Institutions, Industrial Upgrading, and Economic Performance in Japan

Institutions, Industrial Upgrading, and Economic Performance in Japan

The ‘Flying Geese’ Paradigm of Catch-up Growth

New Horizons in International Business series

Terutomo Ozawa

Terutomo Ozawa examines Japan’s once celebrated post-war economic success from a new perspective. He applies a ‘flying geese’ model of industrial upgrading in a country that is still catching-up, to explore the rise, fall and rebound of Japanese industry with its evolving institutions and policies.

Chapter 2: Labor-Driven Stage – and Logic – of Reconstruction

Terutomo Ozawa

Subjects: asian studies, asian business, asian economics, business and management, asia business, international business, economics and finance, asian economics, international business, international economics


2.1. LOGIC OF THE HECKSCHER–OHLIN TRADE THEORY This chapter explores the process and logic of industrial upgrading and structural dynamism associated with the labor-driven (Heckscher–Ohlin) phase of catch-up growth in postwar Japan. Any developing country must rely on its relatively abundant factor in the early stages of industrialization. For a country with scarce natural resources but an abundant supply of labor, its initial development strategy is to mobilize labor so as to exploit the logic of the Heckscher–Ohlin factor endowment theory of trade. Actually, Japan’s resource scarcity (except labor) has turned out to be a disguised blessing, since labor-driven economic development leads to a much quicker rise in wages – hence in the overall level of living standards for workers – than its resourcebased counterpart (Ozawa, 1997c). In contrast, resource-abundant countries are often victimized by their dependence on primary exports, which are subject to a secular decline in the terms of trade in the world market. Resource exploitation is also subject to diminishing returns, especially on the part of labor, with the consequence of a skewed income distribution in favor of landowners but against workers, who would be trapped in poverty. This is not an ideal condition for kick-starting industrialization, since it often leads to social instability. Often cursed are the haves in natural resources, and blessed are the have-nots. 2.2. LABOR SURPLUS AS A CATAPULT FOR INDUSTRIAL UPGRADING In the early postwar period, approximately from the start of the 1950s to the mid-1960s, Japan pursued labor-driven industrialization as...

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