Yoshiro Miwa & J. Mark Ramseyer, The Effectiveness of Economic Controls: The Early Postwar Years in Japan: Part I: The Effectiveness of Economic Controls (Ctr. for Int'l Res. on Japanese Econ., Discussion Paper No. CIRJE-J-110, May 2004) (in Japanese).
Abstract: Despite the many economic studies documenting the problems governments face in trying to control or guide economic growth, the literature on postwar Japan posits an exception: during the first three years after World War II, the Japanese government (working with the Allied occupation) effectively promoted growth. Through a variety of price, quantity and import controls (collectively called the "keisha seisan hoshiki," or the "priority production method"), it boosted production in several vital industries -- most prominently coal and steel. This did not happen. The early postwar Japanese government merely continued the controls it had used during wartime. Those controls had not promoted growth during the war, and they did not promote it after. Instead, they simply created the predictable combination of official shortages and black-market supplies. By the late 1940s the economy started to revive, but it did not revive because of these command schemes. Instead, it revived because these bureaucrats abandoned their attempts at control. They did not abandon the controls because of any change of heart. Instead, they abandoned them because voters made them abandon the controls. In 1948 Japanese voters threw out their socialist coalition cabinet and installed the predecessor to the modestly right-of-center governments that would rule Japan for the next half century. That government then ended the controls and imposed monetary discipline. Crucially, the Japanese government did not shift economic policy because of any pressure from Washington. Instead, it shifted from socialist-oriented controls to a more market-oriented approach before the Washington shift (symbolized by Dodge's arrival) usually credited with the transformation. Before then, interventionist American bureaucrats had dominated occupation policy, and backed the growth-retarding controls implemented by the Japanese government. The dynamics between the occupation bureaucracy and the Japanese government are crucial. During the early post-war years, interventionist bureaucrats ran the Allied occupation. Similarly interventionist Japanese officials had then used pressure from those Allied bureaucrats to hold at bay their domestic rivals who (having seen first-hand the failure of economic controls during the war) hoped to dismantle the wartime control structure. During the first years of the occupation, these interventionists successfully kept the controls in tact -- but brought about an economic disaster. Under strong electoral pressure, in 1948 their non-interventionist rivals prevailed. Shortly thereafter (crucially -- thereafter, not before), non-interventionists in Washington forced a similar shift in Allied policy as well. All this should put in perspective the role that the Allied occupation played in the Japanese recovery. Fundamentally, occupation bureaucrats did not promote economic recovery; during the early post-war years, they dramatically retarded it. Japan did not grow because of occupation policy; it grew in spite of it. And the shift toward healthier economic policies did not begin in Washington; it began among Japanese voters, and began in opposition to Washington. We begin by showing the ineffectiveness of the "priority production method" and the intellectual origins of the myth of its efficacy (Sections 2-3). To make the point in more detail, we take the coal industry as a case study (Section 4). We then turn to the electoral determinants of Japanese policy (Section 5), and conclude by exploring the effect of the occupation (Section 6).