Department of Economics, UCSC

From the 1890s to 1960, industrial policy provided vital aid to the development of the Japanese iron and steel industry. Japanese industrial policy proved successful in steel even though public support was much prolonged, subject to political influence, and based on limited forecasting power ex ante, particularly with regard to recurrent raw material problems. Policy success in steel suggests the importance of large and pervasive market failures within a national context of underdevelopment. Over the longer term, on the other hand, as the Japanese economy grew more mature and its markets less expansive, implicit public commitment of aid to troubled industries may have engendered moral hazard, over-investment, and excess capacity—a set of problems that significantly reduces the attractions of the Japanese model.