Chapter 7 Possibility of Sustainable Development: China and Japan

Manuel Guitián, and Robert Mundell
Published Date:
June 1996
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Hirofumi Uzawa

The main purpose of this paper is twofold. First, we would like to clarify the concept of sustainable development within the theoretical premises of economic theory and to examine the institutional arrangements under which sustainable development may be realized in a decentralized, market economy. Second, we focus our attention on China and Japan, first briefly analyzing the processes of economic development both countries have experienced in the last half century and then discussing the institutional and policy reforms that would enable both countries to pursue market-based, democratic processes of sustainable development.

The concept of sustainable development used in this paper is based on the one customarily adopted in economic theory. Namely, economic development is defined as sustainable when the allocation of scarce resources over time is dynamically efficient and the distribution of real income among individual members of society is inherently dynamically stable. The institutional arrangements under which sustainable economic development may be realized are crucially dependent on the structure of social overhead capital and the way the services from various components of social overhead capital are distributed (Uzawa, 1988, 1993a).

Social overhead capital consists of those scarce resources that are indispensable for each citizen to lead a decent and dignified life. Sustainable economic development may be actualized when the various components of social overhead capital are harmoniously maintained so that the allocative processes under decentralized market institutions result in stable income distribution.

The experiences of economic development in the last fifty years in China and Japan are briefly reviewed, with an emphasis upon the construction and management of various components of social overhead capital. The overall performance of the Chinese economy through the 1970s was satisfactory in terms of both efficiency and equity, as was econometrically shown, for example, by Uzawa (1989). Since the early 1980s, a vigorous attempt has been made to introduce decentralized mechanisms and an incentive system into all spheres of economic activity, resulting in a far more efficient allocation of scarce resources, but also in greater instability in income distribution and prices. The efficiency of the allocative mechanism, however, is short term, and little attention has been paid to the environmental consequences of economic development.

The Japanese experience of postwar economic development may generally be characterized as excellent from economic and industrial points of view, but, from social, cultural, and environmental points of view, the allocative mechanism in postwar Japan is deficient mainly owing to the powerful state bureaucracy, which effectively controls virtually every aspect of life in Japan, from agriculture to education and religion. The various components of social overhead capital are exclusively managed by this bureaucracy, not in accordance with the fiduciary nature of social overhead capital.

There exist many similarities between China and Japan with respect to the management of social overhead capital, although the two countries differ significantly with respect to their stage of economic development and their political and cultural orientation, which are crucial in the management of such capital. One salient feature common to both countries is the dominant role played by the state bureaucracy, which may not be particularly conducive to the actualization of sustainable economic development. Moreover, in both China and Japan, professional discipline and individual integrity are not particularly notable in crucial areas of social overhead capital, in particular, educational and medical institutions, judicial systems, and monetary and financial institutions.

To attain sustainable development, these countries will first have to restructure these crucial sectors so that professional discipline is strictly observed and individual integrity is highly honored. At the same time, every attempt will have to be made to delegate to social institutions the power and authority now vested in various governmental ministries.

A cursory review of the postwar experiences of China and Japan shows that, in China, the Government has acknowledged that the difficulties the people face are consequences of ill-conceived public policies. In contrast, the state bureaucracy in Japan has not, except on rare occasions, been willing to adjust public and social policies once they are implemented. It might be argued that conditions in China favor sustainable development whereas those in Japan do not.

Sustainable Development and Social Overhead Capital

In the last several years, particularly since the 1992 Rio conference on the global environment, the concept of sustainable economic development has become a central theme, for both industrial and developed countries, in devising an institutional framework in which environmental constraints are optimally taken into account in the choice of various economic activities.

Economic development is broadly termed sustainable when scarce resources, including privately appropriated resources and those that are publicly or socially managed, are allocated efficiently over time, and, concurrently, when the distribution of real income among individual members of society is broadly equal.

Resource allocation and income distribution, in terms of decentralized, market institutions, may not necessarily lead to sustainable development, and a variety of institutional arrangements may be needed if sustainable development is to be realized within a democratic political economic system. Such institutional arrangements may be put in perspective if we introduce the concept of social overhead capital, which plays a pivotal role in stabilizing, over time, resource allocation and income distribution as well as in alleviating the environmental disruption resulting from an accelerated pace of industrialization and urbanization.

In principle, the scarce resources that comprise social overhead capital are not allocated to individual members of society but are generally held as common property resources, to be managed by social institutions, which are fiduciarily entrusted by society with maintaining a specific type of social overhead capital in good order and with efficiently and equitably distributing the services derived from social overhead capital.

Social overhead capital may be classified into three categories: the natural environment, infrastructure, and institutional capital. These three categories are not necessarily exclusive or exhaustive, but they exemplify the nature of functions performed by social overhead capital in resource allocation and income distribution (see Uzawa, 1982, 1988).

The natural environment, or natural capital, if we emphasize the role of the natural environment in economic development, consists of natural resources, such as forests, water, rivers, lakes, wetlands, coastal seas, oceans, soil, and, above all, the earth’s atmosphere. It also includes all living plants, animals, and microbes on the earth. They all share the common feature of being regenerative, subject to intricate and subtle forces of ecological and biological mechanisms. They provide all the living organisms on the earth, particularly human beings, with the environment in which it is possible to sustain their lives and regenerate themselves.

Infrastructure is another important component of social overhead capital. It consists of roads, bridges, public mass transportation systems, water and sanitation systems, electricity and other public utilities, and communications and postal services, among others. Institutional capital comprises those facilities, such as medical and educational institutions, judicial and police systems, public administrative services, and financial and monetary institutions, that are indispensable for social stability and economic efficiency.

While, in listing the categories of social overhead capital, it is important to bear in mind that its complexity arises primarily because its constituents exhibit the combined characteristics of public and quasi-public goods, various components of social overhead capital share a number of economic and technological features that have important implications for the allocative process of scarce resources.

First, each component of social overhead capital provides all members of society, to a lesser or greater extent depending upon their specific requirements, with the services they need to lead a decent life and pursue normal productive activities. While water, electricity, and transport may be used routinely in daily life, medical and educational services are required only at specific times during each individual’s lifetime. Nevertheless, if one is deprived of the services provided by any sector of social overhead capital, his or her basic rights as a citizen of the society may be said to be seriously jeopardized. The second feature common to all sectors of social overhead capital concerns the nature of investment in the construction of social overhead capital.

Third, various sectors of social overhead capital exhibit a significant degree of economies of scale, with respect to both the construction and maintenance of the facilities. For example, power-generating plants, water purification plants, and railways are subject to economies of scale in the technological sense. In contrast, other components of social overhead capital are subject to economies of scale either owing to the uncertainty of the need for their services, as for medical services, or owing to the various tastes and propensities of individuals in society, as for educational services.

Fourth, significant costs are involved in providing the services of social overhead capital to individual members of society. Furthermore, the way in which the services of social overhead capital are provided is nonmalleable in the sense that, once investment is made to construct a specific component of social overhead capital, it is technologically impossible or financially costly to transform it to provide the services in a way other than originally stipulated.

Social overhead capital thus constitutes the framework of social institutions within which all human activities, economic, social, and cultural, are conducted in a stable and harmonious manner. The economic efficiency of the allocative process of market institutions and the social stability of their distributive process crucially depend upon the nature of social overhead capital that exists in a society at any one time and upon the way in which the services of social overhead capital are provided to individual members of that society.

The nature of externalities, both static and dynamic, differs substantially for the three categories of social overhead capital, and the behavioral and financial characteristics of the social institution that is charged with each sector of social overhead capital are closely related to the nature of the externalities (Uzawa, 1993b). Because each component of social overhead capital is influenced by externalities, the social institution that effects the intertemporally optimum allocation of scarce resources within the social over-head capital component in question has a unique structure, size, and code of behavior.

As for the management of the natural environment, there actually exist historical and traditional commons, which, at one time, helped sustain the use of natural resources, but which have since ceased to exist. One notable exception is the fisheries in Japan, which, however, are not as productive as in the past partly because of the destruction of coastal wetlands, pollution of coastal seas, and changes in climatic conditions, but mainly as a result of reform measures undertaken concerning the legal and statutory arrangements of commons in general.

In order for the social institution in charge of a specific component of social overhead capital to be able to allocate the scarce resources involved in such a way that the resulting pattern of economic activities is intertemporally optimal and sustainable with respect to the natural environment and the market economy, it must take account of externalities. While such an institution is required to retain organizational integrity and professional discipline, financial neutrality is not necessarily implied.

While the founding of social institutions in charge of various components of social overhead capital is established by statute and their activities financially regulated, the state bureaucracy must be prevented from interfering with their professional activities, particularly with the provision and delivery of the services, for example, educational and medical institutions, monetary and financial institutions, and judicial and police systems.

The organizational structure and code of professional behavior, as well as the concrete financial arrangements, of each component of social overhead capital are to be determined, not on the basis of a predetermined doctrine, but rather relative to the cultural, social, economic, natural, and historic conditions of each country involved.

Inflation and Growth

The role of social overhead capital in economic development may be best understood if we briefly review the relationship between inflation and economic growth in a purely decentralized market economy.

Whether the dynamic allocation of scarce resources through the market mechanism can achieve stable economic growth is not simply a matter of theoretical interest. It is also indispensable in the consideration of the effect of public policy. There exist two opposing views concerning the problem of dynamic stability of the market mechanism. One approach is based upon the theoretical premises of the neoclassical economic theory; the other considers the problem within the framework developed in Keynes’s General Theory (see Uzawa, 1974a). The approach based on neoclassical theory concludes that the process of market growth is usually stable, and that, except in unusual situations, prices change approximately in proportion to the rate of increase in money supply and full employment growth generally obtains. Keynesian theory, in contrast, concludes that the market allocation of scarce resources is an inherent cause of instability in a modern capitalistic system and that maintaining stable economic growth is akin to walking on the edge of a knife.

For purposes of developing a simplified Keynesian model, the national economy is viewed as consisting of business firms and households. Business firms employ labor and other factors of production and engage in production and sales; households own the primary factors of production and possess, as assets, securities issued by the firms. Besides households and business firms, which make up the private sector, there is also a government sector. The latter constructs and maintains social overhead capital facilities and provides the public with the services derived from social overhead capital, which are financed through taxes or the issue of money. New money is provided by the central bank and includes not only increases in the money supply to meet fiscal deficits, but also money issued through open market operations. It is assumed that government policies concerning expenditures and revenues, that is, fiscal policy, and policies concerning the money supply, that is, monetary policy, can be controlled independently of each other.

The market is broken down into three main divisions: the goods and services market, the labor market, and the financial market. The following simplified assumptions are made about the mechanisms through which these markets are adjusted. First, in the goods and services market, it is assumed that prices always equate supply with demand, and, in the corporate sector, that production is always adjusted to changes in prices. In the labor market, it is assumed that, when the demand for labor exceeds supply, money wage rates are immediately increased and equilibrium restored, but when the supply of labor exceeds demand, wage rates do not decline, resulting in involuntary unemployment. At the core of the financial market lies the money market, which is highly organized and operates efficiently. It is assumed that money and short-term financial assets are transacted efficiently in the money market, while the market adjustment mechanism for long-term securities depends crucially on expectations of future prices and rates of interest.

The total amount of goods and services supplied by the whole corporate sector is determined by the scale of the production schedule of individual firms in response to market conditions. The productive capacity of individual firms depends on the amounts of fixed factors of production accumulated through past investment. Each individual firm determines the scale of production and the employment of laborers in such a manner that its net profit is maximized. Accordingly, the aggregate supply price corresponds to the goods and services produced by the corporate sector as measured in units of money wages, to be explained by the productive capacity of the corporate sector and the maximizing behavior of business firms. In contrast, aggregate demand is determined by the behavior of households, business firms, and government vis-à-vis consumption and investment.

Consumption is assumed to depend on permanent real income. Hence, increasing the money supply through open market operations can be seen to have the following effects on consumption demand, as originally suggested by Mundell (1960, 1963). In determining the level of permanent real income, individual households take into account the effects that fiscal and monetary policies may have on the financial situation of the private sector. Because an open market purchase of privately held securities tends to have a compensating effect on the future earnings of the private sector, it may be assumed that any change in the money supply does not induce private economic units to change their long-term expectations immediately (Metzler, 1951). Rather, the expected rate of interest is assumed to be adaptively adjusted over time (Cagan, 1956).

The determination of investment demand is discussed in terms of the Keynes-Penrose theory of investment, as formulated by Uzawa (1969). Each business firm determines the level of investment in fixed capital in such a manner that the discounted present value of expected future net profits is maximized, while the effect of investment upon the increase in real capital is governed by the Penrose effect.

Under the assumptions postulated above, it can be shown that, for a decentralized market economy to be continuously in equilibrium in all markets—the goods and services market, the labor market, and the financial market—the increase in the money supply is determined so that prices tend to increase at a specific, steady rate.

The rate of inflation that brings about full employment in the labor market and the equality of supply and demand in the goods and services market are closely related to the quantity and nature of social overhead capital that exists in a society at any one time. Particularly relevant will be the role played by those sectors of social overhead capital that are crucial for maintaining industrial, agricultural, and transportation activities. The distributional mechanism within the framework of decentralized market institutions also hinges on the nature of social overhead capital facilities and the way the services from it are provided (Uzawa, 1982, 1988).

The role of social overhead capital in bringing about sustainable economic development has been emphasized above. However, the composition of social overhead capital facilities existing in a society is an outcome of political processes regarding the allocation of scarce resources in general and of publicly controlled resources in particular. The experiences of China and Japan are discussed, and, in broad terms, the possibility of sustainable development in these two countries is examined.

Sustainable Development in China

In China, all scarce resources were, until the late 1970s, primarily regarded as social overhead capital, to be managed by various types of social institution, but predominantly by the central bureaucracy. The successive five-year plans, prepared and implemented by the state, authoritatively determined the allocation of scarce resources, including labor and skills, and the distribution of income. The social institutions in charge of various components of social overhead capital were not endogenously formed, but rather were dictated by the state. However, a glance at the actual performance of the successive five-year plans from the beginning of the 1950s to the end of the 1970s indicates substantial revision, in either the second or the third year of each plan, to remedy the gap between what had been planned and what actually happened, particularly with respect to the living standards of the people. Uzawa (1989) constructed a simple econometric model, consisting of six pivotal sectors, for the Chinese economy during this period to demonstrate that the revisions made for each five-year plan were consistent, except for a few years during the 1960s, with the result that economic development was a coherent process. The allocation of scarce resources might not have been as efficient as one would have desired, and the distribution of income, particularly between the rural and urban sectors, was not strictly equal. But the performance of the successive five-year plans, even up to the mid-1980s, had been rather satisfactory, both from efficiency and equity points of view.

The economic performance of China’s economy during the 1980s has been put in a better historical perspective by Zhang and Yi (1995), where the gradualist approach to China’s reform is succinctly summarized in nine stylized facts. The reason China adopted the gradualist approach is explained and the processes through which China’s reform has achieved success are shown. The nine stylized facts of China’s reform, as described by Zhang and Yi (1995), are as follows:

  • (1) Economic reforms have not been conducted according to a well-defined and time-consistent objective model.

  • (2) Economic reforms have not followed a well-designed blueprint.

  • (3) The reforms have been sequenced from the easiest to the hardest.

  • (4) The reforms have been progressing through a dual-track system.

  • (5) No major group has been stripped of its vested interests, but the way in which these vested interests are realized has changed.

  • (6) Local governments have dominated the reforms.

  • (7) Great regional variation has characterized the reforms.

  • (8) The country’s economic reform has been experimental.

  • (9) The reforms have evolved gradually, a process that was preceded by a “stop-go cycle,” a cycle when reforms were initiated and then halted.

The flexibility of China’s economic reforms, as characterized by the stylized facts, can be seen in the way the successive five-year plans have been implemented during the reform that began in the 1980s, indicating that sustainable development is possible, although it may take a number of years before China will be able to reap what it is now sowing. Particularly relevant in this context is the process through which the evolutionary reform measures help create social institutions in charge of various components of social overhead capital, such as market institutions, through self-interested activities under the guidance of an “invisible hand” (see Perkins, 1988; Kornai, 1990; McMillan and Naughton, 1992; Murphy, Shleifer, and Vishny, 1992; Zwang and Yi, 1995, and Lin, Cai, and Li, 1995). However, China faces formidable problems, such as the need to improve every component of social overhead capital, particularly those concerned with the natural environment, urban infrastructure, and energy sources.

One of the main reasons for the environmental problems China faces now is its increase in population. China’s population now numbers 1.2 billion, more than double the population of 540 million at the time of independence in 1949. The various policies the Government has introduced to curb population growth have had some effect, but the overall pressure owing to population growth will not ease for a number of years.

China must manage to support one-fifth of the world’s population with only 7 percent of the world’s farmland. The rapid pace of industrialization and urbanization has reduced the amount of available farmland by a magnitude of 3.6 million hectares. According to official estimates, China’s food requirements by the year 2000 will be more than 500 million tons of grains, 49 million tons of meat, and 29 million tons of fish. These figures surpass those for 1993, the highest figures China has experienced, by 50 million tons of grains and 10 million tons each of meat and fish.

Another major problem China faces is flood control of the Hwan Ho (Yellow River) and the Yangtze. The Hwan Ho has flooded 1,500 times since 602 B.C., while the Yangtze has flooded 214 times since 185 B.C. The Hwan Ho now accumulates 400 million tons of sand and soil annually, with the riverbed rising 10 centimeters a year. Since independence, three major improvements have been made on the Hwan Ho, with the levee raised by 3 meters and with the construction of eight huge dams. The Yangtze accumulates 500 million tons of sand and soil annually, requiring repair of more than 30,000 kilometers of the levee. The construction of the gigantic Three Gorges Dam has begun amid great concern about the disruption of the natural and ecological environments and the dislocation of large numbers of people and villages.

Pollution and environmental disruption still remain serious concerns for China. Although China is known to have the largest reserves of bituminous coal, approximately 80 percent of the world total, there exists a significant trend to shift from coal to oil as a primary energy source, chiefly for reasons of economic efficiency, but also owing to concerns about the effect of carbon dioxide emissions on the environment. China’s energy demands in 1990 were close to 800 million tons of oil equivalent, of which about 19 percent were crude oil. Energy demand is estimated to be close to 1,400 million tons of oil equivalent, of which about 20 percent will be crude oil. As the reforms and economic development proceed at the current pace, the shortage of crude oil in China will become serious enough to require substantial alteration of the development plan as it is now envisaged.

Japan Today

The performance of the Japanese economy has been unparalleled, both during the period of rapid economic growth from the mid-1950s to the beginning of the 1970s and then during the subsequent period of modest economic growth until the beginning of the 1990s. While in 1965, Japan’s GNP was ¥102 trillion ($1,200 billion), in 1995, it is close to ¥500 trillion ($6,000 billion), growing fivefold in 30 years. In 1965, national income was ¥72 trillion ($850 billion), rising, in 1995, to close to ¥360 trillion ($4,500 billion), with a per capita income of well over $30,000.

Despite Japan’s excellent economic performance, as indicated by statistical data and economic indices, social strain and national stress have accumulated during the forty years since the economy began to grow rapidly in the mid-1950s, reminding us of the urgency of re-evaluating the allocative processes in Japan as a whole.

Before the Second World War, the state bureaucracy in Japan, in cooperation with the militarists and in absolute obedience to the Emperor, had been responsible for pursuing the expansionist and nationalist policy that eventually led Japan into the disastrous war. After the war, the state bureaucracy survived almost intact and undermined the reform measures directed by the occupation army, except for the notable cases of agrarian land reform and the dissolution of the Zaibatsus. Virtually all instrumental arrangements and policy measures that had been implemented either in the late 1930s or in the early 1940s in order to mobilize the Japanese economy for the war have remained intact, causing the economic stagnation and social chaos Japan is suffering today, as documented by Noguchi (1995).

Japan today is characterized by the contrast between the corporate sector, on the one hand, and the living environment of ordinary people, on the other. There exists an extensive network of gigantic highways, enormous bridges, efficient and splendorous Shinkansen railways, gorgeous facilities for corporations, both private and public, and, above all, enormous concentrations of industrial facilities, embodying the most advanced technologies and the most efficient entrepreneurial abilities. In contrast, the ordinary people live in small, poorly equipped houses, typically in inhumanly congested urban areas, and the destruction of the natural environment and the disruption of the cultural environment have been extended all over Japan.

In terms of road density, Japan now has the highest in the world, approximately 5 times that of the United States and 40 times that of Canada. Roads and expressways in Japan are built adjacent to residential areas, causing widespread health hazards and property and ecological damage. Still, an inordinate proportion of public investments is allocated annually to the construction of roads and expressways.

One salient feature of the Japanese political system throughout the last forty years has been the intimate collaboration between the Liberal Democratic Party (LDP) and the state bureaucracy to create a milieu favorable to the interests of big business, frequently at the expense of social justice and public welfare. Big businesses donated, legally or otherwise, large sums of money annually to the LDP, which, in turn, collaborated with career bureaucrats in catering to the interest of big business. This has had deleterious consequences for professional discipline and the organizational integrity of virtually all social institutions, particularly the state bureaucracy itself.

There exist numerous cases of bureaucratically conceived public works projects that have resulted in gross misallocations of scarce resources and social disequilibria, occasionally with significant macroeconomic implications. Among them are the Mutsu-Ogawara Industrial Development Plan; the reclamation of Naka-no-umi, Yokaku-wan, and Shibushi-wan; the construction of dams at Yamba, Nagara, and other places; and the ill-fated construction of the New Tokyo International Airport. They have not only contributed to the disruption of the natural environment, but also resulted in destablizing the economic structure and in disturbing social equilibrium. These projects have particularly disturbing implications for the natural environment and social equilibrium.

The Kobe earthquake exemplifies the economic and social consequences of the allocative and distributive mechanisms as managed by the state bureaucracy. At 5:46 in the early morning of January 17, 1995, a great earthquake with a magnitude of 7.2 on the Richter scale struck the city of Kobe and its vicinity, claiming more than 5,000 lives and injuring 30,000 people. Close to 200,000 houses collapsed, and more than 300,000 people were evacuated. With an estimated loss of more than ¥10 trillion ($120 billion), it is the largest disaster in postwar Japan.

The damage was largely concentrated in the western part of the city, centered around the wards of Nagata and Suma. The area is one of the most congested urban areas in Japan, with an extremely low average income and an impoverished living environment. A large number of dwellings in the area were rebuilt immediately after the war when the area was completely burned as a result of American bombing in 1945. For years, the inhabitants had been asking the Kobe government to make substantial investments in improving their living conditions. However, the city government developed Kobe so that subsidiary payments from the Central Government would be maximized and entrepreneurial activities would be made most profitable. The city authorities leveled mountains to develop housing projects and industrial parks. They built several municipal golf courses and cultural facilities, all planned as profitable establishments. Particularly notable were the two gigantic man-made islands reclaimed from the sand and earth, created by leveling the mountains in the Rokko range, and transported by underground tunnels. It has been known that an active fault runs underneath the Rokko range, and some seismologists had expressed deep concern about the possibility that removing mountains of such a magnitude would destabilize the intricate geological equilibrium.

The profits the City of Kobe earned from all its enterprises had been invested exclusively in expanding these profitable enterprises, not in constructing and managing social overhead capital, which is indispensable for maintaining a socially stable and yet culturally attractive environment.

Agriculture is another area where the role of social overhead capital plays a decisive role in the process of resource allocation. Not only does agriculture require the services derived from social overhead capital, such as forests, irrigation facilities, soil, and water, but also the social and economic organizations for agriculture should be neither individual farm households nor state institutions directly controlled by the Government. In 1961, when the Fundamental Law was enacted, there were close to 12 million farm households; in 1991, there were slightly more than 3 million, a decrease of three-fourths within thirty years. In 1961, the number of new graduates who chose agriculture as their occupation was close to 90,000, while, in 1991, it was less than 1,800, with a prediction that it will drop to less than 1,000 in a few years.

The Fundamental Law was centered on the concept of an independent, profitable farm household, and the agricultural policies implemented since have taken the form of subsidiary arrangements in order for farm households to enlarge the size of farmland holdings to become as profitable as any industrial establishments.

As for rice paddy agriculture, the Ministry of Agriculture contemplated roughly 80 hectares of farmland for each independent, profitable farm household and began to undertake vigorous agricultural policies, primarily in the form of numerous subsidiary arrangements for the construction of irrigation canals, paved roads, and other infrastructure facilities. The average size of farmland holdings then was 0.9 hectares; excluding Hokkaido, it was about 0.8 hectares.

The Ministry of Agriculture also reorganized the Agricultural Cooperative Society, founded in the 1930s primarily to regulate Japanese agriculture for the war, to make it a monopolistic organization through which farmers must transact and pay fees in virtually every aspect of rural life, from purchases of seeds, fertilizers, machinery, and daily provisions to sales of agricultural produce. The Agricultural Cooperative Society is the largest single commercial enterprise, and its management is effectively controlled by retired officials from the Ministry of Agriculture.

The school system in Japan, both higher education and primary education, is another example of control by the state bureaucracy undermining the professional integrity of those who are engaged in educational activities and ruining the organizational integrity of many universities and schools in Japan in the last decade or so. With the Ministry of Education firmly in control of the financial as well as the academic minutes of most universities and colleges, with only rare exceptions, academic freedom is constrained and professional dignity has been almost entirely lost. The excellence of the Japanese school system has become a thing of the past.

Concluding Remarks

We have briefly discussed the possibility of implementing those institutional arrangements and policy mixes that would enable China and Japan to pursue market-based, democratic processes of sustainable development. The possibility of sustainable development in China has been demonstrated by a large number of economists who have closely observed both the experiences of the successive five-year economic plans and the way the Government has responded to the divergence between what had been predicted in the five-year plans and the actual outcomes concerning the allocative processes and the levels of real living standards of the people. In contrast, it is rather difficult to predict that Japan may be able to pursue the path of economic development that would result in sustainable use of both natural and social resources. This is primarily due to the persistence of those institutional, legal, and social arrangements that were implemented in the late 1930s and in the early 1940s, giving the government bureaucracy absolute power, in order to prepare Japan to go to war with the Great Powers.


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