–7
Income tax Land tax Business tax Customs duty
Figure 9.6 Percentage of each type of tax to total tax intake in Japan (1888–1937)
Source: Ohkawa and Rosovsky (1960: 26).
went to the agricultural sector before the 1930s (Ohkawa and Rosovsky
1960).
However, capital flows out of the agricultural sector changed direction
prior to the Lewis turning point. Figure 9.6 also shows urban taxes became
more significant as the land tax dwindled as a proportion of the overall
tax take, especially from the 1920s. By 1941, 20 percent of government
subsidies went to the agricultural sector and from 1933 to 1937 only
10 percent of the total tax rate came from the land tax (ibid.).
“Until the 1920s practically no subsidies (although plenty of other
help) were allotted to agriculture; after all, it was one of the major
sources of surplus in the economy. But then income flow seems to be
reversed as agriculture begins to get some financial support from the
government. We believe that the changing distribution of subsidies is
symptomatic of a structural change in the traditional capital flow. In a
sense the economy had turned a full circle. In the early period of devel-
opment there was a net flow of capital from the rural to urban areas. We
think that this flow may have been reversed sometime after World War
I” (Ohkawa and Rosovsky 1960: 63).
Structural transformation of the Japanese economy therefore begets a
reversal of the flow of capital once the initial stages of development are
met prior to the Lewis turning point. In Japan, the postwar years saw an
increased role of technology that led to a boom in agricultural output
(Ohkawa and Johnston 1970) and the development of modern agri-

cultural practices. The agricultural sector developed while maintaining
many small family-based farms.
The cooperative movement developed to deal with problems associ-
ated with small-scale farming with important lessons for understanding
the role of household farming in rural development in other parts of
Asia (Prakash 2000). Aside from cooperatives, Japanese agriculture also
commercialized along a number of lines. Long-term private invest-
ment, both rural and urban, government investment and policies that
supported continual growth in the agricultural sector eventually led to
an increase in the income and consumption levels of rural people and
balanced domestic growth.
Farm households in Japan now possess roughly the same percentage
of major durable goods as non-farm households. For example, in 1964
only 15 percent of farm households had a refrigerator compared to
48 percent of non-farm households, but by 1974 the gap had closed to
97 percent for farm and non-farm households. Similarly, only 9 percent
of farm households possessed a washing machine in 1960 compared to
41 percent of non-farm households, but by 1970 this had converged to
90 percent and 92percent respectively.
Finally, only 7 percent of farm households possessed a washing
machine in 1964 compared to 35 percent of non-farm households. By
1974, this had converged to 82 percent and 91 percent respectively; by
1984 farm and non-farm households were virtually identical at around
95 percent (SBJ 2012). This shows that from the 1960s rural incomes and
consumption began to converge with non-rural incomes and consump-
tion patterns after both a reversal of capital flows and traversing the
Lewis turning point.
But for China there has as yet not been a comparable development in
the rural economy. In fact, all indicators are that rural areas and agricul-
tural industry remain underinvested. Agricultural workers continue to
earn and consume far less than urban employees and there remains an
unbalanced domestic structure. The China Daily reports the World Bank
estimates that the gini coefficient reached 0.47 in 2009, “higher than
the internationally accepted threshold of 0.4, which indicates income
inequality may threaten social stability” (China Daily 2012: Feburary
29). Data from the National Bureau of Statistics show wages in rural areas
continue to grow but cannot keep up with wage growth in urban areas.
In 1978, the per capita net income of rural households was 134 yuan,
compared to 343 yuan for urban households, roughly 39 percent of the
urban income. By 2006, the per capita net income of rural households
206 Jason Young
was 3,587 yuan compared to 11,760 yuan for urban households, roughly
31 percent of the urban income (NBS 2007).
Total investment in fixed assets in rural areas has grown from 438
billion yuan in 1995 to 3.1 trillion yuan in 2009. But this is still in no
way comparable to levels of investment in urban areas which grew from
1.6 trillion to 19 trillion over the same period. Rural investment has
actually decreased as a share of total investment in fixed assets from
22 percent in 1995 to 14 percent in 2009 (NBS 2010). While rural taxes
were lowered in 2002 through the tax-for-fee reform and then removed
after agricultural tax reform in 2006, the impact of this on local serv-
ices such as medical and educational services has offset possible gains
from a lower tax burden (Kennedy 2007). Local rural government poli-
cies have been established to attract investment in agriculture and rural
areas (Smith 2010), but the private sector and central government have
been slow to respond and rural China remains underinvested.
Overall, these figures show that rural areas are lagging behind devel-
opment in urban China and the urban bias of development has yet to
give way to more balanced growth. The Japanese experience suggests
the structural transformation of the economy can be achieved through
a process of concurrent growth supported by market linkages. A 2008
World Bank report argues that in Japan “income differentials between
sectors narrowed only as a result of migration, which sharply reduced
rural populations; generous agricultural price support programs; and
the increase in off-farm employment opportunities” and suggests that
for China, migration and remittances can also play this role as well as
efforts to advance agricultural productivity, technological advances,
investment, and provision of secure long-term property rights (World
Bank 2008: 17–18).
As China approaches this important development stage, there needs
to be a refocusing of efforts into ensuring that the institutional arrange-
ments underpinning rural–urban interdependent growth are in place.
Officials in China clearly recognize the importance of agricultural and
rural growth and balanced economic development. The 12th Five-Year
Plan (2011–15) puts forward the goal of modernizing the agricultural
industry, improving food security, and developing rural livelihoods
(Xinhua 2011).
This is part of a broad strategy of “economic transformation” to move
away from an unbalanced and unsustainable growth model through
promotion of domestic consumption and investment in neglected
industries and human capital. Comments by Premier Wen Jiabao
during the Government Report in March 2011 reflect these goals and
the new emphasis on economic transformation, a slower, more sustain-

able economic development model, focus on rural economics and agri-
culture, and even the “orderly promotion of rural land management
system reform” (Wen 2011). The final section argues that in order for
China to successfully negotiate this new stage of economic develop-
ment, significant reform of China’s land tenure and residency systems
will be necessary to ensure that markets interlinking rural and urban
economies develop to support concurrent growth and structural trans-
formation of the economy.
4 Institutional arrangements underpinning

concurrent growth
“The social and institutional reforms carried out during the transitional
period gave a strong impetus to the development of agriculture by
striking down feudal restrictions such as those on the sale and cropping
of land and on the choice of occupation. In particular the removal of
the Tokugawa restrictions on the movement of goods and people and
the creation of a unified nation with a ‘national’ economy had a great
influence on farmers’ attitudes towards modernization” (Ohkawa and
Johnston 1970: 290).
As Ohkawa and Johnston note, the institutional arrangements under-
pinning the unification and integration of the rural and urban sectors in
Japan were put in place during the Meiji Restoration. These were strength-
ened in the postwar years with land redistribution and the establishment
of a liberal constitution protecting civic rights. The institutional founda-
tions of the Japanese economy included protection of freedom of migra-
tion and residency, and the right to own land. These arrangements were
unified across the rural–urban divide allowing this divide to be traversed
and eventually nullified through the development process.
This was particularly important after the initial stages of develop-
ment when development of the rural sector became a key to sustaining
overall growth and rebalancing the domestic economy. The analysis
above shows that this is the challenge now facing the Chinese economy.
While the Chinese experience has in many ways mirrored the Japanese
experience in the initial stages of development, there remain concerns
the institutional arrangements currently in place in rural China could
prevent this crucial rebalancing process from occurring.
As shown in the previous section, the income levels of rural people, the
levels of investment in rural areas, and the modernization of agricultural
practices has yet to trend toward the post-initial stages of development
208 Jason Young
in Japan. The institutions of rural China are still arranged for an early
industrialization strategy where agriculture acts as a holding area for
“surplus labor” which is slowly transferred to urban areas, in China’s
case, through a managed process. To meet the challenges of the initial
stages of development, the government has employed what Lu Xueyi
of the Chinese Academy of Social Sciences describes as “rural–urban
divided governance – one country two policies” (Lu 2002). To under-
stand how this “divided governance” came about, it is necessary to look
at the 60-year evolution of China’s rural institutions.
In the postwar years, China embarked on collectivization of the entire
rural economy as a means of breaking traditional structures, harnessing the
power of the rural population under state control, limiting the impact of
migration on developing urban industries, and shifting resources to urban
industry. The late 1950s to the late 1970s witnessed a massive experiment
in communal farming and rural production. By the late 1970s and early
1980s, the collectives had begun dismantling and a hybrid economy of
market and planning formed allowing urbanization to take off. Agriculture
experienced productivity gains (Lin 1992) and the rural economy flour-
ished. But the rapid growth in the urban sector meant overall there was
still a relative decline of the agricultural sector as shown above.
At the same time the rural economy maintained its traditional devel-
opment function, acting as a means of subsistence for the hundreds of
millions of rural residents unable to obtain productive work in nonagri-
cultural industries. Today, as China reaches an important turning point
in the structural makeup of the domestic economy, policymakers are
navigating a fine line between the need to modernize and develop agri-
cultural processes and the desire to maintain traditional socialist and,
in some aspects, feudal nonmarket functions of the rural sector. This
developmental tension is most apparent in changes in the land tenure
and residency systems.
The origins of institutional dualism lie in the early decisions of the
socialist state to establish a planned economy in which rural and urban
economies were not only separate but also organized along different
lines. The household residency system (hukou/huji zhidu) was designed
to maintain this division. In 1950, the Minister of Public Security, Luo
Ruiqing, argued that the ultimate goal of the hukou system was to estab-
lish a nationalized system in which rural China acted as a “population
sink” to protect the “bearing capacity” of urban areas from rural to urban
migration (Ma 2003).
As the command economy was established in the 1950s, the state put
increasing curbs on migration and residency (Lu 2002), culminating in
the infamous Hukou Registration Regulation in 1958 (NPC 1958). This

system assigned roughly 80 percent of the population “agricultural
hukou” and the remainder “non-agricultural hukou,” and imposed barriers
to free migration and changes in hukou status. Migration “outside of the
plan” was extremely limited due to controls on access to the necessi-
ties of life in urban areas (food, oils, health, education, employment,
and housing), something Dorothy Solinger calls the “urban rationing
regime” (Solinger 1999). These measures meant rural residents were
confined to rural areas, except through very limited government trans-
fers. This prevented a Lewis transition right up until the late 1970s.
Similarly, the establishment of the new government in the 1950s saw
massive changes in the land tenure system. Land reform in the early
1950s redistributed land in roughly equal lots to all households in
rural China. This was followed by a collectivization movement, which
shifted ownership of land to the collective, and through the creation
of rural people’s communes. This also shifted use and management
rights to collective organization under the people’s communes, produc-
tion brigades, and production teams (CPC 1962). Urban land remained
owned by the state and managed by government and state-owned enter-
prises. This institutional division remains today even after state land
management has seen the development of a vibrant land-lease market.
Table 9.1 summarizes the origins of rural–urban institutional division in
the land and residency systems.
In the late 1970s, when China opened to the world and market-oriented
reforms were introduced, the institutional foundations of rural–urban
Table 9.1 Origins of Chinese institutional dualism
Period The land tenure system Residency

Mao Era Land reform followed Rural & urban hukou and
Division(1950s–80s) by collectivization and preventions on mobility.
communes. State and
collective land.
Market-oriented reforms HCRS, contracting out Labor mobility and
without fully collective management temporary permits.
dismantling Maoist and use rights. Urban land
institutions(1980s on) lease market develops.
Contemporary system Ambiguous ownership Division maintained but
and lease rights in rural weakened. Hukou still
areas. Separate systems linked to local services.
maintained. Limited hukou transfer.
210 Jason Young
dualism were only partially removed. Limits on labor mobility were

reduced through the introduction of temporary permits allowing migra-
tion for visiting and employment outside one’s place of permanent resi-
dency (MPS 1985), but a strict hukou transfer system remained. A series
of central and local government residency schemes shaped the long-
term migration choices of internal migrants by lowering hukou transfer
criteria into areas of low population density and providing local officials
in highly sought-after areas the tools to select migrants with skills, educa-
tion, or finances deemed to be in the interests of local development.
These policies have led to a large “temporary population” of migrants
living and working outside of their permanent hukou zone with only
temporary residency rights. The number has grown from roughly
20 million in the early 1980s to 261 million people living outside of their
permanent household registration for more than six months in 2010.
From 2000 to 2010, the number grew by an astonishing 117 million
(NBS 2011). Moreover, even with significant reforms of the hukou system,
China has not abolished the system and varying access to social services
between migrants and local hukou holders remains evident (Chan and
Buckingham 2008).
Scholars predict that if nothing is done to reform the hukou system,
the number of residents without local residency status will grow to 300
to 400 million in the next decade (Chan 2011). Institutional division
and exclusion based on a migrant’s status at birth remains a hallmark of
the residency system (Wang 2005). The system impedes integration of
rural residents into rural areas and dissuades urban hukou holders from
investing in rural areas.
Likewise, the rural land tenure system was radically reformed in the early
1980s, but the division of rural and urban land rights was maintained. The
introduction of the “household contract responsibility system” privatized
use and management of rural land without privatizing ownership rights.
The contracting of land to rural households through short-term leases
(originally 15 years, but extended to 30 years) was established in light of
the failures of the communes and as a means of ensuring all rural house-
holds would have available a basic means of survival. But increasingly this
hybrid reform is impeding the development process.
First, as Peter Ho argues, the ambiguity of the system prohibits long-
term investment and the development of modern agricultural practices
(Ho 2005), where even the leaseholders are unsure of “who owns the
land” (Ye and Jin 2009). Secondly, even when management rights are
clarified in regulation, there is as yet limited protection of these rights
for rural households (Liu 2009). This impedes local efforts to create a
cooperative movement and puts rural households in a power imbalance

with local government.
Third, the extreme fragmentation and, at times, wasted use of land4
prevents the development of larger-scale and more efficient agricultural
production (Ho 2005). Finally, rural land leases are not as easy to trade
as those in urban areas where the lease is more secure and for a longer
period. This impedes investment in agriculture and local development
and perpetuates the division of rural and urban economies.
Today, as China has reached a new stage of development requiring
a reversal of capital flows and concurrent rural urban growth, integra-
tion of rural and urban systems has become an urgent developmental
task. Lu (2002) argues that establishment of the “two policies” forms
the institutional foundation of what is known in China as the “three
agrarian issues” (inefficient agriculture, backward rural areas, and poor
rural people). Urbanization and the development of domestic markets
and capital flows that cross the rural–urban divide can stimulate rural
development and reorient the economy toward domestic consumption.
Rural–urban integration is a key to this process (Ma 2011).
However, as Fei-ling Wang argues, the rural organizational deficit
perpetuates the urban bias of policymakers and impedes a voice of the
rural areas and stakeholders from having a strong impact on overall poli-
cymaking (F. Wang 2010). This bodes poorly for future policymaking
which at present is dominated by stakeholders in the urban sector. For
China to successively balance the domestic economy and successfully
negotiate the challenges of this new stage of development, economic
transformation will require reforms to dismantle the institutional basis
of rural–urban dualism.
5 Agriculture and the rural economy in

comparative perspective
This chapter has compared the role of agriculture and rural areas in the
economic development of China and Japan. Japan’s long century of
economic development occurred in tandem with major changes in the
agricultural sector. Japan experienced relative decline of agriculture and
transfer of labor to the urban sector until a period of structural transfor-
mation rebalanced the domestic economy and highlighted the signifi-
cance of rural development to overall growth.
The Japanese case shows the importance of concurrent growth, active
interdependency, and market linkages to the development process. The
institutional arrangements in Japan allowed markets to develop that
212 Jason Young
crossed the rural–urban divide, a process crucial for balanced and long-
term growth and development. At the same time, the continuation of
small-scale farming and the growth of agricultural cooperatives show
the traditional East Asian model of agriculture has a place in a modern
economy.
China too is experiencing a relative decline of agriculture and labor
transfer to urban industries. By 2010, these measures were similar to
those of Japan in the 1960s prior to negotiating the Lewis turning point.
However, capital and investment flows are yet to reverse in China as
they did in Japan prior to the Lewis turning point, suggesting there is
some way to go before China is prepared for the structural transforma-
tion of the economy. China’s massive rural population and compressed
urban development is creating massive socioeconomic upheaval in a
short period of time.
This forms the ongoing basis for policymakers to maintain collective
land rights in rural areas and to attempt to manage urbanization and
development through the hukou system. These techniques have clearly not
impeded the initial stages of development but are increasingly problematic
in light of the challenges inherent in rebalancing the domestic economy.
At present, limited reforms in the residency and land tenure systems
suggest China’s rural institutions have some way to go before their tradi-
tional role mediating the development process is removed. The chal-
lenge for policymakers is therefore to integrate the disparate rural and
urban institutions that have functioned as a barrier to the development
of rural–urban market linkages and therefore distorted China’s economic
growth model. To create the conditions for “economic transformation”
and long-term, balanced, and sustainable growth, the land tenure and
residency systems of China’s forgotten sector need to be aligned with
those in the urban sector through a process of rural–urban integration.
Notes
1. Debate over whether China has reached the Lewis turning point is ongoing.
See: Cai (2008). For Japan, see Minami (1968) who concludes Japan reached
the “turning point” somewhere between 1953 and 1960.
2. NBS: 50/52 Japan 1950 and China 1952; 55/57 Japan 1955 and China 1957;
60/62 Japan 1960 and China 1962.
3. Statistics for Japan for 1872 and 1920 from Borton (1955); 50/52 Japan
statistic 1950, China 1952.
4. Agricultural hukou holders who cannot transfer their hukou into urban areas
maintain their land lease even when they no longer farm the land.
10
Beyond Ideological Framing and
Structural Description: Theorizing
Japanese and Chinese Economic
Models
Lei Song and Yanbing Zhang
1 Introduction
Successful stories of modern economic development have been driving

scholarly interests to seek understanding and explanation of their devel-
opment experiences. This is the case with the debate on the Japanese
economic model, along the rise and expansion of the Japanese economy
from the 1950s to the 1980s, and that on the Chinese economic model
with the rapid development of the Chinese economy since the 1980s.
Research and theoretical modeling on the Japanese development experi-
ence established the position of the Japanese economic model in growth
and development economics and international political economy,
particularly in the literature of varieties of capitalism. Theoretical inter-
pretation and modeling on Chinese economic development however
is still in its early stage. Thus there is a lot we can learn from an under-
standing of how the theoretical approaches to the Japanese economic
model evolved over time for our current debate on the Chinese model
of economic development.
This chapter aims to offer an in-depth analysis of the dynamics and
process of theory-building on the Japanese economic model and the
current debate on the Chinese economic model, and argues that key
for the Japanese economic model to have developed into an influential
economic theory lies in our ability to go beyond ideological presump-
tions and influences of the time and complacence with sketchy descrip-
tions of the “structural and organizational features” of the development
213
214 Lei Song and Yanbing Zhang
model, in the initial stage of searching, analyzing, and generalizing of

the Japanese development model. Seen in this light, whether theorizing
of the Chinese economic experience can make useful contributions to
theory-building in growth and development economics and compara-
tive political economy, may also hinge, to some extent, upon our ability
to go beyond prevalent ideological framings of the debate and analysis,
and the “primitive” methods of “structural descriptions” in theorizing
the development experience, which we have already seen in the debate
and research on the Chinese model in recent years.
Choosing to compare Japan with China is not random. There are
important reasons for having Japan as a point of reference in under-
standing the dynamics of researching and modeling the Chinese devel-
opment experience. First, mainstream economics, namely neoclassical
economics, largely reflects the Anglo-Saxon model of economic develop-
ment, represented by the United States. The basic assumptions of main-
stream economics however are largely incompatible with the theoretical
and methodological concerns of the theory of varieties of capitalism. It is
therefore difficult to use the theory-building of the Anglo-Saxon model
for our purpose of comparison. On the other hand, Japan is the second-
largest economy among the “advanced” economies and the economic
theory behind the Japanese economic model differs in many ways from
mainstream economics. Japanese economic development experience is
also a key instance of the varieties of capitalism. Indeed, the rise of the
Japanese economic model is a milestone in the development of varieties
of capitalism.1
Secondly, the German social-market economy model is also funda-
mentally different from the Anglo-Saxon economic model and shares
the same position with the Japanese model among the varieties of capi-
talism. The shaping of the social-market economy theory therefore
could also serve as a main point of reference in analyzing the Chinese
economic model. There are however two dominant traditions in the
literature of varieties of capitalism. One tradition started with a strong
focus on corporatism and gradually evolved into a varieties-of-capitalism
framework. This approach has a clear influence of political science.
The other tradition started from firm theories and then emerged with
varieties-of-capitalism literature. This latter approach is rather close to
general economic theories.
The corporatist approach is usually taken in analyzes of the German
social-market model, highlighting the significance of state-dominated
institutional arrangements for this model. In exploring the Japanese
model, the firm approach is often used, stressing the significance of
Beyond Ideological Framing and Structural Description 215
enterprise-level institutional arrangements. The authors have argued

elsewhere that both state-centered, vertical institutional arrangements
and enterprise-centered, horizontal institutional arrangements are
important in China’s socialist market economy (Song and Sun 2011).
The German social-market model can demonstrate the important role of
state-centric, vertical institutional arrangements, while enterprise-cen-
tered, horizontal institutional arrangements feature more clearly in the
Japanese economic model. Therefore, the theory-building processes of
these two models would be both relevant to the analysis of the Chinese
economic model. However, given the limited space available and the
purpose of this book, we chose the Japanese economic model to do the
comparison. This does not mean we do not see the value of the state-
centered approach. Discussions of theories of the developmental state
later in this chapter will in some way redress this shortcoming.
Thirdly, one difficulty in generalizing national economic development
experiences into models lies in the fact that, while we all theorize the
single dominant form of modern economy, that is, the capitalist market
economy, we ought to be receptive to understanding the economic ration-
alization for the varieties of institutional arrangements among different
national economies. How to balance these two is always a challenge. As
we will show later, theory-building on the Japanese development model
was able to move to an advanced level of economic theory only when
this difficulty was overcome. Transforming from an economic ideology
to an economic theory, the Japanese economic model was finally estab-
lished. In this process of theory-building, we explain Japan through a
Japanese lens in building a theory of market economy. The case of Japan
therefore can be a very useful point of reference for us to see how much
“explaining China through a Chinese lens” there is in theorizing the
Chinese model.2
This chapter will start in Section 2 with a brief review of the state
of research and discussion on the Chinese model of economic devel-
opment. Section 3 investigates the process of theory-building on the
Japanese economic model. Turning the Japanese economic development
experience into an economic theory became possible largely because
research and analysis were able to move beyond ideological framings and
structural descriptions that dominated the early stage of the “research
programme” (Lakatos 2001). Whether the same can happen in the theo-
rizing of the Chinese economic model would therefore possibly deter-
mine the quality of the theory-building. Section 4 provides an analysis
of why the current debates and analyses about the Chinese economic
model are still overshadowed by ideological framings and structural
descriptions, and some suggestions as to how we can move beyond them

toward a real theory of Chinese economic development.
2 The ambiguous “Chinese Model of Economic

Development”
As the notion of “Beijing Consensus” (Ramo 2004) spread around the

world, research, discussion, and debate in and outside China about the
Chinese model has rapidly increased. There are two different ways of
grouping various approaches to the Chinese model into different cate-
gories. In the first, the Chinese model includes the Chinese political
model, the Chinese economic model, the Chinese social model, and
so on (Pan 2009). The Chinese model in this approach therefore incor-
porates major subsystems of the polity: economy, society, politics, and
culture. The second group treats the Chinese cultural model, or Chinese
“ideology” model, as the core of the Chinese model, and the Chinese
political, economic, and social systems as the manifestations of the
cultural traditions. From 2010, works of the second group have gradu-
ally dominated discussions of the Chinese model.
Considering that China’s impressive economic growth has been moti-
vating the discussion, debate, and theory-building of the Chinese model,
it is natural to see that the Chinese economic model is the foundation
of the Chinese model. But, strangely, in contrast to a large amount of
controversial though groundbreaking research on the Chinese political
model and Chinese cultural-ideological model (Want 2007; Zheng 2010;
Qi 2010; Gan 2011), discussions of the Chinese economic model have
been largely marginalized. Views and arguments are often ambiguous.
More importantly, relations between the Chinese economic model
itself, supposedly the core basis of the Chinese model, and the Chinese
political and cultural-ideological system are ambiguous as well.
The value of theory-building on the Chinese economic model relates
closely to our understanding of the broad implications of China’s
development experience. It also relates to much needed theoretical
support for providing practical guidance in continual development in
China. In both theory and development practice, therefore, theory-
building on the Chinese model is significantly important. At the core
of the Chinese model, the discussion of the Chinese economic model
shall be lifted up to a theoretical level. Otherwise there is less value in
generalizing the Chinese model and Chinese development experience
in general.
Anyone who wanted to make contributions to theory-building on the

Chinese economic model would often face two questions. First: Is there
a Chinese economic model? If yes, then a two-part second question
follows: What constitutes the model and what is its internal logic? For
the first question, China’s development experience has already existed.
Whether such experience can be elevated into a model does not prevent
us from discussing this issue. There are two reasons for this. First, China’s
economy is rapidly developing. Even if the Chinese development expe-
rience is not sufficient to inform a Chinese economic model, the pros-
pect of such an experience elevating to an economic model cannot be
completely ignored. Second, generalization of China’s development
experience into an economic model would be useful for us to under-
stand how the transition process and ongoing reform is managed. Seen
in this light, “theorization” of Chinese development experience is not
only possible but practically necessary.
The second question concerns the core of the Chinese economic
model. However, debate and analysis on this so far is largely unsatisfac-
tory. One leading advocate of the Chinese model provides some descrip-
tion of the building blocks of the Chinese model as follows:
China’s economic model consists of four pillars: (1) the state’s control
of land and the individual has only limited use rights of land; (2)
the state owns all the financial and large enterprises as well public
service organizations; (3) a free labor market based on families and
communal medium and small sized enterprises; (4) a free commod-
ity-capital market based on families and medium and small sized
enterprises ... . The Chinese economic model is a unique one. It is
not the Soviet model that produces economy reliant on public prop-
erty ownership. It is not the Anglo-Saxon model either that relies on
private property ownership. Nor is it the Scandinavian social market
economy reliant on high tax and high social welfare. It is certainly not
the state capitalism in German and Japanese history as the Chinese
economy is not dominated by a few large private enterprises. Large
private enterprises are not primary employers of the labor force ... .3
(Pan 2009: 10, 12)
It is fair to say that Pan’s description reflects some of the structural features
of the Chinese economy. This summary description only provides a
starting point for much needed discussion. While debate and discussion
of the Chinese model was pursued initially by political scientists such as
Pan Wei himself, actual research and analysis has been carried out largely
by economists. It is a puzzle however that that affirmative research and

analysis by economists has not produced better understanding and expla-
nations than what political scientists have already suggested.
There are however economists who realize that the Chinese economic
model should be more than just some structural features of the Chinese
economy. Yu Zhang, a leading economist, examines the evolution of our
knowledge of the Chinese economic model, and argues that “attempts
to conceptualize China’s economic model so far centered around five
different perspectives: the fundamental system, economic institutions,
development path, mode of transition, and globalization. Indeed, these
perspectives are closely related.” However, Zhang further points out,
“of these five, the fundamental system, particularly the fundamental
economic system, is the core. ... The fundamental economic system refers
to the ownership arrangements of production materials which deter-
mine all societal relations of production. The Chinese economic model
therefore is the manifestation of the fundamental economic system in
reform, opening and development” (Y. Zhang 2011: 75).
It is evident that there is some similarity between economists and polit-
ical scientists in their approaches to the Chinese economic model. They
both treat structural characteristics of the Chinese economy as the core
of the Chinese economic model. Moreover, both see the important role
of government in this model. Identifying structural characteristics of the
Chinese economy however is only a starting point rather than the end
product of generalizing the Chinese economic model. Analysis of these
structural features cannot substitute an understanding of the institutions
of the Chinese economy and the internal logic of the Chinese economic
model. Moreover, while the role of government in China’s economic devel-
opment is not to be ignored, the model ought to reflect and explain the role
of the enterprise – the real agent in economic growth and development.
Explaining Chinese economic development from the perspective of
the role of government, or state–business relations, has been a domi-
nant approach in the theorizing of Chinese economy. Research on local
corporatism (Oi 1992), Chinese federalism (Qian and Weingast 1997),
and neutral government (He and Yao 2011) have influenced the direc-
tion of the field as well as international scholarship on the Chinese
economy (Boyer 2011). As China’s economic development is closely
related to the process of economic institutional reforms, it is valuable
to examine the role of the state or the state–business relationship. These
research approaches, however, often treat the enterprise as given as a
unit, or a “black box.” Consequently, their work often lacks substance at
the microeconomic level.
Another issue in debates and discussions on the Chinese model is that

a clearly defined relationship among key “elements” of the proposed
Chinese model is lacking. The problem is particularly evident between
China’s economic model and the Chinese cultural-ideological model.
To build the connection between China’s economic model and the
Chinese cultural-ideological model, we must be able to show how
Chinese culture and ideas facilitated economic development since 1949
or 1978. Obviously it is extremely difficult to make the case “since 1949.”
Even making a case for “since 1978” can be a significant challenge.
Indeed, even economists who are highly positive about the economic
growth and development since 1978 are rather cautious on this issue.
What they often emphasize is that China’s economic achievement over
the past decades has seen a revival of Chinese traditional culture. They
have rarely tried to make the case that traditional Chinese culture is a
cause for China’s economic development.5
From the analysis above, we can see two striking features in the
development of the Chinese economic model. First, Chinese economic
development is “modeled” largely in sketchy descriptions of specific
institutional arrangements, or structural features or characteristics of
the organization of Chinese economy. Second, the emergent “model”
carries strong influences of economic ideologies of the time, such as
market versus state, and socialism versus capitalism. It seems the
structural descriptions are unable to lead us to an economic model of
Chinese economic development while the strong ideological influences
are in the way of generalizing China’s development experience into an
economic theory.
Substituting ideologies or structural characteristics of the economic
system for a rigorous economic theory is not unique to China. This often
happens in the early stage of the development of national economic
development models. We can generally see there are two stages in the
development of a national development model: emergence stage and
establishment stage. In the first stage, a national development model is
often related to economic ideologies home and abroad, and emerges in
concrete descriptions of the structural features of the economic system.
Whether such economic ideologies and empirical descriptions can trans-
form into a general economic theory therefore becomes an indicator of
whether such a national development model can be established.
Above criticism of the ambivalence of the Chinese economic model
leads to what this chapter intends to establish. This chapter analyzes
the pattern and methods in building the Chinese economic model
as a national development model. It aims to outline a potential path
of development of the Chinese economic model from an economic

ideology to an economic theory. This chapter makes an argument that
the Chinese economic model is an instance of national development
models and it is often the case that the establishment of a national
development model is contingent upon its transformation from an
economic ideology to an economic theory. Japan can mean many
different things for China. Much has happened in China in terms
of development experience and the model seems to have already
happened in Japan in its century-long earlier experience of modern
economic development, and the creation of the Japanese develop-
ment model.
3 Theory-building of the Japanese economic model
The development of the Japanese economic model experienced two

periods. In the first period, the “Japanese economic model” emerged
with strong ideological influences and was also substantiated with largely
empirical descriptions of the structural characteristics of the Japanese
economy. In the second period, modeling of Japanese economic devel-
opment gradually moved away from ideological influences, and turned
into a general economic theory.
3.1 Shaping of early work on the Japanese economic model

Early efforts in theorizing the Japanese economic model had both
domestic and foreign origins. In Japan, the notion of the Japanese
economic model can be traced back to the debate of “Japanese capi-
talism” before World War II. The Japanese capitalism debate arose
within the wider debate among left-wing academics in the 1930s over
the historical nature and direction of modern Japanese society, an intel-
lectual and political issue since Marxism spread in Japan in the early
twentieth century.
In this larger debate, left-wing academics gathered in two different
factions, the “Koza School” and the “Worker–Farmer School.” Scholars
of the Koza School had the view that Japan at the time was different
from England as described in classical Marxist analysis, since Japan was
still a premodern society then. Consequently, left-wing political parties
should work to finish a democratic revolution before embarking on a
socialist revolution. Scholars of the Worker–Farmer School, however,
believed that Japan had already become a capitalist society after the
Meiji Restoration. Therefore, the challenge for left-wing political parties
was to start a socialist revolution.
The debate is significant for the development of social sciences in

Japan, including theoretical analysis of modern Japanese economy. It
first framed the issue as a problem of universalism versus particularism
in the case of Japan’s modern development. As we will show below,
studies of Japanese economic history then, led by Okazaki Tetsuji, are
an important part of the comparative institutional analysis. Scholars
of Japanese economic history, Okazaki Tetsuji included, were all influ-
enced by the work of Ozuka Hisao in comparative history. Ozuka Hisao’s
comparative history had its origins in the works of the Koza School,
which emphasized diversity in the process of modern development in
Europe, as envisaged in List’s theory of national economy (List 1885).
In the late 1970s and early 1980s, Morishima Michio, one of Japan’s
leading theoretical economists, gave a clear explanation of the meth-
odological requirements for theory-building of the Japanese economic
model. In his view, the British economy was of Protestant capitalism
and the Japanese economy was of Confucian capitalism. The challenge
for Japanese economists, therefore, was to build a “new social science,”
which would be different from the social science of the Anglo-Saxon
countries and which should be based primarily on the Japanese experi-
ence (Morishima 1978: 186–7, 1985).
When Japan moved into its high-speed growth period after World War
II, observers noticed that the Japanese economy showed some unique
characteristics, which clearly differed from those of the American
economy. They see these unique characteristics as evidence of the partic-
ularity of the Japanese economy. This view, however, received strong
attacks from neoclassical economists. In 1970, James Abegglen, head of
the Boston Consulting Company Japan, published a report on strategy
and Japanese firms. In this report he summarizes Japanese firms’ special
organizational structure, financial strategy, marketing, and their rela-
tions with the government as the unique characteristics of the Japanese
economy. In particular, on the basis of the close ties between govern-
ment and business, Abegglen described the organizational structure of
the Japanese economy as “Japan, Inc.”
As US–Japan trade frictions started to come in, the US Department
of Commerce published another report, “Japan’s Government–Business
Relations” in 1972, largely on the base of the government–business rela-
tions part of the Abegglen report. The report argues that a key char-
acteristic of the Japanese economy is the government’s planning and
guidance, and the cooperative relations between government and
enterprises. Japanese firms are backed by government and this creates
unfair competition by Japanese firms in the international market. This
is the background of the theory of Japan, Inc. as the Japanese economic

model. This report indirectly stimulated scholarly interests and research
to focus on the particularity of the Japanese economy in building theory
of the Japanese economic model (Johnson 1982; Abegglen and Stalk Jr.
1985; Okimoto 1989). In some ways, the World Bank’s study of the East
Asian Model (World Bank 1993) was also influenced by this report.
3.2 Theorization of the Japanese economic model

The analysis above shows that early work in theory-building of the
Japanese economic model was closely related to two debates driven by
domestic and international political dynamics. These two ideologically
influenced debates focused their attention on the structural features of
the Japanese economy. In this respect, early attempts in theorizing the
Japanese economic model share some interesting commonalities with
the current efforts in theorizing the Chinese economic model.
There is a widely held view that the turning point over which the
Japanese economic model has become an economic theory accepted in
international scholarship is the emergence of the theory of compara-
tive institutional analysis (Aoki 1984, 1988, 2001; Aoki and Dore
1994). Bringing theory-building on the Japanese economic model to
the advanced level, comparative institutional analysis is founded on
methodological principles very different from those of neoclassical
economics. It combines universalist analytical tools with particular
methodology, supported by multidisciplinary research contributions. It
was in the process of formation of the theory of comparative institu-
tional analysis that theory-building on the Japanese economic model
transformed from an economic ideology to an economic theory.
It should be noted that comparative institutional analysis incorporates
elements of the early works on the Japanese economic model. As we will
show below, work of Ronald Dore and Japmes Abegglen on Japanese
firms (Cole 1979; Dore 1973; Abegglen and Stalk Jr. 1985) and Chalmers
Johnson’s work on governmental intervention and firms’ production
activities (Johnson 1982) have all been reflected in comparative institu-
tional analysis.
(1) The influence of Marxist economics

The influence of Marxist economics on comparative institutional
analysis is quite complicated and indirect. Aoki Masahiko, the leading
scholar of comparative institutional analysis, once publicly expressed his
disappointment in Marxist economics which turned him to mainstream
economics. As an economist, however, Aoki’s early work was largely
framed in Marxist economics. Marxist economics had a great impact

on the development of the research problem for Aoki. Given that many
advocates of the Chinese economic model have also had the background
of Marxist economics, the connection between Marxist economics and
comparative institutional analysis is useful for us to understand theory-
building on the Chinese economic model.
While the challenge for the Koza School and the Worker–Farmer School
was to explain pre–World War II Japanese society, that for the Uno school,
the mainstream of Marxist economics in postwar Japan, was to under-
stand the causes for Japan’s high-speed economic growth after the war.
To meet the challenge, the Uno School proposed a three-level theory of
high-speed economic growth: logical analysis, stage analysis, and empir-
ical analysis. The logical analysis involves rewriting Marx’s On Capital and
re-explaining the logic of capital from the perspective of market economy:
circulation, production, and distribution. The stage analysis is a historical
analysis looking at different stages of capitalism – mercantilism, liberalism,
and imperialism. The analysis of the logic of capital in a purely capitalist
society is essentially to rewrite Marx’s On Capital from the perspectives
of exchange, production, and distribution; the theory of capitalist stages
provides a bird’s-eye view of the development of capitalism moving from
mercantilism to liberalism and to imperialism; contemporary analysis
focuses on the development of capitalism after World War I.5
One main contribution of the Uno School is its clear separation
of theory and practice, and indeed separation of Marxism as a social
science approach and Marxism as a political movement. Moreover, the
reworking of the logic of capital as a theoretical framework provides
support for moving Marxism away from Eurocentrism, the ideological
undertone of the Marxist tradition. The contribution of the Uno School
therefore helps us understand the connection between comparative
institutional analysis and Marxism in Japan.
Aoki’s earliest academic article was an analysis of state monopoly
capitalism from the perspective of the Uno School. In this, Aoki still
attempted to understand global capitalism through the instance of early
post–World War II Japanese capitalism. This line of inquiry echoes the
theme of “going beyond Eurocentrism” in Uno economics. In other
words, Aoki’s early work treated Japan’s experience as a phase of world
history, granting Japanese experience universal significance. Aoki’s
early work on Japanese economy was not a listing of unique features,
but rather aimed at some general logic out of the Japanese particular
phenomenon. This underlying interest has been carried on by Aoki even
after he left the Uno School and Marxist economics.6
(2) Theoretical generalization, universal analytical tools, and empirical facts

While Marxist economics influenced Aoki’s interest in developing a
general economic theory from Japanese economic experience, mecha-
nism design theory and evolutionary game theory served as general
analytical tools for him. In the late 1960s, Aoki studied mechanism
design theory under Noble Laureate Leonid Hurwicz. Mechanism design
refers to design of rules for a particular state of relations in a game. It
concerns the relationship among social institutions, forms of organiza-
tions, and motivations of participants in economic activity. Evolutionary
game theory is a principal analytical tool in mechanism design.
In the years of the Cold War competition between the Soviet Union
(plan economy) and the United States (market economy), mechanism
design theory in its formative years concerns largely the different forms
of resource distribution within the market economy. This research direc-
tion met well with Aoki’s theoretical problem. First, Aoki was suspicious
of both the Soviet plan economy and the US market economy. Second,
Aoki already formed his view of developing a general economic theory
in his early theoretical work. Mechanism design as a general analytical
tool and Aoki’s interest in general theory-building are compatible. These
together provided the foundation for the development of comparative
institutional analysis.
Another key in the development of comparative institutional analysis
is Aoki’s efforts to combine the general analytical tools with the unique
facts of the Japanese economy into a general economic theory. From
Aoki’s view, one difference between a typical American enterprise and a
typical Japanese enterprise is how information is communicated. In the
American enterprise, information is dispersive where the management’s
ability to monitor and respond to emergent events at the shop level is
limited. In the Japanese enterprise, information is shared where produc-
tion decisions are mainly coordinated at the shop level. Aoki demon-
strated that there is no absolute advantage in either the American or
Japanese enterprise over the other in resource deployment and economic
efficiency. For enterprises that require more internal coordination, the
information structure of the Japanese enterprise is more efficient. For
enterprises that need more standardized communication of informa-
tion, the dispersive information structure of the American enterprise is
more efficient (Aoki 1984, 1988).
Furthermore, there is complementarity among information structure,
and employment system, transactions among enterprises and bank-
enterprise relations. The dispersive information flow in the American
enterprise complements the mobile employment relations, transactions
among enterprises, and direct financing. The shared information struc-

ture of the Japanese enterprise, on the other hand, complements rela-
tively stable employment relations, transactions among enterprises, and
banking-centered financial systems.7 The above aspects form the core of
comparative institutional analysis (Aoki 1988; Aoki and Dore 1994).
(3) Co-evolution of the different research fields

Analysis above has shown that theorizing of the empirical patterns of
the Japanese economy is a key in the establishment of the theory of
comparative institutional analysis. The problem, however, is how Aoki,
a theoretical economist, can discover structured facts of the Japanese
economy in various different disciplines. Indeed, research on the empir-
ical patterns by scholars of different disciplinary backgrounds provided a
solid empirical basis for comparative institutional analysis. Comparative
institutional analysis in turn provided theoretical directions for the
continual development of research on the empirical substance of the
Japanese economy. Theorizing of the Japanese economic model is there-
fore built on the “co-evolution” of the theory of comparative institu-
tional analysis and the empirics of the Japanese economy.
Indeed, around the time when comparative institutional analysis
established itself in economics, work by Japanese economists had
reached a very high level in areas such as industrial relations (Dore
1973; Koike 1988), interfirm relations (Nishiguchi 1994; Asanuma
1985, 1989, 1997), strategic management (Itami 1987), corporate
governance (Iwai 2002), information management (Nonaka 1991;
Nonaka and Takeuchi 1995), innovation and operation (Odagiri and
Goto 1996; Fujimoto 1999), economic history (Okazaki 1993), and
economic thought (Takeda 1999). All of these works see the typical
American enterprise and typical Japanese enterprise as very different,
but demonstrated that under certain conditions, they are both econom-
ically justified.
This is clearly reflected in discussions of the differences between the
West and Japan in epistemology. Nonaka Ikujiro, a leading scholar of
knowledge management, argues that:8
While there is a rich episteme-logical tradition in Western philos-

ophy, there is almost none to speak of in Japan. Yet there is in itself a
reflection of the very different ways that the two cultures think about
knowledge. In Western philosophy there has long been a tradition
separating the subject who knows from the object that is known. This
tradition was given a solid methodological base by Descartes, who
posited the “Cartesian split” between subject (the knower) and object
(the known), mind and body, or mind and matter. And, as we will
see below, the history of Western philosophy in the past two centu-
ries can be seen as an unsuccessful effort to overcome this Cartesian
dualism.
This history is important because the Western philosophical
tradition has fundamentally shaped the disciplines of economics,
management and organization theory, which in turn have affected
managerial thinking about knowledge and innovation. Contrasting
this Western philosophical tradition with the Japanese intellectual
tradition, where the split between subject and object has not been as
deeply rooted, goes a long way toward understanding Western and
Japanese approaches to knowledge creation. Indeed, our theory is
based on the idea that these two perspectives are mutually comple-
mentary. (Nonaka and Takeuchi 1995: 20–1)
In summary, the theory of comparative institutional analysis is estab-

lished on the solid research by Japanese economists in different fields.
Indeed, Japanese economists working in various fields quickly accepted
Aoki’s analytical framework (1984, 1986, 1988) and worked subsequently
to further advance the development of comparative institutional anal-
ysis (Iwai 2002; Aoki and Dore 1994).
Further, it was only after comparative institutional analysis came to be
widely accepted that the role of government in Japanese economic devel-
opment was fully understood. This is the case because the government
plays its role in the economic activities of the enterprises. Comparative
institutional analysis provides convincing explanations of the logic of
the economic activities of Japanese enterprises (Aoki, Kim, and Okuno-
Fujihara 1997; Song 2007).
4 Discussion and conclusion
Theory-building on the Japanese economic model has experienced two

periods. In the first period, theorizing the model was shaped by the
prevalent ideologies of the time and substantiated largely with general
descriptions of the structural characteristics of Japanese economic devel-
opment. In the second period, ideological influences gradually faded
away and theory-building shifted its focus from empirical description
of structural characteristics to general economic theory. In a similar
historical path, theory-building on China’s economic model is still at
an early stage, with clear and strong influence of economic ideologies
and substance resting largely on sketchy descriptions of the structural

features of the organization of Chinese economy.
One key reason for theory-building on China’s economic model
having influences of economic ideologies is the strong sense of historical
mission by Chinese intellectual elites. Given the complicated and often
painful history of China’s modern development, this is not surprising.
The problem is how an economic theory of the Chinese economic model
can emerge from all of these. To move toward developing an economic
theory of the Chinese economic model, we will need to overcome
the tendency of those in the debate and discussion over the Chinese
economic model to substitute descriptions of the structural characteris-
tics of the Chinese economy for real theory-building.
One of the reasons that structural descriptions have become “main-
stream” in theory-building of the Chinese economic model is that the
work on the Chinese economic model often fails to see the connection
between the Chinese economic model and varieties of capitalism, and
makes little reference to the large literature on varieties of capitalism.
Indeed, there is an important assumption behind the idea of China’s
economic model: there are different types of market economy or national
development models. These economic development models are indige-
nous to the country’s political economic system, and they can all achieve
efficiency in their own way. This core assumption of diversity is in fact one
that underlies the theory of varieties of capitalism. This makes Chinese
economic development an important instance of varieties of capitalism.
Further, the theory of variety of capitalism includes two logically
related aspects. One explains why, in theory, different types of capi-
talism can all achieve efficiency; the other analyzes the relationship
of the components of a country’s national economic system and their
economic rationalization. The latter aspect is referred to as “national
development model.” In this framework, China’s economic model can
be seen as an instance of national development model.
As the process of theory-building on the Japanese economic model
demonstrates, researching the empirical patterns of the Chinese
economy and demonstrating their economic rationality in the econ-
omist’s language is the primary challenge for theorizing the Chinese
economic model. So far scholars working on the Chinese economic
model are largely political scientists or political economists. Their
academic training seriously limits their ability to ascertain the empirical
patterns of the Chinese economy.
The historical process of theory-building on the Japanese economic
model shows that building of a national economic model requires joint
efforts of scholars of political science, economics, and management.

Much work on empirical patterns has to be done by scholars special-
ized in technical issue areas. The main challenge for economists is to
use general analytical tools and frameworks to theoretically capture the
logical relationship among empirical aspects and relations.
A key challenge here is how to demonstrate the connection between
the Chinese economic model and Chinese cultural model. If we are not
able to meet the challenge, theory-building on China’s economic model
would be problematic. For scholars of the Chinese economic model, the
development of the Japanese economic model is rather inspiring as well
as challenging. On the one hand, Japanese scholars have successfully
demonstrated in economist language that the empirical patterns in busi-
ness operations of Japanese enterprises are highly correspondent with
those in the American enterprise, and that they also have their roots in
their cultural traditions and their own economic rationale.
On the other hand, these empirical patterns of business operations
of Japanese enterprises are in fact the ideal arrangements in business
operations of the Japanese enterprise as envisaged from Confucian
values, which can inspire Chinese scholars’ work on the Chinese
economic model. Here we have a dilemma. If the ideal mode of busi-
ness operations as envisaged in Confucian values is already practiced
in the Japanese enterprise, and their economic rationality has been
recognized in economics, to what extent can research on the relation-
ship between the Chinese economic model and the Chinese cultural
model still produce original theory? Perhaps this is partly the reason
why much of the research and debate on the Chinese economic model
has focused on the role of government rather than the activities of the
Chinese enterprise.
Last but not least, a national economic model is shaped within a
specific international environment or under a particular structure of
international division of labor. Its validity therefore would, to a great
extent, come from the international environment or structure. As
Bai Gao discussed earlier in this volume, the international settings
of Japanese and Chinese high-speed growth are very different. At
the microeconomic level, at the time of Japan’s high-speed growth,
modularization of product design and production had not appeared
on a large scale. China’s high-speed growth, however, is very closely
related to modularization of product design and production (Song
2008; see also Sasuka in this volume). This is partly the reason for the
serious challenge the Japanese economic model faced from the 1990s.
Therefore it is necessary to understand the Chinese economic model
from the perspective of the change of international production system.

Unfortunately, scholars of the Chinese economic model have not given
enough attention to this problem.
Notes
1. The Japanese economic model has been a focus of research and theoretical
development of varieties of capitalism. See, for example, Hall and Soskice
(2001), Amable (2003), and Aoki (2004). Leading scholars of the new genera-
tion of the varieties of capitalism (especially Japanese economists, led by
Masahiko Aoki) have laid the foundation for analyses of Japanese economy
in varieties of capitalism.
2. “China as a method” or “understanding China through a Chinese lens,”
appears to be a celebrated methodological approach, characteristic of the
advocates of the Chinese development model. For more in-depth discussion
on this, see Ding (2011).
3. Original in Chinese; this is our own translation.
4. See, for example, Lin (2011).
5. For a detailed discussion of Uno economics, see Barshay (2004, chapters 4
and 5).
6. The relationship between Aoki’s work and Marxist economics can also be
understood from Aoki’s attitude towards methodological individualism. Aoki
acknowledged in his autobiography that Marxism’s influence on his early
work had kept him some distance from extreme methodological individu-
alism (Aoki 2008).
7. For the concept of complementarity, see Boyer (2005).
8. Knowledge management concerns the strategies and practices used to iden-
tify, create, represent, and distribute knowledge and know-how. For more on
this, see Nonaka (1991) and Nonaka and Tekeuchi (1995).
11
Conclusion: China and Japan as
Instances of Modern Economic
Development
Xiaoming Huang
1 The point of comparison
We set out at the beginning to compare Japanese and Chinese experi-

ences of modern economic development. This raises an immediate chal-
lenge: How do we compare? What to compare? And what we do want
to get out of the comparison? There are various frameworks available
for us to use to rationalize and structure our comparative investigation.
Japanese and Chinese experiences of modern economic development
can be a problem of the East Asian model of economic development:
How much do Japan and China reinforce the idea that there is an East
Asian model of economic development? How much have Japanese and
Chinese development experiences followed the same pattern of devel-
opment as witnessed among countries in East Asia in the long decades
of post–World War II waves of such development?1
The Japanese and Chinese experiences can also be seen as cases of
economic development of developing countries, along the lines of
modernization theory: How much did modern institutions and arrange-
ments shape up in Japan and China for their high-speed economic
growth to take place? How are the unique growth and development of
Japan and China accountable, using a general factors-of-production–
based model of economic growth, factors such as labor, capital, land,
and technology? How many changes have been in industrial structure
in Japan and China as expected in the standard model of structural
change in stages of economic development, from concentration in
agriculture to industry, from rural to urban, from traditional sectors to
services sector? How is the economic development of Japan and China
related to the broad social, cultural, and political transformation of the
country?
230
Instances of Modern Economic Development 231
Finally, Japanese and Chinese experiences can also be seen as instances

of the rise of modern economy at the national level and an important
part of the global evolution of modern world economy: How much are
Japanese and Chinese experiences of modern economic development
related to the early forms of capitalist economies? How do Japan and
China fit into the global emergence of modern capitalist economy differ-
ently? Does Japan represent a reinforcing or even divergent instance of
the modern economy, while China represents a distinct model of the
modern economy?
These different frameworks developed in long, constant debates in
growth and development economics and in comparative political
economy, and came from different discipline backgrounds as well as
different theoretical and methodological traditions. The associated
debates and research programs, that is, varieties of capitalism, the East
Asian model of economic development, neoliberal economic order, and
world economic system and structure, have shaped and defined a field
of scholarship that attempts to ascertain the structure and dynamics
of modern political economy and the shaping and working of the
underlying force at the national and system levels. Capitalist market
economy has become the dominant force and form of political economy
today. Developmentalism reflects a particular type of modern political
economy and stands for a particular set of countries that shared their
historical standing in the development of modern capitalism economy,
and a particular way of organizing their economic activities. The litera-
ture of world economic system and structure brings the global dynamics
and structure of economic organization, global process of the rise and
fall of different types of political economy at the national level, as well
as the combination of the above forming a constraining structure for
national economies, into our debate and analysis on national develop-
ment models.
Looking at Japan and China from each of these frameworks gives
an opportunity to see how Japan and China relate to these dominant
frameworks and the structure, process, and historical circumstances of
the political economies they reflect, and what Japan and China mean
for each of the understandings. Comparative analysis of Japan and
China in these frameworks does allow us to see how these frameworks
relate, reflected in a perspective on the modern world economy. Indeed,
it allows us to think of Japan and China beyond these individual frame-
works, and to see whether the development and shaping of the world
economic system is the product of different political economies at the
national level, and the global expansion and domination of the most
232 Xiaoming Huang
competitive political economy. Or, it is the manifestation of the funda-

mental logic of modern world economics where national economies fit
in, or are part of it, and have their particular role in it, and therefore
whether the substance and form of national political economy can vary
in accordance to their position and role in the modern world economy.
2 Points of comparison
The challenge of searching for a coherent set of implications of the

two successful experiences of modern economic growth and develop-
ment is clearly reflected in the work of this volume. In the first place,
there are several key points of comparison between Japan and China
that are believed to define their respective development experiences.
One immediate point of comparison emerging from the work in this
volume is Japan in the 1980s and 1990s, and China in the 2000s and
2010s. Ben Thirkell-White, for example, looks at the international envi-
ronment of the times, and argues that Japan and China faced a very
similar international structural environment at these two different time
periods, where the rising Japan in the 1980s and 1990s faced signifi-
cant political pressure from the United States on its currency policy,
trade policy, industrial policy and broad macroeconomic policy, and
to “rebalance” its economy and reform the orientation of its develop-
ment model. The same is happening today between the United States
and China. While the US political pressure was largely effective through
domestic coalitional forces of support, and therefore prevented Japan
from bringing its economic power and development model to reshape
the world economic system, whether this would be effective today on
China is not entirely certain.
Among aspects of Japan in the 1980s and 1990s and China in the
2000s and 2010s are the very similar problems of structural imbalance
and macroeconomic challenge of the respective economies of the time:
China in the late 2000s and early 2010s carried all of the signs of a
bubble economy as we saw in Japan in the late 1980s and early 1990s:
excessive capacity and capital; sky-rocketing prices; financial economy
taking the lead in the overall economy; problems in currency exchange
rate, banking and trade practices; great imbalances in terms of industrial
structure, and in trade, consumption and investment; and its changing
role and position in the global structure. Such striking similarities have
led many to be concerned that the Chinese economy is facing a similar
scenario of burst. There is not much attention, however, by contribu-
tors in this volume to the problem. Indeed, as both Bai Gao and Marc
Lanteigne have argued, the Chinese developmentalism is significantly

different from Japanese developmentalism. Even China initially adopted
Japanese developmentalism; as Lanteigne has shown us in his chapter,
China has already “moved beyond” the Japanese model. At the least, the
movers and shapers of China’s macroeconomic performance today are
different from those of the Japanese economy in the 1990s.
Another striking point of comparison is Japan in the 1960s and China
in 2010s. This refers to the “stages” of economic development of Japan
and China largely in terms of change in industrial structure, assuming
that Japanese and Chinese economic development has followed the
model of stages of modern economic development from traditional to
modern, as W. W. Rostow (1960) envisaged. Both Katsuji Nakagane and
Jason Young agree that Japan passed over the so-called Lewis turning
point in the early 1960s, while China is approaching that point, but
clearly has not passed it yet. The structural change can also be measured
in other indicators. Nakagane has provided a long list of such indicators
in broad urban–rural relations from income disparity to Engel efficiency,
from diffusion of electric appliances to life expectancy, from industrial
structure measured in a sector’s contribution to GDP, all supporting his
assessment.
Can we say from here that China’s development level is at least
50 years behind that of Japan? This might be a challenge. The analyses
of both Nakagane and Young show that there are different reasons why
China has not yet, and probably will not for some time, passed the Lewis
turning point. The “level” or “stage” of economic development is not
the only factor that matters here. Dominant factors that see China not
following a standard move along the Lewisian model are mostly institu-
tional as Jason Young in his chapter has clearly demonstrated. Moreover,
as Nobuharu Yokokawa shows in his chapter, compressed development
and pseudo Lewisian industrialization has shaped China to a point
that it exhibits conflicting, contradictory traits that defy a meaningful
Lewisian comparison.
A third critical point of comparison is Japan from the 1950s and
China from the 1980s. This places the comparison in the time frame of
the East Asian model economies since the end of World War II, where
high-speed economic growth and development developed in sequence
for a similar long period of time. This began with Japan in the 1950s and
China in the 1980s. There are many similarities here between Japan and
China along this East Asian model timeframe. Chapter 2 and Chapter 4
have shown that China in the 1980s is more like Japan in the 1950s in
terms of the broad conditions for catch-up growth and then high-speed
234 Xiaoming Huang
growth, with a transition from import substitution to export-led growth.

This is accompanied by heavy-handed industrial policy for promotion of
exports and strategic industries, and the heavy role of the state bureauc-
racy in organizing economic growth and in shaping labor–capital rela-
tions, as well as global production and market networks. Then there is
the rest of the story. Comparison along this framework can tie particular
stages/levels of economic development, broad patterns of institutions,
labor–capital relations, and social and political relations, together to
specific comparable points of time in the respective economies.
This type of comparison has its challenges. Even though Japan and
China had comparable historical processes as seen in the their devel-
opment policy and institutions, as well as macroeconomic growth
performance, the modern economic growth and development of Japan
and China faced quite a different international economic order. This
difference in turn shaped the properties and structure of the Japanese
and Chinese development models in a significantly different way.
As Bai Gao has effectively convinced us in Chapter 4, classical liber-
alism at the time of Japan’s high-speed economic development, and
the neoliberal international environment of the time of China’s high-
speed economic growth and development had structuring effects on
the nature and type of their developmentalism. China’s economic
development is shaped by global forces and dynamics, with much
greater integration and interdependence with the global economy,
while the Japanese economy at the time of its high-speed growth was
based on national economies competing in international markets. If
Japan is more of the original East Asian model, China is certainly a
different kind of developmentalism.
A final point of comparison is between Japan from the Meiji Restoration
in the late nineteenth century and China from the establishment of the
PRC in the early 1950s. This involves debate over the path of modern
development of non-Western, developing countries, and how they fit
into the rise and expansion of the world economic system. Lei Song and
Yanbing Zhang, in their analysis of the development of the Japanese
and Chinese models of economic development, called our attention
to the historical environment in which the development models were
shaped. There was a significant debate in the early twentieth century, for
example, over whether the modern development of Japan was part of the
world capitalist economy, or whether it was more Japan’s unique devel-
opment experience. The same point was raised in Yokokawa’s analysis of
the world economic system in Chapter 3. It traced the evolution of the
world economic system and placed Japan in a position “divergent” from
the dominant world capitalist system today, the bureaucratic liberal

world system, and China in an undetermined position; it is not clear
whether China’s development experience is divergent but part of the
bureaucratic liberalist system, or a very different type of world economic
system that can potentially challenge the US-led bureaucratic liberal
world economic system.
This issue was raised again during the East Asian model debate in the
1980s and 1990s. Song and Zhang argue that the development of the
theory of the Japanese development model is achieved with the devel-
opment of comparative institutional analysis of Japan. The Chinese
economic growth and development in the past 30 to 40 years raised the
question at a more fundamental level: Is China, like Japan before it, the
latest wave of the rise and global expansion of the modern capitalist
economy? If yes, what are the key dimensions that define an instance
of the modern capitalist economy? If not, does China’s recent growth
and development experience represent a distinct political economy that
could have a restructuring effect on the global economic order?
3 Findings
Before we sort out some answers to these questions from the analyses
and discussions in this volume, let us first see the general findings
emerging from the contributions.
3.1 Forces of shaping

One underlying theme that emerged from our analyses and discussions
here is how the Japanese and Chinese experiences of modern economic
development have been shaped to what they are in terms of what
“model,” “structure,” or “type” of political economy their economic
development is. The discussions in this volume reflect a clear focus of
the interests of the scholarly community on this issue: whether the
Japanese and Chinese modern economic development is shaped and
structured more by forces and dynamics at the global level, national
level, or a mixture of domestic and international forces.
Bai Gao, for example, devoted his whole chapter to demonstrating
that the different international economic orders led to the different
types of developmentalist model of Japan and China. More specifically,
China’s neoliberal development model differs significantly from Japan’s
classical developmental model. Japan protected its domestic market and
created its own brands of high-value-added goods to compete on the
international market. China opened up its domestic market to foreign
236 Xiaoming Huang
investment and promoted the export-oriented processing trade, lever-

aging its low-cost labor to participate in global production.
The two models differ in their approach toward the market and asso-
ciated institutional arrangements. The Chinese model reflects neoliber-
alism while Japan’s model represents classical liberalism. The emergence
of these two models reflects the impact that the various stages of globali-
zation have on a country’s economic development and the legacies of
how differing strategies nations adopt to respond to the challenges of
globalization have on their present economic structure.
The Japanese model formed in response to the reversal of the first
wave of globalization and the emergence of the second wave of globali-
zation after World War II. It has a strong focus on protecting society
from the impact of market competition. The Chinese model, on the
other hand, developed in response to the second wave of globalization
and reflects the need to release the power of market forces. The efforts
to release the power of market forces have exerted great pressure on the
existing domestic and international political economic order.
Katsuhiro Sasuga in Chapter 6 echoes the view that global forces and
movements shaped the national economy. Sasuga has shown how the
shifts in automobile production shaped the development of the auto-
mobile industry in China through FDI from Japan’s auto industry to
China, and the strategic relations between firms and local government
in China. This global–national causal link explains some of the key
features of the Japanese development model, for example the impor-
tance of regional production networks, or more so now, the global value
chains, and those of the Chinese development model, for example the
greater role of foreign direct investment and global economic dynamics
in the development of Chinese economy.
Moreover, Sasuga’s investigation of the direct link between global
economic forces and the dynamics of local business and government rela-
tions in the development of an industry goes beyond the conventional
framework of explaining the impact of global forces on a “national”
economy. The very unit of national economy, and the associated frame-
works of state–society and state–business relations, seems to become less
useful in explaining the pattern of economic activities of a country in a
significantly global economy. Global forces and dynamics are working
more along the lines of industry, production networks, and value chains
than national boundaries.
These interfirm, intra-industry linkages have had a significant impact
on the pattern of development of the Chinese automobile industry. In
particular, Japanese parts suppliers have impacted on Chinese firms’
procuring activities. Global and local competition at the same time

demands a focus on shared interests among economic participants
going beyond a traditional viewpoint based on state-to-state relations.
Emerging challenges in the automobile industry suggest the limita-
tions of traditional approaches to the management of the two coun-
tries’ relations based on state–market dichotomous and state-centered
frameworks.
The defining effects of the world structure and global dynamics on the
development of the Japanese and Chinese economies are also seen in Ben
Thirkell-White’s chapter. Thirkell-White has shown us how the global
normative environment and economic structure translates into domestic
political changes in opinion, interests, coalitional basis, and policy and
institutions, primarily through key bilateral relations. Examining the
American pressure on Japan in the 1980s and the ongoing interaction
between the United States and China today, in the large context of the
tensions between “liberal” and “revisionist” arguments and approaches
to economic growth, Thirkell-White has shown how and under what
conditions the pressure from the external environment for change in
domestic policy and institutional arrangements have been successful in
the case of Japan in the 1980s and, in this same framework, how that
would play out in the case of China today.
Indeed, Thirkell-White’s finding is not all about the impact of the
external environment, normative economic order, and political pressure
for change in policy and institutions that caused structural impediments
and global imbalances. The results of US pressure, as Thirkell-While has
found, were more strongly shaped by domestic Japanese politics than
they were by the balance of formal international economic power.
There is a pattern of negotiations in which the United States engaged
in concerted pressure, but its ability to achieve its ends depended on a
varying ability to find allies in the domestic political process in target
countries and intellectual commitments and material interests in these
countries. External pressure can be more effective where it can boost the
domestic forces that favor liberalization sufficiently to create a critical
mass in the domestic political arena, and in issues areas where reform
and policy implementation require less dense social cooperation, for
example exchange-rate appreciation combined with financial sector
liberalization.
Applying this same framework to China today, Thirkell-White has
found that whether this same causal link of external pressure and
domestic political and policy change, and institutional reform, would
be effective in the case of China is not all that certain, as the Chinese
238 Xiaoming Huang
system is so fragmented and it is hard to cultivate and build domestic

coalitions receptive to international pressure for policy change and
institutional reform.
Even in Sasuga’s work on how global shifts in automobile production
provided the basis for the development of China’s automobile industry,
such a global–local link is materialized through “carefully cultivated”
but “strategically contended” firm–local government relations. Global
forces and effects are translated into local relations and conditions that
provided for the development of the automobile industry. In this set of
relations, government responded to global shifts, with the local govern-
ment becoming a key agent, and from there industrial regulations and
government–business relations developed, leading to change in produc-
tion structure. The intensifying interaction and integration of domestic
conditions and institutions on the one hand, and international forces
and factors on the other, have made the organization and promotion of
economic development in China today very different from that of Japan
in the 1960s.
While not arguing that domestic conditions and forces are the only
forces shaping the development of the Japanese and Chinese economic
models, Marc Lanteigne in Chapter 5 has shown that the Japanese and
Chinese models of economic development and their differences can be
explained largely through domestic political dynamics, policy process,
and institutional relations. While there are the conditions of globali-
zation that China responded to and the Japanese model of economic
development earlier as models of economic development for China, it
was China that chose the development path. Lanteigne explained the
strategic environment in which China found itself in the early years
of the reform period; the forces, interests, and ideas competing over
the direction and strategy of China’s reform and development; and the
policy calculations by senior decision makers in “choosing” develop-
mentalism as its development path.
The question here, however, is whether developmentalism is transi-
tory in Beijing’s shift from a closed economy to a liberalized one, or
will the political and social pressures of globalization, the free market,
and the aftershocks of the global recession assist in the perpetuation of
some degree of developmental economics in China for the near term?
The further internationalization of the Chinese economy, the growing
debate about the Chinese model or the Beijing Consensus, informed by
the country’s response to the global recession, have all indicated that
China is moving away economically from its developmentalist poli-
cies and experiments of the previous decades. While it is likely that the
Chinese state will continue to maintain a significant control over the

economy for the foreseeable future, both internal and external pressures
to attempt greater liberalization will continue to factor into Beijing’s
attempts to modernize its fast-changing economy.
Nobubaru Yokokawa has provided a framework of the world economic
system and international order to explain Japanese and Chinese as well
as British and American experiences of modern economy, showing
how the modern capitalist economy at the national level is the effect
of the rise, expansion, and evolution of the world capitalist system.
Indeed, Yokokawa has shown how Japan and China related to the world
economic system of bureaucratic capitalism of the twentieth century
and the East Asian “flying geese” pattern of development in the second
half of the twentieth century.
However, the world capitalist system in Yokokawa’s analysis is not just
a set of imperatives that impose themselves on the shaping of national
instances of modern economy. There is a fundamental logic, and a
defining set of dynamics and institutions the logic generates that consti-
tute the structure and arrangements of the national political economy.
A successful and effective modern national economy can expand by that
very fundamental logic, and dominate the world economy and function
as an effective capitalist world system. Here the critical substance, condi-
tions, dynamics, and institutional arrangements that define the Japanese
and Chinese political economies are seen again as internal and domestic
to the country. Not only that, the same critical substance can be found
in each of these national political economies in history across the globe.
It seems from the analyses and discussions in this volume that, while
the problem of how Japan’s and China’s development experiences were
shaped can be approached from various perspectives, the forces and
dynamics at the global, national, and local levels appear to be the focus
of our discussion. More importantly, in both Japan and China, it is not
always an “either/or” answer in determining which levels of the forces
and factors are most effective. Global, international, external forces
and dynamics do have impact on the shaping of Japanese and Chinese
modern economic development. But such impact tends to be translated
to effects on the economy through the working of domestic/local forces,
dynamics, mechanisms, and institutional arrangements.
3.2 How China and Japan have shaped each other

Another underlying theme that emerged from our analyses and discus-
sions is that Japan and China are not only shaped by different sets of
forces and dynamics, their development experiences influenced one
240 Xiaoming Huang
another. And as the historical sequence goes, one sees more of the
impact of Japan on China. This is reflected in three general areas. First,
in terms of development model, there is a significant amount of litera-
ture exploring and identifying the similarities between Japan and China.
In our analyses and discussions here, Gao and Lanteigne both started
their discussion of Japanese and Chinese models in the large framework
of developmentalism. Gao argues that Chinese neoliberal developmen-
talism is different from Japan’s classical developmentalism, but that they
are developmentalism of some sort is clear.
Lanteigne’s analysis is more direct in linking Chinese developmen-
talism to Japanese developmentalism. While China over time has tried
to move beyond the Japanese model because of the changing domestic
and international conditions, and indeed the imperatives of the devel-
opment path of China itself, it is China that “adopted Japan’s model,”
from the start. Song and Zhang see the exact same patterns of economic
development in Japan and China, and mirror developments in theory-
building of Japanese and Chinese modern economic development.
A second area of mutual influence and impact between Japan and
China is in the movement of production factors, distribution of prod-
ucts and parts, and access to markets through microeconomic and
industrial channels. The two economies are complementary because of
the different stages of their development, different industry structures,
and different positions in production network and global value chains.
Sasuga, for example, has made a detailed case of the “early bird effects”
of Japan on China. In the case of a particular industry, Sasuga has exam-
ined Japan’s FDI to the Chinese automobile industry, and the movement
of products, materials, parts, technologies, and people through global
supply chains, production networks, and market networks, and shown
that these clearly had a structuring effect on the growth of the automo-
bile industry in China.
A third area is the mirror or parallel patterns of decisions, policies,
and activities in organizing economic activities in Japan and China.
Thirkell-White has shown in his work that facing similar international
environmental and structural imperatives, China has learned and no
doubt will continue to learn from Japan as to how to respond to global
pressure on its development policy and institutional arrangements of its
economy. Yokokawa’s analysis has seen the mirror development where
the Japan-led regional flying geese pattern of development is trans-
forming into a China-led flying geese pattern of development in the
region, and even possibly at the global level, paving the foundation for
a new world capitalist system.
The phenomenon of Japan and China mutually influencing each

other goes a bit further than seeing Japan and China as distinct devel-
opment experiences. Analytically, this allows us to see how much there
are parallel patterns of development of Japanese and Chinese modern
economies and to what extent there is a path-dependent development
between the two experiences of modern economic development.
3.3 What models are Japan and China?

This seems to be the most asked question in comparative analysis of
Japanese and Chinese modern development experiences. How do
Japan and China relate to Asian developmentalism, for example?
Developmentalism and, more precisely, the model of the develop-
mental state, developed in the postwar waves of prolonged, high-speed
economic growth in East Asia. It is the theory that the organization
of economic activity in these countries is different from Western regu-
latory states. The state coordinates and organizes national economic
activity through various institutional and organizational instruments,
and rationalizes its function primarily on the idea of economic develop-
ment as a primary purpose and function of the state.
Japan was the first sate identified as a developmental state (Johnson
1982). The theory then applies further to Taiwan (Wade 1990), South
Korea (Amsden 1989), and other East Asian countries (Woo-Cumings
2001). Developmentalism provides a framework for us to understand
Japanese and Chinese modern economic development; how a particular
form of national economic organization developed and spread across a
range of countries of shared institutional, cultural, and historical condi-
tions; and indeed how Japan and China share and differ in the way their
economic activities are organized and “governed” (Wade 1990).
Analyses and discussions in this volume have presented a largely
coherent picture of how Japan and China stand in relation to develop-
mentalism. Bai Gao’s work has shown that Japan and China are both
developmentalist, but of different types of developmentalism: Japan is
classical liberal developmentalism while China is neoliberal develop-
mentalism. Japan and China are more overlapping with each other in
Lanteigne’s analysis. Lanteigne has shown that China originally adopted
the Japanese model, but over time has gone beyond Japanese develop-
mentalism. Here, developmentalism is more specifically the Japanese
model of economic development.
Then there is an issue of how Japanese and Chinese development
experiences relate to neoliberalism and whether Japan is more devel-
opmentalist and China is more neoliberalist, or the other way around.
242 Xiaoming Huang
Gao’s chapter has made a strong case that the Chinese political economy
is more “neoliberal” while Japan is more classic developmentalist. But
the problem of neoliberalism and developmentalism implies a broader
scope of different types of modern political economy, particularly those
of East Asian political economy highlighted in the East Asian model,
and those of the dominant political economies in the world economic
system, neoliberal political economy.
Indeed some of the discussion on the future tensions and scenarios
of alternative models of world political economic order has centered on
this neoliberal versus the Japanese in the 1970s and 1980s, and neolib-
eral versus the Chinese in the 2010s and beyond. Thirkell-White based
his comparative analysis of Japan and China entirely on the tensions
between the orthodox or neoliberal political economic order and a
variety of heterodox Asian approaches to economic growth. Yokokawa,
on the other hand, has shown that, while Japanese political economy
was almost an alternative to neoliberal capital accumulation regime, but
only turned out to be a diversification of the capitalist world system
of bureaucratic capitalism, China may represent a more profoundly
different political economy, and that may possibly present a challenge
to the existing capitalist world system.
Finally, there is a strong theme of Japan and China providing signifi-
cant contrasting cases for the debate we have on capitalism and devel-
opmentalism. Japan and China both are non-Western countries.2 As
such, their successful experiences of modern economic development
can both be easily seen as instances of non-Western developing coun-
tries catching up with the early developed capitalist economies. Indeed,
growth and development economics, modernization theory, and inter-
national political economy have long seen Japan and China as part of
the “rest” in the dichotomous “West versus the Rest” (Amsden 2003).
Our analyses and discussion here have highlighted the underlying
substance and dynamics in Japanese and Chinese modern economic
development that would allow us to go a bit beyond this dichotomous
framework. Song and Zhang, in their analysis of the development of the
Japanese and Chinese models of economic development, looked at the
broad world historical context of Japanese and Chinese experiences of
modern economic development. They used the varieties of capitalism
as a key point of reference and shown us how the debate in Japan in
the early part of the twentieth century saw the tensions between seeing
the development of modern economy in Japan as an important part
of world capitalism and as a unique, particular experience of modern
economic development of Japan’s own. Yokokawa firmed his position
in his capitalist world system theory in which he sees Japan and China
as part of the world capitalist system or instances of it.
Contributors here recognized that Japan is different from China in
this regard. Indeed, as pointed out in their contributions, Japan was
often recognized in the literature of varieties of capitalism as an instance
of world capitalism, an economic development model different from
the Anglo-Saxon model. The Chinese case is more complicated. As
Lanteigne has demonstrated, for a long time whether China is a market
economy or not has been a subject of intense debate within China. Even
today there is an official label, “socialism with Chinese characteristics,”
or “Chinese market socialism” (Zheng and Scase 2013) for what the
Chinese model is, and what it is not (i.e., market capitalism or capitalist
economy). But in policy and operational reality, one certainly has little
difficulty seeing the Chinese economy as a capitalist, market economy.
Contributors to this volume provided theoretical, empirical, and
historical arguments that Japanese and Chinese experiences of modern
economic development are “larger” than the two themselves, however
similar or different they are. They are larger than the developmentalist
state, not necessarily because Japan was the original of that model, and
China is seen as adopting the model or being a different type of devel-
opmentalist state. They are larger than catch-up economies, with non-
Western countries catching up with early modern capitalist economies
of the West. As many countries before and after them, they are instances
of the rise and expansion of the modern economy at the national level
and an important part of the evolution of the world economic system.
4 Japan and China as instances of the rise and

expansion of the modern world economy
Analyses and discussions in this volume have tried to make sense of

the two successful and dynamic experiences of modern economic devel-
opment in various analytical and explanatory frameworks. Competing
frameworks of comparison do provide interesting and useful perspec-
tives. Developmentalism, capitalism, and world system theory allow
us to see the broad context for development of modern economy in
Japan and China, and the historical circumstances for their experiences
being approached in these different theoretical frameworks. They have
at the same time also confined Japan and China to the specific historical
circumstances in which their experiences of modern economy developed
and evolved, and have significantly concealed the greater significance of
the two experiences for the development of world modern economy.
244 Xiaoming Huang
More specifically, if the two experiences of modern economic develop-

ment are part of the global rise and expansion of modern economy, then
the question is whether these two instances of modern economic devel-
opment, and, indeed, those long before them and those still emerging
after them, are replicas of the same national system of modern economy.
Or are they manifestations of the logic, institutions, and process of
modern economy at the global level and therefore an integral part of
the modern world economic system?
The first proposition implied in the questions above takes the modern
world economic system as consisting of economic activities organized
at the national level. The rise and expansion of the modern economy
in this interpretation has seen the formation of national systems of
modern economic organization in the last several hundred years and
their conversion to the most fit. The world economic system then is
congruent with and dominated by the prevailing national system. One
can find broad support for this framework in scholarly tradition from
classic mercantilism to Frederick List (1885), from the political economy
of Karl Marx, to varieties of capitalism of more recent times, as well as
the everlasting tradition on the problem of the rise and fall of nations,
empires, and world powers from Douglas North (North and Thomas
1973) to George Modelski (1987), from Robert Gilpin (1981) to Giovanni
Arrighi (2007), among many others.
In this framework the Anglo-Saxon model, Rhine model, Soviet
socialist model, Latin American dependency model, East Asian develop-
mental state model, and Chinese market socialism are different national
systems of economic organization. But we do see that the capitalist
market economy has prevailed in the increasing numbers of countries
in the world since the very first wave of modern capitalism in Europe.
There is a momentum of the convergence of the national political econ-
omies to the modern capitalist market economy. The political economy
of the world economic system is shaped by the forces, dynamics, and
interests of the national systems. Japan and China in this framework
are seen as two non-Western, late-developing experiences of modern
economic development. They are two systems that are distinct from
each other, even within the overall frameworks of the developmental
state, capitalism, and the modern world economy itself.
The second proposition envisages that there is a fundamental logic of
the world economic system itself that shapes the world economic order
where different national economies have found their distinct roles and
positions. As far as the modern world economic system is concerned,
the relations and institutions of the modern capitalist market economy
evolved from the European continent and their offshoots. As the global
expansion of their economies continued in the early colonial and impe-
rial times and in the age of globalization of the past two hundred years,
initially locally organized economies joined the world economic system
through the working of the world economic structure, global division
of labor, deployment of resources, and access to markets and materials,
production network, and value chains. Here the different ways of organ-
izing economic activity at the national level seem less important than
how the world economy is organized and structured, and what rules
and relations define the world economic system. Works of economic
system theory, as we see in Yokokawa’s contribution in this volume, the
capitalist world structure and process of Immanuel Wallerstein (1973),
Robert W. Cox (1987), and Christopher Chase-Dunn (1989), and globali-
zation theories all have tried to tackle this problem of political economy
at the world or global level.
In this framework, Japan and China used to be in a similar position
in the world economic system in the mid-nineteenth century. Their
historical paths and experiences of modern development turned out to
be different in the early time of modern development of non-Western
developing countries. However, over time Japan has emerged in the
early twentieth century as a successful story of modern transformation
and change of its position in the world economic system. China has
managed to achieve and indeed is still in the process of achieving that
only from the late twentieth century and early twenty-first century.
Their successful experiences of modern economic development are the
effects of the logic of the modern world economy and indeed the world
economic system.
There is a great tension in the two competing frameworks of the broad
historical and global context in which the Japanese and Chinese experi-
ences of modern economic development are explained and interpreted.
In Japanese and Chinese experiences of modern economic develop-
ment, we can see, as this book has shown, the effects of both national
conditions, dynamics and arrangements, and world economic structure,
on the growth and development performance of the two countries and
the way they organize their economic activities. It is perhaps the logic of
modern economy that transcends the world–nation divide and shapes
economic activity and organization. While it is beyond the mandate
of this book to systemically define the logic of modern economy that
structures and rationalizes economic activity at the national, as well as
the world, system level, this book, a comparative analysis of the expe-
riences of the modern economic development of Japan and China,
246 Xiaoming Huang
has made, hopefully, a good case that these two experiences are larger
than themselves and provided a broad thinking space for us to consider
Japanese and Chinese modern economic development and of what more
profoundly they are instances.
Notes
1. This includes catch-up, labor-intensive industries, domestic manufacturing
and international markets, industrial policy, and national incorporation
in organizing and promoting strategic industries, industrial upgrading,
capital/technology intensive, bubble economy and institutional reform, and
economic liberalization: all together around 30 years of high-speed economic
growth and social transformation.
2. Though there is some literature that sees Japan as part of the West and
debates the problem of the ambiguity of Japanese identity in relation to the
West and Asia, this has been a historical issue for the Japanese themselves, in
their century-long efforts of modernization and modern state building (see
Hunsberger 1997; Suganami 1984; Fukuzawa 1885).
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Index
Abegglen report (1970), 221 capitalism, xiii, 2, 14, 35, 38, 43–4,
accumulation mechanism, 50–1, 54, 58 48–9, 51, 54–5, 64–7, 147, 160,
active interdependence, 195 214, 217, 220, 223, 227, 239,
agricultural sector, 104, 108, 173–7, 242–4, 247–8, 250–4, 256, 258,
185, 192–3, 195–6, 203–5, 208, 211 261–4
agricultural tax, 175, 206 capitalist economy, 5, 2, 37, 40, 43–4,
alliance, 165 51, 58, 66, 231, 234–5,
amakudari (descent from heaven), 239, 243
101 capitalist world system, 37–8, 42–5,
Anglo-Saxon model, 4, 214, 243–4 47, 56, 64–6, 239, 242–3
ASEAN-plus-three (APT), 112 cat theory (Deng Xiaoping), 113
Asian financial crisis (1997–98), 62, catching up (countries, development,
74, 112, 163, 253, 261 economies, growth), 4, 16, 38,
Asian model economies, 12, 24, 27, 41–2, 45, 48, 55, 57, 60–1, 102,
29–30 148, 233
Association of Southeast Asian central government, 123–6, 129, 131,
Nations (ASEAN), 58–60, 112 133, 136, 141, 161, 163, 187, 206
authoritarian state, 102, 153 centralization, 130
Automotive Industrial Policy (AIP), 125 centralized state, 104
chaebol, 101
Baumol’s cost disease, 40, 53–4 Chinese model of economic
Beijing Consensus, 110–11, 113–14, development, 99, 213–20, 222–3,
117, 216, 238, 255, 260 227–9
bottom-up, 107 Chinese People’s Political
Bretton Woods system, 49, 52, 54, 57, Consultative Conference (CPPCC),
70, 73, 84, 254 190
bubble economy, 2–3, 59, 64, 74, 76, Chongqing model, 116
95–6, 157 classical liberalism, 68, 236
budget deficits, 146, 159, 164 closed door policy, 12
bureaucratic authoritarian, ix closed society, 12
bureaucratic capitalism, 43–4, 66 collectives, 186, 208
bureaucratic institutions, 42 collectivism, 116
bureaucratic-authoritarian collectivization, 208–9
industrializing regime (BAIRs), 102 command economy, 100, 105,127,
bureaucratization, 106 193, 209
business cycles, 2, 38, 40, 44, 46, 55 Communist Party of China (CPC), ix,
business strategy, 128 100, 107, 109, 114, 116, 209, 250
comparative advantage, 37–9, 41,
caifa, 101 43–4, 55, 58, 61, 63, 76, 95, 150, 178
capital accumulation regime, 38, 41, comparative institutional analysis,
43–6, 48–9, 54–9, 62–7, 242 221–6, 235
capital-intensive, 127, 178, 194 comparative political economy, 214
267
268 Index
competition, 48, 52–4, 68, 70, 72–3, developmentalism, xi, 1, 6, 68–70,

100, 105, 107, 111–12, 124–5, 128, 72, 74–5, 96–106, 109–10, 115, 117,
130, 133, 139, 142–3, 152, 234–5, 238, 240–3, 251, 256
151–3, 156–7, 163, 168, 221, distributional outcomes, 148
224, 236–7 divided governance, 208, 257
competiveness, 97 division of labor, 74, 85–87, 97
complementary institutions, 42–3, Doha Round, 108
45, 60, 62, 147 dual sector (model, theory, structure),
complete knocked down (CKD), 127 173, 193, 195
compressed development, 3, 38, 45, dynamic comparative advantage,
60–1, 212, 233 37–42, 44–5, 47, 49–51, 53–5, 57–9,
concurrent growth, 192–3, 197, 203, 61, 63, 66
206–7, 212 dynamic industry, 37–44, 55, 57, 61, 65
Confucian capitalism, 221 early developers, 2, 11, 28–9
conservatism, 112
convoy policy, 70 East Asian model of economic
cooperative movement, 205, 211 development, 2, 5, 12–14, 23,
cooperatives, 188, 205, 212 29, 34–5, 66, 100, 152, 212, 230,
coordination failures, 127 233–5, 242
corporate governance, 69, 73–4, 225 East Asian Summit (EAS), 112
corporatism, xiv, 55, 109, 214, 218 economic activism, 102 Economic
corruption, 36, 103, 107, 113, 153 Cooperation Framework Agreement
Council for Mutual Economic (ECFA), 135
Assistance (COMECON), 98 economic dependence, 169
creative destruction, 70 Economic Freedom of the World
cross-shareholding, 72, 156 Index (EFW Index), ix, 15, 36
Cultural Revolution, 91, 103–4 economic governance, 5
cyclical crisis, 40, 51, 64 economic liberalization, 108, 116, 126
economic openness, 22
decentralization, 130 economic system, 3–6, 8, 43, 81, 92,
delegate monitoring, 72 98, 100, 103, 105–6, 110, 114, 192,
democratic revolution, 220 218–9, 227, 232, 239, 242, 244
deregulation, 125, 156, 160–2, 163 effective demand, 54–5, 56, 86
developing countries, 42, 45, 58–60, efficiency, 2, 4, 11, 14–15, 25, 28, 35,
72, 85–6, 88, 90, 94, 136, 203, 230, 76, 85–6, 88, 97, 123–4, 153, 178,
234, 242–3, 245 224, 227, 233
development economics, 5, 213–14, elitistism, 153
242 employment, 40, 49–50, 54–5, 61, 67,
development model, 2, 6–7, 34, 68–9, 70–2, 94, 119, 151, 153, 158, 161,
72, 75, 81, 84–6, 88, 91, 94–7, 207, 168, 180, 184, 192, 199, 202, 206,
214–15, 219, 227, 232, 234–6, 238, 209–10, 224, 249
240, 252 endogenous growth, 151
development path, 41–2, 55, 182, enterprise, 69–72, 87, 109, 116, 127,
185, 218, 238, 240 160–1, 190, 215, 218, 224–5, 228
development policy, 88, 145, 240 entrepreneurism, 105, 126, 156, 162
development stages, 194 ethnicity, 2
developmental state, 6, 8, 12, 101, Euro-centrism, 223
104, 108–9, 113, 153, 215, 241, European Automobile Manufacturers’
244, 249 Association (ACEA), ix, 144
Index 269
evolutionary economics, 37 gini coefficient, 205

evolutionary game theory, 224 global imbalances, 145, 147–8, 150,
excessive capacity, 103 159, 164, 166, 237
exchange rate, xiv, 16, 50, 52, 63, 71, global supply chains (GSC), 87, 122
73, 85, 95–6, 147, 150, 154, 155, global value chain (GVC), 45, 58
159–60, 166–7, 237, 260 globalization, xi, xii, 41–2, 57, 62, 68,
exclusionary politics, 153 81, 84–6, 88, 91, 94, 97, 98–9, 108,
export concentration, 102 110, 115, 218, 236, 238, 245, 252
export concentration, 55, 58, 63, 65, gold exchange standard, 43, 49, 54,
100, 102, 148, 150, 152–3, 159–60, 84
169, 192, 234, 236 golden age, 38, 43–4, 48–9, 51, 54–5,
58, 62, 67
factor endowment, 178 government-business relations, xii,
factor inputs (economic growth), 19 142, 221, 238
factor structure (economic growth), gradualism, 103, 113
22 Great Depression, 44, 84, 91
factors of production (FOP), 60, 74, Great Leap Forward (1957–8, China),
87, 230, 240 186
family-based farms, 192 gross capital formation, 22
federalism, 218 Gross National Income (GNI), x, 36,
financial innovation, 56 79, 83
financial instability hypothesis, 46, growth model, 6, 99, 114, 117, 168,
50 192, 206, 212, 238
financial institutions, 42, 45, 111 growth pattern, 22
financial relaxation, 56–7, 62 growth stages, 3, 25
firm theories, 214 Guangdong model, 116
fiscal policy, 54, 70–1, 74, 155
Five Principles of Peaceful heavy and chemical industries, 41–2,
Coexistence, 114 44, 48, 55–6, 64
Five-Year Plan, 124–5 hedge finance, 46, 50, 58
floating exchange regime, 54 hegemony, 4, 42, 95, 147
flying geese pattern of economic high-speed economic growth, xiv, 2,
growth, 30, 38, 41, 44–5, 55–6, 8, 15, 28–31, 34, 72, 74, 86, 93–4,
59–61, 65–6, 101, 112, 102, 172–3, 176–82, 185, 221, 223,
239–40, 248 228, 230, 233–4, 241
fordism, 52 horizontal institutional
foreign direct invested enterprises arrangements, 215
(FDIEs), ix, 77–8 household contract responsibility
foreign direct investment (FDI), ix, system, 210
6, 21–2, 45, 56, 59–60, 72, 79, 91, household farming, 205
118–19, 126, 130, 134–5, 137–8, hukou (household registration), xiii,
142–4, 160–2, 169, 236, 240, 252 174, 186, 190, 208–10, 212, 263
four cardinal principles, 103
free trade, 41, 43, 49, 52, 155 imperialism, 43–4, 223
import substitution, 88, 100, 115,
game theory, 224 124, 168, 234
General Agreement on Tariffs and income disparity, 177–8, 182–3,
Trade (GATT), 49, 52, 70–1, 85, 95 187–8, 233, 249, 257
German historical school, 86 income gaps, 175, 182
270 Index
indigenous brands, 123, 125–6, 132, intra-industry trade, 118, 236

139, 142
indirect finance, 71 Japan bashing, 145, 154
industrial capacity, 150 Japan, Inc., 221
industrial organization, xiv Japanese capitalism, 220, 223
industrial policy, 3, 6, 13, 41, 69–70, Japanese model of economic
93, 124, 131, 158, 162–4, 167–70, development, 170, 213, 214–15,
232, 234, 246, 249–50 220–2, 225–9
industrial relations, 53, 55, 57, 69, 225 joint ventures (JVs), 123, 126–9,
industrial structure, 3, 6, 22, 25, 38, 131–4, 137–9, 141–3
41, 61, 76, 178, 180, 184, 230, 233
industrial zones, 131 keiretsu, 101, 132, 137–9, 143, 151, 156
industrial, technical and trade Keynesianism, 53–4, 86
policies (ITT), ix, 41–2, 45, 49, 60 kicking away the ladder, 41, 49
industrialization, ix, 38, 41, 44–7, 53, Koza School, 220–3
55–6, 58–63, 65, 67, 91, 100, 126,
160, 173, 181, 183, 186, 208, 233, labor, 190
260, 264 labor market, 3, 174, 217, 249, 264
infant mortality, 180, 184 labor productivity, 22
information management, 225 labor scarcity, 177–8, 195
innovation, 67, 69, 71–2, 74, 76, labor supply, 7, 175
87–8, 92–4, 96, 102, 112, 116, labor transfer, 199
151–2, 162, 169, 196, 225–6, 259 labor unions, 50
innovation theory (Schumpeter), 86 labor-capital relations, 234
institutional arrangements, xiv, 68–9, labor-intensive, xiv, 56, 59–60, 65,
73, 87, 142, 188, 192–4, 206–7, 74, 87, 152, 167, 178, 194
212, 214–5, 219, 236–7, 239 land ownership, 193
institutional barriers, 174 land tenure, 193–4, 197,
Institutional division and exclusion, 207–10, 212
210 late development, 3, 106, 132–3
institutional dualism, 197, 208 late industrialization, 60
institutional political economy, 37 latelate development, 3
institutional setting, 19, 24 leapfrog development, 45
integration, 5, 13, 151, 193, 207, leftism, 104
210–212, 238, 257 left-wing, 220
intellectual property rights (IPR), 81, Lewis turning point, 3, 7, 115, 173–4,
125 176, 195, 197, 199, 203–5, 212, 233
inter-firm relations, 225 Liberal Democratic Party (LDP), ix,
international economic order, 3, 6, 102, 187, 190
70, 73, 85, 234 liberal model of economic growth, 35
international normative liberalism, 3, 15, 35, 42–4, 49, 56–9,
environment, 146, 165 62, 65, 68, 99, 113, 146, 148–9,
International Organization of Motor 154, 158–60, 165, 170–1, 193, 207,
Vehicle Manufacturers (OICA), x, 223–4, 236–7, 241
121, 123, 144, 259 liberalization, 83, 85, 117, 147, 149,
international trade system, 70 153–4, 156–61, 171, 237, 239
internationalization, 79, 117, 238 life expectancy, 180
interventionism, 42, 45, 60, 114 lifetime employment, 69, 72, 151
intra-firm trade, 87, 118 linear development, 40–1, 45, 55, 60
Index 271
liquidity trap, 47, 56, 58 Ministry of Industry and Information

local government, 6, 119, 124, Technology (MIIT, China), ix, 107
127, 129, 161, 167, 169–70, 175, Ministry of Information Industry
210–11, 236, 238 (MII, China), ix, 107
localization, 125, 129 Ministry of International Trade and
lost decade (Japan, 1990s), 2, 4, 76 Industry (MITI, Japan), 48, 101,
106–7, 117, 254, 258, 260
macroeconomic (policy, mobility, 4, 209–10
performance), 146, 150, 155–6, modern, 241
159–60, 164–6, 170–1, 232 modern conditions, 2, 4–5, 8
Maddison project, 36 modern economic development, 3,
Maekawa Committee report, 155 11–13, 15, 22, 25, 34–5, 37–8, 66,
manufacturing, 22, 52, 55, 58, 74, 69, 173, 230–1, 235, 239–40, 242–5
76, 81, 94, 100, 119, 122, 128, 131, modern economic system, 4
135, 139, 145, 148, 150–3, 159, modern economy, 2, 4–5, 8, 11, 14,
161–4, 174, 180, 246 19, 25–6, 28–9, 32, 34–6, 192, 212,
Maoist command economy, 100, 215, 231, 235, 239, 242–5
103–4, 114, 116, 185–6, 209 modern institutions, 11, 25, 32, 34,
marginal productivity, 174, 176 230
market access, 156, 168 modern society, 4, 220
market allocation, 145, 148 modernization, 4, 91–2, 101, 103,
market capitalism, 43, 66, 243 106, 115, 207, 242
market discipline, 157 modularization, 122, 228
market economy, 2, 14–16, 18, 25, monetary policy, 58, 62, 70, 157
34, 79, 91, 96, 102, 148, 214–15, monopoly, 69, 73, 87, 102, 126–7,
217, 221, 223–4, 227, 243–4 223
market failures, 145, 148–50 multinational corporations (MNCs),
market institutions, 11, 16, 32, 36, 69 ix, 79, 81, 84, 87–8, 96, 118, 120,
market selection, 41 127, 135, 257
marketization, 11, 15–16, 18, 25, 31,
34, 36, 161, 196 National Development and Reform
mechanism design, 224 Commission (NDRC, China),
Meiji Restoration (Japan, 1868), xiv, 124–5, 132, 144
12, 198, 203, 207, 220, 234 National People’s Congress (NPC), ix,
mercantile realism, 105 124, 188, 209, 259, 264
mercantilism, 38, 43, 111, 223 nationality, 2, 186
merger and acquisition (M&A), nationalization, 93
120–1, 133 neoclassical economics, 214, 221
microeconomic (policy, management, neoclassicalism, 86, 214, 221–2
performance), 159, 240 neo-corporatism, 109
migration, 193, 206–10 neoliberalism, 38, 43–4, 55–8, 65,
Ministry of Commerce (MOFCOM, 67, 72, 75, 79, 81, 84–6, 91, 94, 97,
China), ix, 79, 107, 258 101, 111, 234, 235, 240–2
Ministry of Economy, Trade and neutral government, 218
Industry (METI, Japan), ix, 117, New Left Movement, 108, 247, 251
144, 258 Newly Industrializing Economies
Ministry of Foreign Trade and (NIEs), 56, 59–60, 66
Economic Cooperation (MOFTEC, Nixon shock (1971), 54
China), 125 non-liner development, 42
272 Index
non-Western (countries, states, productivity gains, 195

societies), 4, 234, 242–5 protectionism, 42, 49, 70, 155
normative values, 24 protestant capitalism, 221
pseudo urbanization, 104
oil shocks (1974, 1979), 54–5
oligopolistic competition, 69 radicalism, 104
oligopoly, 69 regulation, 15–16, 36, 127, 157,
one country, two policies, 208, 257 162–3, 211
one country, two societies, 186 regulatory capture, 56
Organization of Economic regulatory control, 164
Cooperation and Development regulatory escape, 56
(OECD), 55, 172, 257 regulatory protection, 152
organizational deficit, 211 regulatory relapse, 56
outsourcing, 76, 122, 139 regulatory state, 101
over competition, 74 reindustrialization, 38, 49
overcapacity, 3, 130, 163 relationship-banking, 151
religion, 2
Pacific Rim triangle trade regime, 59, 63 renminbi, 73, 96, 112, 115, 117, 166
particularism, 221 rent seeking, 103
party-state, 102–3, 107, 115–16, 142 Research and Development (R&D), x,
path dependence, 147 75, 79–81, 132, 133, 151, 262
patronage, 151–3, 252 residency systems, 193, 197, 207,
pattern of economic growth, 67 208–9, 212
Penn World Tables, 36 resource allocation, 86, 149, 160
people’s commune, 186, 189, 209 revisionists, 146
perestroika, 107 Rhine model, 4, 244
Petty-Clarke’s law, 180 Rural Construction Movement
pillar industry, 124, 131 (1930s, China), 190
pilot agency, 101, 106 rural-urban (gap, divide, relations), xiv,
plan economy, 60, 72, 123, 224 7, 172–4, 178, 182–3, 185–9, 192–3,
Plaza Accord (1985), 59, 155 195, 197, 203, 206–12, 249, 257
political bargain, 153
political economy, xi–xiii, 5, 37, 66, self-determination, 91
148, 150, 154, 158, 235, 239, 242, self-reliance, 91, 126, 139
244, 249, 252, 259–60 sensitive interventions, 196–7
Ponzi finance, 46, 50, 58 Shimonoseki Treaty (1895), 92
PPP (purchasing power parity), 28–30 shock therapy, 103, 113
pragmatism, 160, 196 simulated Breton Woods system, 73
preferential treatment, 129–30 small and medium sized enterprises
pre-modern society, 11, 194, 220 (SMEs), 169
present value reversal, 47, 56 social classes, 2
production chain, 151 social market economic model,
production factors, 25 214–15, 217
production networks, xii, 56, 118–19, social welfare, 190, 217
135, 142–3, 236 socialism, 2, 35, 48–9, 60, 91–2, 98,
production structure, 6, 142, 238 103, 160, 193–4, 208, 215, 220,
productivity, 19, 22, 37–40, 42, 44–5, 243–4, 248, 252, 265
47–56, 59, 65, 67, 151, 174–7, 194, socialist camp, 92
196–7, 206, 208, 257 socialist economy, 2, 160
Index 273
socialist revolution, 220 top down, 104

soft power, 110 total factor productivity (TFP), 19
sovereignty, 111, 114, 143, 167 township and village enterprises
Soviet model, 4, 105, 217 (TVEs), 160–1
special economic zones (SEZs), 91, 126 trade deficit, 120, 155, 164, 168
speculative finance, 46, 50, 58 trade policy, 49, 145, 165, 167, 232
stages of modern economic trade structure, 178
development, 4, 22, 43, 68, 97, 105, traditional society, 194
108, 114, 132, 151–2, 161, 195, 197, Transnational Corporations
203–4, 207–8, 212, 219, 223, 230, (TNCs), 90
233, 236, 240 transparency, 113
state activism, 161, 164, 259 trickle-down economics, 111
state bias, 185
state centralism, 93 unilateralism, 114, 166
State Council, 116, 124, 130, 170 universalism, 221–2
state dominance, 214 Uno school, 223
State Economic and Trade urban bias, 185, 196, 206, 211
Commission (SETC), 107, 133, 144 urban industries, 192, 195, 197–8,
state intervention, 111, 149, 170 208, 212
state owned enterprises (SOEs), 104, urbanization, xiii, 104, 173, 179, 181,
123, 131, 133 183, 192, 197–200, 202–3, 208, 212,
State Planning Commission (SPC, 249, 257
China), 124–5, 144
state-business relationship, 152–3, value added per labor (VAL), 37–42, 53
218, 236 varieties of capitalism, 5, 35, 147, 150,
state-owned enterprises (SOEs), 74, 213–14, 227
104, 107–8, 122–3, 160–1, 164, 169 vertical institutional arrangements, 215
statism, xiv, 153 villagers’ autonomy, 189
sticky money wages, 50
sticky real wage, 53 wages, 37–42, 44, 49–51, 53–5, 56–9,
strategic management, 225 61, 65, 67, 69, 150–2, 168, 195, 203,
strong state, 99, 112, 189 205
structural adjustment, 199, 250 Washington Consensus, 111, 114,
structural crisis, 38, 41, 44, 54–7, 62, 64–5 252, 264
structural impediments initiative, 155 welfare state, 43–4, 56, 65, 152, 158
structural transformation, 197, 203, Westphalian system, 111, 114
206–7, 211–12 Worker-Farmer School, 220, 223
subsistence wage, 174–75, 190 world capitalist economy, 231
sunset industries, 167 World Development Indicators (WDI),
super Minsky cycle, 37–8, 46 x, 19, 264
supply networks, 131, 141 World Economic Outlook (WEO), 36
surplus labor, 40, 56, 61, 173–5 world economic system, 5
sustainability, 113 World Governance Indicators (WGI),
sustainable growth, 5, 212 x, 25, 36
World Trade Organization (WTO), x,
tax reform, 161, 206 63, 78, 95, 108, 110, 122, 125, 133,
technology acquisition, 139 141, 146, 162, 166–8, 170–1
temporary population, 210
tiger economies of East Asia, 100 Yangwu yundong, 91–4

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International Political Economy Series

Series Editor: Timothy M. Shaw, Visiting Professor, University of Massachusetts

International Political Economy Series

List of Illustrations viii

1 Modern Economic Development in Time and Place:

2 Mapping Japan and China in the World Economic System 10

3 Dynamic Comparative Advantage and the Evolution of the

4 Neoliberal and Classical Developmentalism: A Comparative

3 Comparative analysis of the two development models 75

5 Chinese Developmentalism: Beyond the Japanese Model 98

6 Japan’s FDI and the Development of the Automobile Industry

7 Development Models and External Constraints: From the

8 Rural–Urban Divide and the Lewisian Turning Point in

2 The debate on the Lewis turning point 173

9 The Forgotten Sector: Institutions, Market Linkages, and

10 Beyond Ideological Framing and Structural Description:

11 Conclusion: China and Japan as Instances of Modern

3.1 Periods of capitalist world systems 43

3.3 Super Minsky cycle 47

Bai Gao is Professor of Sociology at Duke University. He received his BA

Xiaoming Huang is Professor of International Relations at the Victoria

of Wellington. He is also a Senior Research Fellow at the New Zealand

Sasuga Katsuhiro is Associate Professor in the Department of International

Katsuji Nakagane is Emeritus Professor at the University of Tokyo,

University. Professor Nakagane is a leading scholar in Japan on Chinese

Lei Song is Associate Professor and Head of the Department of Political

Ben Thirkell-White is Associate Professor at the School of History,

Nobuharu Yokokawa is Professor of Economics at Musashi University,

Jason Young is Lecturer in the Department of Political Science and

East Asia, and the New Zealand–China relationship. Jason is currently

Yanbing Zhang is Lecturer at the School of Public Policy and

ACEA European Automobile Manufacturers’ Association

MOFTEC Ministry of Foreign Trade and Economic Cooperation

understood through the vastly different historical periods of the early

Theories of late development (Gerschenkron 1962; Amsden 1989), for

Moreover, one set of similarities allows China and Japan to be seen as

progression of the world economic system where the later economies

great impact on the direction and scope of the growth of an industry in

two parallel experiences of modern economic development, and inves-

The intellectual challenge of understanding the modern development

1 Japan and China

Modern economic development of Japan and China has been looked

A second framework looks at Europe, or the West, as a point of refer-

mid-nineteenth century when Japan started to “open up and reform,”

0: lowest level, 10:highest level

Figure 2.2 Institutions of market economy: China and Japan (1970–2010)

of marketization and quality of institutions for market economy was

0: lowest level, 10:highest level

0: lowest level, 10:highest level

0: lowest level, 10:highest level

Figure 2.5 Institutions of market economy: China and Japan (1970–2010) –

0: lowest level, 10:highest level

Figure 2.6 Institutions of market economy: China and Japan (1970–2010) –

0: lowest level, 10:highest level

Figure 2.7 Institutions of market economy: China and Japan (1970–2010) –

in “noneconomic” factors, forces, and arrangements that enable or shape

Figure 2.8 Labor productivity: Japan and China (1960–2010)

Figure 2.9 Gross capital formation: Japan and China (1960–2010)

Figure 2.12 Agriculture, value added as % of GDP: Japan and China

Figure 2.13 Manufacturing, value added as % of GDP: Japan and China

structure. Finally, Figure 2.15 shows trade as a percentage of GDP, meas-

Figure 2.15 Trade as % of GDP: Japan and China (1960–2008)

through 2.21 show that in all these indicators, Japan is considerably

higher the value, the better quality governance outcomes