"Foreign Exchange Allocation and Productivity Growth in Postwar Japan: A Case of the Wool Industry"

Until early 1960's, the Japanese government controlled import by means of foreign exchange allocation system. Rents generated and allocated by the foreign exchange allocation system provided the government with a powerful tool for industrial policy, although there also existed a possibility that this system brought about unproductive rent-seeking. In this paper, we examined the functions of the foreign exchange allocation system, focusing on the case of the wool industry. Through analysis of historical documents, we made clear that MITI utilized the foreign exchange allocation system for such policy goals as export promotion, management of investment and production capacity etc.. Also, using panel data analysis, we could reconfirm and improve the results of Okazaki and Korenaga [1997] that the foreign exchange allocation system actually promoted export and investment. This is because through the foreign exchange allocation system rents were distributed to each firm in an objective performance-based manner. Also, the export-link system had an implication to stimulate efficient use of foreign currency. By regressing foreign exchange allocation to the foreign exchange acquisition rate (FEAR) in the previous term, we found that export-link allocation correlated positively with FEAR. This result implies that the export-link system promoted those firms which used foreign exchange efficiently, through intensively distributing rent to them. On the other hand, the export-link system brought about large firms with great international competitiveness and small and medium-sized firms which was domestic market-oriented. The production capacity-link system played a role to mitigate that difference of capacity utilization rates, which was complementary to the role of export-link system.