INTRODUCTION: LEGISLATION AND LAW

The study of politics is dominated by what might be called a “legislative” view of government. In this view government proceeds largely through enacting general rules to channel social and economic conduct and then using more mundane administrative means to enforce them. This emphasis on legislation encourages us to see other institutions and practices in terms of their connection to or similarity to the legislature. Thus, electoral studies are frequently justified or motivated by their consequences for selecting lawmakers or expressing “mandates” for new laws; presidents are often seen and judged in terms of their role in the legislative process; and administrative agencies and courts are seen as quasilegislative bodies, promulgating general rules and regulations. If the Founding Fathers were wrong to fear congressional dominance of other national institutions, they were perhaps prescient in foreseeing how the legislative model would dominate the way we have come to understand government.

This focus on legislation while, perhaps, natural enough in a democratic nation – statutes are, after all, the principal normatively sanctioned route by which public opinion is translated into public action – produces a distorted description of governmental activity. The centrality of legislative studies suggests that there is a simple relationship between statutes and the law by which we live.

The view that politics plays an important part in determining trade policy is widely accepted among international trade economists. Evidence of this can be seen in the recent surge of research activity focusing on a variety of questions concerning how the political decision-making process affects the determination of trade policy (e.g., Hillman 1989, Magee, Brock, and Young 1989, Grossman and Helpman 1992,1994). This essay attempts to assess the problems and prospects for this literature. We begin by discussing the origins of this literature from an economist's point of view. In this discussion, we try to indicate why economists have become interested in considering the effects of politics on trade policy and what they hope to learn from this effort. We then discuss how the literature has progressed in explaining the existence of protection and what important trade policy facts need to be explained in future research. Surveys of much of this literature have been done by Nelson (1988) and Hillman (1989). Rather than provide another survey, we highlight the types of questions that have been considered and the types of models that have been used.

Unlike traditional economic theory, progress in this area will require improvements in the modeling of both economic and political activities. We discuss elements of an optimal model, describe several important trade policy issues to which such a model should be applied, and illustrate some of the key elements of the optimal model by sketching a specific illustrative model and using it to address some of the issues raised earlier.

An important area where political and economic considerations intersect involves government fiscal policy. Most economists feel that government budget deficits reduce national saving, which in turn reduces the longterm capital intensity of an economy and its standard of living. Hence, controlling budget deficits is one way, perhaps the best way, for present generations to protect the economic interests of future generations. At the same time, to control budget deficits politicians must vote for either tax increases or spending reductions, both of which are politically unpopular and increase politicians' chances of being voted out of office. Hence, the deficit control issue sets up an immediate tension between the policies that might be necessary for long-term economic expansion and the votes that might be necessary for political survival.

Given this tension, one might ask why real-world governments would ever balance their budgets. Part of the answer is that there are natural economic costs to letting budget deficits get out of control. If governments try to finance deficits by printing money, inflation will rise. If governments try to finance deficits by borrowing, interest costs will rise and, indeed, beyond some level, borrowers will not hold the government securities at any interest rate.

INTRODUCTION

Utilities' privatization has become a booming industry. From Latin America, to Europe, to Asia and now to Africa, Utilities' privatization has become a key element of reform-minded governments. Global ideological changes, fiscal concerns, and the recognition that there may not be any visible advantage for government ownership are behind this global reconsideration of the ownership role in the provision of utility services. But with privatization comes the recognition, often belatedly, that utilities are not like any other sector of the economy, where an appropriate tax treatment and a stable economic environment is enough to develop private investment in utilities. In case after case, it is being recognized that the private sector has to be “encouraged” to undertake all the investments that the public and the government expected from the utility. The need for this encouragement, however, is often seen by many governments and the public in general as a further example of the private monopolies ripping off customers, of collusion between the private companies and the governments, of the need to renationalize, and so on.

The purpose of this essay is to discuss what seems to be the crux of success for privatized utilities and what research is needed to further our understanding of the ability to succeed in regulating newly privatized utilities. In this essay I discuss the experience of some countries that have undertaken, or attempted to undertake, utility privatizations. I do not claim, however, that the discussion here is exhaustive, as I focus on a few selected countries on which I have undertaken primary research.

INTRODUCTION

In 1987 I wrote an article entitled “Macroeconomics and politics” (Alesina 1988a), which highlighted new research in “political macroeconomics.” At that time, this literature was still relatively small: It had developed from applications of game theory to problems of monetary policy. Since then, this field has literally exploded: The “new political economics” is one of the most active areas of research in economics. A major contribution to the development of this field comes from a closer interaction between economists and political scientists.

Recent research in political macroeconomics has covered a large number of topics: political business cycles, the politics of the government budget, the political economy of growth, the politics of inflation and stabilization policies, problems of external debt and capital flight in less developed countries, the effect of institutions (such as the degree of Central Bank independence) and different electoral systems on economic policy, the performance of coalition and minority governments relative to single-party governments, the relationship between domestic political competition and international policy coordination, and the politics of international agreements such as the European monetary system, just to name a few.

Even this incomplete list makes it quite clear that it is impossible to assess the progress and shortcomings of all of this body of research in one essay. Therefore, here I concentrate on two broad issues: the economic and political cycle; the effect of electoral systems and party structure on the economy, with particular reference to the issue of “divided government.”

Political economy, to paraphrase the editors of an earlier volume in this series, is the study of rational decisions in a context of political and economic institutions. Its central tenent is that a comprehensive understanding of economic phenomena requires knowledge of the political institutions, actors, and incentives present in the decision-making process. Conversely, these same political variables are best studied with the rational actor orientation of economics and with a continual eye toward the economic consequences of political choices.

While politics and economics coexisted as the single discipline of political economy for much of the period of modern scholarship, these fields were formally split in the late nineteenth century. It is now apparent that this split, while advantageous for certain scientific developments, has biased the way in which economists and political scientists think about many issues. The separate disciplines, with their own views on appropriate methods and the most productive lines of research, place artificial constraints on the study of many important social issues. The reconstitution of political economy is designed to reunite the separate perspectives in those areas where the interaction of individuals, institutions, and markets is paramount.

The division of economics and political science into separate disciplines can be traced back to a variety of factors. To take one prominent example, the development of the neoclassical model in economics emphasized behavior of individual consumers and firms in perfectly competitive markets, at the expense of any sort of political considerations. Indeed, one of the founders of the neoclassical movement, Stanley Jevons, was an early advocate of replacing “the old troublesome double-worded name for our science,” namely, political economy, with the much more concise label of “economics.”

INTRODUCTION

On the independence of the imperial Japanese courts, most scholars turn a bit agnostic: The courts were sort of independent, they conclude, and sort of not. Political scientist Chalmers Johnson captures the mood. The Tsuda incident (described at Section 3.1) accomplished “the legitimation of judicial independence in Japan,” he writes (1972: 29). But “the judiciary still came under intense pressure to insure that the interests of the state … and the interests of justice were never incompatible” (id., 160).

Legal scholars show a similar ambivalence. Kenzo Takayanagi insists that turn-of-the-century judges “scrupulously guarded their independence” (1964: 10), but suggests that the “rule of law” never took hold before the war (id., 14). Hiroshi Oda (1993: 65–66) argues that “the independence of the court was guaranteed to a certain extent,” but concludes that “the Ministry of Justice was in charge of the overall administration of the courts.”

By contrast, on the probability of judicial independence in the abstract, most scholars are more positive. Some suggest, for example, that rational politicians will keep courts independent so that they can credibly promise contributors rent-extracting statutes (Landes and Posner, 1975). Others suggest politicians will keep courts independent so that they can use them to monitor their bureaucrats (McCubbins and Schwartz, 1984). Even to autocrats, some scholars champion judicial independence. Without independent courts, they explain, autocrats will be unable to make any promises they give credible.

INTRODUCTION

For their civil bureaucracy and courts, the Imperial Japanese oligarchs built an institutional framework that let cabinet ministers monitor and control the men they hired (Chapters 5 and 6). Bureaucrats and judges thus answered to the cabinet. During the first Meiji decades, the oligarchs jockeyed to control that cabinet. During the 1920s, the professional politicians did the same.

For their military, the oligarchs built a radically different framework. They – but primarily Yamagata Aritomo – instead built an institutional framework that gave power to those (1) who retained access to the Emperor, and (2) who cultivated particularistic ties of loyalty within the military. Consider the detail. First, the Emperor maintained formal control over the military. As a result, to shape basic military contours, one needed to be able to manipulate the Emperor. This favored Yamagata and most of his fellow oligarchs over the politicians; it did not favor Yamagata over many of his oligarchic competitors.

Second, military leaders could bypass the cabinet in drafting regulations, in making operational command decisions, and in picking their ministers. Effectively this meant that a place in the cabinet did not give a man control over the military. Instead, to control it he needed personal ties within it. This favored Yamagata over most of his fellow oligarchs, for Yamagata had purged his opponents from the Army and stacked it with loyal men. As long as he lived, the Army was independent in theory, but not in fact.

INTRODUCTION

Consider why the oligarchs established a representative assembly. In many ways, the choice they faced resembled decisions made by any autocratic government in any era. But crucial to their choice, we argue, were their numbers. Modern cartel theory suggests that an oligarchy should act fundamentally differently from a dictatorship.

We consider four reasons for the oligarchs' acquiescense to a legislature. First, perhaps the oligarchs hoped to maximize their personal income, and decided that constructing an efficient economy would be the best way to do so. Establishing a legislative check on their power would send a credible signal to investors that they would not use their power to confiscate private property. In the process they would encourage economic growth, and growth in turn would generate more cream for them to skim off.

Second, perhaps the oligarchs were so insulated in the upper stratum of Japanese society that they lacked information about the source of discontent in other social tiers. Recognizing the danger of this predicament, they may have decided to hold regular elections. Through the elections, citizens would choose from among candidates who offered a variety of reformist policy portfolios. In the process the oligarchs would learn what concessions would most effectively and cheaply forestall revolution.

Third, perhaps the oligarchs thought it necessary to share power with entrepreneurs from the political parties before those entrepreneurs launched a full-scale revolution. If so, they may have been acting more urgently and more defensively than either the wealth-maximization or information-maximization hypotheses would suggest.

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.

This book challenges conventional preconceptions and historical interpretations about institutional design in Meiji Japan. For some scholars, the oligarchs creating the Meiji Constitution were selfless state-builders, designing an independent bureaucracy and judiciary to maximize the economic growth of the country as a whole. Ramseyer and Rosenbluth carefully delineate the private interests of the Meiji oligarchs as well, and trace out the many ways in which competition among these oligarchs and their repeated failure to cooperate with each other led instead to the creation of institutions facilitating lobbying as a byproduct of factional conflict. Studying the actual institutions in great detail, the authors show how the electoral system created incentives for politicians to provide private goods rather than productive investment, and the ways in which bureaucrats did not act as independent principals. Their careful historical examination of the strategies of leaders embedded in a straightforward rational choice model of institutional development, and the principal results that followed, are reinforced by an examination of the development of three economic sectors – banks, railroads, and textiles.

INTRODUCTION

Scholars of pre-war Japan routinely trumpet the bureaucrats' developmental, nation-building prowess. A close examination of pre-war policy, however, reveals a different picture. In Chapters 9 and 10 we examine government policy in the railroad and cotton textile industries. In this chapter, we consider financial policy. We find that at least in the 1920s when the political parties controlled the cabinets, financial policy took on a distinctively partisan quality. Financial regulation was more a weapon in the electoral battle for a legislative majority than a means to achieve any economic supremacy.

That the two main parties had distinct constituencies, as we discussed in Chapter 4, shaped their financial policy choices. The Kenseikai and Minseito favored big banks and international firms, whereas the Seiyukai cultivated ties to farmers, small firms and small banks, and domestically oriented manufacturers. This chapter recounts the financial policy shifts that accompanied changes in cabinet control.

Section 2 provides a broad historical sketch of pre-war financial regulation, noting that the Meiji oligarchs never achieved bank consolidation. Section 3 focuses on the Banking Act of 1927. Once in control of the cabinet, the Kenseikai drafted banking regulations that favored the largest banks, undermining the Seiyūkai's support base among the small banks.

In banking regulation, as with any area of policy governed by statute, control of the cabinet alone was not enough. However loyal and clever the bureaucrats, an obstreperous Diet could thwart legislative plans.

INTRODUCTION

Power-seeking entrepreneurs cooperated with one another long enough to overthrow the Tokugawa regime and to install themselves in its place. But as they jockeyed for position in the new government, they eventually forfeited power to party politicians. All too soon, however, events turned as sour for Japan's budding democracy as they had for oligarchy. The military took over; not, we argue, because politicians were inept or because the Japanese public was unready for democracy. Instead, we blame the oligarchs for establishing an institutional structure – including, in particular, the independence of the military – that was designed to protect at least some of the oligarchs themselves. While it may have done that, it ultimately destroyed Japan's first experiment with electoral government.

In the course of this book, we make two principal claims. First, we argue that institutions in pre-war Japan became dysfunctional to all but the military, even though the military was not the group the institutions were designed ultimately to protect. The oligarchs fashioned the institutions as tools for their own purposes. Once established, however, they constrained the behavior of the oligarchs themselves, as well as the choices of successive groups of political party leaders. Institutions may be, as they were in pre-war Japan, costly to change. In Japan's case, the Meiji Constitution and its attending process of decision-making launched a chain of events that was nothing short of catastrophic for the Japanese public.

BACKGROUND

During the last three decades of the nineteenth century and the first four of the twentieth, basic political control in Japan shifted twice. In the 1910s it shifted from a handful of oligarchs to a larger group of professional politicians. In the 1930s it shifted again, this time to a set of independent military leaders.

In this book we explore those shifts. We ask why the oligarchs failed to design institutions that protected their power, why the elected politicians did no better, and what political and economic consequences the various institutions had. More generally, we ask whether the shifts may explain some of the dynamics of oligarchic government and clarify some of the theoretical aspects of the relationship between institutional structure and regime change.

The puzzle

In explaining political control in Imperial Japan, most scholars implicitly posit three hypotheses. In their concern for authenticity and precision, they seldom state them as baldly as we do here. We admit that we strip their accounts of much of the richness and nuance that they give them. Although we do this reluctantly, we do it intentionally – for what we lose in subtlety we capture in clarity. Richness and sophistication can confuse as well as contextualize, and we simplify the discussion here because we think the simplicity clarifies the essential logic at stake.

First, most scholars argue that the oligarchs who controlled the government in the late nineteenth century largely (not exclusively) tried to promote the national interest.