Catastrophe to Construction: The Business of War
Is War Good for Economies?
The news seems to be full of it: stories of death, destruction, political turmoil and natural disasters that threaten human life across the world. But some argue that there is a silver lining to all the misery. A war-ravaged country must be rebuilt, after all, boosting economic productivity and growth.
Indeed, powerful manufacturing economies have emerged from the ashes of widespread destruction, like Japan, South Korea and even the U.S. following the Civil War.
But does it really mean that disasters are actually an economic benefit?
The Broken Window Parable
Someone breaks a shopkeeper’s window. The shopkeeper is angry because he must buy a new window. But some other people will view said broken window in a different light; for them it may actually have positive benefits.
If windows were never broken, what would happen to the glass business? One person's menace may be a whole industry's benefactor.
In the late-twentieth century, Asia experienced its own Broken Window story.
Following the Second World War and the Korean War, Japan and Korea saw their economies grow by double-digit figures. Japan and South Korea went from poverty to advanced industrialized economies in just a few decades.
So despite the death and destruction during the war, did this reshaping of infrastructure actually have a positive long-term effect on these economies?
Let’s examine in greater detail how Japan adapted the tools of warfare to transition into a post-war construction period.
Japan’s Long History Of Militarization
Japan was ready for war long before World War II. From the 1600s, a sophisticated credit market and merchant class were in the making, ready to support a wartime economy.
Advanced credit instruments based on Japan’s rice trade had already been invented. Currency was in widespread use. And an advanced merchant class had emerged.
So in 1868, when the entire country’s political and social structure changed under the Meiji Restoration, Japan was well on its way to industrialization.
The Meiji government simply accelerated what was already in place – but with a twist. It boosted the manufacturing sector by creating a wartime economy.
Under the slogan, ‘Enrich the country, strengthen the military’ (富国強兵 fukoku kyōhei), Japan built a manufacturing industry for war. With the means to fight, Japan entered into major twentieth century wars and colonized parts of Asia.
This wartime economy, and the systems that sustained it, was key to Japan’s post-war economic miracle.
You see, in Japan’s warring period, manufacturers, suppliers, distributors and banks were part of closely-knit groups called keiretsu. To ensure the Japanese government had sufficient supplies and weapons for its military campaigns, it worked with the country’s banks to inject money into these supply chains when necessary.
This is called “window guidance”: an important component of our Asian Capital Development Model (ACD).
After the Second World War, Japan was forced to dismantle its military. But window guidance proved to be an effective economic policy that produced high quality manufactured goods.
Instead of directing banks to lend to weapon manufacturers, the Japanese government insisted that banks direct investment toward manufacturing consumer goods that could be exported.
What happened to the all of the generals directing the wartime economy? Well, they were ‘repurposed,’ too.
Demilitarization released hundreds of military personnel, engineers, scientists as well as normal workers employed by military factories into the non-wartime economy. They filled factories and their offices across the country, though this time, they produced consumer goods and not bombs.
In fact, some of the best and brightest minds of the Japanese military went on to start companies that have since become household names. Masaru Ibuka and Akio Morita, co-founders of Sony (New York Stock Exchange; ticker: SNE) were both engineers in the Japanese navy.
But let's not forget: Japan was devastated after WWII. It needed a lot more than just a skilled manufacturing workforce; it needed investment to rebuild its industrial infrastructure.
Enter The Americans
Japan’s transition from wartime economy to Asia’s manufacturing center wouldn’t have been as successful without U.S. involvement.
War at home wasn’t the only conflict that boosted Japan’s economy. Japan benefited economically from U.S. involvement in the Korean War. The U.S. relied on Japan not only as a base, but also for supplies.
Throughout the conflict, the U.S. spent over US$3.5 billion on Japanese companies.
With U.S. investment came U.S. manufacturing ‘know how’ and technology. Major Japanese brands like Mitsui (Tokyo Stock Exchange; ticker: 8031), Mitsubishi (Tokyo Stock Exchange; ticker: 8058) and Sumitomo (Tokyo Stock Exchange; ticker: 8053) partnered with American industrial experts.
As a result of foreign investment and new technology, Japan’s manufacturing sector grew by 50% between March 1950 and 1951. By 1952, pre-war standards of living were reached and output was twice the level of 1949.
But Japan wasn’t the only economy to benefit from war.
South Korea and Taiwan accrued similar benefits from a wartime economy and demilitarization after the conflict had ended.
With all of the U.S. investment, Asian countries were able to build robust manufacturing sectors.
But what were they to do with all of the goods they produced?
Export them to new trading partners, of course.
Globalization Takes Off
The manufacturing boom that began in the mid-twentieth century continues to drive Asian economies to new heights of development. But manufacturing has many faces, and the more-developed countries of the Northeast - which went through the brunt of their conflicts earlier on - have now also transitioned to services and hi-tech production.
It's the countries of Southeast Asia, which saw large-scale conflict in the 60s and 70s, such as Vietnam and Cambodia, and to a lesser degree Indonesia, which are now the manufacturing hotspots.
What are the next opportunities to arise in this evolving realm of peace? Stay tuned to One Road Research to find out.