What the U.S. can learn from Japan

Japan and the Four Little Dragons in order to achieve their

industrialization goals have a diverse set of policies ranging from

limited entitlement programs to a education and government bureaucracy

that stresses achievement and meritocracy. But one of the most

significant innovations of Japan and the Four Little Dragons is there

industrial policy which targets improving specific sectors of the

economy by focusing R&D, subsidies, and tax incentives to specific

industries that the government wants to promote. The United States

could adopt some of these industrial policies to help foster emerging

high tech businesses and help existing U.S. business remain

competitive with East Asia.

In Japan the government both during the Meiji period and the

post World War II period followed a policy of active, sector selective

industrial targeting. Japan used basically the same model during both

historical periods. The Japanese government would focus its tax

incentive programs, subsidies, and R&D on what it saw as emerging

industries. During the Meiji period Japan focused it's attention on

emulating western technology such as trains, steel production, and

textiles. The Meiji leaders took taxes levied on agriculture to fund

the development of these new industries. Following World War II

Japanese industries used this same strategic industrial policy to

develop the high-tech, steel, and car industries that Japan is known

for today. Some American industries are currently heavily supported by

the government through subsidies and tax breaks to farmers, steel

producers, and other industries that have been hurt by foreign

competition because they are predominantly low-tech industries. But

this economic policy of the U.S. is almost a complete reversal of the

economic policies of Japan and the Four Little Tigers; instead of

fostering new businesses and high tech industry it supports out of

date and low tech firms who have political clout. The existing

economic policy of the United States fails to help high tech

businesses develop a competitive advantage on the world market instead

it stagnates innovation by providing incentives primarily to existing

business. The structure of U.S. industrial policy like the structure

of an advance welfare state has emphasized rewarding powerful lobbying

groups and has not targeted emerging sectors of the economy. The

current U.S. industrial policy is a distribution strategy and not a

development strategy.

Instead of this ad-hoc industrial policy the United States

should follow Japan's model of strategic targeting of emerging

technology. The U.S. instead of pouring its money into subsidies and

tax breaks for failing low-tech industries should provide loans,

subsidies and R&D money for firms that are producing high technology

products. Unfortunately, there are several impediments to copying

Japan's model: first, tremendous political pressure from interest

groups forces politicians to give corporate welfare to failing

established firms and not emerging firms. Second, it is difficult for

a government to select which sectors of the economy it will target.

But despite these obstacles the U.S. is now confronted with trading

powers who have coordinated government programs to foster the

development of new technology; in comparison the U.S. governments

reliance on individual initiative and a lack of government support for

new industries has allowed Japan and the Four Little Dragon's to

catch up to the U.S. in the area of high technology. In the coming

years the U.S. could not just lose its advantage but fall behind if it

fails to redirect government subsidies from failing firms to emerging

sectors of the economy copying Japan's industrial development model.