Opinion - Trump's economists should study what happened in Japan and South Korea

Yahoo

5 days ago

The Trump administration's economic strategy — achieving trade surpluses and deploying tariffs and non-tariff barriers to protect domestic industries and promote growth — is reminiscent of the strategies that Japan and South Korea pursued during their periods of rapid economic growth in the mid-20th century. Japan experienced annual growth rates averaging around 10 percent from the 1950s through the 1970s, while South Korea achieved similar rates from the 1960s to the 1980s.
The economic model behind the rapid economic growth by Japan (and later South Korea) was often referred to as 'administrative guidance,' reflecting significant government intervention in industrial organization, banking and trade compared to more free-market economies.
In Japan, elite officials at the Ministry of International Trade and Industry meticulously analyzed trade and productivity data to identify promising sectors. They then guided banks toward providing favorable loans to strategically chosen sectors and firms. This tight public-private collaboration and the shared desire for growth allowed the government and the private sector to rely on mutual signals and support, fueling Japan's remarkable postwar economic expansion.
South Korea's administrative guidance was more heavy-handed. Korea suffered colonization, civil war and literal national division in the 20th century. Though South Korea emulated Japan's strategies, it pursued even bolder administrative guidance by investing in sectors such as steel, shipbuilding, automotives and semiconductors — areas where it initially had no clear comparative advantage. To support these ambitious ventures, the government imposed steep tariffs on consumer and luxury goods, and the Economic Planning Board coordinated interest rates and exchange rates to ensure that limited dollar reserves were strategically allocated to targeted industries.
But just about when Japan seemed poised to overtake the U.S. economically, it entered its 'Lost Decades.' South Korea's economy also crashed during the 1997 Asian Financial Crisis. Eventually, administrative guidance lost its luster. Japan's economic malaise and South Korea's economic restructuring — under the guidance of the IMF and the U.S. Treasury — served as evidence that administrative guidance distorted the economy, was inefficient and outdated, and further reinforced American liberal capitalism as the superior economic policy.
As Paul Krugman put it, perhaps East Asian economic success was more perspiration than inspiration, i.e. more due to hard work and accumulation than increased innovation or labor productivity.
Regardless, Japan and South Korea's miraculous economic growth in the second half of the 20th century was real, and administrative guidance played a critical role. Liberal capitalism may still be America's dominant economic ideology, but there is a growing sentiment within the White House that the government should take a more active role in steering the economy. Revisiting lessons from Japan and South Korea's experience with administrative guidance may prove especially valuable at this moment.
First, effective administrative guidance requires motivated officials with deep understanding of the economy and public administration. Japan's Ministry of International Trade and Industry and South Korea's Economic Planning Board were staffed by highly trained public servants who not only passed rigorous exams in law, economics and statistics but also learned from their experienced superiors. These extremely talented people committed to serve their country over higher-paying jobs in the private sector.
Second, industrial policy is successful when it works with market forces and promotes competition. The U.S. government helped nurture Silicon Valley through early investments in semiconductors, which was later vetted by venture capital. South Korea picked industries to invest in, but pitted firms against each other to promote innovation and productivity. Industrial policy in the U.S. today should be compatible with American financial markets and venture capital. The U.S. financial and private sectors would likely want to invest in AI or future energy rather than coal and steel.
Third, expanding trade is essential for economic growth. South Korea had no iron or oil but developed steel, automobiles and shipbuilding. The only way it could develop these industries was by importing what it did not have and exporting value-added products. Strategic openness is necessary for successful industrial policy.
Finally, education is foundational to the welfare of the country and its people. America was among the first nations in the world to provide universal secondary education. Its higher education system remains unparalleled in terms of research productivity and its capacity to educate and train the next generation of leaders and citizens. The emergence of the U.S. as the world's political, economic and scientific superpower in the 20th century was built upon a large population of educated citizens. Ensuring high-quality education for Americans must remain a key priority for the 21st century and beyond.
Yong Suk Lee is an associate professor at the Keough School of Global Affairs at the University of Notre Dame, where he is the director of the Future of Labor Lab.
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