Protection, Cooperation, Integration and Development

Professor Hiroshi Kitamura was born in Tokyo on 21 November 1909. He comes from what I think is fair to describe as an enlightened, typically urban, modern Japanese middle-class family which derives from the Samurai tradition of Confucian scholars in the Satsuma clan. He is the eldest of five children, having two sisters and two brothers, all of whom live in Japan, the sisters in Osaka and Nagoya and the brothers in Tokyo. His father, who was the Managing Director of Meiji Sugar Refinery, Inc., was financially responsible for Hiroshi’s entire education.

One of the strongest conclusions following from neoclassical trade theory is that protection of domestic industries from import competition generally lowers average real income in a country unless that country’s trade volume is so large that changes in it affect international prices. Why, then, is protection so pervasive? Is it because some individuals and groups in society are more politically powerful than others and so are able to influence policies in their favour despite undesired costs to the rest of the community? Or is it that in granting protection governments are reflecting the preferences of the community and government officials in assisting certain industries for such ‘non-economic’ reasons as maintaining employment in those otherwise declining industries?¹

US industry these days feels under siege from foreign competitors, and points to rising shares of imports in their home market and falling shares of US exports in world markets. Attention has been drawn to a host of foreign practices that apparently help to explain the increased competition from foreigners, ranging from specific export promotional tactics and specific import prohibitions to broadly-drawn industrial policies and industrial targets that allegedly provide impetus to foreign exports and simultaneously discourage imports from the USA and elsewhere. These practices in one variant or another have been discovered to be widespread, being used not only by other industrial countries, but by less developed countries (LDCs) as well, particularly the newly industrialised countries (NICs) such as Korea and Brazil. But Japan is held up as the main culprit, not so much because its practices are more extensive than those in other countries, but because they are somewhat mysterious and lost behind Japanese reticence and lingusitic ambiguity, and above all because Japan has emerged as the most successful competitor in a number of industries in which Americans have hitherto considered themselves unrivalled. It is foreign success rather than the practices themselves — which in many cases have existed for many years and in some cases have actually diminished in importance — which has given rise to such widespread concern, and has led to calls for US action ranging from retaliation to emulation.

Japan’s phenomenal success in the field of new management techniques and technological innovations, particularly in electronics and new computer systems, has made her economy probably the most competitive in the world. The Japanese society seems to have crossed the threshold to an information society. To the external observer, this remarkable transition appeared to have had no corresponding radical change in the traditional values and historical traditions of Japanese society. This ‘Japanese miracle’ gave rise to numerous studies on how it had been achieved and whether it would or could be transferable to the European and/or American cultural environment.

Hiroshi Kitamura has experienced life in the entire spectrum of countries at different stages of economic development: receiving his higher degrees in Europe and Japan, spending time on economic research in Europe and the USA, teaching in Japan and promoting economic development in the Economic Commission for Asia and the Far East (ECAFE) in Bangkok. It may therefore be fitting, in honouring him for a long and distinguished career, to analyse the question of when a country should, in a normative sense, take on some appropriate (substantial?) share of responsibility for the world economic system. A similar problem presents itself in peace-keeping. Indeed the parallel between peace-keeping and international economic stability is a close one, both being international public goods that have to be provided in the absence of international government that could use coercion, and both goods that are plagued with ‘free-riders’, i.e. countries that hang back from paying the costs on the grounds that others will do so.

Many changes in the monetary and financial fields in Japan, some self-generated and some foreign-induced, have been observed in recent years. These changes correspond not only to the changes in domestic economic conditions but also to the integration in international financial markets. On the domestic front, it became apparent that the traditional financial system, which actually supported the post-war economic era with its remarkable years of economic growth, was not adapting to the system with a wider spectrum of portfolio. After twice experiencing the oil shocks and adopting a flexible system of exchange rates the Japanese economic goals did not remain the same as before. Thus policies had to change drastically in the 1970s. Nevertheless, the remaining financial regulations and structure adjusted less swiftly to the new economic situation during the same period. Eventually, various innovations took place in the 1970s. On the international front, as the Japanese economy has been more extensively involved in international activities, a number of financial institutions and businesses have become accustomed to much broader opportunities than in the domestic situation which had been bound by the rules and regulations established in conjunction with the relatively closed market framework.

World economic growth centred on the industrialised nations in the period between the end of the Second World War and the 1960s. The EC’s intra- and extra-regional trade was at its peak, and growth in the USA was reflected in the Atlantic region which acted as the support for worldwide economic growth, trade expansion and regional development. With the turn of the decade, however, the industrialised nations’ economic growth slowed down drastically, and the world economy’s centre of gravity shifted to the oil-producing nations and the developing and newly industrialising countries (NICs) of Latin America and Asia as these countries’ trade expansion and economic growth made remarkable strides.

This chapter attempts to single out the main structural developments which will to a great extent influence the policy-makers’ attitudes towards foreign economic policy. It starts by examining developments in foreign trade (level, direction and structure of trade) and goes on to consider developments in the domestic economies of Europe and Asia with a particular focus on long-term adjustment problems. It concludes with an evaluation of the attitudes of policymakers with respect to the economic system and trade issues.

Sub-Saharan Africa has attracted global concern twice in the past quarter of a century: 1960 was viewed as the year of Africa, in hope and expectation, while 1985 was one of misery and disappointment. This part of Africa now embraces forty-five poor developing countries, twenty-seven of which are the least developed countries in the world, and 66 per cent of which are low-income countries. Only eight nations have populations of more than 10 million while another eight have less than 1 million inhabitants each. Thus Sub-Saharan Africa can be considered as a cluster of poor small countries. Their development performance in the last two decades has been extremely disappointing; this is shown by their stagnant, or even negative, rates of growth of per capita income. What is even worse is the fear that the prospects for the rest of this century appear to be dismal. The region is now facing a crisis of development which seems to be insurmountable in the short run.

Without exception, all recent internal or external action programmes or guidelines for sub-Saharan Africa (ECA, 1984; World Bank, 1981, 1983, 1984) assign a major developmental role to economic integration and regional co-operation. The case for economic cooperation does seem to be compelling and it can surely only be reinforced by recent redefinitions of priorities. In isolation, most small poor sub-Saharan states have very constrained development options. Their balanced development — and certainly any strategy that gives importance to import-substitution — demands larger markets. For most countries, this points to some form of regional cooperation. This has long been recognised, and regional economic integration and cooperation have constituted an element of sub-Saharan African development strategies for more than two decades. Yet the contribution of integration to development has not so far been great, and in some cases may even have been negative.

The General Budget of the European Communities (EC) forms an integral and very important part of the Community’s fiscal policy. Very widely interpreted, fiscal policy comprises a whole corpus of public finance issues: the relative size of the public sector, taxation and expenditure, and the allocation of public sector responsibilities between different tiers of government. In short, there are at least two basic elements to fiscal policy: the instruments available to the government for fiscal policy purposes (the total tax structure) and the overall impact of the joint manoeuvring of the instruments (the role played by the budget). The purpose of this chapter is to explain briefly the nature of the EC General Budget (EC Budget hereafter), to demonstrate why it is inequitable and to suggest ways in which it could be made less so. It should be apparent that the choice of subject is due to its importance not only for the EC but also for other schemes of international economic integration contemplating the establishment of a grouping as complicated as the EC.

If we pass review on the debate over development policy since the Second World War, one conspicuous aspect is the large number of misconceptions which have been overtaken by later developments. New concepts arise like waves and are widely discussed, only to disappear again in the end. Let us not forget that development in the underdeveloped regions was once seen as a problem of capital provision. It was generally believed that any level of development could be achieved as long as the necessary capital was correctly estimated and appropriated accordingly. It was only natural to present calculations on capital need as if they were a representation of the world’s welfare in a few numbers — though at an incomprehensible order of magnitude.

Professor Kitamura has long had a concern for the improvement of international economic policy. The less developed countries (LDCs) have increasingly had to be factored into this process. And from the development experience of the past four decades, it is now apparent that the international development community must focus more directly on the task of making development policies more effective. This chapter offers some preliminary suggestions toward this end. It asks two overriding questions: ‘Why are economists not heeded?’ and ‘How can the impediments to more effective policy-making be diminished or removed?’.

Researchers whose interest centres on the scope and pace of the global arms race are confronted with increasingly numerous indications that both qualitative and quantitative changes have been occurring recently in world trade in conventional weapons. Developing countries are slowly but surely joining the ranks of the producers and exporters to the LDCs of military equipment and military back-up services. The aim of this chapter is to present a detailed account of the most recent developments in this area which remain relatively unfamiliar in view of the secretiveness based on the pretext of ‘national security’ of these newcomers to the international arms race.

I am happy to pay my tribute to Hiroshi Kitamura and join the ranks of contributors to this volume in his honour. The list of contributors shows in what high esteem he is widely held, both as an economist and as a person. My own association with Hiroshi goes back to our work together in Bangkok in what was then the UN Economic Commission for Asia and the Far East (ECAFE, now called Economic and Social Commission for Asia and the Pacific — or ESCAP). This was a long time ago, but I have never forgotten the stimulation and friendship which then developed and which we were able to renew in more recent meetings (unfortunately all too rare) and by intellectual exchanges. I find his ideas and approach to economic problems very congenial and have learnt a great deal from him both directly and through his writings. I hope we may still look forward to further contributions from his pen.

The framework of pure theories of international trade, having evolved through analyses of, among other things, interrelationships among factor-intensities of production functions and factor-endowments of nations, has provided a useful basis for analysing various problems of public economics. Harberger’s (1962) analysis of the incidence of the corporation income tax is a classical example.¹ The concept of ‘rent-seeking activites’, recently popular among public-choice theorists, finds its forebears in analyses of protective tariffs.² This chapter is an application of that framework to the analysis of demand and supply of publicly-provided goods and services. It analyses the effects of publicly-supplied goods on income distribution and their consequential impact on the demand for public provision of goods and services. (Hereafter the term ‘public goods’ will be used to refer to all publicly-provided goods and services, including Samuelsonian public goods (Samuelson, 1953) and Musgravian social goods (Musgrave, 1969).

Accidents of personal academic history barred me — or so I believed —from international economics early on. Not having studied the subject as an undergraduate, I did not do well in the redoubtable Jacob Viner’s graduate sequence at Chicago in the mid-1900s. What brought me back to the field were two policy issues of the immediate post-war period a dozen years later — the allegedly-permanent ‘dollar shortage’ and the alleged impossibility of Japanese return to balanced international payments at or above the country’s pre-war standard of living. These were joined in the early 1950s by another ‘Japanese’ issue — the questionable relevance of Meiji Era development experience to the problems of Asian and Latin American LDCs a century later. To make a long story short, I began teaching international economics in the early 1960s, and have continued to do so at intervals ever since.¹ But I remain more nearly self-taught in theoretical aspects than are most international economists of my acquaintance, and therefore limit my teaching to the undergraduate level. I beg your kind indulgence insofar as my criticism of the conventional wisdom of international economics betrays mainly my own ignorance of the relevant literature.

In the dawn of ping-pong diplomacy, a group of Yale economists visited China. Lloyd Reynolds, in his account of the visit, related how in Peking they expressed to their hosts the wish to meet some government economists, whether planners or advisers. They were quite unsuccessful. Gradually, said Lloyd Reynolds, the awful thought occurred to us: is it possible that a country of 900 million people can be governed without any economists at all?