INTRODUCTION

Key role of the treaty ports of Western empires

THE EXPANSION OF impersonal market trades has been the driving force of the modern economic growth. Third party governance of Western states has thus far been the only institutional arrangement to have succeeded in this kind of development in history (North and Thomas (1973), North (2005)). Indeed, Westernization of non-Westem countries has generally accelerated the growth of economies in the long term (Parente and Prescott (1994, 1999), Hall and Jones (1999), Acemoglu and Robinson (2000), Acemoglu, Johnson and Robinson (2001)). A successfully Westernized economy has grown faster. This statement is persuasive in itself. The question then arises as to how some economies have been Westernized while some others have not.

Efficient forms of institutions invented in the North Atlantic spread across the world in the late nineteenth century under the imperialist integration of the global economy. The nexus of institutions, represented by the free trade and the international financial system, functioned as world-wide “public goods,” and boosted global economic growth. In international trades during the process of globalization, the entire world was exposed to Westernized and standardized practices. By the early twentieth century, almost every economy was incorporated into the global free trade regime and the well-standardized international finance centered at London. In particular, regions annexed by empires or under control of imperialist power smoothly enjoyed the benefit from increased trade volume in the market integrated under efficient institutions, at least on average in the long-term. On the other hand, among countries that kept independent against empires, unfortunately the opportunity to be exposed to Western institutions was exploited only by a few economies. Only those countries successfully established a coordinated linking of the domestic commodity and factor markets to the Westernized international commodity and financial markets.

Pre-modern economies often consist of diverse and segregated markets, each of which is governed under a specific institution. Country-wide coordination failure might be normality rather than abnormality in such a context. In economies where the coordination failed, the outcome was not simply something that was yet to happen. Domestic commodity and factor markets governed by domestic institutions, which were often characterized by the personal and relational governance mechanism, could work together as stubborn “barriers” to Westernization of governance. The social cost of development to overwhelm the “barriers” was significant also in the Japanese case.