MITI or ‘mitti’?

The BJP wants to strengthen Indian industry without scaring away foreign investors. Its manifesto talks of creating an institution like Japan’s ministry of international trade and industry (MITI), which channelled substantial financial support to select Japanese industries after World War II and helped spark the Japanese economic miracle. The Korean government, too, provided massive financial support to its chaebol (industrial conglomerates) and helped them become world-size and world-class. Neither Japan nor Korea encouraged foreign direct investment. The BJP likes that. So it plans to set up a MITI-style institution to produce a Hindu (or at least Hindutva) economic miracle.

I hate to be a spoilsport, but it won’t work. What Japan and Korea did was to give enormous financial favours that made some industrial groups phenomenally rich, trusting that there would a trickle-down effect which benefited the whole country. This formula actually worked in these two countries. Yet it is a very risky strategy, just a hair-breadth away from crony capitalism, which has destroyed so many Third World economies. Governments are very rarely so platonic that they can dispense massive favours without getting into the vicious cycle of corruption.

No government in India will ever be able to get away with such a policy. Suppose the government selects the Ambanis, Modis and Sarabhais for special financial favours. The Birlas, Tatas, Singhanias and all the other business groups will shout from the rooftops, and opposition MPs will call it a scam. The press and most citizens will denounce this as shameless cronyism. Nobody will swallow the thesis that what is good for the favoured businessmen is also good for India. There will be mud-slinging all round, and much of the mud will stick. It will be a case of mitti rather than MITI.

Can the BJP avoid mud-slinging by channelling billions to specific industries rather than business groups? No, every industry will lobby with ‘donations’ to get into the select list. And since various business houses are identified with different industries (Tatas with steel and trucks, Birlas with cement and aluminium), the mud will still fly.

Japan and Korea did something quite remarkable. They went for a version of crony capitalism where the government was able to oblige the favoured groups to stick to a social contract. In return for financial favours, they had to produce world-class goods at competitive prices. The World Bank believes this is best achieved by allowing liberal imports, which will force domestic producers to shape up. But Japan and Korea took a different route. They erected substantial import barriers to help favoured groups, but also forced them to export. That was a package deal. Forcing them into the global market ensured that they would achieve global standards.

If the BJP provides massive incentives to companies that export, nobody will regard that as corrupt. But another problem arises here. The WTO forbids export subsidies, direct or indirect. In the old days, when India was too small and poor to matter, nobody bothered to make an issue of Indian export subsidies. But if India is serious about becoming an economic power that matters—and the BJP definitely wants that—then WTO will oblige India to end export subsidies. What was possible in the 1950s and 1960s is no longer possible today.

Korea had a military dictatorship that could ensure obedience to the implicit social contract. Japan was a democracy, but its Liberal Democratic Party had a monopoly of political power, and its samurai tradition of obedience to bosses enabled it to exercise discipline in business. India, alas, is a corrupt democracy where politicians are more likely to be criminals than platonic guardians. Virtually every Indian business tries to get round laws and rules by hook or crook, in connivance with politicians and bureaucrats. Such a set-up cannot ensure the non-partisan use of massive giveaways.

In any case, MITI’s role in the Japanese miracle has been vastly exaggerated. Consider the following passage from a recent article by Professor Takatoshi Ito of Hitot-subashi University. While many theorists attribute Japan’s growth to intelligent government intervention, he says, there is also a contrary school of thought which “points to failures in the government’s attempt to identify sunrise industries: Coal, petrochemicals, oil refining and aluminium are some examples”. In fact, some studies suggest that if productivity increases are related to loans from the Japanese Development Bank at the industry level, the relationship is negative (that is, the government worsened rather than improved matters through intervention). Consumer electronics, probably one of the most successful export industries, was never on MITI’s list. The automobile industry is another interesting case. In the early 1960s, MITI attempted to merge several automobile manufacturers into two groups, arguing that there were too many automobile manufacturers in Japan. The firms fought back and maintained their independence. If MITI had succeeded in reducing their number, domestic competition would have been stifled, and Japanese automobiles might not have dominated the world market in the 1980s.

Professor Ito is not alone in this assessment. One of the most famous blunders of MITI was its refusal to see any future for Sony in electronics or Honda in cars. In India, these companies would simply have been denied a licence. In Japan they were denied concessional finance, but went ahead nevertheless. Today, despite MITI, they are world leaders.

After World War II, when financial markets barely existed and foreign exchange was scarce in Japan, the support of MITI counted for a lot. But by the 1970s Japan had became prosperous, had plenty of foreign exchange and its companies had access to global capital markets. MITI shrank greatly in importance: Japanese businessmen no longer needed it. The magic of MITI has disappeared altogether in the 1990s. Japan has been mired in a long recession since 1991, but MITI has been unable to anything about it.

So, let not the BJP think that creating a MITI-type ministry is a magic wand that will yield a Hindu economic miracle. A miracle economy is one with a broad range of institutions that constantly reward companies that increase productivity and penalise those who lower it. The daily hunt for increased productivity was the force that made Japan a world power. India needs it too. Swadeshi protectionism cannot achieve the same result.

What do you think?