Introduction

The rise of the global market economy has been marked by an increasing recognition of the role of the private sector in making the economy more efficient and competitive. One of the available approaches for promoting private sector development is the privatization of state-owned enterprises (SOEs). More than eighty countries have launched ambitious efforts to privatize their SOEs. Since 1980 more than 2,000 SOEs have been privatized in developing countries and 6,800 world-wide. Although the privatization process began with small and medium-sized companies, in the past few years privatization has included large SOEs as well. In fact, the number of countries involved in privatization and the pace of privatization have dramatically increased.

Privatization, when correctly conceived and implemented, fosters efficiency, encourages investment (and thus new growth and employment), and frees public resources for investment in infrastructure and social programmes. In developed countries such as Japan and France, where the role of state enterprises has been previously dominant, privatization and deregulation are considered key instruments to economic restructuring and growth promotion. Even in former socialist economies like China and Russia, policy makers have seriously considered possibilities for privatization in their efforts to develop the private sector. Similarly, ASEAN countries have also realized the necessity of privatization in the greater deregulation process. In fact, privatization and, in broader term, deregulation can be considered as a key factor behind the robust growth of the world's fastest growing region.

In Indonesia for many years the issue of SOE reform, especially privatization, has been politically sensitive and purposefully avoided in public discussions. In particular, the word ‘privatization’ has been thought to be contrary to the spirit of nationalism and socialism that is strongly embedded in the Indonesian values. It is therefore understandable that although much research has covered the deregulation of the Indonesian economy, there have not been many studies discussing the privatization issues in Indonesia. The progress of the Indonesian SOE reform is relatively slow, especially if compared to reform in other sectors. This chapter attempts to give an overview on the role of SOEs in Indonesia and the results of the efforts to reform SOEs that have been undertaken since the late 1980s.

The State as Development Agent

Although Vietnam now recognizes the utility of a state-regulated market economy, and the desirability of a multi-sectoral economy (that is both private and state enterprises), the complete abandonment of state-owned enterprises (SOEs) is not deemed acceptable. Indeed, Vietnam wishes to see the state sector maintain its position at the forefront of the economy. One general conviction prevailing, and categorically stated in two of the chapters on Vietnam (Tiem and Thanh, Tuan et al.), is the view that the state plays a pivotal role as a development agent; and that the provision of certain goods and services shall remain in the exclusive domain of the state. The areas listed range from public utilities, infrastructure, defence, security, transport, postal services, and telecommunications to fertilizers, pesticides, veterinary products, and geological prospecting.

Three basic reasons have been given for an active state role: (1) low or non-profitability in the provision of (often capital-intensive) public utilities and infrastructure; (2) the need to help develop remote and mountainous areas; and (3) the need for industries necessary for Vietnam's industrialization and modernization, which the private sector is unable, at present, to play an important role in promoting. The literature on the establishment of SOEs, however, cites many more reasons, pertaining to factors such as macroeconomic stabilization, just and fair distribution of income and wealth, market failures and imperfections, monopolistic market structures, and externalities (see for example, C.Y. Ng and N. Wagner, Marketization in ASEAN. Singapore: ISEAS, 1991).

Indeed, the ASEAN experience has shown a strong case for the state to play a pivotal role in development, through the establishment of SOEs. It should, however, be noted that all ASEAN countries are currently undergoing dramatic transformation, through divestment of SOEs, having experienced a serious drain on their budgets in the recent past. The one possible exception where SOEs have been (in general) profitably and efficiently run is Singapore, and yet this state too has a comprehensive programme of privatization.

It was a letter to the editor of a Tokyo daily newspaper. And it captured at least some of the economic impact of the textile industry. Having made a minor fortune in the textile mills, the women had raised their sights, and raised them high.

To explain why the textile workers were able to obtain these high wages, in this chapter I explore the informational logic to the employment arrangements they used. Because each firm was so large and because so many women regularly quit work to return home and marry, potential employees had access to a steady flow of verifiable information about their potential employers. Owners, however, did not have accurate information about their recruits, could not readily monitor each recruit's performance, and could not precisely verify what their plant managers told them.

In significant part, the history of law in imperial Japan is a history of the way courts enforced claims to scarce resources. More simply, it is a history of property rights. As one court (somewhat sanctimoniously) put it in 1918, “the inviolability of the right to property is one of the fundamental principles of the Imperial Constitution.” Throughout the period, Japanese courts enforced private claims to property, and labor remained an asset controlled by the laborer himself or herself.

Over the past several decades, scholars have detailed the close (though obviously imperfect) relation between institutions that enforce private rights to scarce resources and the dynamics of economic growth. Those institutions, as Douglass North (1994: 359) put it in his Nobel Prize address, “form the incentive structure of a society, and … in consequence, are the underlying determinants of economic performance.” Through its courts, the Japanese government maintained those institutions scrupulously. The relatively efficient Japanese economic growth in the pre-War years was no surprise. It was the predictable result of the legal rules the government enacted and the courts enforced.

Land and labor are critical ingredients in almost all industries. By the turn of the century, Japanese courts systematically enforced the rights to use land, to exclude others from it, and to transfer it. Most land has value only when improved, and for most of Japanese history improvement has meant irrigation. Over irrigation rights, too, courts enforced such rights.

INTRODUCTION

Few industries tug as strongly at the heartstrings as the sexual services industry. Take the tales social historian Mikiso Hane tells. A “growing chasm” separated rich and poor in pre-War Japan (1982, 34), he writes. “[T]he condition of the peasants remained pathetic in contrast with the growing well-being of bourgeois capitalists,” and peasants found themselves waging “a bitter struggle for survival” (id., at 31, 27). Within this impoverished world, some of “the most pitiful victims …were the young farm girls who were sold to brothels” (id., at 207).

Unfortunately, the poignancy masks the ingenuity with which prostitutes and brothel owners overcame the chronic informational asymmetries in the contracting process. In most industries, prospective employees know their own productivity better than employers; employers know their own operations better than employees; both have an incentive to lie; and both would do best if both could communicate honestly. Given that most employers and employees care what others say about them, reputational effects mitigate some of these problems. Often, however, employers and employees can – and do – draft labor contracts to reduce any remaining informational problems. In the sexual services industry, they drafted those contracts with a remarkable resourcefulness.

In the following two chapters, I consider two issues central to the thesis in this book: narrowly – how did workers and employers respond to such informational asymmetries in the labor market; and more broadly – how independently and selfishly did they behave? To explore these questions, I study two very different industries.

The Cambridge series on the Political Economy of Institutions and Decisions is built around attempts to answer two central questions: How do institutions evolve in response to individual incentives, strategies, and choices, and how do institutions affect the performance of political and economic systems? The scope of the series is comparative and historical rather than international or specifically American, and the focus is positive rather than normative.

Property rights shape the incentive structure of a society and so determine its economic performance. In his thoughtful and provocative analysis of Japan before 1940, Mark Ramseyer argues that governments created and courts enforced legal rules that made people economically autonomous agents in many ways, providing the motive force behind economic growth. His evidence rejects oft-stated claims that Japanese courts enforced autocratic family law, for instance. But his arguments from the field of law and economics go further than this, analyzing the historical evolution of Japanese property rights in such diverse areas as land and water, children, families, factory labor, and sexual services. Many of these markets feature severe information asymmetries and thus sometimes depend more on cartelization and bargaining than on simple decentralized exchange among individuals. This magnifies the role of rules and laws in such markets in promoting economic growth. Ramseyer shows how the Imperial courts confirmed explicitly what customary practices of Tokugawa markets in land, water, and labor had conveyed implicitly, namely, secure specific rights to individuals to use factors of production under their control as they saw fit.

INTRODUCTION

“I see the world in very fluid, contradictory, emerging, interconnected terms,” Jerry Brown once observed, “and with that kind of circuitry I just don't feel the need to say what is going to happen or will not happen.”

Life is subtle. Life is complicated. Life is hard. But Jerry Brown notwithstanding some things are less subtle, less complicated, less hard than they first seem – and the relationship between legal rules and economic performance is one. Legal rules structure institutions, and institutions determine economic growth. Rules that clarify and enforce rights to scarce resources tend to promote efficient growth, and those that muddy those rights tend to retard it.

In imperial Japan (1868 to 1945, though I largely end my discussion with 1930), these connections between law and growth raise at least two questions: what role did law play in Japanese economic growth; and what caused the Japanese government to adopt the law that it did? In this chapter I begin with the argument about the first of these questions and follow it with a more tentative hypothesis about the second. In later chapters I focus on the legal rules themselves and on the ways people manipulated those rules by private agreement.

Accordingly I begin this chapter by outlining the theoretical relationship between legal regimes and economic performance (Section 1). I describe the Japanese regime in place during the first half of this century, and explain how it tended to promote efficient growth (Section 2).

INTRODUCTION

In any world where people cannot bargain with each other costlessly (which is to say, in any world that counts), a court that would promote efficient growth will need to resolve disputes over conflicting uses of property. Typically, it will face the problem when one person develops property in a way that lowers the value of the property next door. In Chapter 2, I discussed related issues in water use. Here, I turn to the problem of pollution.

Although observers sometimes suggest that the imperial Japanese government let entrepreneurs externalize the costs of their activity by polluting freely, the observers are wrong. Notwithstanding the many ambiguities in the law, the government did not let entrepreneurs freely pollute. Instead, if an entrepreneur harmed others through inefficient activity, the courts held the entrepreneur liable in tort. In the process, they necessarily encouraged efficient levels of growth.

To explore how imperial Japanese courts handled the externalities to industrial production, I first summarize the economics of pollution (Section 1; readers familiar with law & economics may safely skip to Section 2). I then explain Japanese tort law (Section 2), and discuss its implications for economic growth (Section 3).

LAW AND EXTERNALITIES

To explore the relation between pollution law and efficient growth, consider a simple example from Polinsky (1983: 16). Posit one factory F, one neighbor N, production volumes that range from o to 3 units per day, and hypothetical profits to F and harm to N given by Table 3.1.

INTRODUCTION

As Thomas Hardy told it, Michael Henchard sold her in a tavern at a wayside fair. He was poor, drunk, unhappy, and unhappily married. He owned her. “I don't see why men who have got wives and don't want ‘em, shouldn't get rid of 'em as these gipsy fellows do their old horses,” he explained (Hardy, 1886). If a passing sailor wanted her, well for five guineas he could have her.

From time to time, scholars have told similar tales of Tokugawa (1600– 1868) Japan. The late Takeyoshi Kawashima (1950a,b), professor of civil law at the University of Tokyo and probably the best-known legal sociologist in Japan, claimed Tokugawa men routinely sold their wives and children or rented them long-term. It was endemic to the brutality of Asiatic patriarchal feudalism, he explained. During the early Tokugawa period “peasants frequently sold their family members into temporary servitude,” echoes historian Mikiso Hane (1972: 170–1). “In reality this resulted in permanent enslavement, because the contract could not be dissolved until the debt was repaid, and this the impoverished peasants could seldom do.…[Indentured servants [had] terms of service [that] might run from ten years to a lifetime.”

One might have thought the sold children would resist. According to most scholars, though, out of ideological conformity or cultural docility they eventually complied. Living as they did within a hierarchical and familistic world, they thought working in a place like a brothel for the sake of the family “a supreme example of filial self-sacrifice” (Hendry, 1986: 21).

“Weird markets.” A friend suggested the phrase in 1991 over burnt coffee in one of those nouvelle-Italian restaurants that plagued the East Coast that year. “That's all you do, you know. Write about weird markets.” She had a point, I guess. And even if she had not thought the phrase a compliment, it did have a nice ring. It may have been a bit too cute to work as book title (I tried it, but prudent friends said no), but it does capture an important facet of this project.

If this is a book about weird markets, it is also a “law & economics” book about Japan. Solidly within the genre of positive (nonnormative) “law & economics,” it explains the relation between legal change and economic growth through a model of individuals who rationally maximize their utility (generally, wealth). Where most studies in law & economics either develop formally theoretical (mathematical) models or test theories with empirical data from the United States, however, this book uses data from Japanese history. It is data from a different world: For much of the period at stake, the Japanese government was an oligarchy rather than a democracy; the judges operated a civil rather than common law regime; the economy grew modestly but erratically; and social customs changed rapidly and radically. As a result, this book applies an economic logic, but to markets in a vastly different environment – to markets in a different historical period with a different political regime, a different legal system, and a different cultural context.