MITI and the Japanese miracle

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teed competitive interest rates; the lack of a well-developed capital market or other alternatives to personal saving; and a substantial exemption from income taxes for interest earned on savings accounts. The government is quite aware of these incentives to save and of the fact that money placed in the postal savings system goes directly into Ministry of Finance accounts, where it can be reinvested in accordance with government plans. Innate frugality may indeed play a role in this system, but the government has worked hard at engineering that frugality.

The theory of the "free ride," our fourth category of explanations, argues that Japan is the beneficiary of its postwar alliance with the United States, and that this alliance accounts at least for the miraculous part of Japan's rapid economic growth, if not for all of it. There are three ways in which Japan is said to have enjoyed a free ride: a lack of defense expenditures, ready access to its major export market, and relatively cheap transfers of technology.

Although it is true that Japan has not had to devote much of its national income to armaments, this factor cannot have influenced its growth rate significantly. If Japan's overall rate of investment had been very lowas low, for example, as it was in Chinathen the demands of defense could have had a retarding effect. But in Japan, where capital formation exceeded 30 percent of GNP during high-speed growth, the effect of low defense expenditures was negligible. The cases of South Korea and Taiwan, which have been pursuing the high investment strategy of the Japanese with equal or even more spectacular results, illustrate this point: their very high defense expenditures have had little or no impact on their economic performance.

The case of exports is more important. Japan profited enormously from the open trading system that developed throughout the world after World War II, and Japanese government leaders have repeatedly acknowledged the favorable effects for them of such institutions as the General Agreement on Tariffs and Trade, the International Monetary Fund, and, until 1971, stable exchange ratesall institutions that they had no role in creating. In fact, in their more pessimistic moods MITI leaders have speculated on the historical observation that Japan's great economic achievements came in the relatively open periods of world commercefrom the Meiji Restoration to World War I and from 1945 to 1970and they have expressed concern that the post-1970's era could look like 192045 when seen in historical perspective.

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Nonetheless, the important point for our discussion is that Japan's growth did not depend nearly so much on exports as it did on the development of the domestic market (a market half the size of the