Abstract: A Long, Contingent Path to Comparative Advantage: Industrial Policy and the Japanese Iron and Steel Industry, 1900-1973

Bernard Elbaum


From 1900 to 1960, the Japanese iron and steel industry was nursed along by some varying combination of subsidies, trade protection, and military demand. Industrial policy made an important contribution to industry achievement even though it was prolonged, flawed, subject to political influence, and based on limited forecasting power ex ante, particularly with regard to the recurrent problem of raw materials. Despite many such problems, the record for steel—and other parallel cases—suggests that for a less developed nation as was Japan, market failures are sufficiently pervasive and large in scale that a diversified portfolio of interventions in basic industries can yield enough striking successes to repay the risk. Over the long term, however, implicit public commitment of aid to troubled industries may have created moral hazard problems that contributed to difficulties with excess capacity—difficulties that worsened with economic maturity and a less favorable market environment and that limit the attractions of the Japanese model.