KOBE

ECONOMIC & BUSINESSREVIEW
lsth

ANNUAL REPORT

ss"VTa '-Oee,iB,,•Sb
ny. "THE RESEARCH INSTITUTE FOR
AND BUSINESS ADMINISTRATIONECONOMICS
KOBE UNIVERSITY

1968

KOBE

ECONOMIC & BUSINESSREVIEW
lsth

ANNUAL REPORTTHE

RESEARCH INSTITUTE FOR
AND BUSINESS ADMINISTRATIONECONOMICS
KOBE UNIVERSITY

1968

CONTENTS
Page

Characteristic Approach for Regional

Development in Western Europe and U. S. A.
-Relating to the Case in Japan ••••••-•••••••`Minoru BEiKA

1

Export Patterns of Leading Industrial
Countries•••••••••••ny-•••••-•••••-•••••-••-•••••••••••Fukuo KAWATA

9The Early Development of Kobe Port •••••••••--t-•-•••Seiji SAsAKi

17

Rise of Modern Shipbuilding in Japanand Promoters •••-••••••••••••••--••••••••••••••••Tadakatsu INouE

29

A Note on the Redistribution of Profits•••••••••••••••Nobuko NosE

39

International Liquidity Controversy
in Japan (2)-••••••••••••••••••••••••••••••-•••••ny•Masahiro FuJiTA

47

Factors to Determine the Relative
Share: The Case of India •••`•••••••••••••••••Hikoji KATANo

Maintenance of Capital based on Earning Power•••••••••Jiro ONo

57

69

Recent Changes in Japan's Trade with Latin
America and Brazil ••••••••••••••••••••••••Yoshiaki NisHiMuKAi'

Some Inventory Accounting Problems ny t • • - • • • • • • • • • • • • • Isao NAKANo

77

113

Organizational Slack and Adaptive Behaviourin the Firm•-•••••••••••••••••••••••••••••••••-•••Hideki YosHiHARA

131

CHARACTERISTIC APPROACH FOR REGIONAL
DEVELOPMENT IN WESTERN EUROPE
AND U.S.A.
Relating to the Case in Japan

Minoru BEIKA
I
The current regional development policy of Japan started in 1962.
The policy aims to prevent the excessive concentration of economic activi-

ties in a few central districts and to decrease the income-gap in underdeveloped regions. As a means to promote these aims, about 20 new industrial
districts apart from the central districts have been established for regional

industrial development. However, the actual development processes havebeen considerably different from the objectives of the policy, in spite ofpolicy execution for these last several years. Industrial activities have been

concentrated in a few central districts as before and many young people
have drifted out of the local districts. Rapid urbanization has caused severe
economic, social and physical urban problems in the central districts.

These regional problems relating to the excessive high density of population in the central districts and to the excessive low density in the local

districts in Japan, which were treated in detail in the last Review (14thAnnual Report 1967) by the same writer, are now common in both developed countries, developing countries and under-developed countries. But

Western E,uropean countries and the United States of America have hadvarious severe experiences for this last half century on urban problems,

and they have been confronted with severe regional problems since thepanic of 1930 or since World War il, The writer had chances of observing the actual circumstances of these several countries in two visits in1961 and 1966. He was greatly impressed by their problems, experiences
and results. Since then, he has studied their regional problems and policies
depending on his own observations and from several printed matters relating

to these subjects. As a consequence it seemed to him to be useful to makea comparative study of the experiences of these countries and Japan. First,

2 MINORU BEIKA
the writer's viewpoint will be conclusively shown regarding the characteristics of these regional development policies and processes, their effects andresulting problems, and then he will review the present conditions of regional development problems and policies in Japan.

II
The United Kingdom has been confronted with unprecedented severe
local unemployment since the panic of 1930, especially in Scotland, North

England and Wales. The regional development policies of this country
aimed to solve these severe unemployment problems not only before WorldWar R, but also after the War. The Special Areas Act, 1934 .and theDistribution of Industy Act, 1945 were major characteristic means in theirregional policies. At the same time, the decentralization of the populationfrom Greater London and some other metropolitan regions has been pro-

moted by the New Town Act, 1946, the Town and Country Planning Act,
1949 and some other acts. Since then, these policies and realizationmeans have been changed more or less to adapt to changing circumstances.
But their basic course has been little less changed and has brought about
considerably effective results for regional development.

France, Netherlands and several other European countries have also,
been confronted with regional unemployment problems or the under-development of country districts with rapid urbanization after World War ll ,and so they have adopted respective regional policies, referring to the ex-periments of the United Kingdom and the United States of America.
Sweden, Denmark, and several other European countries did not have thesesevere regional unemployment problems, but they were confronted with
rapid urbanization problems in the central metropolitan regions. Several
new finely planned suburban towns can be seen in these countries.

The United States of America has developed enonrmously throughtechnical innovations since World War E, but 3 or 4 million unemployedworkers, chiefly excluded by automation, have been found in a considerable
number of districts which had old types of industries. The Federal Govern-ment, which had resisted participating in local (unemployment) problems
for a long time, finally established the Area Redevelopment Act, 1961, to

help local governments and local communities. Aside from these regional

CHARACTERISTIC APPROACH FOR REGIONAL DEVELOPMENT 3
IN WESTERN EUROPE AND U. S. A.

development problems, rapid urbanization has brought abont many urban
renewal projects and suburban industrial and residential development.

Recently, the United Nations and other international institutions havegreatly contributed to these countries and to other under-developed countries

by the interchange of their valuable experiences and experiments, and by

their accumulation of common useful knowhow resources. The writer has
been interested in these policies, projects, actual processes, and accumulatedcommon knowhow resources. He has summarized their characteristics,
from the viewpoint of Japanese regional development problems, as follows.

III
The processes that these developed western countries have been chal-lenged with in their regional problems, have been characterized by thefollowing seven points, from the viewpoint of the writer who has studied
the current regional development problems of Japan.
(1) Problem-conscious challenge to regional development.

The driving forces for regional development in the western countries
were the severe urgent regional problems, especially radical mass unemployment at first, and concentration of the population, and then rapid urbaniza-tion. These regional problems needed some urgent counter measures, yetthey had to be planned as synthetically as possible, due to the difficulty

and largeness of the problems. Accordingly their development policies
needed to be as practical and effective as possible.

In contrast, it seems that the current regional development policies inJapan have been a little more synthetic and well-planned in some points,

than in those western countries. But the real regional problems had notalways been grasped correctly by the Japanese policies, which were moreor less idealistically formulated. Because of this reason, actual conditions
following these policies have not always shown expected results. Gradually,

the recent rapid urbanization has begun to lead toward more practicalmeans of regional planning and urban renewal planning in the congested
central industrial districts. But other regional problems due to the low
density of the population in the local districts are left and are not clarified

problem-consciously. The income-gap in the country districts which canbe grasped stati$tically, has been considerably large, but it has been unable4 MINORU BEIKA
to be realstically grasped, This is now one of the important regional
problems in Japan.

(2) Accumulated experiences through trial-and-error experiments in regional development.

Regional development should be approached from the standpoint ofintegrating the social and economic functions or activities in a certain
district to its physical planning. The economic (especially industrial)
activities of the region affect a wider sphere than the social functions.
And yet these economic and social functional approaches have respectively

very different problems from the physical approach. Many trial-and-error
experiments in these regional development problems have been accumulated

in the common knowhow resources for five decades since the end of the

19th Centnry. For example, the creation of the New Towns in the
United Kingdom originated from the garden city movement by Ebenezer
Howard at the beginning of the 20th Century and have depended on the
many accumulated experiments since then. The well-designed industrial
estates, and industrial parks (or districts), which have been widely appliedin the United Kingdom and the United States of America, originated fromseveral experiments at the end of the 19th or the beginning of the 20th

Century. These experiments and widely used townplanning techniques
have been characteristically developed between the first and the second

World Wars. These accumulated experiences have bloomed brilliantly as
well-planned new towns, suburban industrial areas and well-ordered land
use in the western countries afert World War ll .

On the contrary, Japan has been confronted with regional development
problems since only these last 10 or 15 years, when economic activities began

to develop enormously. Any kind of well-planned integrated physical systems,

such as the New Town, industrial estates and some other new types in thewestern countries as stated before, had not been experimented with in Japan

before World War ll . The Town Planning Act had already been establishedby 1919 in Japan, but severe landuse and other physical problems had not yet
occured at that time. These regional or physical techniques developed in thewestern countries, could be adapted in Japan a!so, but it would be very diffi-

cult for us to master the trial-and-error experiences of these countries.

(3) The importance of approaching processes in regional development.

CHARACTERISTIC APPROACH FOR REGIONAL DEVELOPMENT 5
IN WESTERN EUROPE AND U.S.A.

Regional development depends not only on the formation of the fundamental objects and po!icies, but also on the creative designing of theprocesses to realize these objects and policies. The more severe andurgent the consciousness for regional and urban problems is, the morenecessary the realizing processes are to be. Therefore the processes torealize policies have been attached with importance in western countries.

These processes have included not only public (central and local governments) actions which are legal regulations, financial assistance, and somepublic guidance, but also private cooperation by industrial enterprises, otherbusiness firms and individual citizens inhabitants, and still more some mixed

types of cooperation between public and private regional activities. The
problem-conscious challenges and the trial-and-error experiments as stated
before can bring forth realized results only by these processes.

The regional development policies of Japan, so far, have been considerdaly synthetic and theoretical in some points, but greatly abstract insome other points. The subjectivity to realize those policies has tended
to be overlooked in Japan. In other words, approaching processes have notsufficiently been concerned with in realizing the objects of regional develop-

ment. It is related to the limited experience of trial-and-error experiments
and the challenge of problem consciousness, as stated before.

(4) Development of several types of planned integrated physical systems
for regional development problems.

The writer has been greatly interested in the New Towns in,the United
Kingdom, which consist of many functional facilities of the community, suchas town center, shopping centers, industrial estates, residences and otherrelated community facilities. He has also been interested in the industrial

parks, and research parks in the United States of America, the suburban

new towns in Sweden, Denmark and some other European countries, whichhave both the characteristics of the New Towns and suburban bed-towns.
It is the same, for the Tennessee Valley Authority, the Port of New York
Authority, the Air Pollution Control District such as found in Los Angeles
County, and other physical or functional organizations. These respectively
different physical or functional facilities or organizations have the samecommon characteristics, which are some kind of planned integrated physicalsystems for any kind of regiorial development problems. Some of these6 MINORU BEIKA
creative systems have originated from experiments at the end of the 19th or

the beginning of the 20th century as stated before, and some of them
have been found during the inter-period of the two World Wars, and eachof them has been created as a challenge and experiment for any difficult

problem of regional development. Especially, have these systems beendevised to accomplish many-sided considerations for public and private
needs in regional development or community development to coordinate theeconomic and social functions, and functional and physical factors. These
are synthetic, integrated systems to prevent a one-sided view or behavior
by a lateral functional line organization of public administrations or by
private economic or social activities.

In Japan also, some kinds of planned integrated physical systems havebeen introduced and applied to regional or urban problems, and these havebeen transformed to gain some peculiar merit for the specialities of regional

problems in Japan. For instance, these examples are industrial and commercial estates for small businesses, underground shopping centers in urban

centers or terminals, and new large suburban bed-towns. However, thewriter thinks that these planned "integrated" physical systems have notalways been well-integratedly applied but have tended to be utilized
rather straight forwardly as some one functional or physical facility. It
seems to be related to a vertical line organization or straight narrow viewof public administrations or private activities, Now the rapid and severe
urbanization has gradually widened these narrow views or straight behaviors

by public or private organizations, and they have begun to use thesesystems as multi-functional physical facilities.

(5) Gradual progressing integration of public and private activities inregional development.

It is the general rule in a free-economy system, that central and local
governments, public administrations private enterprises and other individual
economic and social activities should respectively fulfil their functions intheir eommunities to maintain a harmonious development. However, therecent rapid technical and industrial innovations have increased the scale ofeconomic and social activities to a larger and larger scale and has drasticallychanged their features again and again so that the economic activities and$ocial lives have interacted complicatedly against each other in the com-

CHARACTERISTIC APPROACH FOR REGIONAL DEVELOPMENT 7
IN WESTERN EUROPE AND U.S.A.

munities. They have brought about excessive concentration of industrial
activities, disordered landuse, industrial nuisances such as air and waterpollution, paralyzed road transportation, and have had many undesirable ef-

fects on community life. Legal regulations, public assistances and some
private cooperations have gradually reduced these severe problems, but the
gap betwcen public action and private cooperation has been too large to be

overcome by such ordinary public and private cooperation. Accordingly,
creative efforts to overcome these gap have led to the formation of manykinds of planned integrated physical or functional systems, as stated before.

The writer has reached this conclusion now. It shows the importance ofthe functional and physical relations between public and private activities.

In this sense, new so-called system approaches have been introduced in thepresent regional development and community development problems inwestern countries. The writer has been impressed by the gradual progressing integration Qf public and private activities found as such in regional

development.
In Japan hitherto, the problem-consciousness of these public and private
relations, and the participative functional and physical forms or systems of

public and private activities have been overlooked more or less. Macroeconomic-and-social approaches have been considerably developed in regional
problems, but relationship, cooperation, and participation of public, private

and other interest groups have not been sufficiently considered for these
problems in Japan.

(6) Managerial approaches found commonly in regional and community
development problems in western countries.

In this paper, the writer uses such words and phrases for regional
problems as problem-conscious challenge, trial-and-error experiments, importance of the processes, systems approach, and integration of public andprivate activities. These words and phrases are all relating to those ofbusiness administration and management. Though these processes to approach regional problems might not have always been recognized to be a

managerial approach in western countries, the writer has concluded sothrough their realizing processes and characteristics for the past half-century.

In Japan now, business administration and management have been given
due consideration and been studied earnestly in the busine$s world. B.ut

MINORU BEIKA

8

these thoughts and approaches have not yet been applied beyond the frameof individual business activities. The current regional development problems and urbanization problems are closely related to economic activities by

individual business enterprises, through their industrial development. Recently top executives of business enterprises are now considerably interested

in regional problems through the activities of their economic bodies orparties. Therefore, the writer hopes now for them to come foward andparticipate in activities by managerial approaches to regional problems beyond the frame of their individual business enterprises.

(7) Importance of a fact-finding survey in regional development.

Problem-solving should generally depend on a fact-finding survey. It
is needless to say that regional development problems belong to the samecase. Fact-finding surveys and researches have been accumulated for regional development, especially in the United Kingdom. Many surveys andresearches for industrial location, regional development policies, and urban

development had been in operation not only in the 1930's, but also evenduring World War II and then of course after the War. A statisticalcensus and survey in Japan had already progressed to some level before

the War, and was enormously developed after the War. But these areinsufficient for solving current regional problems and should be reviewed
from the viewpoint of a fact-finding and problem-conscious survey in re-gional development. The so-called managerial approach should also befound on these surveys and researches.

The seven points stated here are simplified conclusions for regional
development by the writer who observed and reviewed actual conditions in.
western countrles.

IV
The problems of regional development have close relations to multi-side
investigations; which are regional econometrics, location theory, human andeconomic geography, sociological studies, town and country planning research,engineering approaches of land-and-sea transportation, civil engineering ap-

proaches and so on. These problems should be approached from the fieldof synthetic applied sciences. The writer has challenged these complicatedregional problems from characteristic approaching methods, which the studyof business administration and management have brought about nowadays,

EXPORT PATTERNS OF LEADING
INDUSTRIAL COUNTRIES
Fukuo KAWATA(1) The purpose of this article is to make some comparisons of theexport trade patterns of six leading industrial nations, including the UnitedStates, United Kingdom, West Germany, France, Italy, and Japan. Highly
industrialized nations are also large trading nations. Their shares in the
total exports of the free world are not only large, but also have been in-creasing. In recent years their shares have been more than half of thefree world exports.

Although the shares of these six industrial nations in total have been
rising since the early post-war years, those of the United States and theUnited Kingdom have been declining, while those of the other four countries

have been increasing. Especially remarkable is the trade expansion ofGermany and Japan. Table 1 shows the shares of these countries in the
total exports of the free world.

(2) The ratios of export to gross national product differ from country

to country. The United States has a very low ratio, which means thatthe dependence on world market of that country is relatively small ; while

Germany and the United Kingdom have large ratios, and the export ratiosof Italy, Japan, and France are intermediate. (See Table 2.)

Table 1. Shares of Industrial Nations in Exports of the Free World (%)
iCountry

1sc8

1953

1958

1963

1ee5

World Total

100.0

1oo.O

100.0

100.0

100.0

United States

23.6

21.2

18.7

17.3

16.6

United Kingdom

12.4

10.0

France

3.7

8.8
5.9

8.3
6.1

10.8

10.9

Japan

2.0
O.5

5.1
5.9
2.2
1.7

9.7
5.4
9.3
2.7
2.7

3.7
4.0

4.4
5.1

Total of above six countries

42.2

46.1

48.5

50.5

51.4

Germany
Italy

Source : IMF, lnternational Financial Statistics,'

10 FUKUO KAWATA
The movement of the export ratio of each individual country since1952 has also been different. During the period from 1952 to 1965, theratio declined in the United States slightly and in the United Kingdom
rather sharply ; whereas in Italy and Japan, this ratio increased conspicuously,

and in Germany and France the rise was moderate.

(3) Let us compare the commodity pattern of export trade of thosehighly industrialized nations. In the exports of those countries, it is quite

natural that manufactured goods, (SITC No. 6, 7 and 8) should take a majorpart, although the relative share of each group in the total export of manufactured goods is different according to the country.

In Germany, the United States, and the United Kingdom, the share ofmachinery and transport equipment (SITC No. 7), the most sophisticatedkind of manufactured goods, is much larger, and in Italy a little larger thanother groups of manufactured goods, while in Japan and France manufactured goods classified by materials (SITC No. 6), the more simple and crude

sorts of manufactured goods, show a higher percentage than any othergroup of manufactured goods.

Table 2. Ratio of Export to Gross National
Product in Highly Industrialized Nations (%)
Country

1952

1955

1958

1962

1965

United States

4.3

3.9

4.0

3.9

3.9

United Kingdom
France

16.3

15.2

14.0

13.6

13.9

9.8

9.8

8.8

10.3

10.8

Germany

12.4

14.3

16.0

14.9

16.0

Italy

s.e

8.4

9.4

11.8

12.6

Japan

7.8

8.9

10.4

9.3

12.7

Source : IMF, "International Financial Statistics", and the Btank of

JaPan, "Foreign Eeonomic Statistics".

It is also to be noted that in Italy and Japan miscellaneous manufactured articles (SITC No. 8), more labor intensive category of manufactured
articles, take larger shares than in any other country. (See Table 3.)

Beside manufactured goods, chemicals also play an important part in theexport of highly industrialized nations, and their share has been increasing.

In Germany and in France chemicals ab$orb more than 10% of their total

EXPORT PATTERNS OF LEADING INDUSTRIAL COUNTRIES 11
export, and in the United Kingdom and the United States they take up
about 9 0%, whereas in Italy and Japan their percentage is lower than theabove four countries, the ratio in the case of Japan, being particularly small.
As a noteworthy contrast in the export patterns of leading industrial countries,

we point out the fairly high percentages of food export registered by theUnited States, France and Italy, and the fairly low percentages in the caseof Germany, the United Kingdom, and Japan.
In the former three countries, the ratio of food export accounts for morethan 10%, while in the latter three countries it is less than 4%. (See Table 3.)

Table 3.

Commodity Pattern of Export of Highly Industrialized Nations (%)
SITC
NumberUnitedUnitedStatesKingdom

Germany

Japan

Italy

1958 1os5 1958 1%5 1958 1965 1958 1965 1958 1965 1958 1965

lO. Food

FranceI !2.7 14.8

3.3

3.2

9.4

12.9

1.8

2.6 17.9 10.6

8.0

3.9

1. Beverage & Tobacco

2.5

1.9

2.7

3.1

3.6

3.0

O.3

O.4

2.2

1.2

O.2

O.1

2. Crude materials,
inedible except fuels

9.6

10.5

3.2

3.2

6.7

7.1

2.3

2.9

4.0

3.3

2.6

2.6

3. Mineral fuels

6.1

3.5

4.1

2.8

6.3

3.2

6.6

4.1

7.0

5.4

O.4

O.4

e.31

o.3

O.3

O.4

O.2 1.1

O.3

10.1

10.7 11.5

6.6

8.4

4.8

6.5

4. Animal and vegetable oils and fats
5. Chemicals
6. Manufactured goods
classified by materials

7. Machinery & trans-

port equlpment
8. Miscellaneous
manufactured articles

1.5

1.7

O.2

O.1 O.5

7.8

8.9

8.2

9.3

8.4

14.9 12.2 26.9 25.6 31.8 27.8 24.2 22.0 26.0 23.9 46.9 40.6

35.8 37.1 42.5 42.1 22.8 26.4 44.9 46.0 27.0 30.4 22.1 31.3
7.9

6.0

6.3

7.5

Z5

8.7

8.5

8.8

1.2

3.4

2.6

3.1

3.0

O.5

O.4

1.4

8.9 15.4 13.9 13.7

9. Miscellaneous trans-

actions and commo-

1.2

O.6

dities n. e. s.
Total

1oo.O 1oo.O 100.0 100.0 !oo.o 100.0 100.0 1oo.O 100.0 100.0 1oo.O 1oo.O

Source : U. N International Trade Statistics.t(4) Let us here make an international comparison of the amount of
manufactured goods exported by the above six countries.
The United States held the first and foremost position in the export ofmanufactured goods both in 1958 and in 1965, but her relative importancedeclined in 1965. In contrast, Germany, France, Italy and Japan raised
their shares. Particularly striking was the progress achieved by Italy and12 FUKUO KAWATA
Japan. The United Kingdom, like the United States, has lost her position.
(See Table 4.)(5) If we compare the production elasticity of manufacturing export whichmeans the ratio between the growth of export and the growth of manufacturing production, we find that on the average, Italy and Japan have thelargest, and the United Kingdom and the United States have the smallest
elasticity value, whereas France and Germany have the intermediate one.

(See Table 5.) This implies that in Italy and Japan a most rapid expansion of manufacturing export in relation to the increase of manufacturing

production, has been achieved, while in the United Kingdom and the UnitedStates, the slowest growth of manufacturing export has been experienced.

'
Table 4.

Manufactured Goods Exported by Highly Industrialized Nations(in billion U. S. dollars)iCountry

1958

1

(%)

1965

(%)

United States

9.76(29.7)

16.84<26.0)

United Kingdom

7.64(23.1)

11.20(17.2)

France3.60(10.9)

7.32(11.6)

Germany

7.76(23.5)

15.92(24.5)

Italy

1.72

(5.2)

5.60

(8.7)

Japan

2.52

(7.6)

7.76

(12.0)

33.00(100.0)M.64(100.0)Total

Source : Board of Trade lournal, 26 August

1966.

Table 5.
Production Elasticity of Export of Highly
E

Country

1961

1962

1ee3

United States

O.99

O.97

United Kingdom

1.05

1.01

FranceO.97

Germany

Nations

1960 -65 1958-65

1964

1965

1.01

1.11

O.98

1.13

1.12

1.03

O.98

1.05

1.13

1.10

O.98

1.04

1.02

1.12

1.13

1.40

1.04

1.00

1.00

1.03

1.05

1.19

1.31

Italy

1.05

1.01

1.02

1.18

1.16

i.48

1.85

Japan

O.88

1.07

1.02

1.06

1.22

1.24

1.18

Source : Board Trade Journal, 26(6)Industrialized

Whenwe compare the growth rate

August l966.

of the export

market with that of

EXPORT PATTERNS OF LEADING INDUSTRIAL COUNTRIES13
the export of individual countries, we find that in general, the former ishigher than the latter in the case of the United States and the United
Kingdom, while in the case of Italy and Japan, the reverse is true, and in

the case of France and Germany the former is almost equal to the latter.
(See Table 6.)(7) If we mean by the market elasticity value of export the ratio between

the growth of the export market and the growth of export, we find thatthe value is high for Japan and Italy, and low for the United States andthe United Kingdom, while for France and Germany' it is intermediate.
(See Table 7.)
Table 6.

The Growth-rate of Export Market and the Growth-rate ofExport in Highly Industrialized Nations (O/o)
1os1Country

A

1962

B

A

1963

A

B

1965

1964

B

A

B

A
<1)

B

United States

6

3

3

4

8

7

12

14

6r--8

3

United Kingdom

4

4

7

3

9

7

12

4

15

7

France

5

5

1

2

8

10

11

!1

11

12

Germany

8

11

8

5

10

10

13

11

10

11

Italy

7

15

8

12

9

8

14

17

12

20

Japan

2

4

10

16

9

11

14

23

13

27

Source : IMF. Annual RePort, 1964, 1965, 1966.
Note : Column (A) shows the growth rate of exPort market.

Column (B> shows the growth rate of exPort.
(I) The growth rate ofthe exPort market ofthe United States, in l965 isdifficult to calculate correctly owingto changes in statistical classification.

Table 7.
Export Market Elasticity Value of Highly Industrialized Nations
Country

1961

l962

1963

1964

1965

Japan

2.0C)

1.33
o.as
2.oo
O.63
1.50
1.60

O.88
O.77
1.25
1.oo
O.88
1.22

1.17
O.33
1.00
O.85
1.14
1.64

O.38-O.50

Italy

O.50
!.oo
1.oo
1.38
2.14

United States

United Kingdom
FranceGermany

Source : IMF. Annual RePort, 1964, 1965 and 1966.

O.47
1.09
1.10
1.67
2.08

14 FUKUO KAWATA
The higher the value for the country is, the faster is the export expansion of the country.

In this sense, it may be concluded that the advance of Japan and Italyin the world market is very rapid, while the United States and the United
Kingdom are very slow in their export growth in relation to the expansionof their export markets.

(8) We take up the relative cheapness of export price as an indicator ofcompetitiveness in the world market. By the relative cheapness of export
price we mean the relative change of a country's export price in comparison

with the change of the average export price of industrial nations. For
example, if country A's export price rises by 5%, while the average export
price of industrial nations rises by 10%, then country A's relative changeof export price is minus 5 %. Table 8 provides the relative changes ofexport price in each industrial nation.

Table 8.

Relative Change of Export Price inHighly Industrialized Nations (%)
Countrylil 1961

1ee2

1963

1964

1965

o
o
o

o
o
o

-2.0
+l.O

-O.5

+2.0

o

o

o

+2.5
-4.0
-4.0

+4.0
-4.0
-4.0

-2.5
+4.0
-2.0

+2.0
-O.5
-O.5
-2.5

-1.5
+O.5
-2.5
-3.0

United States

United Kingdom
FranceGermany
Italy

Japan

,

Source : IMF. Annual RePort, 1964, 1965 and 1966.

Those countries, such as Japan and Italy, which have high export
market elasticity values, have kept their export prices low in relation to theaverage export prices. From this fact, we realize that, in order to expand

export in the world market of keen competition, we must keep the relative
export price as low as possible.

In the case of the United States, and especially of the United Kingdom,

the relative export prices have rarely been below the average. This is oneof the reasons why exports of these countries have failed to expand rapidly.
(9) The geographical export pattern of the six leading industrial countries

EXPORT PATTERNS OF LEADING INDUSTRIAL COUNTRIES 15
is presented in Table 9. All of these six countries increase percentages of
their trade with the industrial area but they all reduced their trade ratios withthe developing area. Their trade with "other developed area" and with the
Sino-Soviet area does not show such a distinct tendency as is shown in thecase of their trade with the industrial area and with the developing area.

Those countries which diminished their trade percentages with "otherdeveloped area" are the United States, the United Kingdom, Germany, andItaly, while those which increased them are France and Japan.
As for trade with the Sino-Soviet area, their relative importance decreased in the United States and Germany, while it increased in the United

Kingdom, France, Italy and Japan.
The fact that the relative importance of the industrial area as a market

for all these six countries has been increasing, means a growing intra-industrial area trade at the expense of trade with developing areas.

Among the six countries, those which have the largest percentages intrade with the industrial area are Germany, Italy and France. These three

countries are members of the European Economic Community established in
1958, and have remarkably expanded their trade with the EEC countries.
The United States holds an intermediate position. Her trade percentage
Table 9.
Geographical Pattern of Export of Highly !ndustrialized Nations (%)
Industrial Area

Country
1958

United States

United Kingdom
FranceGermany
Italy

Japan

1965

45.2

55.8

(13.6)(18.3)

36.1

47.5(13.8)(20.1)

42.e

63.5(22.0)(41.4)

62.6

71.4(ev.3)(35.2)

56.2

66.2(23.6)(40.2)

37.0

43.4

(4.2)

(5.7)

Other Developed

Area

Developing

Sino-Soviet

Area

Area

1958

1965

1958

1965

1958

1ee5

6.3

5.2

36.2

31.0

O.6

O.5

24.5

19.6

34.2

25.6

3.1

3.2

5.8

8.7

48.4

25.0

3.6

3.8

7.8

7.5

23.2

14.3

5.0

3.7

9.2

8.7

28.0

16.2

4.7

5.3

3.6

8.8

57.0

43.0

2.6

5.7

Source : IMF. Direction of Trade
Note : Rigures in Parenthesis show Percentages of exPort to the EuroPean Economic

Community.

FUKUO KAWATA

16

with the EEC is not so large as the above three countries. The United
Kingdom and Japan have the smallest percentages. Japan's export to the
EEC takes only about 6% of her total export in 1965.
As for export to developing areas, Japan and the United States register
the highest percentages, especially large is the percentage recorded by Japan.

In contrast, Germany and Italy have the lowest ratio in export to developing

areas, whereas the United Kingdom and France show an intermediate ratio.
(10) The shares of each developing area in the total export of the above
six countries are shown in Table 10.
The United States, France and Japan have their export concentrated toa particular area, while Germany, Italy and the United Kingdom have theirexport fairly evenly distributed to each area.

In the case of the United States, Latin America is the largest markeL

For France the most important market is Africa, and for Japan South andSouth-east Asia. It is noteworthy that the degree of concentration of export to any particular area in 1958 decreased in 1965 for the above three
countries. For the United States; the ratio of export to Latin America fell

from 24.2% in 1958 to 15.5% in 1965, and for France the ratio of theAfrican market decreased from 35.8% in 1958 to 15.7% in 1965, and forJapan, the percentage of South and South-east Asia declined from 32.4%
in 1958 to 25.9% in 1965.
Table 10,

Shares of Each Developing Area in the Exportof Highly Industrialized Nations (%)

South &

Latin America

Middle East

1958

1os5

1958

1ea5

1958

1965

United States

24.2

15.5

2.6

3.4

1.7

United Kingdom

7.0
5.6

5.5

5.7

5.0

3.8

2.4

2.5

Germany

8.2

4.6

4.5

3.2

8.8
35.8
2.6

Italy

10.7

4.5

5.5

3.9

Japan

7.0

5.4

4.8

3.5

AfricaSouth-east Asia

Country

France

5.6
12.8

1958

!965

2.2

7.7

9.5

6.9

11.9

8.9

15.7

4.5

2.0

2.4
4.9

7.9

4.1

6.2

7.7

32.4

2.7
25.9

(4.7)

(3.4)

(1)

(1)

Source : IMF. Direction of Trade.
Note : (1) Figures in Parenthesis indicate the exPort of shiPs to Liberia.

THE EARLY DEVELOPMENT OF KOBE PORT
Seiji SAsAKII
Kobe port of today clearly includes the port-area named "Hyogo-pier"within its boundary, and is nothing but the old port of Hyogo which was
one of the most famous and prosperous ports during the period of sailing
vessels. From this, people are apt to reach the simple conclusion that theport of Kobe belongs to type of so-called good natural port. At least
there is a popular impression or recognition generally that the present
modern port of Kobe in that of the old port of Hyogo which expanded or
evolved during the hundred years after the reopening of our country toforeign commerce. We can consider from a historical standpoint that theport of Kobe belongs to the category of "an old famous port". This article

does not aim to oppose the above opinion. On the contrary the author
rather wishes to stress this historical connection in comparison with thefollowing facts ; first, the old ports of the Mediterranean Sea like Marseilles

and Genoa show clearly a degeneration, and second, it is evident that there

is a difference of sphere between the anchoring ground of the old port ofNaniwa and today's port of Osaka as well as between the landing place ofthe old port of Edo and the present port of Tokyo. Actually it is certainthat old Hyogo port is distinctly connected with the new port of Kobe ascompared to the very much weaker relation of the old Naniwa port to thepresent port of Osaka, and of the old Edo port to the new port of Tokyo.
However, we cannot overlook the delicate but indubitable distinction
itself, between the old port of Hyogo and the present port of Kobe on the
one hand; for there is a certain variation not only in the word (name) but
in the substance, historically or developmentally. At least all Japanese in

those days knew that new Kobe was not the same as old Hyogo, although
it includes Hyogo in its geographical city limits now, This discrimination

was generally recognized in Kyoto, Tokyo and elsewhere in Japan as wellas in Kobe (Hyogo). In fact the port of Hyogo, not of Kobe, was opened,because the latter was not yet a port-town. We must carefully understand18 SEIJI SASAKI
the fact that the notification to open Kobe in place of Hyogo was issued
formally after the accomplishment of the Meiji Restoration, and that the

Japnese Governments, both the Shogunate and that of Meiji, attempted tocreate new facilities such as anchoring grounds foreign settlements, and soon in Kobe which did not have any facilities required for a modern port
at that time.

There is a delicate but important distinction in the following two points ;1) the old port of "Hyogo" became the modern port of Kobe it
would be better to say the modernization of the old port-- -.rmv, 2)
the new modern port of "Kobe" was built and developed near the old porttown and absorbed the latter little by little.

It was certain that most Japanese of the time had hardly any knowledge of the little village of Kobe, as to whether it was a place suitable forships to enter or not. Neither did most Western countries. America andEuropean nations had perhaps few knowledge about Hyogo, which was a(1)very famous port in our country. Especially the two nations, the U. S.
A. and Russia, which were most positively trying to open some Japanese
ports for their own mercantile marines, seemed to have little knowledge of
Hyogo port in the first stage; for the port wasi geographically very far andinconvenient to American whaling-vessels and Russian ships.
Hyogo port did come question as an officialt treaty port in he discussionof the so-called "Shimoda-Treaty" which was proposed by Harris, theAmerican Consul-General. Even at this stage, representatives of theTokugawa Shogunate government gave unwilling consent to open the portof Hyogo as well as both the cities of Osaka and Kyoto that were directly

requested to be opened by Harris. By the way it is said that the portof Sakai, one of the oldest and rather more famous port, was earnestly
recommendedin the early stage of the discussion, though the port was finallystruck off the list later.

In this meaning the opening of Hyogo port was a compromise between

both parties. And we must remember that the majority of the Westerncountries did not estimate the port of Hyogo so highly on account of theirinsufficient understanding, while the Japanese Government, both the Toku(1) The Dutch and Korean missions landed at or passed Hyogo on their way to Edo<Tokugawa-Shogunate).

THE EARLY DEVELOPMENT OF KOBE PORT 19
gawa Shogunate and the Meiji Government, tried to keep any foreign power

away from Kyoto, where the Japanese Emperor lived and where the headquarters of an anti-alienist group was also located.

In addition to such negativism or hesitation in the opening of the portof Hyogo, a final disagreement was declared by the Emperor's Governmentin Octover 1865. When the opening of the port was permited officiallyand somewhat inevitably two years after, the provision for necessary institutious, especially, the establishment of a settlement was carried on in

Kobe, not in Hyogo. The new modern port was born in place of the old
Hyogo port. In this meaning the new port of Kobe was formed with verymuch difficulty.

Some of the following reasons are given to explain the opening of

Kobe instead of Hyogo;
1) The people of Hyogo were afraid of foreigners as being terrible bar-barians, 2) There was already a place for anchoring in Kobe, 3) The
geography of Kobe and its neighbour-hood was wide and flat, etc. Regard-

ing the selection of Kobe instead of Hyogo, we can add a few important
facts or problems;first, its geographic nearness to Kyoto and Osaka, especially the latter, second the commercial importance of Osaka, (the real

superiority of Osaka-merchants over Hyogo-merchants), and, finally thegradual but necessary recognition that a new foreign trade should beaccelerated through Osaka and its merchants. In fact, the growth anddevelopment of Kobe Port was in close connection with the economy of
Osaka.
From a strict interpretation, however, the opening of Kobe instead of

Hyogo was a sort of swindle. The change was quite different from theopening of Yokohama in place of Kanagawa as one of the new trade(2)
ports, even if there were some apparent similarities in both. Of course,
there was a distinct gulf between the relation of Kobe with Hyogo andthat of Nigata with Ebisu (in the island of Sado).
(2) a) As both towns of Kanagawa and Hyogo were on the main route to Edo, unforeseen
trouble might take place during a "daimyo Procession" it the towns became a trade
port where many foreigners would live and visit. From this anxiety the Tokugawa
Shogunate tried to select a smaller village in the suburbs.
b) Both Yokohama and Kobe were not yet ports, and this might have given less difficultyin forming new big port-facilities,

20 SEIJI SASAKI
Undoubtedly it is important and often necessary to have a general com-prehensive grasp and understanding of the five ports, Hakodate, Yokohama(Kanagawa), Nigata, Kobe (Hyogo) and Nagasaki, or six ports including
Osaka as symbols of Japanese new modern ports. It would also be usefulto regard en bloc or common both ports of Yokohama and Kobe as thetwo greatest by showing many comparisons between them. However,another important thing which must be remembered is to find eacd port's
own characteristic and development process. Why did only the two ports,

Yokohama and Kobe, tower above the rest? Did they have the same
condition and character in their progress as either of a port or in the tradecarried on there? . Did the port of Kobe grow up quite differently fromthe port of Yokohama?

II
The Commerce Treaties of 1859 signed between the Tokugawa Shogunate and the five countries, the United States of America, Holland, Russia,

the United Kingdom and France, described the opening dates of these five
Japanese trade ports as follows;
Kanagawa, Nagasaki and Hakodate......."v.."........""--July 4, 1859
Nigata.."....."........... ........................ . .............m....".....January 1, 1861

Hyogo."..-....".""... . ...."h.H-""January l, 1863
Even from this we can understand that the last to open was the port of

Hyogo (Kobe). Moreover its opening date was really postponed to a few

years later. Naturally it showeda later start in forming modern port
provisions.

The late opening of Hyogo-port came, as aforesaid, from its connection
with Kyoto (Emperor's government) and with the conservative anti-alienist

group. After the signing of the above-said Commerce Treaties the disputeconcerning the reverence for the Emperor and expulsion of foreigners waxed
hot, and in October of that year, it led to the Emperor's negative answer

in refusing to open Hyogo port. On the other hand the postponement of

the opening of Edo, Osaka, Nigata and Hyogo was seriously discussed
because of radical actions like attackes against foreigners, foreign firms andJapanese rich merchants. At last a special mission consisting of Y.
Takeuchi, Y. Matsudaira, T. Kyogoku and others visited European countries

THE EARLY DEVELOPMENT OF KOBE PORT 21
in order to obtain consent in postponing the opening of the above four
ports till January 1, 1868.

There were also some questions as to whether the delayed date for
opening the ports could be successfully kept, and whether the Emperor's
government would agree with the opening of Hyogo port itself as a major
promise. In fact the Kyoto party, viz, the anti-alienists under the commandof the Satsuma-han and Choshu-han, did not easily amend their movement
against the opening of Hyogo port. But in May of 1867 the latest agreement for opening the port was issued in exchange for leniency regarding(3)
the Choshu-han's defaults, while foreign fleets were carrying out a demonstration in Osaka Bay.

The opening of Hyogo port was realized for formality's sake on thefirst day of January 1868, when several warships belonging to the United

Kingdom and the United States of America were putting pressure on the
port.

While both of the above-said foreign problems and the late start ofover 10 years compared to the port of Yokohama must be particularly
remembered as the most essential and direct reason that brought about therelative slow development of the port of Kobe, the following fact must be

also stressed for its similar effect; the port was built in a new place

separate from the old port of Hyogo. As stated before, Kobe was not a
port in those days, and did not have any harbour-equipment. From thismeaning we can also say that Kobe port was gradually formed from a barecoast town where there were no modern harbour-equipment. In the middleof the nineteenth century there were only about 500 houses in Kobe village,

about 300 houses in Futatsuchaya village and 140 houses in Hashirimizu
village in comparison with about ten thousand houses in Hyogo town.

We can getabare picture of the port from the next few situations;first, it was the anchoring place for local sailing vessels, "Higalei-kaisen"

and the "Taru-kaisen" both were regular traders from Kamigata (Osakaand Hyogo) to Edo (Tokyo) in the early Meiji Era; second, it had a'(3} The Choshu-han had bombarded American and Dutch warships at Shimonoseki in May
1863. The squadron of each country and their allied fleets attacked Shimonoseki in thatyear and the next, and requested considerable indemnity because of their victory. On theother hand the Tokugawa Shogunate tried to conquer the Choshu-han twice. After all
the Choshu-han was punished tolerantly and remitted half of the requested indemnity.

22 SEIJI SASAKI'"Fune-sue-tate-ba" (an equipment like dock to scrape off and burn seaweeds or shells), which was built by Kichibe Amiya in 1859; third there
was the "Kaigun-sorensho" (Navy School) built by Kaishu (Rintaro) Katsu.

Even after the royal permit of opening the port concrete works were noteasily set up and only a few formal preparations were realized like theappointmnet of several port officers and plans for "Hyogo-Kaiko-shosha"(an enterprise to arrange for opening the port) which miscarried at last.

So there were only a few nominal equipment "Unjosho" (custom house),three little warehouses and three piers at the ceremony for the openingof the port, while the settlement had not yet been brought to completion.

Here it must be repeated that formal permit or determination for the

opening of the port never meant the appearance of a modern port with
substantial equipment and the visible shape of a port. The modernizationof Kobe port it should rather be said, the development of Kobe from avillage to a port town took many years and many difficulties had to beconquered. The Tokugagwa Shogunate system fell apart soon after the

ceremony for opening the port. This was followed by a period ofdomestic war and confusion accompanied by the complete stoppage of tradeand shipping transportation. Of course the construction of the new port
was put in abeyance during this period.

'

A real chance for Kobe to begin fulfilling its function as a port forforeign trade, in other words, as a port for foreign ships to visit; wasgiven in fact by the new Meiji Government; above all, by its local department in Kobe, though the name was often ehanged as follows; first, it was"Hyogo-Jimkyoku", second, "Hyogo-Chindai", third, "Hyogo Courthouse",
and last, "Hyogo Prefectural Office". M. Higashi-kuze assumed formal
leadership, with Sajiemon Iwashita, Tozo Terashima, Shunsuke Ito (H. Ito)and so on. The last man, Ito, the First Prime Minister in our country,
made the biggest and most direct contribution to the development of Kobe

and of modern Kobe port, when he was the public official for foreign
affairs at the prime of his life. Later he became the Governor of Hyogo
Prefecture.

However, such a start toward the modernization of the port of Kobe,
which was brought to fruition by Ito and others, did not immediately mean
the achievement or the beginning of physical modernization in port equip-

THE EARLY DEVELOPMENT OF KOBE PORT 23
ment. It meant indeed only an actual start forward to becoming a modern
port, or a port itself. The real construction of modern harbour facilities

depended greatly upon many people, both Japanese and foreigners andrequired much time and expense. Even in selecting a place for theconstruction of a settlement itself, can we find many difficulties. It wascertain that the new Meiji Government had little money and power toaccelerate such a large peaceful work against urgent military movements.

On the other hand, a grave transition quickly took place on a large

scale with the moving of the Meiji Government (Emperor) from Kyoto toTokyo, that is, all leaders of the Meiji Restoration moved to Tokyo, andtheir important concern was turned to the urgent development of Tokyoand Yokohama. The majority of useful Japanese young men, as well as
foreigners, also centered in Tokyo. So the nucleus of our country wastransferred from Kyoto or Kamigata including Kobe (Hyogo) to Tokyoand its neighbouring area. Although the actual economical center of ourcountry still remained in Kamigata (Osaka and Kobe), and the Osaka
merchants especially were continuously playing a most active part in Japan-

ese economy. The fact, however, promised little good for Kobe or
Hyogo;there was not a merchant firm in Kobe, and no large Hyogo
merchant could have precedence over, any Osaka, merchant in any aspect
or period. In the final analysis Kobe or Hyogo was subordinate to Osakaand its merchants. Moreover, new friction between Hyogo (residents) andKobe (residents) came into existence with the development of Kobe territory.

Because of all these conditions the port of Kobe was not quickly able tostart substantial modernization development as a modern port even though
the course itself had been decided.

While the following chronological date show us main early construction

works made in the port of Kobe, we can easily understand their relative
lateness in starting essential modern harbour facilities. The so-called firstsection of the work was started in about 1906. The same construction
work had been earlier undertaken in other ports like Yokohama in 1889,

Nagoya in 1896 and Osaka in 1898.
1868 (Meiji-1) Opening of Unjosho (custom houses, east and west,
by the new Meiji Government)
Completion of settlement construction work,

SEIJI SASAKI

24

1871 (Meiji-4)

Building of the Wada Light-house.
Construction of a coast stone quay. (repeated often
later on)1873 (Meiji-6)

The East Unjosho changed its name to the Kobe
Custom House. Laying of the pier 15ken-length,
3ken-wideness by the West Unjosho.

1875 (Meiji-8)

Opening of the Kanagawa Dock inside Kobe (railway)
Station.

1876 (Meiji-9)

Construction of the Railway Pier inside Kobe Station

1882 (Meiji-15)

Establishment of the Kobe Sambashi Kaisha (Kobe
Pier Company) and construction of their pier.

Establishment of the Kobe Senkyo Kaisha and construction of their pier that was made of many vessels

connecting each other. •1883 (Meiji-16)

1884 (Meiji-17)

The fixed moorage for the navy was moved from
Hyogo to Kobe,
The Kobe Sambashi Kaisha built a railway pier in
Onohama with warehouses and sheds.

1885 (Meiji-18)

Establishment of a permanent disinfecting station(predecessor of the present Kobe quarantine station)

at Wada Point.

1889 (Meiji-22)

Kobe was organized as a municipality.

1892 (Meiji-25)

The fixed moorage for ships was enlarged. (Theamount of import in this port accounted for 40 percentof the total volume of Japanese import trade).

1896 (Meiji-29)

Opening of the Kobe inspecting office of Silk.
A survey for harbour construction was started.

1897 (Meiji-30)

The break-water was built in front of Kano-cho as awork of the Kobe Custom House.
1898 (Meiji-31)

The 30th anniversary of open-port. The issue of
open-port regulations. The establishment of Kobe
Port Authority. Establishment of "Kobe Ryoshui Co.

Ltd. to supply water to ships. The plan for Kobe
harbour construction so called "Okino's plan" .
was brought to completion,

THE EARLY DEVELOPMENT OF KOBE PORT 25
1899 (Meiji-32) Restitution of the settlement territory.

1901 (Meiji-34) A Union for pilots, named "Setonaikai Pilots Union,"

was founded in Kobe.
The Onohama shore protection works were carried out.
1903 (Meiji-36) Formation of Ikari hill (Anchor hill)
1906 (Meiji-39) Sakatani, Minister of Finance, expressed his plan for

Kobe port constructlon.
1907 (Meiji-40) The first section for port construction was set up.

A railway combining the land with the sea wascompleted.
1910 (Meiji-43) Construction work of the East breakwater was started.

1911 (Meiji-44) Reconstruction of Meriken-pier was brought to completion.
Although through almost the whole of the Meiji Era the port of Kobe

had not yet grown to be a modern trade port in the rigid meaning of theterm, actual foreign trade business and shipping business (transportation
activity), were carried on to a certain extent, so that both the port and thecity also developed correspondingly. Our next subject will be to take up
the essential character of Kobe commerce during the fifty years till the endof the Meiji Era or World War I, But we are able to describe them only
grossly and most typically;a. Inclination toward import trade
In contrast to Kobe's present high estination as the most important ex-

porting port, the foreign trade of Kobe port at that time clearly inclined
toward import, as is shown in the above paragraphs. At the earliest stage

Osaka merchants clerks came to Kobe carring small quantities of packed
goods on their backs and attempted to sell them to foreigners along theroads or on the shore, expressing themselves by gestures. This was thefirst type and method of export from this port. Till the tenth year of

Meiji (1877) exporting cargo shipped from Kobe port was very small in
number and quantity; the third item (tea) can be pointed out as the only
plausible cargo among some of the exporting goods like silk, silkworm-egg
card, tea, raw wax, tobacco etc. shown in old records of the time.
Compared with exports, the import trade clearly and gradually increased
at an early stage because of the recovery and stabilization of domestic order26 SEIJI SASAKI
after the accomplishment of the Meiji Restoration, of the trend to adopt
European civilization, especially all foreign progressive goods, and of theunexpected military demands for the Japan-Formosa War (1874) and theSatsuma Rebellion (1877). Since the second decade of Meiji import trade
had been given more rational and large impetus by the following economicaldevelopment, that is the successful consolidation of paper currency opened
the road to modern economy (capitalism) in the concrete and to direct expression of the so-called capitalistic industries, and presented a decisive

opportunity to import much material, machinerys and equipment. Of
course this general tendency as a whole was surely recognized in importsof Kobe port. But there wasarelative stagnation in both exports andimports before the twenties year of Meiji (1887) at Kobe because of arigid and detailed survey. Besides the actual progress of the above-said
economical developments, there were a few direct considerations that led
to a quick and real growth of foreign trade, especially of import, in Kobe
port; first, the development of local transportation in Kobe City including

the completion of road sand a railway, second, the appearance of native
shipowners including shipping interests in the town so-called Shagaisengroup. The clearest and greatest increase in import (amount) can bepointed out from the twenty-fourth year of Meiji (1891). It is well toremember that imports of Kobe port stood first in the list of Japanesetrade ports by exceeding that of Yokohama port, and this position has
continued to date. It is need less to repeat here that foreign trade,
especially imports of Kobe port increased greatly through the two wars, theSino-Japanese War in 1894-5 and the Russo-Japanese War in 1904-5, andwith an attendant expansion in economy, commerce, and transportation.

b. Transportation of main imported cargoes
The composition of imported goods was variable through the fifty years.

Firstly the import of raw materials increased very rapidly from the 20thyear of Meiji onward, while that of finished goods conversely decreased.

Second, in the early period the main imported cargoes were composed ofclothing and woven goods, but textile material (weaving thread) took firstplace together with petroleum and sugar during middle of the Meiji period

and at last cotton and ginned cotton became the largest imported cargoduring the later period. FrQm this phenomenon we can easily analyze theTHE EARLY DEVELOPMENT OF KOBE PORT 27
regular development of Japanese industry, especially the fiber industry. On

the other hand we must understand that in those days Kobe port and its
real daily activities remained as low as to transport such comparatively in-fant trading cargo. The above explanations will be useful for us instudying the reasons and limitations for the slow modernization process of

Kobe harbour.
c. Many-sided shipping activity
Apart from the smaller size vessels in those days, which in itself has

connection with the slow development of the port, we must here point out
the fact that the many-sided activity of marine transportation can be re-cognized in Kobe port since the earliest days. Such a tendency can also
be found in Yokohama port, but that of Kobe in more distinct and is fullof importance. It was of course related to the high importance of the

Hanshin (Osaka and Kobe) economic power, on the one hand, and wasconnected with its geographic or historical position to many main world-

wide trade ports on the other hand. Moreover, it seems to us that theslow tempo of modernization and its eventually indispensable performance
together depended on this multifariousness considerably.

In spite of the above-mentioned undeveloped situation as a modern
port, a good number of foreign vessels visited Kobe even during the earliest
preiod, that is, immediately after the opening of the port, and their flags

were various; the Hayot, the first merchant-ship to enter Kobe port after

the opening was a German ship, and her captain and crew were English.
In 1868 another German sailing vessel, Illies visited Kobe as the first shipfrom Europe (Hamburg), while at the same time the English sailing vessel,
Brave, set sail from this port to the United States of Americaloaded withtea. Other foreign liner-boats, especially American and English vessels
either sailing vessels or steamers, began to call at Kobe on' their route

between their own home-port and Far Eastern ports like Yokohama, Nagasaki and Shanghai as well as tramp ships of other countries called at very

often this port. Consequently the flags of the vessels that entered Kobe

port were various and it was easy to find those of the Dutch, English,
French, German, Italian, and of the U. S, A. together with Asiatic shipowners

like the Chinese. On the other hand the Japanese ships set sail from

Kobe Port for many foreign ports when steamers and their shipowners

28 SEIJI SASAKI
began to grow gradually. Almost all Japanese ocean-going liner-boats thatwere first built by the "Mitsubishi Kaisha" and were able to develop

through the efforts of the "Nippon Yusen Kaisha" and "Osaka Shosen
Kaisha" set sail from Kobe or at least called there. As the shipowners ofthe "Shagaisen" so-called Japanese tramps began to grow in Kobe
the port, majority of Japanese tramps practically ran between Kobe andforeign ports. ,Such multifariousness of ships, their flags and their routes, etc. as has

already been shown beforehand, promised the internationality of Kobe as a

big city or port. The development of Kobe port was nothing but the
progress of this international character in a sense. And it seems to us
that the greatest and final stage of such an international connection set up

the true modernization of the port at the end of the Meiji Era, while thedistinct enlargement in ship size and the continuous increase of ships andtrading cargo gave the most direct impetus to its physical growth as a port

together with all the other land developments like population, industries,
transportation and so on.

RISE OF MODERN SHIPBUILDING IN
JAPAN AND PROMOTERS
Tadakatsu INouE

I
The beginning of shipbuilding in Japan goes back to the mythologicalage. According to the Nihonsholei compiled in 720 for the purpose ofrecording the legendary traditions chiefly on the origin and lineage of theImperial Family, King Suijin who is believed to have been on the throne
from 97 to 30 B. C. encouraged his subjects to build ships. This is quitepossible in view of the geographical conditions of Japan as an island nation,

though most of the ships built in those days must naturally have been smalland simple.
In the early seventh century the Yamato (Japanese) court sent its first

cultural missions headed by Imoko One to Zui, the then dynasty of China.

After the dynasty was replaced by T6 in 618, Japan continued to send
missions to the continent. This clearly indicates that ships capable ofnavigating the oeean had already been built in those ancient times.

In the days of the Kamakura and Muromachi periods that continued
from the late twelfth to the sixteenth century, both the feudal lords inKyushu, Shikoku and Chugoku districts and the merchants in the cities of
Kyoto, Sakai and Nagasaki became increasingly active in foreign trade while,on the other hand, famous pirates called WakoA infested the Chinese coastand the more southern seas. In the following Azuchi-Momoyama Era,
Hideyoshi Toyotomi who rose from the lowest position of footman to thehighest of kamPaku, the chief adviser to the Emperor, encouraged foreign
trade by using chartered ships called Goshuin-sen, and also sent large expeditionary forces twice to Korea in the 1590's. All these events gave a big

impetus to the rise and development of shipbuilding in all parts of Japan•

The growing tendency in shipbuilding, however, was suddenly checkedwith the enforcement of the seclusion policy in the early days of theTokugawa Era. After 1635 Japanese were forbidden to leave' Japan and30 TADAKATSU INOUE
foreigners to settle there. A concomitant law forbade the building of shipsof five-hundred leoleu and over and with a structure of two masts and akeel. After 1639 to 1641, commerce between Japan and the outside world
was restricted to that conducted by the Chinese at Nagasaki and by the

Dutch merchants who established a firm at Deshima in the same neigh-bourhood. Asa consequence the demand for ocean-going ships disappeared. All ships built during the Tokugawa period that lasted as long as
two and a half centuries were thus limited to those for coastal and river

services. And there naturally developed a peculiar type of ship known as
Yamato-gata-sen (Japanese-style ship) which was characterized not only by
its smallness but also by its keelless structure with a single mast and sail.

As is generally known, when Commodore Perry steamed for the second
time into Uraga Bay in 1854 and refused to leave without obtaining fromthe Shogunate the right of calling at Japanese ports, the Government founddifficulty in keeping its long established policy of isolating Japan from therest of the world. By 1858 the Government was compelled to sign treaties

which conferred rights of trade on American, British, French and othernationals. It is needless to say that this forced opening of the ports toforeigners marked the beginning of the marvellous changes in Japan's
economic and political life that subsequently occured.

Now that Japan opened her ports to foreign trade and joined in thesociety of nations, her government and people could no longer rely on the
traditional water transportation facilities represented by Yamato- style ships

which had been used wholly for coastwise service. They had to bepromptly replaced by Western-style ships which surprised the Japanese by
their superior capacities as ocean-going ships. Since the necessity for themodernization of ships was recognized, Japan's shipbuilding industry entered

upon a new phase of development.

II
The process of the modernization of Japanese-built ships that took placefrom the middle of the nineteenth century may be outlined as follows.

The transition from Yamato-to VVestern-style sailing vessels.
Although both IYamato-and Western-types were sailing ships built of wood,they were greatly different in their structures. As mentioned above, theRISE OF MODERN SHIPBUILDING IN JAPAN AND PROMOTERS 31
former which had long been used exclusively for coastal service was a small
keelless ship. In contrast, the latter which had developed as an ocean-goingship was a larger ship with a keel abie to surmount the raging waves. It
was thus necessary for those who attempted to adopt Western-style ships inplace of Yamato-gata-sen to make a fresh start in acquiring the art andscience of building the former type of vessels.
Credit for the first Western-style sailing ship is given to the Mito clan,

which built the Kyokuzitsu-mara in 1856 at Ishikawajima, Yedo (Tokyo).
It is interesting to note how the clan got the technical skills to build the ship.

In 1854, a Russian fleet off the coast of Shimoda was seriously struck

by a tidal wave. The eommodore of the fleet decided to build two sailing
vessels of the schooner type at the port of Heda, Izu and asked the Shogun-

ate to supply the necessary materials and labor. To seize this opportunityof learning the art and science of building new type of sailing ships,
the Government sent retainers (samurai) of its own and of the local lords

besides a group of carpenters and blacksmith and had them engage inbuilding the ships under the direction of the Russians. Among the samurai

there was Hanbei Suzuki delegated by the Mito clan, whose expericencebecame the technical basis for building the Kyoleuzitsu-maru. But theship was soon called "Yaleleai-maru (troublesome ship)" because of difficulties in controlling her due to a mistake in the plans.

The adoPtion of steam Power in Place of sail. In 1849, the Satsuma
clan ordered Ganpo Minozukuri to translate a Dutch book on steam engine
into Japanese. Under the guidance of this translation, the clan built a
trial steam engine in 1851 and installed it in a small boat. As a moreearnest effort along this line, the Shogun founded a shipbuilding yard in1857 at Nagasaki with the assistance of Dutch engineers and, in 1859,
constructed the steamship Tamaura about twenty-seven meters long. This
ship is generally known as the first steamship built in Japan.

The transition from wooden to iron and steel shiPs. Efforts tointroduce iron and steel in shipbuilding were made in the 1880's. Three iron-framed wooden warships-the Katsuragi, Yamato, and Musashi-wereconstructed at the shipyards of Yokosuka and Onohama, Kobe in 1885
and 1886. Then, two steel-framed and iron-board warships-the Atago andTakao-were built at Onohama during the next two years. The same de-32 TADAKATSU INOUE
velopment occured in the construction of merchant vessels. Among thefirst iron ships there were the Asahi-maru and A7'ileawa-maru built at
Onohama in 1884 and 1885 and the Yoshinogawa-maru (401 gross tons),

Minatogawa-maru (about 400 gross tons), Kizugawa-maru (138 grosstons), and Kamogawa-martt (421 gross tons) each constructed at the
Kawasaki Dockyard Company of Kobe in 1885, 1886 and 1887. At thelatter shipyard two steel ships, the Tamagawa-maru and Rnjigawa-maru,
each of about 500 gross tons, were built in 1889, while, in the same year,
the shipyard of the Mitsubishi Company of Nagasaki constructed three steel

vessels, the Chileugogawa-maru, Kisogawa-maru, Shinanogawa-maru, eachof about 600 gross tons.

The aPPearance of larger laPanese-built shiPs. Although the modernization of Japanese-built ships had been carried on since the middle of thenineteenth century, before 1895 the Japanese shipyards launched only one

vessel of over 1,OOO gross tons.* A new era began with the Shipbuilding

Encouragement Act of 1896, the year following the Shino Japanese War.
This provided for the granting of official subsidies to builders of iron andsteel vessels of 700 gross tons and over. The bounty was fixed at therate of 12 yen a ton for ships of under 1,OOO tons and 20 yen a ton for
those of over 1,OOO tons, while 5 yen per horse-power was given for marine

engines manufactured in Japan. As a result existing shipyards were extended and several new ones founded. In 1899 further encouragement wasgiven by an amendment to the Navigation Subsidy Law. This law, passed
in 1896, had provided for subsidizing the mercantile marine. The amendment entitled owners of Japanese-built ships to claim twice the amount ofsubsidy granted to owners of foreign-built ships, From this time onward
leading yards were entrusted with the building of large ocean-going steam-ships. Vessels of over 700 gross tons built at private Japanese shipyards
in the years from 1896 to 1913 were as follows:
ShiPbuilding Companies Number of Vessels Tonnage in Gross Tons

Mitsubishi 43 207,765

Kawasaki 35 101,713

Osaka
30,521Others30
4 4,568

Total 112 344,597* This ship was the Sumamaru of 1,592 gross tons constructed at the shipyard of the
Mitsubishi Company of Nagasaki in 1895.

RISE OF MODERN SHIPBUILDING IN JAPAN AND PROMOTERS 33
III
ttt

We have outlined the rapid progress in the modernization of Japanesebuilt ships during the few decades after the opening of the ports to foreigners.

Next, we need to refer to the rise of Western-style shipyards in Japan
where actual imProvements in water transportation facilities took place.

Emphasis will be laid on the problem of who played the leading part inlaying the foundations for these modern dockyards.

1. The role of traditional shipbuilders, .
It may truly be said that most of the ship carpenters who had been
actively engaged in building ships for coastal or river service in the Toku-

gawa period failed to become modern shipbuilders. See, for example, theleading shipbuilding companies of today. There are none with the excep-

tion of the Fujinagata Dockyard of Osaka that had their origin fromtraditional
shipbuilders. ,The explanation for this is not hard to find. As mentioned above,
there was a great difference between Western methods of shipbuilding andtraditional ones. Ship carpenters thus found great difficulty in adapting
their craftmanship to modern technical methods of shipbuilding. Further, alarge sum of money was needed to build a Western style yard capable ofefficiently building ocean-going steamers. This undoubtedly made it difficult for traditional shipbuilders to transform themselves into modern industrialists.

'
2. The shiPptards founded by foreign residents.
Among the Europeans and Americans who resided in Japan after the
opening of the ports to them in the late 1850's, there• were those whostarted• shipbuilding and ship repairing businesses in Kobe, Hakodate, andother places. The following cases indicate that they played no small part
during the early Meiji Era in initiating Japanese modern shipbuilding industry.

Edward C. Kirby's shipyard:the origin of the Naval Arsenal of Kure.

About 1865 E. C. Kirby, an Englishman, came to Yokohama and became
an importer of matches and dry goods. In 1868, when the port of•Kobe
was opened to foreigners, he moved there and engaged in importing dry
goods and machinery. Sometime later he founded an iron-work at Onohama,
Kobe with two partners and started out in the ship repairing business.

34 TADAKATSU INOUE
After a failure in 1878, the partnership was taken over by Kirby, who wasthereafter the sole owner of the establishment. In 1884, however, when

the yard was busy in building the coastal defense ship Yamato and themerchant vessel Asahi, he got into trouble and committed suicide. The

Meiji Government who had advanced money to Kirby on the security of
the latter's buildings and machinery took over the yard and put it under
the administration of the Navy. In 1895, the facilities were moved to near

Hiroshima and became a part of the Naval Arsenal of Kure. It is here
that, about a half century later, the Yamato, the largest battleship everconstructed in the world, was launched.

Morehead's machine shop: one of the predecessors of the Kawasaki
Dockyard Company. An American called Morehead set up a machine shop
in Kobe at the beginning of the Meiji Era and engaged in manufacturing
and repairlng marine engines. The shop soon added the building of ships
to its line and changed its name to the Balkan Iron Works. But the firm

was bought out in 1873 by the Meiji Government which had taken over a
shipyard in the same harbor founded by samurais of the Kaga and Daishojiclans. After operating the yard for over a decade, the Government yard
was transferred in 1887 to the private ownership of Shozo Kawasaki, thefounder of the Kawasaki Dockyard Company.

E. H. Hunter:the founder of the Osaka Iron Works. Among theearly employees of the above-mentioned E. C. Kirby and Co. of Kobe, there

was a young man called Edward Hazlett Hunter from the same province asthat of his employer. Retiring from the firm in 1873, he engaged for awhile in foreign trade at the foreign settlement of Kobe. Then, in 1879,
he determined to embark on the shipbuilding business and started the construction of a Western-style shipyard on a site of 3,OOO tsubo at Ajikawa,

Osaka. The yard was completed in 1881 and called the Osaka Iron
Works. At the beginning of its operation, the yard had about two hundred

employees and various English-made machinery powered by a steam engine
of six horsepower. After a successful operation of thirty-five years, thefirm of Hunter and his Japanese-born son, Ryutaro Hunta, was reorganizedin 1914 as a corporation under the same name. (As everyone knows, thecorporation was put under the control of the Hidachi Works in 1936 and thename was changed in 1943 to the present Hidachi Shipbuilding Company)

RISE OF MODERN SHIPBUILDING IN JAPAN AND PROMOTERS 35
3. Newly risingshipbuilders.
Besides the shipyards of foreign residents, there arose a number ofprivate ones founded by Japanese citizens. But the part they played ininitiating the modern shipbuilding industry was not so important. Take,for example, the port of Kobe. According to a book published in 1898
for the celebration of the 30th anniversary of the port that was formallyopened on January 1, 1868, the following names are listed as new shipbuilders in the municipality :Names Years of Foundation

Gombei Hinoue's works 1877
Shozo Kawasaki's works 1881
The Hyogo Dock Company 1882

Masakichi Daimatsu's works 1888
Kiichiro Arita's machine shop 1888

Hanbei Honda's works 1891

But, according to the same book, all except Shozo Kawasaki were not
worthy the name of modern shipbuilders by the end of the nineteenth
century. In addition, S. Kawasaki does not fall under the category of a
newly risen shipbuilder in the strict sense of the term. As will be statedlater, he owed much of his success to the transfer of the Government yardof Kobe to him in 1887.

4. The role of Government yards.
Toward the end of the Tokugawa period, the Shogun and the deimyo,
who saw the irresistible might of Western naval equipment, realized thenecessity of improving their own water transportation facilities. To begin

with, they bought ocean-going ships from abroad. At the same time the
Shogun annuled in 1853 the law forbidding the building of large ships andfounded himself several shipyards at Uraga, Nagasaki, Yokohama, andYokosuka for repairing and building ships. The Mito, Satsuma, and Kagaclans also followed this and set up their yards at Ishikawajima, Kagoshima,

and Nanao. It is needless to say that foreign technical experts made animportant contribution to the construction of these yards, though entrepreneurial initiative came almost entirely from native sources.

After the House of Tokugawa was overthrown in 1868 and the Emperor
was restored to the constitutional position which he had not occupied forsome hundred years, the new Government took over the shipyards of the

36 ' TADAKATSU INOUE
Shogun and the daimyo and re-equipped and re-organized them. For
example,tthe yard of Nagasaki, originally owned by the Shogun, was put

under the control of the Restoration Government in 1868 and, after an
overall improvement, played an important part in repairing vessels during
the Satsuma Rebellion of 1877.

Among the new Government dockyards, some developed into naval
arsenals while others were transferred to private ownership. The yard of
Yokosuka represents the former; it was turned over to the administrationof the Navy in 1872. The yards of Nagasaki, Kobe, and Ishikawajima,
Tokyo each illustrate the latter ; the first one was lent to a samurai named

Yataro Iwasaki, the founder of the Mitsubishi Combine, in 1884 and trans-ferred to him in 1887, the second one was lent and then transferred to

Shozo Kawasaki, the founder of the Kawasaki Dockyard Company, about
the same year, and the third one was lent to Tomiji Hirano, the founderof the Ishikawajima-Harima Dockyard Company, in 1876. As everyone
knows, the Mitsubishi, Kawasaki, and Ishikawajima-Harima are now the big
Three in our shipbuilding industry.

+x*+*

We have examined the four courses through which Japan's modern
shipbuilding yards developed. And we have made it clear that the mostimportant among them was the course of development from the shipyards
founded by the Shogun and the daimyo to the Restoration Government
yards, and to private shipyards such as the Mitsubishi, Kawasaki, andIshikawajima-Harima dockyards. But this does not neccessarily lead to theconclusion that the Japanese Goverment played the most important part inlaying the foundation for modern shipyards. Before we reach any conclusion, we have still some important problems to examine. They are as
follows :1. What were the conditions of theshipyards when they were under
the control of the Shogun or the daimyo and, then, under the new Government? If it is certain that the size, technical method, and administrativetechnique of these yards were in such a state as worthy of the name ofmodern shipyard, we would have no hesitation in setting a high value on
the achievements of the then Government. If not so, we shall come to an
opposite conclusion,

RISE OF MODERN SHIPBUILDING IN JAPAN AND PROMOTERS 37
2. What changes did occur in the shipyards after they were transferred

to private ounership. If there are facts that these yards were reallymodernized through these changes, we must evaluate the entrepreneurial andmanagerial efforts of the businessmen such as Y. Iwasaki and S. Kawasaki.

3. In order to answer these questions, we must not only know more
about the facts but also get a clearer idea concerning the concept of"modern shipyard."

These problems, however, are too big to be examined here. The
writer is satisfied by indicating the main points of the problems.

A NOTEONTHE REDISTRIBUTIONOF PROFITS
NobukoNosE

In the traditional approach to income re-distribution, the main arguments have been directed to the re-distribution of income in the personal(1)
sector through, say, fiscal policy. There may be, however, the possibilityof considering the redistribution of profits through taxation assuring theindepende.nce of the business sector as a going concern in an economy.
At the same time, further reasoning for the incidence of profits tax can beobtained on the belief that the burden of profits tax can be passed on toother businesses or personal sector up to the point where the equalizationof a profits rate can be obtained. During the years of continuous debate
on this question, the issues at stake have been made more precise in many(2)
literatures.

This paper is essentially an attempt to incorporate this new material,
and, taking statistical evidence, to appraise the possibility of the debate.

In Section I we present a formula to clarify the point. This serves bothto illuminate the effects of profits tax for the business sector and toestablish the basis for our statistical survey. We add statistical results in

Section II based on this procedure, and some remarks are discussed in the
final section.

(1> G. F. Shirras and L. Rostas, The Burder of British Taxation (Cambridge:at the
University Press, 1942) ; T. Barna, Re-Distributi'on of lncomes through Public Finance(Oxford : at the Clarendon Press, 1945) ;A. M. Carter, The Redistribution of lncontein Post-war Britain (New Haven : Yale University Press, 1955) ; A. T. Peacock, Income
Redistribution and Social Policy (London : Jonathan Cape, 1953) .

(2) E. M. Lerner and E. S. Hendriksen, "Federal Taxes on Corporate Income and the Rateof Return on Investment in Manufacturing, 1927-52," National Tax Journal, September

1955; D. Bodenhorn, "The Shifting of the Corporation Income Tax in a Growing
Economy," Qnarterly Journal of Economics, May, 1956; M. A. Adelman, "The Corporate
Income Tax in the Long Run," lournal of Political Economy, April, 1957; C. Cosciani,"Zur Frage der tiberwalzbarkeit der Kbrperschaftsteuer," Finanzarchiv, 1959; R. E.
Slitor, "The Enigma of Corporate Tax Incidence," Pbeblic Finance, September, 1ee3,

40 NOBUKO NOSEI A Formula for Estimeting the Redistributzon of Profits and theEquali2ation of Profits Rate
We produce somewhat different variations in the formulae from thoseusually conceived;these can however, easily be adapted to other cases
wherever appropriate data are available for the objectives.

We assume that there are n industries in a closed economy and thatoriginal data are available (also analysed by industry) for output, grosstrading profits, assets as well as the actual burden of profits tax.

First we define the rate of profits in the simplest flom as(1) ei =- Pi/Yi
where Pi is gross trading profits in the i-th industry, and Yi is output in thei-th industry, both measured in money terms. We also consider an assetoutput ratio ri for the i-th industry given by(2) ri =- Yi/Ai
where Ai stands for total assets in the i-th industry. Combining (1) and(2) we shall define the trate of yield' of the i-th industry as(3) ri pi - Pi/Ai.
We have no statistical evidence that the asset-output ratios of all in-

dustries are equal with a constant value nor are there any data available
for the values on these ratios;it is however possible to argue that theseratios are more stable than profits ratios because of technical reasons andthat the values may have less differences among industries than the latter,having some level less than unity. If then we may first discuss the rateof profits, we shall be able to extend the reasoning to the case of rate ofyield in all industries. On this ground, we shall start with the formulae
to present the comparison of the rate of profits before and after profits tax.

Let pi and pj be the rates of profits of i-th and j-th industries before

profits tax, it is clear that generally speaking they have different values

when there is no disturbance through profits taxation. The key problem
here is whether equalization of profits ratios can be attained through theassessment of profits tax and hence through redistribution of profits or not.

If now we may accept the argument, as shown in some previous works,that an equality of the revenue ratio might be obtained as the key factor
in the process of the incidence of profits tax, then we can get an extreme
case where the rates of profits of all industries will reach an egual level

A NOTE ON THE REDISTRIBUTION OF PROFITS
after the assessment of the tax, Therefore we get the relationk(4) p'i =- (1-tpi) Pi/Yiee- (1-tpj) Pj/Yj == dj- -pwhere p'i and p'j are the rates of profits of i-th and j-th industries after++

profits tax, tpi and tpj stand for the effective profits tax rates for thoseX (1-tpi) is the effective ratio of profits (left to theindustries, and therefore
industry at its disposal), and b is the average rate of profits which may beobtained in the final process.
On the other hand, the version of the effective profits tax rate of, say,i-th industry can be expressed in the formac(5) tpi ==: tp (PimDi)/Pi=- tp (i` IBi )when tp is the statutory profits tax rate prevailing at the uniform level(pre-determined by the tax law), Di is the amount of abatement out of
profits for tax purpose in several forms of allowances. Therefore (Pi-Di)

makes chargeable profits, and we can define the term (Di/Pi) as theabatement ratio of profits, the greater (or smaller) value of which ,will
make the values of effective profits tax rate smaller (or greater) under aconstant statutory profits tax rate.

Substituting (5) into (4), and taking our d,efinitipn (1) into account,one derivespi (1-tp)+tp(Dj/Pj)(6) pj == (1-tp)+tp(Di/Pi)
which explains an extreme case where the equalization of the rate of profits
has been attained as a result of the• redistribution of profits through taxation.

As stated above, it is evident that the rate of profits are actually dif'ferentfrom industry to industry before tax. Then if we accept thetendency of the equalization of the rate of profits through taxation, we haveto conclude that the abatement ratios should be actually different in order

to approach the result shown in the relation (6), because the statutory41

42 NOBUKO NOSE'

profits tax rate will have a definite value of, say, 10 per cent. In otherwords and more precisely, if the rate of profits in i-th industry pi is actually

greater than that of j-th industry pj,the abatement ratio of i-th industry(Di/Pi) must be smaller than that of j-th industry (Dj/Pj) so as to establish
the equalization of the rate of profits at the level of P.

From an inverse reasoning of the above discussion, we may conclude
that the tendency toward the equalization of profits rate may be working
if we can confirm the fact that the higher abatement ratios have actually

been effective in tax administration for industries in which only lower
profits ratios have been prevailing, or vice versa. This can be made clear

by the statistical evidence showing the negative correlation between therate of Profits ei and the abatement ratio (Di/Pi) for all industries.

Second, we may conclude that a principle of taxation (equity) can besatisfied if the higher (or lower) effective profits tax rates are actuallyassessed to the higher (or lower) rates of profits. This is also tested withthe correlation of the rate of Profits pi with the effective Profits tax
rate tpi for all industries, Third, as a result, the rate of change in therate of profits must be equal to the value of the effective tax rate shownin this formula sinceee(7) i- S,Ii-i- (i-B?.i).,Pi'/Yi..t,ac,which will be a measure for estimating the effect of redistribution of
profits through tax policy.

As stated previously, when we assume more or less stable values of theasset-output ratios (which are defined in (3)), we may obtain parallel
results for the rate of yield. With the same reasoning as above, we may
conclude that the principle of equity may be satisfied if the effective profits
tax rates are levied on industries containing higher rates of yield, i. e. withthe result that there is a positive correlation between the rate of yield+ tax rate tpi. We now proceed to a statisticalTiei and the effective profits
survey to clarify this issue.

II The Statistical Results
The data used mainly in the survey of the rate of profits and the redistribution of profits were taken from the RePort of the Census of Pro-

duction for 1958 (Board of Trade, London, H. M, S. O., 1961) which

A NOTE ON THE REDISTRIBUTION OF PROFITS 43
contains 132 parts; but the data are adjusted by the general price index on

the basis that 1958-- 100 and 1959-101. For profits tax, the data in the

1962 (10th) Inland Revenue Annual RePort (London, H. M. S. O.,
1963), pp. 216-17 has been arranged to be appropriate to our objective forcomputation by industry. In the above Census we get information of net
output, wages and salaries and capital expenditure out of net output analysedby industry, although in the simplest form, we can obtain gross trading
profits. Therefore, it is easy to obtain the rate of profits by industry
under the relation (1) the results of which are listed in Table I below.

Then combining the information of the burden of profits tax by industry
obtained from the Inland Revenue Annual RePort, the effective profits tax

rate can be computed, which are also shown in Table I.
In line with the discussion above, a correlation to test the equalizationof profits through taxation has been found, i. e.

Correlation coefficient between rate ofprofits and effective profits tax rate:=O.385 for all industries, and=O.904 for production goods sector.
This will predict a resulting actual heavy profits tax assessment to the in-dustries with high profits rates, and vice versa. Hence we can conclude
that the principle of equity has been actually realised in the profits tax

administration through redistribution of profits among industries. Therearises also the point as to the difference between the above two results;
since the consumption goods sector has to bear the burden of excise taxes,

some allowances may be considered in computing chargeable profits, whichmeans that a pure equalization effect of profits tax will appear mainly inthe production goods sector.

Second, data of chargeable profits are also available in the Inland
Revenue RePort (pp. 216-17) for all industries, so that, the computation ofabatement ratio by industry can be worked out in the form of Di/Pi.
To clarify our result obtained above, an other correlation has been tested,which shows the result
Correlation coefficient between abatement ratio and profit rate

= -O.414 for all industries, and= -O.411 for production goods sector.

44 NOBUKO NOSE
It is clear that the higher (or lower) is the profits ratio the lower (orhigher) is the abatement ratio. This also predicts that several allowancesmight have been actually taken into consideration for low profits industries
so as to attain the equity of taxation, and vice versa. Further, the estimatedcalculation of statutory profits tax rate in our form (5) has been listed inTable I, which shows approximately the same value as the actual level of
10 per cent which was in effect in the 1959 fiscal year in the U. K. (seethe lg62 Inland Revenue RePort, p. 211) ' •.
Third, in order to approach from the trate of yield' aspect under relation (3), data on total assets, gross trading profits and profits tax weretaken out of the Economist (April-June, 1959; July-September, 1959;
October-December, 1959 tind January-March, 1960 issues). The liabilityof profits tax has been arranged with a three month lag• to make a suitablecorrespondence of the tax base• with the burden. Taking the values of theratio between total assets and gross trading profits, we obtain the rate ofyield as shown in Table II. Also since the above information gives theeffective profits tax rate for each industry, we get the result listed inTable II.

With approximately similar reasoning, but different data from the above
survey, another correlation has been found :Correlation coefficient between rate ofyield and effective profits tax rate
r:-=- O.292 for all industries,'and- O.286 for production goods sector.
This also shows a tendency for equity of profits taxation as has been discussed above.

Concluding Remarles
In all that has been said so far, although the survey has been limited
in finding a line for an approach to clarify the actual tendency of equaliza-tion of profits through taxation, we have found an argument to predict theissue on the redistributive character of profits tax. 'More precise discussions will be needed to bring the problems to asatisfactory solution; there remains some observations in line more or lesssimilar to the case for the personal sector, for example, taking the number

ANOTE ON THE REDISTRIBUTION OF PROFITS 45
of businesses in each industry, and second, a microscopic attack will be

useful since only the profits above a certain level may be charged withalsoa specific rule of abatement. Also to add realism to the form,backing with information of the actual tax administration must be necessary.

These are problems to be solved in the future, and also problems beyond
this tentative and statistical survey.

APPENDICES' Profit ratio, Abatement ratio and Effective profits tax rate analysed
Table 1.

by Industry (1959 Fiscal Year in the U. K.)
Estimated

profitrate Aba,.`e,Mi,e"`,E,.iS?iC,t/si,V.e i,3Sl..tf"it`.O,r,Y

Industry(m) (Dilpi) (t:i) t:i/(i-l?i')

L Mining and quarrying

O.1173O.83e5

O.O121

O.07142.

Food, drink and tobacco

O.4955

O.4247

O.0506

O.08803.

Chemicals and allied industries

O.3689O.2132

O.0697

O.0886

4.

Metal manufacture

O.2637

O.1376

O.0794

O.0921

5.

Engineering and electrical goods

O.3515

O.4963

O.0498

O.09896.

Shipbuilding and marine engineering

O.1881

O.5879O.ou34O.1053

7.

VehiclesO.3096

O.4482O.OM8

O.0993

8.

Metal goods not elsewhere specified

O.3MO

O.3878

O.0618O.1O099.

Textiles 'O.4521

O.sc33

O.0403

O.0923

10.

Leather, leather goods and fur

O.3532O."99

O.0611

O.1111

11.

Clothing and footwear

O.3387

O.6330O.0358

O.oo75

12. Bricks, pottery, glass, cements, etc.

O.3311

O.3215

O.066O

O.0973

13. Timber, furniture, etc.

O.2732

O.6480O.0320O.090914.

Paper, printing and publishing

O.3439O.4681

O.0513

O.0964

15,

Other manufacturing industries

O.3324

O.6570O.0245

O.0714

O.2507

O.7612

O.0242O.1013

O.3202

O.5017

16. Construction

O.0939Averageo.o473 S".C,`",a.1,'?8

1959 F. Y.>NOBUKO NOSE

46

Table 2.

Rate of yield and effective profits tax rate analysed by industry(1959 Fiscal Year in the U. K.)

Industry

Rate of yield(ripi)

Effective profits

tax rate
*
(tpi)

1.

Breweries and distilleries

O.1148

O.07952.

Clothing and footwear

O.1180O.0673

3.

Food and confectionery

O.1290O.03814.

Shops and stores

O.1540O.0904

5.

TobaccoO.1307

O.0514

6.

Building

O.1260O.0665

7.

Engineering

O.1308

O.0757

8.

Iron and steel

O.1138

O.05939.

Shipbuilding

O.0879O.0762

10.

Chemicals and paintO.1153

O.0511

11.

Electrical manufacturing

O.0983

O.061312.

Motors, cycles and aircraft

O.1170O.074413.

Newspapers, papers and printing

O.1116

O.0674

14.

Miscellaneous manufacturing

O.1105

O.0684

15.

Shipping

O.os96

O.0255

16.

CottonO.0557

O.0426

17.

Silk and rayon

O.0729

O.048818.

Woo1

O.0949O.094819.

Other textiles

O.0764

O.063520.

Oil

O.1040O.077821.

Rubber

O.1096

O.O12222.

TeaO.0958O.0253

23.

Other companies

O.0770O.0723

O.1049o.oscaAverageINTERNATIONAL LI9UIDITY CONTROVERSYIN JAPAN (2)Masahiro FUJITAI
In the 14th Annual Report of Kobe Economic & Business Review (1967),

we have already examined some original reforming plans or proposals ofinternational monetary system in Japan, so it is an important moment for us

to examine some attractive proposals of them.*
International Liquidity Controversy in the early period had rather intro-

ductive character of the leading proposals in international aspects (between

Angro-American and continental Europe) than the controversy of original
proposals among the specialists in Japan. 'After the appearance of the Triffin plan the proposals began to actual
controversy and discussion and we can understand easily that these discussions

are based on their national interest. International liquidity discussion isabout to change a new development and to be a remarkable stage with theappearance of the Special Drawing Rights (S. D. R.) of International
Monetary Fund in the Rio de Janeiro Meeting in September 1967.
Generally speaking, it would be very beneficial or convenient to divide
these controversies into the two periods. So, the first period was the starting

period of controversy of the ideal and theoretical proposals (1958-1962)

among many scholars and economists, the second period is the promoting
period of proposals after 1963.

The turning point from the starting period to the promoting period
may be implied the discussion of the creation of new reserve assets. Now,

we have entered into the realizing process of the new plan, the S. D. R.
plan was called as the most useful solution of the present "Dollar Crisis".

The various proposals before the S. D. R. plan have played, so to speak,
preparative parts, so we have never to neglect that nothing came out of allthese discussions immediately.
* We studied the Matsumura plan, the Horie proposal, and the Miyata plan in another work.
Masahiro Fujita, Internatlonal Liquidity Controversy in JAPAN (1> , Kobe Economic & Business Review, No. 14, 1967, pp. 73-86.

48 MASAHIRO FUJITAIn this work, we would like to try the bibliographical review as to theabove-mentioned starting period of the international liquidity problem.

'II
Mr. Pierre-Paul Schweitzer, Managing Director of the International
Monetary Fund, pointed out the focus of the present international liquidity
problem in his Rio de Janeiro Meeting address,(i)as follows :"An outstanding lesson of both the Kennedy Round and liquidity negotia-

tions is that the most difficult problems of trade and finance can be
resolved provided that the will exists. The discussions on internationalliquidity were conducted over a period of four years in the Fund, among
the ten countries that participate in the Fund's General Arrangements to
Borrow, in the joint meetings of Executive Directors and the Deputies of

the Group of Ten, and in many other forums. As a result, Governors now
have before them, approved by the Executive Directors as the basis for anamendment of our Articles, a specific Outline for facility to meet the need,

as and when it arises, for a supplement to existing reserve assets. At thisjuncture I want to express my very real appreciation of the way in which

the long period of discussion and negotiation was so lightened and madepleasant by the spirit of cooperation shown by all participants, and I shouldlike here to pay particular tribute to the Chairman of the Deputies.

After a number of years in which I could do no more than report acertain amount of progress and promise intensive additional study for the nextyear, I am particularly happy to be able to present this plan to you now

on behalf of the Executive Directors and to give my warm support to the
proposed Resolution that asks them to prepare the necessary amendments of

the articles for submission to the Board of Governors. Once approved by
the Board, the amendments would go to members for ratifications.

The Fund staff and management stand ready to prepare with maximum
dispatch drafts of the necessary instruments, and any other requisite material, to facilitate the work of Executive Directors in both tasks assigned tothem in the Resolution, relating to the establishment of the new facility andto possible improvement in the present Fund. The Outline reflects the(1> Pierre-Paul Schweitzer, Managing Director of the Fund, International Financial News
Survey, Oct. 6, 1967, pp. 320-324.

INTERNATIONAL LIQUIDITY CONTROVERSY IN JAPAN (2) 49
principle that the international community should be able to control reserves,

instead of reserves controlling the community."

Also, Mr. Schweitzer has shown the following his plan.
"The new facility is aimed at creating international liquidity in the unconditional form. There are two categories; unconditionally available reserves,the kind of liquidity that countries can use without being subject to any
commitment or discussion as to policy, and conditional liquidity, such as
the Fund provides in the credit tranches. It is vital to the promotion of an
efficient international adjustment process that conditional credit facilities

should continue to play a major role in the international payment system.

It has become clear, however, from the discussion of recent years thatcountries see important differences between access to such conditional facilities

and reserves available as of right, so that augmented conditional facilities
are not regarded as a full substitute for a normal accrual of reserves."
Mr. Schweitzer defined very clearly the new reserve asset, as follows :"A member will be able to use the S.D.R. (Special Drawing Rights) for
which the outline provides whenever it has a balance of payments or reserveneed to do so, and its judgement of its own need will not be subject toprior challenge. A member will be able to transfer its drawing rights toappropriate transferees, and in this way can be sure that it will get thecurrencies it needs to meet a payments deficit. Members that join thescheme will be obligated to accept without question the new reserve assets

when presented to them by other members in accordance with rules
and instructions of the Fund. This acceptance obligation is an importantfeature of the reserve character of the new drawing rights, and its limit has

been set at a level designed to ensure that members will be able to use

their drawing rights when they need to do so. Of course, any member
can agree to hold any amount of the assets in excess of the limit, The
new drawing rights will be usable among participating members only for
official settlements. But they will presumably also be usable, under rules
still to be worked out, for some of the types of transactions that presently

take place between the Fund and its members.
The assets will be given certain other characteristics to make it aninternational assets worthy of standing side by side with gold, reserve cur"rencies, and existing reserve positions in the Fund, such as a guarantee of the50 MASAHIRO FUJITA 'maintenance of its gold value and interest remuneration at a moderate rate.

For these reasons, countries can be expected to want normally to retain
the drawing rights allocated to them, to acquire additional amounts when
they are in payments surplus and, when they are in deficit, to use the new

drawing rights only in conjunction with the use of their other reserves.
The latter idea is indeed reflected in the Outline, which refers to the desirability that countries pursue over time a balanced relationship between theirholdings of special drawing rights and other reserves. A member that
follows this principle in the management of its reserves would be unlikely
to have to adjust its holdings of drawing rights as a result of the obligation

to reconstitute-an obligation which specifies that over a five-year period amember's average use is not to exceed 70 per cent of its average net
cumulative allocation."

However, we know that there are the two different opinions in ourcountry, one regards the S. D. R. as credit facilities,(2)another states theS. D. R. as the third world currency.(5) Now, we have no sufficient afford,

so we would like to analyze in detail in coming chance.

'III
On February lst, 1968, President Johnson announced the Economic
Report to the Congress. In this Report, President Johnson states thefollowing explanation of the Dollar and the International Monetary System :"The interests of major nations are also linked together in the international monetary system, For us, there is a special responsibility, since thedollar is a world currency, the dollar widely used by business abroad, andheld along with gold as a reserve assets by foreign central banks. Our
deficits in the past decade have sent more dollars abroad than businesses

there needed to acquire, or than governments have wanted to hold as
reserves. Many of these dollars were used to purchase gold from theUnited States. Speculation generated by the Strains on the international(2) Many metalists in Japan, assert the theory of the facilities. For example, Professor

Zentaro Mabsumura, On the new reserve assets theory by Professor Tachi: Z. Matsumura, International Monetary Fund, Banking (JAPAN), No. 236, Nov., 1967, pp. 11-20.
(3) Many nominalists and a few metalists in Japan assert the theory of the third world

currency. For example, Einosuke Ashiya: The Third World Currency, Asahi Journal,
Nov., 1967.

INTERNATIONAL LIQU!DITY CONTROVERSY IN JAPAN (2) 51
monetary system has caused further drains of gold from international re-serves. Above all, much of gold outflowed from the United States to therest of the world (the Continental Europe). During the last three months in

1967, the amount of outflowed gold from the United States to Western
Europe reached $700 million. As a result, the United States' gold reserves

have declined to about $12 billion. This is still ample to cope with for-eseeable demands on the United States' gold stock. But persistent large
the United States' deficits would threaten the entire international monetarysystem. Our commitment to maintain dollar convertibility into gold at $35
an ounce is firm and clear. We will not be a party to raising its price.
The dollar will continue to be kept as good as or better than gold."
Nextly, as for the Freeing the Gold Reserves, President Johnson said asfollows :"I am therefore asking the Congress to take prompt action'to free ourgold reserves so that they can unequivocally fulfill their true purpose to
insure the international convertibility of the dollar into gold at $35 perounce. The gold reserve requirement against Federal Reserve notes is notneeded to tell us what prudent monetary policy should be.
It is not needed to give value to the dollar that value derives from our

productive economy. The reserve requirement does make some foreigners
question whether all of our gold is really available to guarantee our commitment to sell gold at the 35-dollar price. Removing the requirement will

prove to them that we mean what we say."President asked speedy action from the Congress, because it will demonstrate to the world the determination of America to meet its international
economic obligations.*

And President Johnson's Report continued :"Neither can it depend on gold. Gold production has been levelingoff in the face of rising industrial use and a steady drain into private hoards.

What is needed is a reserve asset universally acceptable as a supplement
to gold and dollars, that can be created in the amount needed to meetthe desired expansion of world reserves. The Special Drawing Rights plan,
agreed on in Rio de Janeiro, last September, provides such an asset, This
plan will fundamentally strengthen and ultimately transform the internationalmonetary system in the years ahead."'* The proposal of abolishment of the gold reserve requirement against Federal Reserve notes(25%) passed the Congress at February 20, 1968,

52 MASAHIRO FUJITA
The International Liquidity controversy in Japan 1958-1965 :A Selected Bibliography.
The selected references presented in this bibliography cover books,
reports, and periodical articles which describe the international liquidity
problems.

(1) International Liquidity
Akamatsu Kaname, Kokusai Ryudosei Seminar (Seminar of International
Liquidity), Shiseido Publishing Co., Tokyo, 1959.

Araki Nobuyoshi, Saikin no Kokusai Ryudosei Mondai (Recent International

Liquidity Problem), Boeki to Kanzei (Foreign Trade and Tariff),
No. 128.
Fujita Masahiro, Kokusai Ryudosei to Heika Henko, (International Liquidity

and Devaluation), Banking (Osaka), vol. 18, No. 6, 19.
Fujita Masahiro, Kokusai Ryudosei Mondai (1)-(2) (International Liquidity

Problem) (1)-(2), Kinyu-Journal (Journal of Money and Banking)(Tokyo), vol.5, No.2-No.3.

Fujita Masahiro, Kijiku Tsuka to Kokusai Ryudosei (Key Currency andInternational Liquidity), Journal of Economics & Business Administration (Kobe), vol. 110, No. 4, 1964.

Fujita Masahiro, Kin Hoyu Heijunka to Kokusai Ryudosei (Equalization ofGold Holdings and International Liquidity), Banking (Osaka), No. 190.

Fujita Masahiro, Kokusai Ryudosei Ron no Ichi Kosatsu (On the Theory ofInternational Liquidity), Kinyu Ron Senshu 9 (Readings in Money andBanking), Toyo Keizai Shimpo Publishing Co., Tokyo, 1962.
Fujita Masahiro, Kokusai Ryudosei to Kin (International Liquidity and Gold),

Journal of Economics & Business Administration (Kobe), vol. 108,
No. 4, 1963.
Fujita Masahiro, Kokusai Tsuka Seido Ronso ni tsuite (On the Controversyof International Monetary System), Journal of Economics & Business
Administration (Kobe), vol. 110, No. 2, 1964.

Fujita Masahiro, International Liquidity and the Tokyo Meeting of theInternational Monetary Fund, Kobe Economic & Business Review(Kobe) No. 12, 1965.
Higuchi Goro, Kin, Gaika, Shinjunbi-Shisan to Kokusai Ryudosei (Gold,
Foreign Exchange Reserves,, New Reserve Assets and International

INTERNATIONAL LI9UIDITY CONTROVERSY IN JAPAN {2) 53
Liquidity), Sekai-Keizai (World Economy) (Tokyo), No. 98.

Ikeda Takeshi, Kokusai Ryudosei Mondai to Kokusai Kyoryoku Mondai no
Rekishi-teki Haikei (An Historical Background of International
Liquidity Problem and International Cooperation) 1-6, Kinyu Journal(Tokyo), vol. 5, No, 2-vol. 6, No. 5.

Irie Itaro, Kokusai Ryudosei o meguru Shomondai (On the Problems ofInternational Liquidity), Journal of Economics & Business Administra-tion (Kobe), vol. 111, No. 2.
Kajiyama Takeo, Kokusai Ryudosei to Doru Pondo (International Liquidity

and Dollar and Pound Sterling), Keizai Hyoron (Review of Economics) (Tokyo), vol. 14, No. 3.
Kojima Kiyoshi, Kokusai Ryudosei (International Liquidity), Keizai Seminar(Seminar of Economics) (Tokyo), No. 55.

Kodera Takeshiro, Kokusai Ryudosei Mondai no Ronten (The Focus ofInternational ,Liquidity Problem), Banking (Osaka), No. 191.

Miytita Kiyozo, Kokusai Ryudosei to Kin Kakaku Hikiage-An (International
Liquidity and the Proposal of Increase of the Price of Gold), Shogaku

Ronkyu (University of Kansei Gakuin), vol. 11, No. 3.
Noritake Yasuo, Kokusai Ryudosei to Ryudo Shisan no Senko (International

Liquidity and Preference of Liquid Assets), Sekai Keizai Hyoron(World Economic Review) (Tokyo), vol. 8, No. 5.
0hmiya Eiichi, Kokusai Kinyu Seido to Kokusai Ryudosei (International
Monetary System and International Liquidity), Sekai Keizai Hyoron(World Economic Review) (Tokyo), vol. 7, No. 11.

Shinjo Hiroshi, Kokusai Ryudosei Mondai no Tenkai (the Development ofInternational Liquidity Problem), Banking (Osaka), No. 201.
Shinjo Hiroshi, Kokusai Tsuka to Kokusai Ryudosei ni kansuru Kosatsu(On the International Currency and International Liquidity), Kinyu
Kenkyu No. 1 (Kobe), 1965.
Suzuki Koji, Kokusai Ryudosei Ronshu (Readings in International Liquidity),

Toyo Keizai Shimpo Publishing Co,, (Tokyo), 1959.
Suzuki Koji, Kokusai Ryudosei Mondai to Kokusai Shushi (International
Liquidity Problem and Balance of Payments), Kinyu Journal (Tokyo),
No. 37.
Tanaka Kinji, Kokusai Ryudosei no Mondaiten (Some Problems on International Liquidity), Kinyu Journal (Tokyo), vol. 2, No, 11,

54 MASAHIRO FUJITA
Yoshida Gizo, Kokusai Junbi (International Reserves), Banking (Osaka),

No. 137.
Yoshikawa Koji, Kokusai Ryudosei Mondai ni kansuru Ichi-Kosatsu (On theInternational Liquidity Problems), Yokohama Shi-Dai Ronso (Review
of Yokohama Municipal University), vol. 15, No. 1.
Yoshino Masatoshi, Kokusai Ryudosei to Kokusai Shihon Ido (International
Liquidity and International Capital Movements), Hitotsubashi Ronso(The Hitotsubashi Review) (Tokyo), vol. 54, No. 2.
Yoshino Masatoshi, Kokusai Ryudosei Mondai ni tsuite no Ichi Kenkyu (Onthe International Liquidity Problems), Aoyama Keizai Ronshu (Review

of Economic Studies of Aoyama) (Tokyo), vol. 16, No. 4.

(2) Gold
Ashiya Einosuke, Kokusai Tsuka Ronso (International Currency Controversy), Toyo Keizai Shimpo Publishing Co., (Tokyo), 1960.
Ashiya Einosuke, Kin to Doru (Gold and Dollar) Nihon Keizai Shimbunsha(Tokyo), 1958.
Kajiyama Takeo, Kin no Mondai (Gold Problem), Shunju-Sha PublishingCo., (Tokyo), 1961.
Kajiyama Takeo, Kin to Doru (Gold and Dollar), Sekai Keizai Hyoron(World Economic Review) (Tokyo), vol. 5, No. 11.
Matsumura Zentaro, Kokusai Tsuka Doru no Kenkyu (On the Dollar as theInternational Currency), (Tokyo), 1964.

Miyata Kiyozo, Kokusai Tsuka Seido ni okeru Kin no Mondai (Gold Problem

in the International Monetary System), Hitotsubashi Ronso (The
Hitotsubashi Review) (Tokyo), vol. 24, No. 1.
Noritake Yasuo, Kin to Doru (Gold and Dollar), Journal of Economics &Business Administration (Kobe), vol. 108, No. 4.

Ono Asao, Saikin no Kin Mondai (Recent Gold Problem), Sekai Keizai
Hyoron (World Economic Review) (Tokyo), vol. 10, No. 7.
Ozaki Eiji, Kin Mondai to Sekai no Tsuka Mondai (Gold Problem andWorld Currency Problem), Analyst (Tokyo), vol. 5, No. 11•

Sakai Kazuo, Kanri Tsuka-Sei to Kin Kakaku Hikisage Mondai (Managed
Currency System and Decrease of the Price of Gold), Keizai Hyoron(Economic Review) (Tokyo), voL 8, No. 5.
Suzuki Takeo, Doru kara Kin e (From Dollar to Gold), Economist (Tokyo),INTERNATIONAL LI9UIDITY CONTROVERSY IN JAPAN (2) 55
vol. 37, No. 10.

Yoshino Masatoshi, Kin to Kanri Tsuka Seido (Gold and Managed Currency
System), Economist (Tokyo), vol. 39, No. 1.
Horie Shigeo, The International Monetary Fund, Restrospect and Prospect,

1964.
Miyake Yoshio, Kokusai Tsuka Taisei to Kin, (International Monetary System

and Gold), Sekai Keizai Hyoron (World Economic Review) (Tokyo),vol. 9, No. 4.

Nakatani Minoru, Kokusai Tsuka Kinyu no Mondaiten (Some Problems on
International Currency and Finance), Keizai Ronso (The Economic
Review) (Kyoto), vol. 91, No. 1.

Ozaki Eiji, Kokusai Kanri Tsuka-Ron (Theory of International Managed
Currency) (Tokyo), 1961.
Shindo Motokazu, IMF Taisei-ka no Kanri Tuka Seido (Managed Currency
under the IMF System), Ritsumei Keiei-Gaku (Business Administration
Studies of Ritsumeikan University) (Kyoto), vol. 1, No. 1.

Tsuchiya Rokuro, Kokusai Kinyu no Kozo to Riron (The Structure andTheory of International Finance), Nihon Hyoron Publishing Co.,
(Tokyo), 1963.
Yasui Koji, Kokusai Tsuka Seido (International Currency System), Chuo
Keizai Publishing Co., (Tokyo), 1966.
Isomura Yoshibumi, Kokusai Kanri Tsuka Sei to Kin Kakaku (International

Managed Currency System and the Price of Gold), Annual Report of
Economics (Osaka Municipal University) (Osaka), No. 17.
Matsumura Zentaro, IMF Tokyo S6kai ni mochikomareru Kokusai Ryadosei
Ronso 1-2 (The Controversy of International Liquidity as the Main
Subject in Tokyo Meeting of IMF), Economist (Tokyo), vol. 42,
No. 12-No. 13.
Matsumura Zentaro, IMF no Soko-An to Ginko-An (The Warehouse Plan
and the Bank Plan of IMF), Economist (Tokyo), vol. 42, No, 22.
Murano Takashi, Kokusai Tsuka Seido no Kaikaku o megutte (On the Reformof International Monetary. System), Sekai Keizai Hyoron (World
Economic Review) (Tokyo), vol, 5, No. 5.

Odawara Kenichi, Kokusai Rytidosei Ronso no Mondai to Tenbo (1) (SomeProblems and Prospect on the Controversy of International Liquidity),

Jochi Keizai Ronso (Sophia Economic Review) (Tokyo), vol. 11,

56 MASAHIRO FUJITA
No. 1.
Yoshino Masatoshi, IMF Saikento no Riron-teki Haikei (Theoretical Back-ground of Reexamination of IMF), Sekai-Keizai Hyoron (World
Economic Review) (Tokyo), vol. 5, No. 5.
Yoshino Masatoshi, Key Currency System and International Capital Movements, Banking (Osaka), No. 209, 1965.

(3) Reforming of International Monetary System
Fujita Masahiro, Kokusai Tsuka Men ni okeru Keynes-teki Fukkatsu (AnRivival of J. M. Keynes in International Currency Aspect), Journalof Economics & Business Administration (Kobe), vol. 103, No. 2,

Kitagawa Kazuo, Kin to Doru Kiki ni shosuru Triffin-An no Ginmi (Reexamination of Triffin Plan), Keizai-Kagaku (Economic Science)(Nagoya), voL 8, No. 2.
Sobajima Shozo, Triffin no IMF Kaiso-An ni tsuite (On the Triffin plan),

Osaka Keizai-Gaku (Economic Review of Osaka University) (Osaka),
vol. 11, No. 12.

Tanaka Kinji, Roosa Koso to Maualing Koso (Roosa Plan and MaualingPlan), Banking (Osaka), No. 179.

Ohtsuka Takeshi, Jacobson Teian to IMF Sokai no Sh6ten (Jacobson
Proposal and the Focus of IMF Meeting), Economist (Tokyo), Sept.

1961.
Iwai Shigeru, IMF no Shikin Hokyo Taisei o megutte (On the Reinforcementof IMF), Osaka Keidai Ronsha (Review of Osaka Economic University) (Osaka), No. 35.

Maigawa Haruo, Kokusai Kinyu to Kokusai Kyoryoku (International Financeand International Cooperation), Kokusai Kinya (International Finance)(Tokyo), No. 328. 1964. 'Araki Nobuyoshi, Gendai Kokusai Kinytt-Ron (Theory of Modern International Finance) (Tokyo), 1967.

Matsumura Zentaro, Sekai Tsuka no Kenkyu (A Study of the World Currency), Nihon Keizai Shinbum-Sha, Tokyo, 1967.
Shinjo Hiroshi, Kokusai Kinyu-Ron (Theory of International Finance),

Yifhikaku Publishing Co., (Tokyo), 1967. •Ikeda Takeshi, Kokusai Kinyu Kyoryoku-Ron (Theory of International
Financial Cooperation), Kinsei-Sha Publishing Co., (Tokyo), 1968.

TO DETERMINE THE RELATIVE SHARE:FACTORSTHE CASE OF INDIA(*)

Hikoji KATANO
1. In the present paper, we analyse factors to determine the relative
share, which is defined as the ratio of profit to wage. Moreover, we treat
the relative shares both in respective industrial sectors and in the economy

as a whole. Due to this reason, our analysis is concerned with economy's
intersectoral transaction structure.

2. We have various kinds of relative share theories. These have beendeveloped from various standpoints by many economists; M. Kaleckl, S.
Weintraub, N. Kaldor, R. M. Solow, M. W. Reder, and so on. However,
we will develop, in this paper, an alternative theory of relative share fromaquite different point of view. We consider the relative share which
depends on (1) the situation of exchanges and (2) the rate of surplus value.
3. As mentioned above, we use the intersectoral analysis in this paper.

The numerical base depends on the intersectoral transaction structure ofIndia of 1955/56.(i) In this structure, the sectoral classification is as follows :1. agriculture

2. mining
3. small-scale industry
4. Iarge-scale light industry

5. Iarge-scale heavy industry

6. transport and communication
7. construction
8. trade and distribution(*) The author is indebted to Prof. N. Okishio and Prof. K. Matsuda for their helpful
suggestions and cornments.
(1) cf. H. Katano,"Intersectoral Transaction Table with Endogenous Foreign Trade Sector

in the Indian Economy: 19551se, "Kobe Economic and Business Review, 12th Annual
Report, 1965. This table is prepared by arranging the Indian Statistica1 Institute'stable (Inter-Industry Transaction Table:1955/56 (at market prices), unpublished revised
version in mimeographed paper. Nov. 5, 1sc2).

58 HIKOJI KATANO
9. financing organization
10. administrative and professional services

m. foreign trade.
The most significant characteristic of this structure is that it treats theforeign trade sector as an endogenous industry. This depends on theassumption that foreign trade is a kind of production process.

4. According to the intersectoral transaction data (1955/56) of India,
the relative shares either in respective industrial sectors or in the economy

as a whole are calculated as shown in Table 1.

Table 1 : Sectoral Aggregate Relative Shares

Profit Wage Relative Share(P) (W) (PIW)(Rs. crore)

1. 1,170.90 3,445.85 O.33980

2. 111.54 40.54 2.75136
3. 128.51 528.29 O.24326
4. 424.46 234.39 1.81091
5. 278.86 115.52 2.41395
6. 171.09 341.96 O.5oo32
7. 591.05 366.81 1.61132
8. 350.34 1,332.09 O.26300
9. 44.57 56.31 O.79151
10. 1.04 1,223'.53 O.OO085
3,272.36 7,685.29 O.42580
In the following analysis, we examine factors to determine both sectoraland aggregate relative shares.

5. Developing our analysis, we use the concept of labour requirement,
which is defined as "labour unit required directly and indirectly for pro-ducing one crore rupees of each commodity." The idea for this concept
mainly depends on Prof. N, Okishio's contribution.(2) Similar ideas havebeen developed by K. May,(5) and some Russian economists.(`)

6. Letting ai,• stand for the rupee value of ith domestic product required for producing one crore rupees of 1'th domestic product, mj for the(2) Okishio. N., Fundamental Theories of CaPitalistic Economy, (in Japanese), Sobunsha,

1965.
(3) May, K., "The Structure of Classical Value Theories", Review of Economic Studies,
1949150.
(4) cf. V. S. Nemchinov, ed., The Use oX Mathematics in Econemics, (English Edition ed.

, 1964,
by A•
Nove)

FACTORS TO DETERMINE THE RELATIVE SHARE: 59
THE CASE OF INDIA

rupee value of aggregate imports required for the same purpose, n,• for theunit of direct labour (employment) required for also the same purpose, andei for ith domestic product component contained in one crore rupees ofaggregate exports, the labour requirement of respective domestic products
and aggregate imports satisfy the following relations,th = Xaijyi + mj y.+ nj.y. = =ei .y,
where yi stands for the labour requirement of ith domestic product andy. for the labour requirement of aggregate imports.

7. These labour requirements are measures of equivalent and/or unequivalent exchanges of all commodities in the market. For example, let
us pick up a pair of labour requirements, y. and ptb. Then, (1) in thecase y.==yb, the commodities a and b are equivalently exchanged in themarket, but (2) in the case pt.lyb, both commodities are unequivalently
exchanged in the market: when y.>yb, this exchange is in favour of producers of b-th commodity, because they can get a larger amount of labour
unit than their products contain in themselves, and vice versa. These relations must be true for all pairs of commodities. This is the fundamental
idea of labour requirement to be used in this paper.
8. As to the input coefficient (ai,•, mj and ei), we can calculate it byusing the above-mentioned intersectoral transaction structure. For calculating the labour input coefficient, we use statistical data given by theCentral Statistical Organization(5)and the Ministry of Labour and Employ-ment.(6) The sectoral labour inputs are shown in Table 2.

Table 2 : Sectoral Employments(Unit : 1,ooO persons)

1. 77,341

2. 789

3. 5,512
4. 2,108
5. 1,055(5) cf. Central Statistical Organization, National Income Statistics: P>'oPosals for a Revised

Series of National Income Estimates for 1955156 to 1959160, Government of India, 1961.
The CSO has given us both official series and revised series of the estimates of sectoral

employments. In this paper, we use the official series. In any case there is only
a one or two percent error on the average between these two series.
(6) cf. Statistical Abstract, lndia, l955156, New Series, No.6, Government of India, 1957.

60 HIKOJI KATANO
6. 2,384
7. 2,354
8. 9,205

9. 148

10. 15,713
116,609
9. Based on these statistical data, we, at first, calculate the labour re-quirements of all products, which are shown in Table 3.

Table 3: Labour Requirements(Unit: men-year IRs. one crore)

1. 16,432.24

2. 5,439.06
3. 9,959.25
4. 8,134.41
5. 5,162.35
6. 7,161.04
7. 4,558.67
8. 6,189.47
9. 2,733.32

10. 12,368.21

m. 8,878.79

10. Unit expenditure patterns from wage and profit are expressed byrespective sets of commodities which arewage : (bi,••••••, b., b.), =bi+b.:==1
profit : (Ci,'''''', Cn, Cm), ZCi+Cm=1

These sets of commodities are purchased by one crore rupees of their
These expenditure patterns are shown
unit expenditures.
in Table 4.

Table 4: Expenditure Patterns(Unit: Rs. crore/Rs. one crore)(b) (c)1. 0.42806 O.11802
2. 0.00ss9 -O.O0309
3. 0.12760 O.07533
4. 0.0onca O.Oca96
5. 0.01117 O.07362
6. 0.05473 O.05852
7. 0.06642 O.29774
8, O.15Q27 O.07768
9. 0.oo782 O.O0857
10. 0.05188 O.21689
M. O.OOI12 O.07176
1.00000

1.00000

FACTORS TO DFTERMINE THE RELATIVE SHARE: 61
THE CASE OF INDIA

11. Using these expenditure patterns, we can calculate the units oflabour requirement contained in respective unit expenditures, that is,.yw '-u Zlbi.vi + bm.vm.Y. '= XCi.Yi 'l- Cm.YM,

where .y. and y. stand for units of labour requirement contained in unit

expenditures from wage and profit, These are easily calculated by using
the statistical data mentioned above, that is,.Y. =: 11,470.77

Yp = 8,698.64

What does the difference between .v. and .y. depend on? According
to the above-mentioned relations, the difference between .)7. and .y. depends

on the expenditure patterns (bi, b.) and (ci, c.). As we can see in Table

4, workers expend their income (wage) mainly on agricultural products(foods), small scale industries' products and trade distribution services.

The labour requirement of these sector's products are all very large.
Correspondingly, the value of .)x. becomes very large. On the other hand,profit earners expend their income mainly on construction, administrativeand professional services and agricultural products. Due to such an expenditure pattern, the value of y, becomes relatively low compared to thevalue of y..

12. In 1'th industrial sector, the direct labour input (employment) is

Nj, the data of which are shown in Table 2. This isa produced valueadded in this sector. On the other hand,

Nj-y.wj+y.Pj •stands for a received value-added in 7'th sector, which means the unit oflabour requirement contained in MZj+Pi crore rupees of sectoral income in1'th sector.

The received value-added is calculqt,ed by using the preceding statistical

data. This is shown in Table 5.

Table 5: Received Value-Added(Unit: 1,ooO persons)

1. 49,711
2. 1,436
3. 7,176
4. 6,382
5. 3,751

62 HIKOJI KATANO
6. 5,411
7. 9,349
8. 81,328
9. 1,034
10. 14,043
116,621
13. Let us consider the ratio of Nj to Nj, which is specified as sJ.

This ratio is defined as the unequivalent exchange ratio. In case sj>1,
this J'th sector is in a favourable position in exchange as a whole, and viceversa. The unequivalent exchange ratio can be easily calculated. And
the results are shown in Table 6.

Table 6: Unequivalent Exchange Ratios

1. 0.64275
2. 1.82003
3. 1.30189
4. 3.02751
5. 3.55545
6. 2.26971
7. 3.97154
8. 1.99109
9. 6.98M9
10. 0.89372
1.00010

14. As we have mentioned above, the labour requirement shows theunequivalent exchange situation for each pair of commodities, while theunequivalent exchange ratio expresses an unequivalent exchange situation
among all industrial sectors. The empirical results in the case of India

are shown in Tables 3 and 6.
These results show that the lst (agriculture), 10th (administrative andprofessional services) and 3rd (small scale industries) sectors are the mostunfavourable in exchange and that the 5th (large scale heavy industries),

7th (construction) and 9th (financing organization) sectors are the mostfavourable in exchange. We shall consider the favourability and unfavour-

ability in terms of (1) the labour requirement and (2) the unequivalentexchange ratio.

At first, as to the labour requirement, let us take the pair y. and yb,

FACTORS TO DETERMINE THE RELATIVE SHAREI 63
THE CASE OF INDIA

where ath sector has a larger capital coefficient than bth sector does. Then,for ath sector to have the same rate of profit as bth sector has, yb mustbe smaller than y.. Moreover, it is very likely that ath sector with alarger capital coefficient may contain a few big firms and bth sector witha smaller capital coefficient may be composed of very crowded industries.

The price of ath commodity may be increased over the corresponding
equilibrium price for a balanced rate of profit and the price of bth com-modity may be decreased below the corresponding equilibrium price. In
such a situation, y. becomes smaller and smaller and Nb becomes larger andlarger. So the divergence between y. and yb becomes larger and larger.

Secondly, the unequivalent exchange ratio depends on the labour requirement. Then the favourability or unfavourability of respective sectors

can be explained by the size of capital coefficients and the degrees ofcompetitive power in the corresponding sectors.

Thus, (a) as to the large scale heavy industries, construction, andfinancing organization sectors, the favourability is explained by their large

capital coefficients and their strong competitive power. For these sectors,

we can naturally expect a relatively large amount of capital accumulation.
And also, strong competitive power is expected.

(b) As to agriculture, administrative and professional services, andsmall-scale industries sectors, the unfavourability is explained by their small

capital coefficient and their weak competitive po'wer. These factors dependon the characteristics of these sectors. In these sectors, there may notalways be any capitalistic production. So there may naturally be no large

amount of capital accumulation. And also, their competitive power would
be very weak.
15. Next, let us define the rate of surplus value of ]'th sector as

1-.y. w.i 'aj= .y. Wj ' 'where wj stands for the money wage rate in 7'th sector. As we mentioned

above, y. is the amount of labour requirement contained in a unit expenditure from wage. So (1-y.wj) is the surplus labour per one unit oflabour in jth sector. As .Ji. is constant for a unit expenditure from wages
in all industrial sectors, the sectoral differences of the rate of surplus value

depend only on the sectoral differences of the wage rate.

HIKOJI KATANO

64

The sectoral wage rate is shown in the first column of Table 7. We
can then calculate the surplus labour per one unit of labour, and in turnthe rate of surplus value (the second and the third columns of Table 7).

Table 7: Rate of Surplus Value
Wage Rate

Surplus Labour per
one unit of Labour(Rs. per year)(men-year)6.

1,434.40

7.

1,558.24

8.

1,447.14

9.

3,804.73

O.48893
O.41061-O.09940-O.27545-O.25603-O.64537-O.78742-O.65998-3.36432

10.

778.67

O.106813.

445.54513.829ss.44

4.

1,111.91

5.

1,094.98

1.

2.

Rate of Surplus
Value

Surplus Labour(1,eOO men year)

O.95668
O.69655-O.09041-O.21596-O.20384- O.39223-O.44053-O.39758-O.77087
O.11958

37,814
324
- 547

-581
- 270
-1,539-1,854-6, 075

- 498
1,678

O.32275 28,452
16. According to these results, the sectoral surplus labour is negative
for the 3rd (small-scale industries), 4th (large-scale light industries), 5th(large-scale heavy industries), 6th (transport of communication), 7th (con-struction), 8th (trade and distribution), and 9th (financing organization)

sectors, and positive for the lst (agriculture), 2nd (mining), and 10th
(administrative and professional services) sectors. These situations are economically explained as follows : The surplus labour of 7'th sector is defined as

1-.y.wj,
pt. is common for all sectors. Then the sectoral difference in sectoral

surplus labour depends only on the sectoral difference in wj. Thus
negative values of sectoral surplus labours for the 3rd to 9th sectors are
explained by the relatively high money wage rates in these sectors.

This situation is very peculiar to our common sense. In a normallydeveloped economy, surplus labours in all sectors of the economy may have,more or less, positive values. For such a situation existing in the Indian

economy, a large amount of surplus labour should be produced in the lst,

2nd, and 10th sectors. According to our results, the required amount of
surplus labour is produced in the lst (agriculture) sector. This situation
is supported by the small capital coefficient in the agriculture sector andFACTORS TO DETERMINE THE RELATIVE SHARE: 65
THE CASE OF INDIA

the very weak competitive power of the sector.

Thus the above-mentioned peculiar situation is explained by the relatively high levels of money wage rates in the 3rd to 9th sectors and thevery low levels of money wage rates in the lst, 2nd, and 10th sectors.
In addition to this explanation, we have to consider the small capital coefficient in the agriculture sector and the sector's weak competitive power.

Here we should note, the negative value of a sectoral surplus labour
never means the negative value of profit of the corresponding sector.

17. Using these above-mentioned concepts, the sectoral and aggregate
relative shares can be developed as follows:
Pj =': { (SJ -L 1) (1 + ad) +a,} •IYtv

wj

Yp

X=P,,'i={(s-1) (1-t-d)H-a}::)V,.tv

Then the relative share depends on three factors:a) unequivalent exchange ratio : sb s,b) degree of unequivalent exchange between commodities which arebought by wage and commodities which are bought by profit: y./y,,c) rate of surplus value: a,•, aAs we can easily see, if all exchanges are equivalent, then sj=1 and .y./.J7.

-1. Thus Pj/w,•=-a,•, that is the relative share coincides with the rate ofsurplus value. In this situation, the sectoral differences in relative sharedepend only on the sectoral differences in wages.
According to these conditions, the relative share depends on the follow-

ing two factors:i) the situation of exchange:s and v./y.
ii) the rate of surplus value: d,•

18. In the aggregate relative share, s is the ratio of XNj to =Nj. So
this ratio is the unequivalent exchange ratio of the economy as a whole.
Under the condition where the balance of trade deficit is absorbed by the
profit earner's income, this ratio depends both on the differenee between.y. and .y. and on the balance of trade deficit. Because this ratio can be.
rewrltten
as -s == 1- (•Ypn'.Yw)D

XN, ,where D stands for the balance of trade deficit of this economy. When

HIKOJI KATANO

66

the balance of trade deficit is zero, and/or when the equivalent exchangesof all commodities are kept in the market, this ratio becomes unity.

19. Using the results mentioned above, we can arrange factors to determine the relative share as in Table 8.

Table 8: Factors to determine Relative Share
sj•

aj'

Yw/ YpPJ'!WJ'

1.

O.64275

O. 95668 'h

O.339802.

1.82003

O.69655

2.751363.

1.30189-o.ego41

O.24326

4.

3.02751-O.215sc

1.810915.

3.55545-O.20384

6.

2.26971'-

O.39223O.50032

7.

3.97154-O."053

1.611328.

1.99109-O.3or58

O.26300

9.

6.98649-O.77087

O.79151

10.

O.89372

O.11958 /O.oo085

1.ooOIO

O.32275

2.41395
1.31869

1.31869

O.42580

20. The influence of the unequivalent exchange ratio (s) to the aggregate

relative share is very small, because s=1.00010. Then the aggregate relative

share depends on the rate of surplus value of the economy as a whole(a) and the degree of unequivalent exchange between commodities which
are bought by wages and commodities which are bought by profits (y./.y.).

The rate of surplus value in the Indian economy (!gss!s6) as a whole
IS O.32275.
.

This value means a rather low level for the rate of surplus value as awhole in the economy. For example, the rate of surplus value asawholein the Japanese economy in 1951 was o.g2g, which was estimated by asimilar method used in our present analysis.(')

The rate of surplus value as a whole in an economy is defined as
1 -.J7.W

a= Y.w ,where w is the average rate of money wage. The smaller a is supported(7) cf N. Okishio, "Measurement of the Rate of Surplus Value", (in Japanese), The
Economic Review, Vol. 10, No. 4, Oct. 1959.

EACTORS TO DETERM!NE THE RELATIVE SHARE: 67
THE CASE OF INDIA

by the larger .J7.w, .vww is decomposed intoy.zv - ]Z] ti Ri, R= aiwt/P"

where ti denotes the amount of labour necessary to produce one unit of
ith commodity and Pi denotes the price of ith commodity, and Ri denotes

the amount of consumptlon of ith commodity by a labourer. However, in
the Indian economy, we can perhaps say that the amount of consumption
goods (Ri,•••, R.), consumed by a labourer, is relatively less than the world

average. Then the lower a comes to be supported by the very high levelsof (ti,'••, tn)• This means the lower a of the Indian economy is supportedby the very low levels of labour productivity, which is expressed by the

inverse of the amount of labour necessary to produce one unit of commodity• As to (Ri,•••, R.), the part of agriculture products (foods) shouldtake the largest percentage of all consumptions. On the other hand, we
can guess that the lowest labour productivity is in the agricultural sector.

Such a situation helps yw become larger. Thus we explain the lower
value of the Indian economy by the smaller amounts of labourer's consumption and the very low level of labour productivity. An additional
explanation can be given by our observation that the largest percentage
labourer's consumption is taken by agricultural products and that the labour
productivity in the agricultural sector is the lowest of all.

.)7./.y. takes the value of 1.31869 due to the reason mentioned above.

Thus the aggregate relative share takes the value of O.42580. Thisvalue reflects the Indian situation'in the sense mentioned above.

21. The sectoral relative shares are widely distributed around theaggregate relative share. Such a situation depends on sectoral differencesof the unequivalent exchange ratio and the rate of surplus value for theconstant .Jtw/.IVp•

The extremely high rate of the sectoral relative share is that of the

2nd (mining) sector. This is based on both the relatively favourable
position in exchange and the high level of the rate of surplus value due tothe very low level of the sectoral wage rate.

The second highest value of the sectoral relative share is that of the
5th (large scale heavy industries) sector. In this sector, the rate of surplus

value is relatively low. But the exchange situation in market is very
favourable. This latter factor supports the very high level of thi$ sector's

68 HIKOJI KATANO
relative share.

. The most favourable position in exchange has been given to the 9th(financing organization) sector. However, in this sector, the money wage

rate is very high, so the rate of surplus value is very low. Thus thesectoral relative share cannot be very high. A similar situation can be,
more or less, seen in the 7th (construction) sector.

The lowest value in the sectoral relative share is that of the 10th (administrative professional services) sector. In this sector, the rate of surplus

value is not so low that the surplus labour can be negative. However, on
the other hand, the unequivalent exchange ratio is very low. This latter
factor causes the lowest value in this seetoral relative share.

In the lst (agriculture) sector, the rate of surplus value is very high(the highest value in the economy), while the exchange situation in market
is very unfavourable. These factors cause the very low level of this sector's

relative share. •For the other sectors, we can see their respective situations from thearranged series of the unequivalent exchange ratio and the rate of surplus

value shown in Table 8.

(Nov., 1967)

MAINTENANCE OF CAPITAL BASEDON EARNING POWER
Jiro ONoI
As the readers are already aware, quite a few writers have recently
tried to reexamine the theoretical structure of business accounting from theviewpoint of economics.!) They intend to define the concept of businesscapital on the basis of the theories of Fisher, Hicks and other economists,2)

and to develop a more economical rather than a more scientifictheory by applying it to accounting. Iam sure that one of their prime
motives is to find a more useful "maintenance of capital" concept to makefirms more adaptive to the dynamically changing social economy.

In this paper we intend to examine "the maintenance of capital basedon earning power concept" which is the theoretical core of the above
writers' opinions, and to formulate a general framework of thinking.

II
In regard to "maintenance of capital", there are several substantiallydifferent concepts as follows;5)(A) Maintenance of nominal money capital, This is the most powerfulconcept which has been used in commercial law, the law of taxation and thegenerally accepted accounting principles. According to this concept, "main-

tenance of capital" means to maintain the original amount of money capitalwhich was initially invested in a firm. As everybody is aware, the present
business accounting founded on this static concept, that is, the original costbasis has great significance in that it can provide the so-called "objective
verifiable evidence". However, it cannot be a sufficiently capable calculation-standard for the maintenance of capital, because it can keep the scaleof business activity of a firm the same as before only on the unreal as-

sumption that no innovation, no decrease in the value of money and nochange in the consumption structure occur.

(B) Maintenance of purchasing power of money capital. The intention

70 JIRO ONO
of this concept is to maintain the above-mentioned nominal capital adjusted

by the general price index at a given time. So, according to this concept,
the scale of business activity can be kept the same as before whether thevalue of money increases or decreases, but it is possible only if we canfortunately assume that other conditions, especially concerning innovationand consumption structure, remain the same.

(C) Absolute maintenance of physical capital. The purpose of thisconcept is to reproduce or reacquire the same assets as ones which were
initially purchased or acquired by a firm and to maintain them. That is,from the viewpoint of this concept, the net earnings of a firm can be re-cognized only after the amount necessary to reacquire the old assets has
been charged as expenses. This is also a static concept, because the scale
and the quality of business activity are considered to have only to be always
the same as in the initial situation in spite of the present dynamic economicchanges.

(D) Relative maintenance of physical capital. The intention is tomaintain a firm's proportionate part, that is, its relative position in thewhole of a national economy through its business accounting based on the

reproduction cost of assets. However, this concept can make it possible
only in a limited sense and only under several unreal assumptions. The
accounting certainly provides a firm's periodical performance and the amountof its assets which are founded on the reproduction-cost basis, and it may
change the scale of business activity. But, to my regret, it does not always

mean the maintenance of capital in accordance with the changing valuesystem in the national economy.

(E) Functional maintenance of physical capital based on its service
potentials. This concept intends to maintain the function of capital tosupply its service, the significance of which is always changing in accordancewith innovation, decrease in the value of money and changing consumption

structures in an economic society. This new concept seems to provide a
firm with a much more reasonable accounting basis concerning the maintenance of capital, because it regards the very function of the capital as
one which must be kept whether it is physically the same as before or not

and whether the accounting is founded on the original cost basis or the
reproduction cost basis, However, it fail$ to recognize that it i$ not theMAINTENANCE OF CAPITAL BASED ON EARNING POWER 71
individual physical assets' functions but the organic whole of business activities that we have to maintain in a living firm, that is, a going concern.

(F) Maintenance of capital based on earning power. This is a concept which has been built on the basis of economic theories and which we
can regard as the most theoretical. It intends to maintain the earning
power of a firm, that is, the present value of its expected future earnings.

Business accounting has the purpose of dividing the earnings into one
part which must be collected as consumed capital during a period (expenses)

and another surplus part which can be appropriated for dividends (netearnings or profit). But if the basic concept of accounting intends only

to maintain the nominal money capital which was initially invested in a
firm or the present physical capital, that is, its present individual physicalassets which are being used, the business activity of the firrn becomes in-flexible. It cannot adapt itself to a dynamically changing social economy,
and at last "the capital" could be lost. It is not the individual assets ortheir individual functions but the earning power of the organic whole ofthe firm, including the quality of management, an excellent research develop-

ment staff, a complete information system and other intangible factors, thatmust be maintained from the viewpoint of "capital", because theoreticallythe value of capital which we must consistently maintain for its investors is

decided only by its earning power. "Maintenance of capital based on
earning power" concept is the sole useful concept which can give us anexact recognition of the present dynamic social economy, especially in regard

to innovation, decrease in the value of money and in the change of consumptions structure, and which make us reflect it in business accounting forthe maintenance of a much more adaptive business activity.

So, we now come to the problem which we have to examine and try
to formulate in the next chapter, that is, what does the maintenance ofcapital based on earning power mean? •III
For example, in Co. X, the expected earnings (or cash-inflow) in a
future period from the time t-1 totare supposed to be E,, the expenses(cash-outflow) are At, the company's duration is n years, the capitalization
rate i$ i and 1+i=q (supposing that ii=i2. =;• is=i4•••••••••-i.-i to simplify

72 JIRO ONO
So, the worth of Co, X, is shown by the following formula. At thetime O,n (Et---At) q-t
Wo=Xt.1
At the time 1,

n-1

vai - X (Et +i- At ,i) q- t+ (E, - Ai)

t-1

n-l n-l At.i.q-t)-Ei+X Et.i.q-'t-(Ai+X
t-1 t-!

nn-(1+i) X Et•q-t-(1+i) Z At.q-t

t-l t-1-(1+i)n = (Et-At) q-tt-1nn-Z] (Et-At) q"t+iZ (Et-At) q-t

tti t.1
Therefore, the net earnings in the first period are as follows;
P,- Wi- Wo==niZ (Et-At) q-t
t.1=- i VVo
That is, in the above-stated simple assumption that the future of abusiness activity can be certainly antieipated, if the capital based on earning

power which was initially measured must be maintained, the net earnings(or net cash-inflow) in any period Pt is equal to the interest which thecapital existing at the beginning of the period Wt-i the present valueof the expected net earnings (net cash-inflow) in future periods from thetimetto n should bring forth. In other words, the part of interestin the earnings is considered as the firm's disposable profit during theperiod, and another part of earnings is the expenses which have beencollected to recover the consumed capita1 in the period.

Now we shall try to formulate a structure of financial statements fromthe above-mentioned viewpoint, that is, to think over what asset, debt,
revenue and expenses consist of. According to the above-stated example,
the balance-sheet and the profit and loss statement at the time O and 1 areshown a$ follQws ;BASEDON EARNING POWER
MAINTENANCE OF CAPITAL
B/S (the73

time o)The present value of the expected

The present value of the expectednfuture cash-inflow••••••Z
Et.q-tnfuture cash-outflow••••••2
At.q'tt.1

t-1

Capital (the present value of the
expected future net earnings or net
cash-inflow)•••••••••••••••••••••••• Wo

B/S (the time1)4)

The present value of the expected

The present value of the expectedn-lfuture cash-inflow••••••:
Et.i.q-'t

future cash-outflow•••-••E At.i.q-t

t-1
The increased cash (the alreadyacquired net cash-inflow) in the

Capital (the same as at the timefirst period••-•••••••••••••••••• Ei-Ai

Profit•••••••••-•••••-••••••••••• i VVon-l

P/L (theThe cash-outflow in the first period."H.".."".."."....".-".,"m-.

t.lO) ••••••••••••••••••••••••••••••••••••••• Wotime 1)s)

The eash-inflow in the first period

A,"..H.""..""."..H"."."."..-"The decrease of the value of

The increase of the expected future

capita1

cash-inflow•••

X (Et-At) q'`-X (Et-At)q-t

t.i t-2••••••••t•••

The increase of the expected futuren-1
n Et.q-t
XEt".q-'-Xt-1 t-2

cash-outflow'''''''''''''''n-1
n
X At+i.q-'-X
At.q"tt.l t-2
Profit••••••••••••••}•••}t•••••••••••••i VVIo

First, at the time O, the present value of the expected future cashinflow S Et.q-`t is recognized as an asset, the present value of expectedttt1

nfuture cash-outflow
Z At.q-t as a debt and the difference between thet.1
n X (Et-At) q-t, that is, the present value of expected future
two values
ttl
net earnings or net cash-inflow as the capital vae.

E,

74 JIRO ONO

n-1above-stated items (X Et+i.q-t
Second, at the time 1, in addition to thet-1

and " 2i At.,.q-t), the net cash-inflow Ei-Ai realized in the first period

is t-1counted as an asset and, as a matter of course, the same amount of
capita1 VVe as at the time O and the profit iMZo are disclosed on the debt
side.

Thirdly, we have to examine items in the income statement at the time
1, which will make the structure of our accounting viewpoint much clearer.

(1) One of the most important expense items is the cash-outflow Ai
in the first period.

(2) An item which is called the decrease of the value of capita1 isthe difference between the present value of expected future net earnings at

the time O, X (Et-At) q-', and the one at the time 1, Z] (Et-At) q"t.

t-1 t-2

This item must be necessarily recognized, because the realization of net
earnings or net cash-inflow Ei-Ai in the first period shortens the firm's

duration and, in accordance with the shortening, decreases the expected
future net earnings or net cash-inflow.

(3) The item which is stated as the increase of the expected future
cash-outflow is the difference between the amount anticipated at the time O,

X At.q-t, and the one at the time 1, X At.J.q-'. This item is brought
forth as the result of having shifted the valuation-time from O to 1. Thatis, at the time O, the amount was smaller because the cash-outflow was
anticipated to occur in the further future, whereas, at the time 1, it becomeslarger because it is anticipated to have been gotten in the nearer by one

period future. So, the item must be counted as expenses, too.
(4) Cash-inflow Ei is one of the most important revenue items in thefirst period.

(5) The increase of the expected future cash-inflow on the side ofrevenue is also the difference between the amount anticipated at the time O,

X Et.q-', and the one at the time 1, X Et.i.q"t, which has been brought
forth by shifting of the valuation-time from O to 1, like item (3) on the
expense side.

That is, (2), (3), (5) are adjustment-items of the present value of the

expected future cash-flow which are necessarily brought forth only by

75
MAINTENANCE OF CAPITAL BASED ON EARNING POWER

shifting of the valuation-time from O to 1. Especially, item (2) can becalled "economic depreciation" of the business enterpriset

In sum, the characteristics of these financial statements which we haveformulated from the viewpoint of economics are (1) to regard the expected
future cash-flow as the decisive factor in accounting, (2) to estimate thevalue of capital to be maintained on the basis of future net earnings or net
cash-inflow, (3) to discriminate the disposable profit in a period from theabove-estimated capital, (4) to recognize also asset and debt as the present

value of the expected future cash-flow, (5) to count the increase of the

future cash-flow as revenue or expenses and (6) to have confirmed thatthe thus measured profit in any period is equal to the interest or the costof capital to be acquired for the amount of the capita1 existing at the
beginning of the period.
We are sure that this new framework of thinking is the most theoretical,

because it can provide the business management with a more scientificcriterion for his activity and inform the shareholders of the true financial
position of business, that is, whether the capital based on its earning poweris maintained or not.

This theory, however, has a critical weak point that it can be satis-

factorily established only on the very simple assumption that we can"certainly" anticipate the future cash-flow, that is, the expectation at thetime O continues to be valid forever.

If the future of a business is "uncertain" this assumption is much
more realistic we must more elaborately think over the modification of
the future cash-flow, the increase or decrease in the value of capital andalso the character of the profit in a period brought forth as a result.

But these problems are too difficult to solve in the present stage. At

a future opportunity We hope to examine them logically.

'- December ll, 1967
Note:(1) Hansen, Palle ; The Accounting Concept of Profit, 1962, Schneider,

Dieter; Besprechungsaufsatz, Bilanzgewinne und Oekonomische Theorie,

ZfhF, 1963, S.457-S.474, Albach, Horst; Grundgedanken einer systematischen Bilanztheorie, Z. f. B., 1965, S.24-S.31, Honko, Jaako ; Uber einige

Probleme bei der Ermittlung des Jahresgewinns der Unternehmung, Z• f• B•,

76 JIRO ONO
1965, S.611-S. 642, Jaedicke, Robert K. and Sprouse, Robert T. ; Accounting

Flows: Income, Funds and Cash, 1965, p.9-p.27.

(2) Fisher, Irving;The Nature of Capital and Income, 1923, p.52,
Hicks, J. R.; Value and Capha1, 1939, p. 172, Lindahl, Erik; The Concept

of Income, Economic Essays in Honour of Gustav Cassel.
(3) Eckardt, H. ; Die Substanzerhaltung industrieller Betriebe, 1963,
S. 19-S. 36.

(4) Because MZo+iVVo-(1+i) VIZo=- (1+i){,l,
X Et.q-'--ZA,.q-t],l,-= (1+i)n: (Et-At) q-t

t-1
t-l
So, in the credit n-1
side of B/S, X At+i.q"t+ Wo+ivao
t-1
n-1-Ei-Ai+X(Et.i-At.i)q-t

n-1 n-1t-1 t-1n-1-:E]Et+i.q-t+Ei-Ai-:= At.i.q-t+Ei-Ai+= (Et.i-At.i) q"'tt-1

The above-stated structure of B/S can be satisfactorily established.

(5) BecauseniWo==i : (Et-At) q-'

t#1

So, in the debt side of P/L,nn

Ai+2] (Et-At) q-'-Z]l (Et-At) q-t

ttln-1
t-2+X At.i.q-'-X
At.q-t+i
n nX (Et-At) q-t
t-l
t.2
tdl
-Ai+Z At.i.q-'+(1+i) :['-L' (Et-At) q-'-2I] E,.q-t

n-1 n nt-1 tvl (Et-At)
t-2 q-'-X E,•q-t- (1+i) X At.q-'+(1+i) ]Z]
nnn
t-1
t=1
:- (1+i) X Et.q-`-X
nn Et.q-t tn2
t-1 t-2

On the other hand, in the credit side of P/L,n-1 nEi+]I[] Et.i.q-'--X Et.q-t

t-1 tt2- (1+i) X Et.q-'-X
nn Et.q-t
ttl t-2
The above-stated structure of P/L can be satisfactorily established.

RECENT CHANGES IN JAPAN'S TRADE WITH
LATIN AMERICA AND BRAZIL
Yoshiaki NISHIMUKAI

Since 1960, there have been large absolute increases in Japan's tradewith Latin America. However, trade with Latin America is still relatively
unimportant in terms of total trade for Japan. In 1965, the share of tota1

Japanese exports which was absorbed by Latin America did not reach 5
percent; while the corresponding share for imports was 8 percent. Thesefigures were much smaller than those which were found in Japan's tradewith other Asian countries. Moreover, the share of Japanese exports to

Africa has increased since 1962 and is now larger than the comparable
share to Latin America; although Japanese imports from Latin America are

still more important than those from Africa. .
In Japan's trade with other Asian countries, there are some factors,
such as nearness and historical intimacy, which promote trade relations

based on the principle of comparative advantage. But in Japan's tradewith Africa and Latin America, there are not such promoting factors andconsequently the trade relations are determined only by the comparativeadvantage. In this sense, it may be said that both trade relations areunder the same condition. But, in fact, the importance of Japan's tradewith Latin America has decreased in terms of her total foreign trade, whilethat with Africa has increased.

One of the causes of this phenomenon may be that Latin America hasreached a relatively advanced stage of economic development as comparedwith Asia and Africa and consequently industrial structures of Japan and

Latin America have become less complementary or heterogeneous. But
another important cause is related to the recent expansion of intra-Latin
American trade through the reduction of regional trade barriers which has

been taking .place in the LAFTA countries and the Central Americancountries. It can be supposed that trade expansion among Latin Americancountries had a trade-diverting effect which affected Japanese exports toYOSHIAKI NISHIMUKAI

78

Latin America. In order to examine these issues, it is necessary to analyze

in detail Japan's trade with Latin America. My purpose in this essay is tofocus attention on some of the main changes in trade patterns of Japanand Latin America before and after the establishment of LAFTA. However,for lack of commodity trade statistics according to the Standard International

Trade Classification, the greater part of my analysis could not help being
concentrated on Japan's trade with Brazil which was the only country that
had the above-mentioned statistics for the period under consideration.

I. Japan's Recent Trade with Latin America
In order to make clear the relative importance of Japan's trade with
Latin America in terms of her total foreign trade, it is necessary to giveattention to the rates of trade expansion of the countries concerned.

From 1961 to 1965, world trade rose about 40 percent in exports andimports. Japan's exports rose during this same period about 99 percent,

Table 1.

Recent Trend of Foreign Trade of Japan and Latin

America(Million Dollars)
1seO

1oo1

1962

1963

1964

1965

(A) Exportsa)

129,919.6

115,989.0 122,041.6

133,181.9

150,285.3

162,218.5

Japan

4,054.7

4,233.5 4,917.5

5,449.1

6,677.3

8,456.2

Latin America

8,029.9

8,088.5 8,648.2

9,220.2

9,973.2!O,371.0

LAFTA

4,762.3

4,seO.3 5,228.1

5,656.8

6,170.8

6,595.8

Brazil1,270.9!,402.3 l,214.6

1,406.9

1,430.9

1,595.7Worldb)(B) Imports

a)

World

139,137.1

121,275.0 129,319.0

140,669.9

158,324.4

171,693.1

Japan
Latin AmeriP3

4,491.7

5,810.1 5,634.9

6,739.3

7,947.4

8,167.8

7,689.3

7,927.9 8,O18.7

7,853.3

8,580.7

8,853.6

LAFTA

5,660.4

5,998.0 5,921.7

5,738.7

5,990.0

5,993.3

Brazil

1,463.1

1,461.6 1,475.5

1,487.4

1,265.6

1,e97.5(Source) IMF, Direction of Trade, Annual 1960-64 and l961-65.
a) After 1961, excluding socialist counuies.

b) Excluding Cuba.

RECENT CHANGES IN JAPAN'S TRADE WITH LATIN AMERICA 79
AND BRAZIL
while her imports increased at the same rate as that of world trade, The

rate of trade expansion of Latin America was much lower than that ofworld trade in both exports and imports, But, the exports of the LAFTA
countries rose about 33 percent which was approximately the rate of theworld exports expansion. Brazil's exports increased only about 13 percent,while her imports tended to decrease. (see Table 1).

The difference among these rates of increase results in changes intheir participation in world trade, as Table 2 indicates. Only the ratio ofJapanese exports to total world exports increased and in 1965 accounted
for 5 percent, but it is notable that all other ratios showed a decline; theshares of Latin America, the LAFTA countries and Brazil in world trade
tend to decline in both exports and imports.

Under these conditions, Japanese exports to Latin America and to theTable 2.

Rates of Trade Expansion of Japan and Latin
and their]

Percentage Shares in World Trade

1960

1961

World

112

100

Japan

95

,598,

99

,}98,

96

,198,

1ca2

(A)

(4.0)

107

(7.1)

(6.2)

LAFTA

105

(4.3)

(3.7)

Brazil

90

86

,l98,

(O.9)

(1.0)

(B)

World

114

100

Japan

77

100

(3.2)

Latin America

97

(5.5)

LAFTA
Brazil

sc

1963

1964

1965

114

129

139

128

157

199

(4.1)

(4.4)

(5.2)

Exports

105
116

(3.1)

Latin America

114

123

128

(6.9)

(6.6)

(6.4)

114

124

133

(4.2)

(4.1)

(4.0)

100

102

113

(1.0)

(O.9)

(O.9)

141

Imports

106
97

116

130

116

136

140

(5.0)

(4.7)

(4.8)

(4.3)

(4.8)

1oo

101
(6.2)

(5.5)

(6.5)

100

98

99
95

(4.9)

(4.5)

(4.1)

100

100

(1.0)

(1.2)

101
(1.1)

(1.0)

(4.0)

,

(Source) Data of Table 1.

America

102

108

111

(5.4)

(5.1)

100

1oo

(3.7)

(3.5)

86

(O.8)

75

(O.6)

YOSHIAKINISHIMUKAI

se

Table 3.

Japan's Exports to Latin

America(Million Dollars)

L
I
:

Total

Latin Americaa)

LAFTA

Braz'ill9se

2,5oo.6

164.0

120.5

45.1

1957

2,8ss.O

149.0

74.4

25.0

1958

2,876.6

193.7

100.5

41.9

!959

3,456.5

232.4

103.2

37.4

1960

4,OM.7

270.7

140.5

45.7

1961

4,233.5

308.7

215.3

86.0

1962

4,917.5

306.5

202.9

43.6

1963

5,449.1

305.2

l73.3

56.3

1964

6,677.3

364.3

166.2

29.1

1965

8,456.2

404.7

211.9

26.8

85

99

53

55

71

91

index :

19se

61

1957

70

1958

71

1959

85

1960

100

1961

104

1ca2

121

1ee3

134

1964

IM

1965

208

(Source)a)1960:=100

60
55
71
86
100
114
113
112
134
149

Tsasho-habusho, 196! and IMF,

73

82

100

100

153

188

144

95

123

123

118

63

150

58

Directionof Trade Annual.

After 1eeO, excluding Cuba.

i
LAFTA countries
rose about 50 percent which were much lower than therate of increase of Japan's total exports and those to Brazil decreased byabout 40 percent (see Table 3).

On the other hand, Japanese imports from Latin America and the
LAFTA countries increased at a higher rate than that of the increase ofher tota1 imports, although Japanese imports from Brazil increased only
about 50 percent which corresponded to less than half the rate at which
Japan's Latin American imports increased. (see Table 4).

81
RECENT CHANGES IN JAPAN'S TRADE WITH LATIN AMERICA
AND BRAZIL

Table 4. Japan's Imports from Latin America(Million Dollars)
Total
1956

3,229.7

1957
1958
1959

LatinAmerica LAFTA

Brazil

349.2

259.5

50.2

4,283.6

312,5

168.2

45.0

3,033.1

260.4

185.3

27.1

3,599.5

327,8

215.9

36.4

1960

4,491.7

288.6

243.3

32.8

1961

5,810.1

452.7

385.7

61.3

1962

5,634.9

434.9

331.8

40.1

1963

6,739.3

532.1

386.6

38.4

1964

7,947.4

607.4

461.6

37.1

1965

8,167.8

ooO.9

497.4

49.7

index : 1960=100
1

1956

t

1957
1958

1959
1960

72
95

i

,

67

80
100

1961

129

1962

125

1963

83

1964

177

1965

r

1

h

182

121 106

108 6990 76
113 88100 100
157 158
150 136
184 159
210 189229 204

153
137

82
111

100

186
122
117
113
151

(Source) Data of Table 3.

Consequently, the relative share of Japan's trade with Latin America
in her tota1 foreign trade showed substantial changes since 1960. In thefirst placg, the notable expansion of Japanese exports in the last few years
is due to her increase of exports to developed countries rather than to thatto less developed countries, as Table 6 indicates. Japanese exports to
Latin America are not an exception to this general trend. The ratio ofJapan's exports to Latin America to total exports declined from 1960 to1965, increasing only in 1961. Japan's exports to the LAFTA countries
and to Brazil followed the same trend (see Table 6).

h82 YOSHIAKI NISHIMUKAIIn the second place, Japan's imports from less developed countries

have increased since 1961. The ratio of Japanese imports from thesecountries to total imports rose from 35.8 percent in 1961 to 41.8 percent

in 1965. The share of Japan's imports from Latin America was stablefrom 1961 to 1964, but exceeded 8 percent in 1965. However, the sharesof Japan's imports from the LAFTA countries and Brazil gradually declined and in 1965 showed a little recovery, which did not return to the levelof 1960. (see Table 8). •Table 5. Destination of Japan's Exports(Million Dollars)
r

1caO

1ee1

1es2

1963

1964

1965

Developed Areas

1, 927.8

1,906.7

2,453.5

2,ou7.3

3,298.3

4,346.1

Less Developed Areas

2,054.3

2,218.6

2,244.4

2,554.6

2,956.9

3,623.7

United States

1,107.5

1,073.0

1,410.6

1,522.4

1,866.3

2,517.1

Canada

119.2

116.6

126.2

124.8

166.2

214.6

United Kingdom

120.6

114.6

192.2

155.8

197.9

205.1

Common Market

174.6

211.2

272.5

331.8

365.6

484.1

Other Ind. W. Eur.

99.6

127.7

127.2

115.1

197.7

251.3

Other W. Europe

81.6

91.8

99.4

115.3

107.0

155.7

Aust. Nz. S Africa

224.7

171.8

225.4

282.1

397.6

518.2

Latin America

270.7

308.7

306.5

305.2

364.3

4oo.7

LAFTA

140.5

215.3

202.9

173.3

166.2

211.9

Brazil

45.7

86.0

43.6

56.3

29.1

26.8

Other W. Hemis.

21.5

18.9

28.1

38.1

49.1

49.7

Middle East

156.6

173.3

165.8

201.4

245.2

295.7

Other Africa

273.7

308.0

254.9

367.9

469.5

649.2

r

Other Asia

1,313.7

1,393.0

1,473.1

1,617.8

1,781.4

2,190.5

Sino-Soviet Area

72.4

105.8

215.3

2".6

420.6

480.7

Miscellaneous

18.6

18.5

20.3

26.8

48.9

39.6

Total

4,054.7

4,233.5

4,917.5

5,449.1

6,677.3

8,456.2(Source) IMF,

Direction of Trade

AnnualLATIN AMERICA
CHANGES IN JAPAN'S TRADE WITH
RECENT
AND BRAZIL

Table 6. Destination of Japan's

Exports(Percentages)

1osO

1961

1962

1963

1964

1os5

Developed Areas

47.5

45.e

49.9

48.6

49.4

51.4

Less Developed Areas

50.7

52.4

45.6

46.9

44.3

42.8

United States

27.3

25.3

28.6

27.9

27.9

29.8

Canada

2.9

2.7

2.6

2.3

2.5

2.5

United Kingdom

3.0

2.7

3.9

2.8

2.9

2.4

Common Market

4.3

5.0

5.5

6.1

5.5

5.7

Other Ind. W. Eur.

2.4

3.0

2.6

2.i

2.9

3.0

Other W. Europe

2.0

2.2

2.0

2.1

1.6

1.8

Aust. Nz. SAfrica

5.5

4.0

4.6

5.2

5.9

6.1

Latin America

6.7

7.3

6.2

5.6

5.4

4.8

LAFTA

3.5

5.1

4.1

3.2

2.5

2.5

Brazil

1.1

2.0

O.9

1.0

O.4

O.3

Other W. Hemis.

O.5

O.4

O.5

O.7

O.7

O.6

Middle East

3.4

3.7

3.7

3.5

3.9

4.1

Other Africa

6.7

7.3

5.2

6.7

7.0

7.7

Other Asia

32.4

32.9

30.0

29.7

26.0

25.9

Sinc"-Soviet Area

1.8

2.5

4.4

4.5

6.3

5.7

Miscellaneous

O.4

O.4

O.4

O.5

O.7

O.5

Total

100.0

100:O

100.0

!oo.o

100.0

100.0

(Source) Table 5.

Among these changes, one of the most important problems is that therelative importance of Latin America has decreased in terms of markets forJapanese exports since 1962 when the Montevideo Treaty first influenced
trade among the member countries. It can be expected that this trend isdue not only to the development of industrialization in Latin America, but

83

84 YOSHIAKI NISHIMUKAI
to the trade-diverting effect through the liberalization of intra-Latin American

trade. On the other hand, we can suppose that changes in the industrial
structure of Japan brought about by the rapid growth of her economy also

constituted another important cause for this trend. Considering thesequestions, we shall attempt to analyze in detail Japan's trade with Latin

America by commodities.

Table 7. Breakdown of Japan's Imports, by Origin'(Miilion Dollars)
1eaO

1os1

1962

1963

1964

1965

Developed Areas

2,585.7

3,504.5

3,259.2

3,772.4

4,327.1

4,196.2

Less Developed Areas

1,773.2

2,080.3

2,127.6

2,689.0

3,116.2

3,415.5'
United States

1,554.2

2,Oee.7

1,809.1

2,078.1

2,336.9

2,364.3

Canada

203.7

265.8

255.0

318.8

378.3

355.0

United Kingdorn

99.1

137.1

145.8

149.2

187.1

162.0

Common Market

209.1

311.9

344.4

396.2

444.0

391.9

Other Ind. W. Eur.

55.7

81.8

94.8

106.0

146.5

134.2

Other W. Europe

31.1

27.2

21.6

23.8

39.0

40.8

Aust. Nz. S Africa

432.8

584.0

588.5

699.7

795.3

747.4

Latin America

288.6

452.7

434.9

532.1

607.4

660.9

LAFTA

243.3

ea5,7

331.8

386.6

461.6

4on.4

Brazil

32.8

61.3

40.1

38.4

37.1

49.7

Other W. Hemis.

3.1

3.5

6.6

9.2

30.9

17.7

Middle East

439.8

515,O

592.0

771.6

937.6

1,098.8

Other Africa

88.1

89.4

88.1

120.5

203.1

191.9

Other Asia

925.1

991,4

983.2

1,228.6

1,289.5

1,405.8

Sino-Soviet Area

132.6

225,3

244.7

277.9

497.9

556.1

Miscellaneous

28.7

28.3

26.2

27.0

53.9

40.4

Total

4,491.7

5,81,O.1

5,634.9

6,739.3

7,947.4

8,167.8(Source) IMF,

Direction of Trade Annual,

CHANGES IN JAPAN'S TRADE WITH LATIN AMERICA85
RECENT

AND BRAZIL

Table

8. Breakdown of Japan's Imports, by Origin(Percentages)
1960

1os1

1962

1963

1964

1965

Developed Areas

57.5

60.3

57.8

56.0

54.4

51.4

Less Developed Areas

39.5

35.8

37.8

39.9

39.2

41.8

United States

34.6

36.1

32.1

30.8

29.4

28.9

Canada

4.5

4.6

4.5

4.7

4.8

4.3

United Kingdom

2.2

2.3

2.6

2.2

2.3

2.0

Common Market

4.6

5.4

6.1

5.9

5.6

4.8

Other Ind. W. Eur.

1.2

1.4

1.7

1.6

1.8

1.6

Other W. Europe

O.7

O.5

O.4

O.3

O.5

O.5

Aust. Nz. S Africa

9.6

10.0

10.4

10.4

10.0

9.2

Latin America

6.4

7.8

7.7

7.9

7.6

8.1

LAFTA

5.4

6.6

5.9

5.7

5.8

6.1

Brazil

O.7

1.0

O.7

O.6

O.5

O.6

Other W. Hemis.

O.07

O.06

O.1

O.1

O.4

O.2

Middle East

9.8

8.9

10.5

11.4

11.8

13.4

Other Africa

2.0

1.5

1.6

1.8

2.5

2.3

Other Asia

20.6

17.1

17.4

18.2

16.2

17.2

Sino-Soviet Area

3.0

3.9

4.3

4.1

6.3

6.8

O.6

O.5

O.5

O.4

O.7

O.5

100.0

100.0

1oo.O

1oo.O

1oo.O

1oo.O

Miscellaneous
Total

r

II. Patterns of Comparative Advantage of Japan and Brazil
In order to measure the effects of LAFTA on Japan's trade with Latin
America, we have to examine, first, trade patterns before the establishmentof this institutional organization. However, for lack of trade statistics

necessary for our purpose, the following analysis cannot but concentrateon the foreign trade between Japan and Brazil.

86 YOSHIAKI NISHIMUKAI
Our first intention is to detect the patterns of comparative advantage

of both countries in world trade and in mutual trade, and to make clear
the divergence between these two patterns. The patterns of comparativeadvantage are approximately given by the composition of exports and imports shown in "Annexed Tables" at the end of this paper. The classification of commodities used in this paper is based on the SITC code andeach category includes the following SITC code numbers: food andbeverage (O, 1), raw materials (2), fuels and fats (3, 4), textile (65, 841),

nonmeta1 mineral manufactures (66), other light industrial manufactures(61, 62, 63, 8, excluding 841, 861, 864, 891), chemicals (5), iron and steel(67), non-ferrous metals (68), metal manufactures (69), general machinery(71), electrical machinery (72, 891), transport equipment (73), instruments

and watches (861, 864).

In Figures 1 and 2, in the first place, the parts enclosed by solidlines represent the pattern of comparative advantage in world trade of bothcountries. As Figure 1 shows, generally speaking, Japan has a comparative disadvantage in primary products and a comparative advantage inindustrial rnanufactures. The degree of comparative disadvantage is greaterin raw materials and fuels. On the other hand, the comparative advantage

is overwhelming on light industrial manufactures and great on machineryand equipment and metal manufactures. On the contrary, trade patternsof Brazil still show characteristics of less developed countries which export

some primary products and import industrial manufactures. The categories in which Brazil has comparative advantage are food and beverage andraw materials, while Brazil has an overwhelming comparative disadvantage
in almost all industrial manufactures.

In spite of the remarkable contrast found in the patterns of comparative advantage and disadvantage, the degree of concentration of foreign
trade is not so different in both countries. The degree of concentrationof exports which is calculated as the total percentage share of the first
three important categories of commodities in exports is 84.4 percent (lightindustrial manufactures, 44.2 percent, machinery and instruments, 27.1 per-cent and metal manufactures, 13,1 percent) in Japan, and 97.8 percent(food and beverage, 74•1 percent, raw material, 19.4 percent and fuels andRECENT CHANGES IN JAPAN'S TRADE WITH LATIN AMERICA 87
AND BRAZIL

oil, 14.3 percent) in Brazil. The correspondent degree for imports is 77.8
percent (raw materials, 48.4 percent, fuels and oil 17.2 percent and foodand beverage, 12.4 percent) and 69.8 percent (machinery and instruments,
37.1 percent, fuels and oil, 19.6 percent, and food and beverage, 13.1 percent), respectively.

In the second place, the patterns of comparative advantage in mutual

trade are shown by the shaded portions of Figures 1 and 2. The parts
enclosed by intermittent lines in Figure 1 show the pattern of comparativeadvantage of Japan in her trade with Latin America. It can be deduced
from the trade patterns of Japan and Brazil in their total foreign tradethat the division of labour between the two countries would be complementary or harmonious in the form of primary products vis-a-vis manufactured goods. In fact, Japanese exports to Brazil are mainly composed ofindustrial products and Brazilian exports to Japan of primary products,
while Japanese export of primary products to Brazil and Brazilian exportof industrial products to Japan are negligible in both absolute and relative

terms. Other distinguished facts are as follows: (1) machinery andinstruments are the most important items exported by Japan to Brazil, (2)the ratio of machinery, instruments and metal manufactures of Japan's
exports to Brazil is much higher than the comparable ratio of her totalexports, (3) but the share of light industrial manufactures in Japan's
exports to Brazil is considerably smaller than the corresponding share in
Japan's total exports, (4) Brazil's exports to Japan consist primarily offood and raw materials, (5) the percentage share of raw materials in
Brazil's exports to Japan is much greater than the comparable share in the

proportion of her total exports, (6) but in regard to food and beverage
we can find the reverse relation.

In other 'words, Japan's comparative advantage to be found in world
trade is strengthened in machinery, instruments and metal manufactures

and weakened in light products in her exports to Brazil. On the other
hand, Brazil strengthens her comparative advantage in raw materials andweakens it on food and beverage in her exports to Japan. This meansthat the important problems related to trade expansion between Japan andBrazil are how to promote Japan's export of light industrial products andss

YOSHIAKI NISHIMUKAI
Figure 1. Japan (1959-61 average)

89
RECENT CHANGES IN JAPAN'S TRADE WITH LATIN AMERICA

AND BRAZIL

Figure 2. Brazil (1959-61 average)

Exports

Imports

t/a7/1/////trk-/a
")

4/kua

(2)

(3)

{4),

C51

IIIitsz
t6b

C7)va/ltZ/7rf.

eo 7e fie so 4o se 20 10 Oe!eO 10 2e 30 40 rn 6o rooo YOSHIAKI NISHIMUKAI
how to expand Brazil export of food and beverage. However, both problems seem to encounter great difficulty as we shall examine later, becausewith regard to the former problem, the process of import substitution in
Brazil has substantially progressed in the field of light industries and hasentered into a new stage of capita1 goods industries, on one hand; andthe share of light industrial products in Brazil's imports from Japan slightly

exceeds a comparable share for her tota1 imports, on the other; and inreference to the latter, the share of food and beverage in Japan's imports
from Brazil in much higher than the corresponding share for Japan's total.

Imports.

Considering the trade patterns of Japan and Brazil in terms of absolute value, we can reach the same conclusion as given by an analysis of

the relative composition of trade. Assuming that a country whose importof particular categories of commodities is less than 20 percent of the ex-port of the same category and is specialized in the export of those commodities, we can derive the following conclusions from Annexed Tables I

and III. The commodhies in which Japan has specialized and, therefore,

has an overwhelming comparative advantage are all manufactured goods•
On the contrary, the commodities in which Brazil has specialized are pri-mary products with the only exception of fuels. In regard to trade
between Japan and Latin America as a whole, we can find the same patterns, excepting the case of chemicals,III. Intensity of Trade by Commodities
Trade relations between Japan and Brazil which were clarified to someextent in previous sections can be understood more clearly and synthetical-

ly through calculation of the coefficients of their trade intensity. These

coefficients are given in Tables 9 and 10. The first column shows thecoefficient of concentration of exports which represent the percentage shareof a particular commodity absorbed by country B to country A's totalexport of this commodity. The second column shows the coefficient ofconcentration of imports which corresponds to the percentage share of aparticular commodity exported by country B to country A's total importsof the same commodity. The third column represents the intensity oftrade which is Qbtained by the following methQd of calculation ;RECENT CHANGES IN JAPAN'S TRADE WITH LATIN AMERICA 91
AND BRAZIL

II,- illllli.i / :11 ••loo
Ift.,. : country i's intensity of exports of commodity h to country 7.

X,h.j : country i's export of commodity h to country i
Xi,• : country i's tota1 exports to country iM,h. : country 7"s total import of commodity h•

MJ• : country is total imports.
In short, the first term shows country i's composition of exports to count-ry 1' and the second means the structure of demand for imports in country.

1.

Consequently, the intensity of exports helps to indicate in what com-

Table 9. Intensity of Japan's Exports to Brazil(Average of 1959-61)
1(1)

to L.A

1. Food.Beverage

L6

2. Raw Materials

2.1

3. Fuels . Fats

4. Light Ind. Products

(2)

(3)

(4)

to B.

O.4

O.5

13

13.1

1.0

O.4

O.06

o
2

19.6

4.4

o.i

4.5

117

4.6

o

O.1

4oo

O.9
3.6

TextileNon-Metal Minerals

4.4
4.7

1.2

16.2

4.4

Others

4.5

O.2

1.9

50

5. Chemicals
6. Metals

3.8

O.4

O.5

13

9.4

10.2

2.7

8.4

218

11.7

Iron . Steel

11.0

2.7

11.7

302

5.4

Non-Ferrous
Manufactures

o

2.9

10.4

3.6

10.6

27!

3.4

12.1

3.4

6.9

177

37.1

13.7

8.0

7.5

193

17.9

11.5

2.2

7.9

204

5.4

12.9

2.2

5.4

140

12.8

Instruments

6.0

1.5

!O.1

260

1.e

Total

6.9

1.4

3.9

100

1oo.O

7. Machinery.Instruments
General Machinery
Electric MachineryTransport Equip.

(Source)Annexed Tables r-n.

O.3

92 YOSHIAKI NISHIMUKAI
modities country i has greater comparative advantage, or competitive power,

and of what commodities country 1"s imports come largely from country i.
If the trade relations between i and i have greater intimacy, the coefficientof intensity will exceed 100.

Table 10.

Japan

Intensity of Brazil's Exports to(Average of 1959-61)

(3)

(2)

(1)

(4)

1. Foocl.Beverage
2. Raw Materials

1.7

2.8

415

12.4

5.8

O.7

96

48.4

3. Fuels . Fats

O.4

O.03

5

17.0

4. Light Ind. Products

1.5

1.0

O.1

18

TextileNon-Metal Minerals

4.3

e.s

os

O.3
O.8

O.4

Others

O.6

O.06

5. Chemicals

O.7

O.03

9
5

6. Metals

9.4

O.09

12

4.9

9.7

O.2

29

2.1

Iron . Steel

6.0

Non-ferrous
Manufactures
7. Machinery.Instruments

2.5
O.3
9.8

General Machinery

6.3

Electric Machinery

O.9

Transport Equip.

1.8

Instruments

O.8

Total

2.4

O.7

100

(Source) Annexed Tables I-VM.

First, from Table 9, we can find that the coefficient of concentrationof Japan's exports to Brazil is only 1.4 in aggregate terms and is considerably lower than the comparable coefficient to Latin America, that is, 6.9.

Among the coefficients by commodities, those of metal manufaetures andmachinery are relatively high. The highest level is shown by generalmachinery which exceeds 8. It means that Brazil is one of the most important markets for Japan's exports of these items. Other manufactures

100.0

l

RECENT CHANGES IN JAPAN'S TRADE WITH LATIN AMERICA 93
AND BRAZIL

show coefficients less than 1. The coefficient of concentration of Brazil's

imports from Japan is also relatively high in metal products and machinery

among which the corresponding coefficients to items of iron and steel,metal manufactures and instruments are over 10. As to light industrial
products, non-ferrous metal manufactures have a coefficient of the highest
level.

Second, as Table 10 indicates, the coefficients of concentration ofBrazil's exports to Japan are relatively higher in iron and steel, raw mate-rials and non-ferrous metal manufactures than those in food and beverage.
This means that the importance of the Japanese market for Brazil's exports

is greater in metals than in primary products, with the exception of raw

materials. On the other hand, the degree of concentration of Japan's
imports from Brazil is very low.

Last, we shall turn our attention to the intensity of exports shown in

Tables9 and 10. Generally speaking, the coefficients of intensity ofJapan's exports to Brazil are higher in industrial products. Among these,
the coefficients regarding metals and machinery are especially high, but thecoefficient of light industrial products is relatively low, although in tradewith the rest of the world Japan has a great comparative advantage in this

item, as we have mentioned above. The only exception is related tochemicals in which the coefficient is very low, that is, 13. Consideringthat chemicals are products in which Brazil has a comparative disadvantage

and Japan has an overwhelming comparative advantage at least in her
trade with Brazil, we can reach the conclusion that Japan has little chancein the export competition of these commodities. On the other hand, theintensity of Brazil's exports to Japan can be theoretically considered higher

in primary products, but in fact food and beverage are the only categoryof commodities that show a coefficient of more than 100 while the otherproducts stay on a level lower than 100; raw materials, 96, fuels and fats,

only 5. As to the latter, this situation is inevitable because of its comparative disadvantage, but as for the former it is necessary for Brazil toexpand her exports to Japan and to correct the excessive concentration onfood and beverage.

These problems can be made clearer through a comparison of theintensity of exports of both countries with the demand patterns of each

94 YOSHIAKI NISHIMUKAI
partner country. This comparison clarifies the disparity between the actual

situation and a desirable one. The last columns in Tables 9 and 10 show
the structure of demand for imports. If we compare this structure with
the intensity of exports, we can reach the following conclusions; (1) inthe case of Japan, the intensity of Japan's exports of chemicals to Brazil
must be higher than that in reality, although the coefficient regarding lightindustrial products is satisfactory, (2) as to machinery and instruments inwhich Brazil has the largest demand for imports, the intensity of Japan's

exports should be higher, comparing it with the case of metals, (3) for
Brazil, the intensity of her exports to Japan must be increased in the itemof raw material where Japan has the largest demand for imports.

IV. Dynamic Changes in Japan's Trade with Latin America
The considerations in some previous sections were based exclusively on

analyses of the averages of 1959-61 when LAFTA had not yet had any
effective impact on regional trade. Our next purpose is to make clear
some important changes in the trend of Japan's trade with Latin America.

In order to verify these probable changes, we shall examine whether thedivergence between the two patterns of comparative advantage, one ofwhich is concerning each country's trade with the rest of the world andthe other is related to trade between the two countries, has expanded orcontracted after LAFTA affected regional trade. For this examination, it
is useful to calculate the coefficient of the intensity of trade.

First, we showed the movements of total foreign trade, by commoditi-es, of Japan and Brazil in Tables 11, 12, and 13, where we found thefollowing characteristic facts: (1) jncreases in Japan's exports are greaterin industrial manufactures than in primary products, and greater in heavy
industrial products than in light ones, (2) on the contrary, Japan's imports
increased more rapidly in primary products than in industrial products, andas to the latter, the increases in imports of light industrial products are

remarkable. These can be considered as the repercussion of changes in
the Japanese industrial structure. (3) Brazil's exports of primary products

show a relative stagnation, with the exception of raw materials where wecan see a relatively satisfactory expansion. However, her exports of in-

IN JAPAN'S TRADE WITH LATIN AMERICA
RECENT
CHANGESAND BRAZIL
dustrial products increased in all items, and each rate of increase is extra-

ordinarily high, except for chemicals, as the 'consequence of exports ex-

pansion to member countries of LAFTA, as we shall examine later, (4) asa consequence of restriction of imports, Brazil's imports in 1965 declined,with the exceptions of food and beverage, and chemicals.

Second, concerning trade between Japan and Brazil, we can find somedifferent features: (1) Japan's exports of industrial products to Brazil
substantially declined, with the only exception of chemicals, (2) Japan's
imports from Brazil highly increased in industrial products, especially inchemicals. It might be true that the overwhelming comparative advantage

which Japan has in this category tends to disappear and the horizontal
division of labor•goes on. Imports of primary products from Brazil are

Table 11.

Rate of Increases of Japan's Exports,

by Commodities (1965)
1 959--61 = 1oo

Total

1. Food.Beverage
2. Raw Mateials
3. Fuel.Fats

130

4. Light Ind. Products142

to Latin America

to Brazil

Iron . Steel

379

32
1os
sc
118
136
86
oo
265
219
260

Non-Ferrous
Manufactures

461

5,635

213

7. Machinery.Instruments

283

General Machinery

261

Electric Machinery

326

Transport Equip.

275

Instruments

2M

ee
131
102
175
121
161

85

Total

214

146

47

184
121

TextileNon-Metal Minerals

157

Others153

5. Chemicals

312

6. Metals

336(Source)Annexed Table r.

135

109

30

93
287
81

le9

14

29
26

49
15

95

YOSHIAKINISHIMUKAI

eealso expanding with the exception of food and beverage, (3) in 1959'61,
Japan specialized in exports of all industrial products in her trade with
Brazil, as we have already pointed out, but in 1965, machinery and instru-

ments were the only category of commodities that Japan specialized inexports. But this must be understood as a consequence not of the disappearance of Japan's overwhelming comparative advantage, but of the restriction of imports on the part of Brazil.

Table 12.

of Japan'sRate of Increases

Commodities

Imports, by(1965)
1959K;1=1oo

L

Total

from Latin America

from Brazil

1. Food.Beverage

258

122

42

2. Raw Materials

143

198

155

3. Fuel.Fats

215

2,531

346

4. Light Ind. Products

342

1,172

376
495

Textilemo

Non-Metal Minerals

415

1,253

Others338

211

5. Chemicals

149

169

2,080

6. Metals

185

M7

606

Iron . Steel

145

or1

am

Non-Ferrous

218

239

Manufactures

192

7. Machinery.Instrumenbs

172

General Machinery

156

Electric Machinery

303

Transport Equip.

186

Instruments

127

Total

178

(Source)Annexed Table m.

83

M
192

116

CHANGES IN JAPAN'S TRADE WITH
LATIN AMERICA
RECENT

97

AND BRAZIL

Table 13.

Trade, byof Brazilian

Rate of Increases

Commodities (1965)
1959-61=100'

Exports
to JapanTotal

L Food.Beverage
2. Raw MaterialslI

3. Fuel.Fats
4. Light Ind. Products

TextileNon-Metal Minerals

Others

105
157
83
405

166
398
103
2,368

Iron . Steel

2,295

7. Machinery.Instruments
General Machinery
Electric MachineryTransport Equip.
Instruments
Total(Source)

40
141

269

i

l

l

108

r

67

1

from Japan

Total

:
E

45

73
83

501

64
194
,
t

783

i

783

4,363

600
1,071

3,696

223

130

95

11
84
261

61

119
160

135

3,308

48
49
58
65
23

19
34
58
21
13
122

76

lel

121

82

85

69

366

•551

5. Chemicals
6. Metals

Non-Ferrous
Manufactures

Imports

76

Annexed Table v,vr.

Last, we shall consider the coefficients of intensity of total trade which

are shown in Table 15. The coefficients, whose method of calculation is

given in the same Table, is based on data from Table 14. The methodof calculation shows us that the coefficient is the ratio of country isimports from country i to country i's exports, in relation to country 1"sposition in world imports. Therefore, trade relations between both count-ries are intimate, if it exceeds 100, Table 15 has two meanings;if weread it vertically, it shows us the coefficients of intensity of imports and
if we look at it horizontally, it shows us the intensity of exports.

Now, Table 15 shows us the following changes;(1) The intensity of Japan's imports from Latin America has slightly
increased, but that from LAFTA countries decreased and, above all, that60

YOSHIAKINISHIMUKAI

98

from Brazil considerably declined. The intensity of Japan's exports to
Latin America, LAFTA countries and Brazil declined, the last intensity
showing a remarkable decrease.
(2) On the contrary, the coefficients of intensity of imports of Latin

America, LAFTA countries and Brazil show considerable increases, except-

ing that from Japan. This trend can be found in the coefficients ofexports.

(3) The intensity of Japan's exports to Latin America and Brazil ishigher than the intensity of her imports from these areas, but in Japan's

trade with LAFTA countries we can find the reverse relation.

(4) The intensity of intra-Latin American trade and intra-LAFTA
trade rose, particularly, the intensity of Brazil's trade with other LAFTA
countries considerably increased.

Table 14.

Trade Matrix(i)(MMion Dollars)

exports tolmports

from x.

Latin

Japan

{2)

America

LAFTA

Brazil

Å~
l
s

Japan

(2)

Latin America

235.3
431.5

LAFTA

189.0
2se.2

Brazil

36.8
29.9

289.7
4ca.7

177.9
211.9

65.8
26.8

607.4
1,O16.3

508.9
797.7

153.1
212.9

371.5
72e.2

318.6
636.5

66.3
137.7

93.1
202.2

90.8
197.3

1

-

1

(Source)

IMF, Direction of Trade, Annual 1960-64 and 1961-65.

(Note)(1) Upper row shows annual average of 1%O-61 and the(2) Exeluding Cuba.

lower of1965.

WITH LATIN AMERICA
IN JAPAN'S TRADE
RECENT
CHANGESAND BRAZIL

Table 15. Intensity of

Xsxxxsxports tO

Japanimports fr6}li'x-x.x.

Tota1 Trade

Latin America

Japan

LAFTA

Brazil

112
88

92
as

136
46

Latin America

69
83

118
180

132
209

158
306

LAFTA

93
89

1ee
204

139

267

!15
315

Brazil68
39

an(Source) Table(Note) lii =

114

150
351

14.

Mil'

xi

Mj
1 w-MiIii :country 1"s intensity of imports fromMi]' :

country 1"s imports from country i.

xi :
Ml':

country i's total exports.

Jlr :world imports

Mi :country i's total imports

country i.

country 1"s total imports.

These changes mean that Japan's trade with Latin America has lost its

intimacy after the establishment of LAFTA. Tables 16 and 17 show inwhat commodity group this alienation in trade relations has occurred.
The intensity of Japan's exports to Brazil has been relatively higher inmost of the industrial products. But the intensity of Japan's exports oflight industrial products sharply declined and that of metals remarkably
increased. In chemicals, this intensity rose from 13 to 49, but this is still

far below 100. As regards the category of machinery and instruments,
we can say that the intensity of exports has not changed, if we consider

some error in the calculating process. Comparing these changes withchanges in the composition of Brazil's imports which represent the structureof her demand for imports, we can find some important facts. For
example, as Brazil's demand for chemicals has considerably increased, the99

1oo YOSHIAKI NISHIMUKAI
intensity of Japan's exports of these commodities could have been muchhigher. Moreover, it is strange that the intensity of Japan's exports oflight industrial products to Brazil has decreased, because BraziPs demand

for these products did not show any adverse changes for Japan. On thecontrary, in the category of metals and of machinery and instruments,
Japan has gained satisfactory results, because the intensity of Japan's ex-'
Table 16. Changes in Intensity of Japan's Exports
to Brazil, by Commodities
Exports

Intensity of

1. Food.Beverage
2. Raw Materia!s

3. Fuel.Fats
4. Light Ind. Products

13

o
o
o
2
3
117

88

TextileooNon-Metal Minerals

400

Others50

5. Chemicals

6. Metals
Iron . Steel

Non-Ferrous

o

116

13
49
218
388
302
gg9

o

69

Composition ofImports
13.1
18.7

4.4
3.9
19.6
21.9
4.6
4.1
O.1
O.1
O.9
O.9
3.6
3.1
9.4
16.0
11.7
11.7
5.4

4.4
2.9
5.2
3.4
2.1

Manufactures

271
133

7. Machinery.Instruments

177
179
193
142
204
259
140
153
260
369

37.1
23.7
17.9
13.8

100
100

100.0
100.0

General Machinery
Electric MachineryTransport Equip.

Instruments
Total(Source)(Note)

Annexed Tables rr-vwn.

Upper row: Annual average ofLower rowi: 1965.

1959-61.

5.4
4.6
12.8

4.0
1.0
1.3

Brazil'sRECENT CHANGES IN JAPAN'S TRADE WITH LATIN AMERICA 101
AND BRAZIL

ports ofthe former increased and that of the latter remained stable, while

Brazil'sdemand for these two categories showed unfavorable changes forJapan.

Table 17.

Changes in Intensity of Brazil's
to Japan,by Commodities

Intensity of Exports

1. Food.Beverage
2. Raw Materials

3. Fuel.Fats
4. Light Ind. Producbs

415
121

os
178

5

11
18

36

TextileNon-Metal Mineralsca157

Others9

5. Chemicals

5

6. Metals
Iron . Steel

12
12
98

1oo.O
1oo.O

Transport Equip.

Instruments

Upper row: Annual average of

17.0
20.6
1.5
3.0
O.4
O.7
O.3
O.7
O.8
1.6
6.0
5.0
4.9
5.0

100
1oo

Electric Machinery(Note)

48.4
38.9

2.1

General Machinery

Annexed Tables re-•vVIIE.

12.4
18.1

1.7
2.5
3.0
O.3
O.3
9.8
9.4
6.3
5.5
O.9
1.5
1.8
1.9
O.8
O.5

Z Machinery.Instruments(Source)lmports

29

Manufactures

Total

Composition of288

Non-Ferrous

Lower row: 1se5

Exports

195g61

Japan's102 YOSHIAKI NISHIMUKAI'
On the other hand, the intensity of Brazil's exports to Japan declined

strikingly in food and beverage and rose in raw materials. It is noteworthy that the coefficient of intensity rose from 12 to nearly 100 in the

category of metals. As a consequence of these changes, the divergence
between the magnitude of intensity of Brazil's exports to Japan and thecomposition of Japan's imports has almost disappeared.

V. Conclusions
As we have pointed out, the liberalization of intra-Latin American

trade, especially intra-LAFTA trade have had some negative effects on
Japan's trade with this region. Will these effects continue to be strong

in the near future? How does development of Latin American economic
integration affect Japan's trade with Latin America? The lack of sufficient statistical data about intra-regional trade by commodities and theexistence of many uncertain factors in the integration process make it
difficult to reply to these important questions. It can be said, however,that Japan's exports to Latin America will be confronted with more difficulties. What are desirable policies to promote Japan's exports under thesepredictable conditions?

Intra-Latin American, especially intra-LAFTA trade has been expanding

since 1962, as shown in Table 18. Table 19 shows the coeffieients ofintensity of total trade which, using the data of Table 18, were calculatedby the same method as in Table 15. It is clear that all LAFTA
countries increased their intensity of intra-regional trade and decreased thatof extra-regional trade, with the only exception of Uruguay. But it isnoteworthy that the rate of decreases in intensity of extra-regional trade ismuch smaller than the rate of increases in the intensity of intra-LAFTA

trade. This means that in spite of the remarkable expansion of intraLAFTA trade, it is still important for Latin America to expand her tradewith extra-regional advanced countries.

In order to make clearer this problem, we calculated the coefficientsof Brazil's imports, by commodities, which are shown in Table 20. The
method of calculation is as follows,Table 18.

Intra-LAFTA Trade Matrix(Million Dollars)

exports tolmports

from

A

CH

B
54.8

A

107.1

B

62.0
141.e

CH

20.5
26.5

O.1
5.5

co

PA

2.2
O.8
7.4
8.2

PE

8.8

U

M

e

O.8
12.0

16.2
11.2

oo.8
lg7.3

O.3
2.8

3.1
O.1

4.6

1.2
1.9

32.3
53.3

O.1
?12I

O.6'

o.sl

O.8

3.9i

l!
o]

4.2
6.1

1.5
5.4

8.9

O.8
2.3

O.6
2.9
1.9

,5Ig

1.5
5.5

O.1
O.5

3.5
5.2

O.2

O.5
3.8
O.7

3.5

ii3

l

14.7

extra-reglor
nal exports

131.2 a
231.1

10.3
19.0

O.6

lntra-regi"
nal experts

l
9.3
8.0

6.7

14.1

U

14.8
37.6

7.1

sie

PE

8.6
10.6

i.ol

O.3

gig

E

PA

M

E

42.3
53.4

6.0

O.1
O.4

co

l

5.2 P
16.6 l

O.3

7.0

15.5

4on.O
685.0
450.5
539.0
135.5
222.7
795.0

9.3

19.7
40.1

29.0
57.0

1.0
1.7

32.2
54.1
15.5

429.8
614.9
147.7
175.5

462.0
669.0
152.0
191.0

4,560.4
5,961.2

16.9

sig

O.3
4.6

-

O.3

O.3
O.2

O.1
1.0

lmports

102.5
220.1

66.3
137.7

72.8
107.0

8.3
32.4

4.3
8.6

2.3
23.7

9.7
13.2

23.5
67.7

rs.9
26.1

318.6
636.5

extra-regional

1,251.5

1,394.7

lmports

on7.9

958.3

476.2
497.0

529.7
421.6

92.7
147.8

1,160.2
1,536.3

23.8
30.8

397.0
651.3

184.6
124.9

5,510.4
5,345.9

Total

1,3M.O

1,461.01,Oee.O

538.0

604.0

97.0
1se.4

1,162.5
1,560.0

33.5
44.0

42e.5
719.0

213.5
151.0

{Source)

464.7
631.7
445.3
522.4
128.5
207.2
788.7

1.1
2.2

2.1
3.1

(Note)

1,3sc.7

1,3sa.O
1,595.0

1,146.0

O.8
4.3

4M.O

1,M5.2

1,109.8

2.5
1.4

M9.0

1,022.0
1,493.0

36. 2

O.8
4.3

1,198.0

8oo.8

6.3 1

l9i2

intra-regiona1

1,261.9

O.1
O.8

2.9
5.3
1.0
5.4

19.7

Total

4.3

4,879.06,5su.7

xg
E

g
:

E
i
gE
co Åë

gg
FvU

i

i
z.

5,829.e5,982.4

Direction of Trade, Annual 1960-64 and 1961-65.

{1) A:Argentine, B:Brazil, CH:Chile, CO:Colombia,

E:Ecuador, M:Mexico, PA:Paraguay,(2} Upper row: Annual average of 1960-61, Lower row:

1965

PE:Peru,

U: Uruguay

5

YOSHIAKI NISHIMUKAI

104

Intensity of Intra-LAFTA Trade

Table 19.

Å~ exports
ftsrl ii)[lx"rx!9.
impOr

A

as 917

A
B

CH
co
E

M
PA
PE
U
intra-regional

extra-regional

CH co

B
1 ,!38

418

1,281

371
559
2
147
142
9
92
2,M6

6
180
171
9
350 69
27
103

1,050

1oo
325

1
11

15
74

za
41
375 702435 1,05037
40
314 IM

E
12

"

.l

PA PE

l

535
662

200
700

17
182

711
875

182
!63

141

135

50

337

226

98
95

62

23
89

100

1

61
6

10

226
234
108

107

9

414

eo2

99
es

5

87

16
91

104
100

2,229
4,825

667
861

70
72

123
312

145

234

97
95

58
235

102
95

2

23
73

37
122

!12
330

331

476

38
188

100
144

4 633

101

105
95

91

109
1oo

1oo
1oo

110
109

95

or
oo

212
8oo

289
486
89

141

359

91
87

46

447

M

"9

150
222

675
233

125

267

extraregional

423
612

740 38764 24671
431381 923

51

intraregional

9 2,8oo
49 3,550

3,737

171
426
124
2sc

U

19

67
16

633
5oo

17
126

40 1,Ooo

ms

347
487

os
1oo

105
100

sc
87

141

98
93
103
98

(Source) Table 18.

4•j- M",/i'{ / ,M,,,•i' •ioo
Ie.: intensity of country 1"s imports of commodity h from country i' tj

M 8.: country J"s imports of commodity h from country itl

M ii': country 1"s total imports from countryi
Mh: country i's total imports of commodity hM ]' : country 1"s total imports

In other words, the coefficient is given as the ratio of composition of country

1"s imports from country i to the composition of country 7's total imports.
As Table 20 indicates, the intensity of Brazil's imports of industrial

products from other LAFTA countries increased, but the absolute levels
are still lower than 100, with the only exception of metals. On the other
hand, the intensity of Brazil's imports of industrial products from extraregional countries also increased, and the levels are higher than 100. Thus,

we can find that the only case of trade-diverting effects appeared in im-

103

105
RECENT CHANGES IN JAPAN'S TRADE WITH LATIN AMERICA

AND BRAZIL

ports of metals,

and as regards other commodities, the intensity ofimports rose inboth intra-regional and extra-regional imports.

Table 20.

Brazil's

Intensity of Brazil's Imports from Other LAFTACountries, by Commodities

t

CH co

A
L Food . Beverage
2.

Raw Materials

3.

Fuel. Fats

4.

M PA PE

734
492

le5

56

16

20

943
218

!M
82

3
3

Light Ind. Products

E

763

14

4 375

13
10

411
i52

intraregional

extra- 'regiona1

650
374

43

763
473

M

105

457

426

38
6

U

28
348
62

313
119

274

38

100
113

12
17

106
117

50
as

104
110

100
1oo

TextileNon-Metal Minerals

Others

1,790

17
13

525
206
82 1,06436

5.

Chemicals

6.

Metals799Iron . Steel2

Non-Ferrous

7

Manufactures

21

165

l2

22

12

zz

7.

155
536

220
4oo
oo

1 ,150

229
720

126
197

1,276

1 ,206

727

1oo
1oo

M

103
113

42
19
pt

"o

276
316
323

70

924

1,619

105
116

32
137

105
92

13

107
120

66
308

103
56

32

103
124

Machinery .

Instruments
General Machinery
Electric MachineryTransport Equip.

17

28

146

10

13

le7
118

14

107
117

17

107
117

8

107
120
1

Instruments

'

'

100
123

(Source) Annexed Table IX(Note) Upper row: Annual averageof 1959-61

Lower row: 1965

Considering these trends thathave to take a pessimistic view on

appeared in Brazil's imports, we

do notthe possibility of expansion ofJapan's1oa YOSHIAKI NISHIMUKAI
exports to Brazil, at least in the near future. If we compare the intensityof Brazil's imports from extra-regional countries with the intensity of Japan's

exports to Brazil, we can see favourable results in exports of metals,
machinery and instruments, and unfavourable ones in exports of light industrial products and chemicals. Therefore, it is necessary to expand theexports of the last two categories of commodities. But the expansion ofexports of the former seems to be more difficult than that of the latter,because Japan's exports concentrate excessively on exports of light indust-

rial products; Brazil has already achieved an import substitution in theseproducts and the rate of increase of demand for these products is generally

lower than the correspondent rate for heavy industrial products. Thus

the commodities of which we must and can expand exports are mainly
chemicals. These conclusions seem to have validity to some extent regarding Japan's exports to other LAFTA countries.

Annexed Table r Japan's Exports(Million Dollars)
Total Exports

to Latin

America

1959-61

1965

to Brazil

195g61

1959-61

1ee5

343,392
222,ea958,309

4,098
2,547
513

1,300
4,283
484

945

2,999

1965

1.

Food . Beverage

2.

Raw Materials

3.

Fuel . Fats

264,177
12!,363
48,2204.

Light Ind. Products

1,727,813 2,459,591

77,18591,034

1,059,040 1,426,608

46,86863,891

1os,434 265,129
500,339 767,854
175,278 546,866
510,322 1,718,299
340,376 1,290,481
26,715 123,208
143,231 304,61O

7,874

6,819

2,021

22,443

20,324

6,609

17,516

978
os8

1,979

52,239114,544

14,202

11,55137,33097,!Ol

9,072

9,936

TextileNon-Metal Minerals
5.

OthersChemicals

6.

MetalsIron . Steel

Non-Ferrous
Manufactures
7.

174

191
909

eo9

71

4,OOI

14,83813,442

5,130

907
708

Machiney . Instruments

1,061,982 3,OIO,zzO

128,779

169,194

36,627

1O,776

General Machinery

2gg,797 624,427
276,021 899,996
451,745 1,243,297
95,419 242,56e

32,81033,645

19,137

4,987

31,86955,804

6,098

3,O18

ss,36370,511

9,9ss

1,552

5,737

9,234

1,434

1,219

3,909,155 8,359,706

271,970

398,355

55,63525,406

Electric MachineryTransport Equip.
Instruments
8. Total(scurce)U, N., Clommodit2

Trade StatisticsIN JAPAN'S TRADE
RECENT
CHANGESWITHLATIN AMERICA

107

AND BRAZIL

Composition of Japan's

Annexed Table ff

Exports(%)

Total Exports

to Latin

America

1959-61 1 1965

195es1 I

1965

1. Foocl . Beverage

4.1
2.7
O.7
29.4
17.0
3.2
9.2
6.5
20.5
15.4
1.5
3.6
36.1
7.5
10.8
14.9
2.9

1.5
O.9
O.2
28.4
17.2
2.9
8.3
2.4

Non-Ferrous
Manufactures
7. Machinery.Instruments
General Machinery
Electric MachineryTransport Equip.
Instruments

6.8
3.1
1.2
44.2
27.1
4.3
12.8
4.5
13.1
8.7
O.7
3.7
27.1
6.1
7.1
11.5
2.4

21.5
2.1

O.3
1.1
O.1
22.8
16.0
1.7
5.1
4.4
28.8
24.4
1.0
3.4
42.4
8.4
14.0
17.7
2.3

8. Total

100.0

100.0

1oo.O

100.0

2. Raw Materials

3. Fuel.Fats
4. Light Ind. Products

TextileNon-Metal Minerals

Others
5. Chemicals
6. Metals
Iron . Steel(source)

19.1
13.7

O.03
5.4
47.4
12.1
11.7

to Brazil

1959-61 l

1965

1.7
O.3
5.4

O.7
3.6!

3.6
1.8
1.2
25.5
16.3
9.2
65.9
34.4
11.0
17.9
2.6

3.6
7.8
45.5
39.1
3.6
2.8
42.4
19.6
11.9
6.1
4.8

100.0

100.0

Annexed Table r.
Japan's Imports

Annexed Table M(Million Dollars):

Total Importsi1959-61 l 1965

1. Food.Beveragei 2. Raw Materials

569,499 1,470,148

Manufactures
Z Machinery.Instruments
General Machinery
Electric MachineryTransport Equip.
Instruments

2,217,735 3,167,571
781,188 1,679,749
245,166
71,52356,88419,02358,572
14,116
129,710
38,384
408,184
274,064
412,609
222,939
140,700
97,O13
247,515
113,22124,3sc12,705769,023"5,6or
450,710
288,807120,2sc
39,698
1ss,614
82,25934,93344,403

8. Total

4,ss2,M5 8,152,450

3. Fuel.Fats
4. Light Ind. Products

TextileNon-Metal Minerals

Others
5. Chemicals
6. Metals
Iron . Steel

Non-Ferrous(Source)U. N., Clommoclily

Trade Statistics

from Latin America
1959-61 1

1965

95,390257,O19
1,224

117,033
51O,360
30,989

2M

3,095

48
171
45
3,272
7,566

2,144
951
5,547
18,688

1,729
5,837

13,997

4,691

3,624
17
8

3,036

3,599

3,036

368,359

os8,748

from Brazil
1959-61 1

1965

19,93222,e098,404
34,268

250
158

866
594

120
38
31
773
773

594

4,686
4,686

43,15349,463

M5

YOSHIAKINISHIMUKAI

108

Composition of Japan's Imports

Annexed Table IV(%)
from Latin America

Total Imports
i 1959-6i (1. Focxl.Beverage
2. Raw Materials

3. Fuel.Fats
4. Light Ind. Products

TextileNon-Metal Minerals
Others
5. Chemicals
6. Metals
Iron . Steel

Non-Ferrous
Manufactures
7. Machinery.Instruments
General Machinery
Electric MachineryTransport Equip.
Instruments
8. Total(Source)

1959-61 [

1ee5

12.4
48.4
17.0
1.5
O.4
O.3
O.8
6.0
4.9
2.1
2.5
O.3
9.8
6.3

1.8
O.8
1oo.O

100.0

e.

195961 i1965gfrom Brazil
1ee5

25.9
69.8
O.3
O.07
O.Ol
O.05
O.Ol
O.9
2.0
O.4
1.6

16.9
74.0
4.4
O.4

46 .2

O.3

o .3
o .09

1.2

o .07
1 .8

1.3
9.4
9.4

1.0
o.oo
o.oo
O.97

O.4

100.0

1oo.O

100.0

1oo.O

18.1

38.9
20.6
3.0
O.7
O.7
1.6
5.0
5.0
1.7
3.0
O.3
9.4
5.5
1.5
1.9
O.5

1

16.9

51 .o
o .5

69.2
1.7
1.2

o .4

O.1
O.8
2.7

1 .8

O.6
2.0

O.4

Annexed Table M.
Brazil's

Annexed Table V

Exports(Thousand Dollars),

Tota1 Exports
1959-61

1

1.

Food . Beverage

2.

Raw Materials

3.

Fuel.Fats

4.

Light Ind. Products

5.

6.

966,605
252,939
56,078

Textile

8,213
2,693

Non-Metal Minerals
Others

3,997

1,523

Chemicals
Metals13,7oo1,953
1,915

Iron . steel

Non-Ferrous
Manufactures
7.

38
4,oo6
1,582
138
3,186

Machinery . Instruments

General Machinery
Electric MachineryTransport Equip.
Instruments

8. Total(Scurce)

1,304,4M
U. N., Commodity Trade

Statistics,

1

1965

to Japan
1959--61l

1ee5

1,O!5,215

16,120398,299
46,71933,317
14,841
2,536
15,94014,27046,26343,929676
1,658
29,465
16,953
5,101
7,111
300

14,561

6,534
20,662

243
89

655
326

65
24
sc
185
l85

326
183
1,450
1,450

1,583,548

31,29229,810

SEEF, Foreign Trade of Brazil.

CHANGES IN JAPAN'S TRADE WITH
LATIN AMERICA
RECENT

109

AND BRAZIL

Annexed Table VI

Composition of Brazil's

Exports(%)
to Japan

Total Exports
1959-61

1. Food.Beverage
2. Raw Materials

3. Fuel.Fats
4. Light Ind. Products

TextileNon-Metal Minerals

Others
5. Chemicals
6. Metals
Iron . Steel

Non-Ferrous
Manufactures
7. Machinery.Instruments
General Machinery
Electric MachineryTransport Equip.

l

1ee5

74.1
19.4
4.3
O.6
O.2
O.1
O.3
1.1
O.1
O.1

o.oo
O.31
O.1
O.Ol
O.2

Instrnments
8.

Total
(Source)

1oo.O

l195961 i

1965

64.1
25.2
3.0
2.1
O.9
O.2
1.0
O.9
2.94
2.8
o.oo
O.1
1.82
1.1
O.3
O.4
O.02

51.5
46.5
O.8
O.27

21.9
69.3
2.2
1.1

O.2
O.07
e.3
O.6
O.6

1.1

100.0

1oo.O

100.0

O.6
4.9
4.9

Annexed Table V.

Annexed Table VII

Brazil's Imports(Thousand Dollars)from Japan

Total Imports
195{>-61

1. Food.Beverage
2. Raw Materia!s

3. Fuel.Fats
4. Light Ind.Products
TextileNon--Metal Minerals

Others
5. Chemicals
6. Metals
Iron . Steel

Non-Ferrous
Manufactures
7. Machinery.Instruments
General Machinery
Electric MachineryTransport Equip.

Instruments
8. Total(Source)J

1965

12,48952,135
134,162
167,625
77,84841,572
48,205
530,613
2ss,079
77,152
183,143
14,239203,497
42,581
239,11445,342
1,159
1O,42833,755
174,159
127,323
47,632
56,381
23,31O
258,627
150,155
50,53743,605
14,3301,429,609

1,Oee,M3

187,693
63,509279,803
66,204

1,ssO

U. N., Ca,nntadity Trade Statistics, SEEF, Foreign

1959-61 1

1965

165
276

136

2,974

1,341

"
!,557
1,373

183

M

1,158
2,557
18,32016,204
1,125

5,259
41,111
13,35017,976
8,720
1,065

14,205
7,849
3,906
1,146
1,3oa

60,90836,559980
15,402
10,109Trade of Brazil.

991

YOSHIAKI NISHIMUKAI

110

Annexed Table VI[

Composition of Brazil's

Imports(%)
Lfrom Japan

Total Imports

195g61

1965

1.

Food . Beverage

13.1

2.

Raw Materials

4.4

3.9

O.3

3.

Fuel. Fats
Light Ind. Products

19.6

21.9

O.4

4.

5.

6.

7.

1965 ' '1959-61

18.7

4.6

4.1

4.9

TextileNon-Metal Minerals

O.1

O.1

O.07

O.9

O.9

2.5

Others

3.6

3.1

Chemicals
Metals

9.4

16.0

2.3
1.6

11.7

11.7

Iron . Steel

5.4

Non-Ferrous
Manufactures

2.9

O.3
3.7
O.5
3.2
7.0
50.1

4.4

25.3
16.6

44.3

5.2

O.05

3.1

3.4

2.1

Machinery . Instruments

37.1

23.7

8.6
67.5

38.8

General Machinery
Electric MachineryTransport Equip.
Instruments

17.9

13.8

5.4

4.6

12.8

14.3

1.0

4.0
1.3

1oo.O

1oo.O

100.0

8. Total(Source)Annexed Table VII.

2.7
21.5

21.9
29.5
1.7

10.7

3.1

1

3.5
1oo.O

RECENT CHANGES IN JAPAN'S TRADE WITH LATIN AMERICA
AND BRAZIL

111

Annexed Table Ix Brazil's lmports from Other LAFTA Countries(Thousand Dollars)

PA

A

CH

1. Food.Beverage

72,769120,569

1,092
2,757

255

2 Raw Materials

711
118
372

3,278
2,239

274

4,115

236

736

446
502

1,490
1,705

160

3. Fuel.Fats
4; Light Ind. Products

co

E

M

122

PE

U

127
!35

1,047
7,351

69

136
1,733
130

1,M7

137

429

951

intra-

160

112,536
72,430187,693
203,497

4,058
2,767

59,451
39,81463,50942,581

2,105
6,864

277,698
232,250

279,803
239,114

2,073
3,747

64,131
41,59566,20445,342

1,580
1,159

1,580
1,159

12,489

1,300

9,128

12,48910,428

240

2,073
2,447

50,062
3!,30852,13533,755

1,601
7,223

132,561
166,936

134,162
174,159

3,272

30,075

164,353
97,248167,625
127,323

M5

77,20347,632

77,84847,632

1,668

30,07539,90426,306

41,572
56,381

959

47,24623,31048,20523,3105,819

530,613
252,808

530,613258,627

3,699

256,079
146,456

256,079
150,155

1,584

77,152
48,95377,15250,537536

183,143
43,069183,143
43,605

14,23914,330

14,23914,330

1,490
1,705

1,868

1,512

395
3,843

812

1,426
16,599353
3,275

Iron . Steel

112

533

Non-Ferrous

184

Manufactures

516

443

3,826

1,412

2,287

1,412

5. Chemicals
6. Metals

7. Machinery.Instruments

General Machinery
EIectric MachineryTransport Equip.

605

951

189

446
502
531

Others

137

70

450

681
10,201

681

353
3,275

16,59910,201

581

1,oo3

581

536

Instruments
75,641130,998

Total(Source)U. N.,(Note)

Upper row : Annual average ofLower row; 1965

Contmedity Trade Statistics,

7,891
26,460

70
8se

954

8,657

122
130

and SEEF, Foreign Trade of BraziL
1959-61,

Total

75,157131,067

TextileNon-Metal Minerals

extra-LAFTA LAFTA

2,541
12,119

1,047
8,302

88,266 1,341,343 1,429,609
187,562 903,081 1,090,M3

YOSHIAKI NISHIMUKAI
Annexed Table X

112

LAFTACountries

Composition of Brazil's Imports from Other(%)

A

cH L co
i

E

M

PA

PE

1. Food.Beverage

os.2
92.0

13.8
10.4

2.9

5.0
1.1

2. Raw Materials

O.9
O.1

41.5
8.5

7.2
3.2

1.1

3. Fuel.Fats

O.5
3.1

O.9

82.1

4. Light Ind. Products

O.6
O.4

18.9
6.4

17.9

100.0

100.0

extra-LAFTA LAFTA

100.0
88.5
i
l

os.2
13.6

14.4
5.0

intra-

U

11.5

85.1
69.9

8.4
8.0

13.1
18.7

4.6
1.5

4.4
4.4

4.4
3.9

2.4
3.7

20.7
25.7

19.6
21.9

2.3
2.0

4.8
4.6

4.6
4.2

e.1
O.1

O.1
O.1

O.9
1.0

O.9

TextileNon-Metal Minerals

Others
5. Chemicals

17.9
O.6
O.4

18.9
6.4

O.7

Z7

1.4
1.1

6. Metals

100.0

5.7

18.1

O.1

Non-Ferrous

O.2

5.7
62.7

Manufactures

O.7

5.6

Electric MachineryTransport Equip.

O.7

2.9

5.3

1.7

5.3

1.3

3.7
3.5

3.6
3.1

41.4
44.4

1.8
3.9

9.9
18.5

9.4
16.0

3.7
16.0

12.3
10.8

11.7
11.7

O.7

5.8
5.3

4.4

37.0
37.8

26.8
84.2

26.8
84.2
l

6.7

O.4

3.0
2.9

2.9

1.1

3.5
2.6

3.4

39.6
28.0

37.1
23.7

19.1

100.0
100.0

(Source)Annexed Table m.

1oo.O
1oo.O

1oo.O
1oo.O

1oo.O 100.0
1oo.O 100.0

1oo.O
1oo.O

100.0
1oo.O

5.2
2.1

2.0

16.2

17.9
13.8

O.8

5.8
5.4

5.4
4.6

O.3

13.7
4.8

12.8
4.0

1.6

Ll

O.1
1.3

1oo.O
1oo.O

1oo.O
1oo.O

Instruments
Total

5.4

1.9
16.0

3.1

6.7

O.8

1.0

2.3

6.8

Iron . SteelGeneral Machinery

1!.5

14.4
2.8

37.0
37.8

62.7

7. Machinery.Instruments

2.2

Total

1oo.O
100.0

SOME INVENTORY ACCOUNTING PROBLEMS
Isao NAKANOI The Concept of Inventory
What is the correct meaning of the term "inventory" in accounting?
Disagreement of opinions on this basic concept is often responsible for thefact that so many different views and proposals have been advanced andyet so little progress made in the field of the inventory accounting theory.

We are therefore going to take up and consider here two opposite viewson this concept in Japan, with the hope that this study may be of somehelp in giving the most proper definition to the term.

The official written opinion series No. 4 "On the Valuation of Inven-tories" (published by the Council on Business Accounting in Japan) havereferred to this problem, and in this writing "inventory" is regarded as

those goods and services which belong to any one of the following cat.
egorles;<a) those goods and services which are held for sale in the ordinary
course of business,(b) those goods and services which are currently being manufactured
to be sold in the future,(c) those goods which are to be consumed in a short time for the
purpose of manufacturing goods and services for sale,(d) those goods which are to be consumed in a short time in thefield of selling and general administrative activities.(i)The pamphlet further says that parts of living trees and bamboos
which are to be cut off within a short time also constitute elements of in-ventory because "they will become expenses in a short time-period", andthat goods with very short useful lives (ex. perishable tools etc.) as well as

goods whose acquisition costs are very small (ex. tools and furniture whose
acquisition costs are under certain specified amounts) should also be counted
as inventory "from the view-point of their accounting attributes."(2)(1) The written opinion series No. 4, "On the Valuation of Inventories" (An interim reportby the Council on Business Accounting, the Finance Ministry in Japan), Chapter 1,P. 29•(2) Ibid., P. 30.

114 ISAO NAKANO
As you can see from the foregoing, the concept of inventory in thiswritten opinion includes (1) all those assets which are held or being
manufactured for sale in the ordinary course of business, (2) all thosewhich are to be consumed in a short time-period in business operationsand (3) all those which, though not so rapidly consumed, have small
acquisition costs. This is indeed a "pluralistic concept of inventory" inthe sense that the propriety of counting an item as an inventory asset has

been judged here not from a single consistent point of view but from theabove-mentioned three heterogeneous bases. Consequently, the title of"inventory" is given not only to merchandise, finished goods, goods inprocess, partly finished goods and raw materials, but also to factory andoffice supplies, part of living trees and bamboos which are to be cut off
in a short time, and moreover to perishable tools and furniture.
It is this writer's opinion that any theoretical concept should cover all

items which have a certain characteristic in common and yet exclude anyother which lacks it. Of course, this characteristic must be important anduseful enough to be adopted as the basis upon which to select the proper

elements covered by the concept. Returning to the inventory concept, my
opinion is that we must inquire into the theoretical and practical significance and usefulness of the "inventory" concept before it is justified to use

the terminology especially as the name for a part of "current assets." We
already possess the concept of "current assets." Why divide them and givea part of them another title "inventory"? Unfortunately there is no explanation of the aim with which the above pluralistic concept of inventory

has been proposed. It seems, however, that since this concept covers
almost all assets whose costs are to be charged to operations through theirsale or their consumption measurable by some physical unit the purpose of

proposing this broad concept of inventory may have been to study as awhole the accounting principles and procedures of these assets and thus tocontribute to a proper determination of "operating income."

But considering the matter from a logical point of view, the above
written opinion has been challenged by the criticism that "it offers no
consistent basis upon which to judge whether or not an item belongs toinventory(5)and that "the scope of inventory assets should be determined(3) Susumu Watanabe, Inventory Accounting (Revised Edition), Tokyo (Japan) 1965, P. 508.

SOME INVENTORY ACCOUNTING PROBLEMS 115
on the unitary basis of utility or function of assets to a business enterprise."(`)

According to this view "inventory" assets are defined as those which areintended for sale in the ordinary course of business and those which are to

be consumed physically and in a measurable form for the purpose of
manufacturing assets for sale. Compared with the former, this may becalled a "unitary concept of inventory." When this interpretation is adopted, the items covered by the concept are usually limited to such assets
as merchandise, finished goods, work in process, raw materials, parts, con-tainers, the titles of which are to be passed to customers, those factory
supplies which come to be physically embodied in finished goods (ex. nails,

screws, bolts and paints) and those goods which, though not physicallyembodied in finished goods, will be consumed rendering services indispensable for, or facilitating production (ex. fuel, chemicals etc).(5)As mentioned above, this concept has the theoretical merit of having

adopted a unitary and consistent view point in determining the scope of
inventory assets. But when inventories are thus regarded as those goods
or services which are intended for sale or which are physically and directly

consumed in their production, why cannot "plant assets" be included ininventory assets? Buildings or machines are, in essence, bundles of services

to be utilized and consumed for manufacturing salable assets, and on thispoint no fundamental difference cqn be found between plant assets andthose cited above as inventory. A possible answer to this question may
be that, for instance, raw materials and fuel are consumed in physicallymeasurable form while machines remain almost the same in their physicalform throughout their use in production. This kind of difference is,however, so superficial that this explanation alone can hardly justify dividing a part of current assets from another part under the title of "inventory."

What is the theoretical and practical usefulness of introducing this unitaryconcept of "inventory" into accounting? Advocates of this concept do notseem to have paid attention to this problem.

In order to inquire into this point, it is useful, I think, to clearlyrecognize that the unitary concept of inventory has the following threecharacteristics. (1) The items covered by this concept are usually ex(4) Ibid., p. sogl(5) Ibid., PP. 17-20.

116 ISAO NAKANO
pected to become elements of the cost of goods sold in income statements,(2) expired costs of these items can be determined on the basis of physically consumed (or sold) quantities, and (3) these items take part in the
production of salable assets, not by rendering services to administrative
activities of a business but by being physically consumed in the production
process, so that it would be realistic to assume that fall in prices of thesegoods would exert some influence on the selling price of finished goods
produced therewith. These points show us that the proposal of the unitaryconcept of inventory is logically based on the assumption that the adoptionof this concept will help to systematically develop the accounting principles

and procedures on items which have the above three characteristics and toproperly determine the cost of goods sold (including the possibility ofapplying the "cost or market, whichever is lower") for the ultimate purposeof a proper determination of profit (or loss) on sales in an income statement.

Thus far, we have pointed out the theoretical and practical usefulnessof adopting the pluralistic or unitary concept of inventory. And this study

has lead the writer to the conclusion that the latter concept should be
preferred, because first the former pluralistic and broad concept of inventory

lacks any consistent basis upon which to select inventory asset items, which

the latter really possesses, and second, there is some doubt whether the"cost or market" rule may properly be applied to those items which,according to the former concept, is included in inventory but not when thelatter is adopted. Since these items include those which will ultimately
become elements of selling and administrative expenses, any fall in pricesof these goods will not necessarily lower the selling prices of finished goodsin the business. If one should deny the theoretical propriety of the "cost-or-markeV' rule, of course, the above second point will be' unimportant.
But this writer's opinion is that the accounting theory should, first of all,concentrate upon theoretical explanations of accounting practices as it is("raison d'atre") (including the cost-or-market rule) and that the proper

concept of an inventory should be consistent with the existence of thisvaluation rule that is now permitted to apply to any inventory asset item.

[ Full Costing vs. Direct Costing in Inventory Valuation
What sorts of cost elements should properly be aggregated to determine

the cost of each inventory asset? Broadly speaking, generally acceptedSOME INVENTORY ACCOUNTING PROBLEMS 117
accounting principles on this problem are as follows : First, in case of goods

purchased from outside the firm, their acquisition costs usually consist ofpurchase prices (net prices after deducting purchase allowances and purchaserebates, if any) and of incidental costs (ex. duties, freight or other trans-

portation costs, storage, insurance while goods are being transported orstored, etc.);Second, costs of geods in process and finished goods arechiefly their production costs which are made up of costs of raw materials,
supplies, labor costs and manufacturing overheads properly allocated to thegoods concerned, while costs due to idle capacity or excessive damage ofgoods etc. are not included in inventory costs but treated as expenses (orlosses) during the period in which they were incurred. (Such incidental
costs as those required for transportation, storage etc, of goods finished or
still in process should be included in their acquisition costs only when they
can clearly be distinguished from selling expenses).

It may be assumed that the principle underlying the above generally
accepted accounting procedures relating to inventory costs is that "all costelements which had `relationship' with the acquisition or production of theinventory asset concerned should be treated as its cost,"(6) or as far as thecosts of products are concerned, that "all costs that took part in the production of the goods and possess any `causal relation' with their production
should compose their product costs."(')

In this seemingly clear explanation, however, theoretical ambiguity be-

gins to appear when we start to investigate what the essential concept"relationship" or "causal relation" really means, viz. (1) what kind of
relationship it is, and (2) between what objects the relationship should
exist. And it is the vagueness of this important concept, we think, thathas given rise to controversy between advocates of "full costing" and thoseof "direct costing" in inventory valuation.

Under the direct costing procedures the manufacturing costs are divided

into variable costs and fixed eosts, and the former alone are allowed toconstitute the costs of products while the latter are to be treated as ex-penses of the period in which they were incurred. The advocates of this(6) Susumu Watanabe, Allocation of Inventory Costs, (A Paper included in:Katsuji
Yamashita (ed.), Income Accounting Theories, Tokyo 1959) P. 131.
(7) Ibid., P. 131,

118 ISAO NAKANO
kind of inventory valuation have raised the following two reasons to support
their view.

(1) Fixed costs really are not costs expired for manufacturing goods,
but they are costs arising from keeping the capacity to manufacture and tosell in readiness for use, namely "capacity costs."(8) Services provided bysuch capacities flow away with the passage of time even when there is no
production of goods in a given period, so that the cause of these cost expirations is not production of goods but the passage of time. Such "capacity costs", therefore, are most properly matched with revenue through themedium of time-period (viz. they should be applied to the revenue of theperiod in which they were incurred).

(2) Inventories should be valued by the amount of cost which will besaved in following periods. The variable manufacturing costs incurred in
the current period will not have to be incurred again in the future unlessadditional production is carried out, while fixed costs accrues with thepassage of time whether or not production is made in following periods, sothat the latter kind of costs do not have the power of "future cost avoid-ance." Accordingly, the inventory should be priced by variable costs
incurred during their production.(9)Traditional full costers have challenged the former of these views asfollows ; Taking up the depreciation cost as an example of fixed costs,
since no production is possible without use of productive capacity, plant
assets constitute essential factors for manufacturing in the period concernedand clearly contribute to producing goods. Therefore, the treatment of
this fixed cost as an expense in the period in which it was incurred can
not be justified from the viewpoint of the proper matching of costs withrevenues.(iO)The latter theory of "future cost avoidance" also seems to be open to
the following objection. It is undoubtedly true that variable costs incurred(8) National Association of Accountants, Research Report 37, Current Application of Direct

Casting, New York 1961, PP. 10•wll and P. 76.
(9) Raymond P. Marple, Try This on Your Class, Professor, the Accounting Review, July

1956, PP. 492--497.
(10) Susumu Watanabe, Allocation of Inventory Costs, op. cit., P. 135. Philip E. Fessand William L. Ferrara, The Period Cost Concept for Income Measurement-Can It Be
Defended?, the Accounting Review, Oct. 1ee1, PP. 598N6e2. James M. Fremgen, Variable
Costing for External Reporting,A Reconsideration, the Accounting Review, Jan 1962, P. 77,

SOME INVENTORY ACCOUNTING PROBLEMS 119
in this period for the production of an inventory at the year-end can savethe same kind of costs in the future but fixed costs cannot render this sortof favorable benefit to the future. But the real question here is whether
or not placing emphasis on this difference can justify the direct costingprocedure in an income statement. The real meaning of this theory isthat because expiration of service potentials (revenue-producing potentials)

in plant assets are dependent upon the passage of time rather than on
manufacturing activity their expiration in the future cannot be avoided byany manufacturing activity during this period. But this inescapability of
fixed cost expiration in the future cannot negate the fact that a part ofservice potentials in the assets has been effectively put to use for pro-duction during this period. In other words, even though "expiration" of
fixed costs relate to time-periods, their "utilization" relates to the products
manufactured during this period, resulting in the creation of utility (service-potential) of the products. It may be said that the manufacturing activity
in the current period has given rise to a shift of a part of service potentialfrom plant assets to manufactured goods. Accordingly, if accounting
principles and procedures should reflect this economic fact correctly, itfollows that the expired cost (roughly corresponding to the service potential

used up in the current production) of the plant assets must be allocated togoods manufactured with the assets.
In the above discussion the "service potential" concept has been used

to mean the "revenue-producing potential" of an asset. But another new
interpretation of this concept has been proposed by Messrs. Horngren andSorter, who assert "a cost has service potential, in the traditional accounting

sense, if its occurrence now will result in future cost avoidance in theordinary course of business. In other words assets (unexpired costs)
ordinarily represent costs whose reincurrence is unnecessary in the future•••.

Expressed another way, if the total future costs of an enterprise will bedecreased because of the presence of a given cost, that cost is relevant to
the future and is an asset. If not, that cost is irrelevant and is expired."(!i)

This new revolutionary proposal may properly be called a "future cost
avoidance" concept of service potential, And no fixed costs have "service(11) Charles T. Horngren and George H. Sorter, "Direct" Costing for External Reporting,
the Accounting Review, Jan 1961, P. 86.

120 ' ISAO NAKANO
potential" in this sense and therefore can be allocated to the inventory.

But this definition cannot be free from the following criticism. "Theobjective of a firm's operation is not the minimization of costs but the

production of revenues in excess of costs. Hence, the service potential
concept ought to be interpreted in the light of an incurred cost's capacity
to contribute to the production of revenue."(i2) Accordingly, the "revenueproducing potential" concept of service potential would be more appropriate

from the standpoint of the objective of a firm. And adoption of thisinterpretation inevitably demands including in inventories all costs, variable

and fixed, required for their production, as was explained above.

In response to this criticism Horngren and Sorter amended their definition of "service potential" as follows ; "To represent service potential, agiven cost must be an index of future economic benefit in the form of areduction of total expected future costs or an addition to total expected
future revenue in the ordinary course of business. Expressed another way,

if the total expected future revenue in the ordinary course of business.
Expressed another way, if the total expected future costs or revenue of anenterprise will be changed favorably because of the presence of a given
cost, that cost is relevant to the future and is an asset; if not, that cost isirrelevant and is expired."(i5) It seems to us that this definition of service

potential concept would be the same as the traditional interpretation of theconcept, but for the peculiar assumption connected with the former that it
is possible to postpone utilization of the capacity to produce and sell goods

provided for by the fixed cost items from this period to the future without

incurrence of any incremental explicit or opportunity costs. This assumption is not justified, however, first, because the so-called base stock portionof a firm's inventory in a current period cannot be diminished without
preventing future normal manufacturing and (or) merchandising activities

and reducing the amount of revenue in the future period, and second,
because the amount of inventory in excess of the base stock is built up, innormal cases, to provide for the prospect of an increase in sale and so thelack of this provision must inevitably lead to either a loss of additional(12) James M. Fremgen, op. cit., P. 77.
(13) George H. Sorter and Charles T. Horngren, Asset Recognition and Economic Attributes-The Relevant Costing Approach, the AccQunting Review, July 1962, PP. 393N394,

SOME INVENTORY ACCOUNTING PROBLEMS 121
revenue or to incurrence of additional production costs in the future tomeet this additional demand.

Therefore, we have come to the conclusion that attempts to support
direct costing procedures by means of developing a new interpretation ofthe "service potential" concept have not succeeded.

In the foregoing we have pointed out the theoretical ambiguity of theterm "relationship" which decides whether or not a cost element should be
included in "product costs." Returning to this point, our opinion is that

fixed cost items (a plant asset for example) have the following three
aspects : (1) they gradually expire with the passage of time, keeping thecapacity to manufacture goods ready in use ("expiration of capacity") ; (2)the capacity is, in normal cases, more or less put to use in business opera-

tions ("utilization of capacity") ; (3) as a result of this utilization of

capacity products are manufactured in the ordinary course of business("manufacture of products"). And it seems to us that the above-citedcontroversy is reduced to whether the relation of (1) and (3) or that of(2) and (3) should be recognized as the basic fact which decides whether
or not a cost element should be included in "product costs."

The relation between (1) and (3) means, expressed more precisely,
the quantitative correlation between the quantity of expired fixed costs andthe quantity of products manufactured in this period. Advocates of direct
costing assert that since currently incurred variable costs clearly possess thiskind of correlation with currently manufactured goods they must be charged
to the products but fixed costs are not inventoriab!e because they do nothave such a relationship. But how is it permitted to let this relationshipdecide the scope of inventoriable cost items? If a cost element possesses
this kind of relationship, it will mean that incurrence of the cost has been"caused" by the very products that the cost correlates and therefore thecost shou!d be "recovered" through the sale of these products. But othercost elements with no correlation of this kind would have been incurred
even without production of the goods, and so it will be illogical to require
recovery of the incurred costs specifically through the sale of the products.

The latter kind of costs have inevitably incurred and expired with thepassage of time, so that they should be recovered evenly from the revenueof each period. In other words, existence or non-existence of a correlation

122 ISAO NAKANO
between the amount of an incurred cost and the quantity of manufactured

goods in a period may be said to determine whether the cost should be"recovered" from the revenue due to sale of the goods to which the cost
relates or from the revenue of the period in which the cost has been in-curred. Therefore, if the proper concept of business income could be
defined as a difference between "expiration of economic resources" and"sources for its recovery" rather than, as the traditional accounting theory

explains, a difference between "efforts" (expired costs meaning economic
contribution to producing revenue) and "accomplishments" (revenue), thedirect costing would be justified for external reporting. On the other
hand, when the relationship between (2) and (3) is preferred as the basic

requirement in deciding whether or not a cost element should be included
in "product costs;' it follows that since no production is possible without
utilization of plant assets there clearly exists a "causal relation" between"utilization of the capacity" and "manufacture of goods." And if thiscausality is to be reflected in accounting records, currently manufactured

goods should be charged not only with their variable costs but also withthe fixed costs (the depreciation cost, for example) reflecting the utilizationof the capacity in the current period. But why should existence of thiscausal relation be chosen as the criterion for deciding the extent of invent-oriable cost elements? This is required, in this writer's opinion, from theviewpoint of regarding the accounting concept of income as the difference
between "efforts" (expired costs contributing to production and realizationof revenue) and "accomplishments" (revenues expressing an economicai
result of these contributions) rather than as the difference between "ex-piration of economic resources" and "sources for its recovery," because
matching "efforts" with "accomplishments" in income accounting is no lessthan a comparison of "causes" and "results" relating to the current economic activity of a firm so that recognition of the "causes" and recognitionof the "results" should be synchronized in the income accounting. Treatingsome of the manufacturing costs as product costs is one of the means inachieving this synchronization.

To sum up, the controversy between full costing and direct costing in

financial accounting is reduced to whether the proper accounting income
concept should be regarded as the difference between "effQrt$" and "accom-

SOME INVENTORY ACCOUNTING PROBLEMS
plishments" or as the difference between "expiration of economic resources"and "sources for its recovery." And so long as the former concept ofincome still prevails, we must conclude that there is no room for theoreti-

cally supporting the direct costing procedure for the external accounting
purpose.

N On Inventory Pricing Methods
In the inventory accounting theory in Japan as well as in the UnitedStates, various inventory pricing methods have been "separately" explained

and their merits and defects have been pointed out from theoretical andpractical standpoints, but only few attempts can be found which have tried

to "systematize" these many inventory pricing methods. This systematization seems to be indispensable both for the further development of inventory
accounting theories and for improvement of accounting practices.

This attempt at systematization can be made in two different ways;
one of them may be called a "unitary" systematization, the other a "dualistic" systematization. One example of the unitary systematization of theinventory pricing methods is that which was made by Carman G. Blough.(i`)

In his theory all inventory pricing methods are regarded as forminga"unitary" system in the sense that according to him all the methods havethe same theoretical grounds in common (or aim at determination of thesame concept of business income) and that they are different from one
another only in the situations in which they are properly to be applied.
For instance, the fifo method is said to be justified only where current
acquisition costs of inventories do not relate to current sales prices but thesecosts may be regarded to have been incurred in order that the goods sold in

the current period may be replenished and the sales in the future provided
for. The lifo and the base stock methods are based upon the assumption, hesays, that there is a close mutual relationship between current sales prices

and current purchase or production costs and that the current costs ofpurchases or production have been incurred to cover current sales. Suchan assumption is justified, he asserts, when a company bases its sa!es prices

on current costs. Third, average cost methods are said to assume thatcurrent costs of purchases or production have been incurred to replace the(14) Carman G. Blough, Changing Accounting and Economic Concepts Affect Methods ofInventory Policy, Journal of Accountancy, Sept. 1en8, P. 2os.

123124 ISAO NAKANO
inventory which are being sold (like the case of the fifo method) but at
the same time there exists a mutual relationship between current sales prices

and current purchases or production costs, the relationship recognizable inthe case of the lifo method. Accordingly, average cost methods are said tobe appropriate when goods are acquired or produced in advance of their sales

but unlike the case of the fifo method their selling price varies with thechange of their current costs, especially when there is a lag between thechanges of the current costs and those of the selling price.(i5)In short, it may be said that this theory is attentive to whether thecurrent sales price is influenced by current costs or by original costs ofpurchases or production, and that in the former case the current revenue

is matched with most current costs by means of the lifo or base stock
method, while in the latter case the fifo method is said to be used in orderto charge original costs of the goods sold to the current revenue. Whenthe sales price varies with the change of current costs but it is accompaniedwith a lag, some average cost method is preferred.. Mr. Blough does notrefer to the specific identification method, but judging from his laying
great emphasis upon the correlation between change of the current sales
price and change of current purchase or production costs, this method may

most properly be used when each item of inventory has some speciality
and its selling price is clearly influenced by its individual original cost.

According to this theory all inventory pricing methods are regarded asaiming at the determination of the common concept of business income as

an excess of revenue over costs and expenses exerting influence on thecurrent selling price. This income concept seems to be different fromthat usually explained in accounting text-books in putting great emphasis
upon the relationship between the current selling price and the costs to be
charged to the current revenue. What is the use of this new interpretation?
He is silent on this point.

Besides this unitary systematization of the inventory pricing methods,
however, we find another kind of attempt, a "dualistic" systematization, so

to speak. According to this view, the specific identification method, thefifo method and the average cost methods are regarded as composing an
exclusive group, named "fifo" group, while both the last-in first-out method<15) Ihid., P.206,

SOME INVENTORY ACCOUNTING PROBLEMS 125
and the base-stock method form another group called "lifo" group, andthese two groups are quite different from each other in the nature of theincome concept underlying each group Moreover, these two sorts of businessincome concepts are so incompatible and so sharply opposed to each otherthat the system of the generally accepted inventory pricing methods arecomposed of these heterogenous, ever-struggling groups.(i6)

According to this "dual systematization" theory, the "fifo" group tries
to achieve allocation of inventory costs on the basis of "the flow of goods."

From this point of view the specific identification method is ideal because

it matches the cost of the specific item sold with proceeds from its sale.

But this method suffers from the following practical shortcomings ; (1)This is not applicable to all sorts of inventories, (2) application of thismethod allows artificial controls of periodic income (say, by means ofselling goods in the order of the amount of their unit costs) or variationof the amount of net income by an accidental occurrence of a certain flowof goods (which has no significance for the firm concerned). In thesecases allocation of inventory costs between the cost of sales and the costof inventory at the year-end should be made by another method, such as
the lifo or average cost method. The fifo method is usually supported on
the ground that the assumption of the "cost flow" underlying this method(the first-in first-out) generally reflects the actual physical flow of goods,

namely that the objective of matching cost of sales with the revenue fromthe sale of identical goods can be approached fairly well without thetrouble of specific identification of goods sold. The same reason has also

been given to justify the average cost methods. In other words, (1) when

the goods received are intermingled with one another during storage theassumption of the cost flow underlying the average cost method (the costof goods taken out from a given stock is composed of proportionate sharesof the costs of all goods received during a given time-period) coincidewith the physical flow of goods; (2) even when the goods move in thefirst-in first-out pattern, the average cost methods tend to assign comparatively new acquisition costs to the inventory at the year-end and(16) Most accountants seem to share this view consciously or unconsciously, but it is Professor Susumu Watanabe that has clearly developed this way of systematizing the inventory pricing methods for the first time. (Cf. S. Watanabe, Inventory Accounting,

op. cit., PP. 383tw384).

ISAO NAKANO

126

relatively old costs to goods consumed or sold during the year, so that
it will result in an inventory cost allocation similar to that achieved by
the fifo method.(i7)The above explanation has clearly shown that the inventory pricing

methods belonging to the "fifo" group aim at such an inventory costallocation as will reflect the actual flow of goods. But is this belief
in the "physical flow" unconditionally justified? On this problem William

A. Paton properly pointed out as follows; The final test is always usefulness. If it can be shown that more significant, more helpful conclusions
can be drawn from arrays of financial data that disregard physical arrange-ments and sequences to some extent one would not be justified in insisting that such arrays are improper or invalid."(i8) If the final test of an

accounting method is its usefulness, the inventory pricing methods based

upon "physical" flow of goods should also be reconsidered in order toknow whether or not these methods have any usefulness and, if any, toascertain "what kind of usefulness" it is.

Our opinion on this problem is that the inventory pricing methods be-longing to the fifo group intend to determine the amount of "monetary
income" which is the difference between the revenue in the current period

and the actual historical costs of the goods consumed or sold to get therevenue. This kind of business income may be called "monetary income"because it means the difference between recovered money" (vz. revenue)
and originally "invested money" related with the revenue (vz. costs). And
this monetary income concept seems to have the following three theoreticalcharacteristics ; (1) this concept is based upon the interpretation of businessactivity as "Cash->Cost factors.Product->Receivables (or Cash)." When
this cycle terminates and the cash is coiiected, it is assumed that the re-covered cash can be invested in any direction freely, namely that "initialinvestment is made as an alternative to all other possible uses of funds and,as recovered, again becomes `free' for re-investment or any other proper
business use."(i9) But now that a substantial portion of inflowing funds(17) Susumu Watanabe, Allocation of Inventory Costs, op. cit.,PP. 142N151.; ditto, Inventory
Accounting, op. cit., PP. 73fi"124.

(18) William A. Paton, Asset Accounting, New York 1952, P. 66.
(19) Price Level Changes and Financial Statements, Supplementary Statement No. 2, Committee on Concepts and Standards Underlying Corporate Financial Statements (American
Aecounting Association), (included in: Accounting and Reporting Standards for Corporate Financial Statements and Preceding Statements and Supplements, American Accounting Association) P. 26.

t

SOME INVENTORY ACCOUNTING PROBLEMS 127
must be used to replace the production factors consumed if the productive
resources of the enterprise are to be maintained, the above pattern of business activity and the assumption of free availability of collected funds do

not seem to reflect the real activity of a business faithfully. (2) As theabove cycle of business activity underlying the "fifo group" does not always
coincide with the reality of business operations, it follows that the businessincome calculateq using any inventory pricing method belonging to the fifogroup becomes only a "partial" reflection of real business activities, Solong as goods held for speculative purposes are concerned, the monetary income can reflect the result of these speculative sales transactions realistically.

But when it comes to the production factors that are consumed and immediately replaced in order to keep the activity of a going concern, thereal pattern of business operations must be regarded not as "cash.cash"
but as "cost factors.products.cash-e-cost factors." (3) Since in a periodof rising prices the real cycle of business activities must be interpretated as"cost (production) factors.cost (production) factors", the monetary income

based upon the cycle of "cash->cash" does not reflect the "short-term"
results from business operations, but it must remain a part of the "long-term" results allocated to each period. When a long period from theorganization of a business enterprise till its liquidation or at least a time-

period covered by long-term plans of activities of a firm is concerned, theprofit or loss during such a period could properly be computed as thedifference between "invested money" to and "collected money" from thebusiness operations during the period. Namely, the monetary income holds
good in computing such a "long-term result". But when it comes to thecalculation of a "short-term result" (say, during a year or half a year) frombusiness operations, the real pattern of such a short-term business activity(cost factors.cost factors) requires that part of the monetary income corresponding to the difference between current acquisition costs and original

historical costs of the production factors consumed in earning that income
should not be distributed to interested parties outside the firm but reinvested

to replace the consumed production factors and also that such a replacement
should constantly be made without regard to possible changes of their prices
in the future. As a result of these requirements, this part of the monetary
income of a period is neither available for free distribution nor is itagood

128 ISAO NAKANO
measure of the effectiveness of management. This latter result is due tothe fact that the above difference is derived not from a free choice of the

management in the timing of acquisition of production factors but from thenecessity of almost automatically replacing consumed goods and services ata certain point of time to keep the activities of a going concern, In short

it is doubtful whether this part of "monetary income" properly constitutes
business income in the sense of the "short-term" results of business activities.

Advocates of the "dual systematization" theory on inventory pricing

methods have paid attention to this part of monetary income, and they
regard the development of the base stock method and lifo method ("lifo"group) as attempts to exclude this part from business income. Contrary to

the "fifo" group, these methods are based upon the assumption that the
short-term reality of business operations follows the pattern "cost factors-

cost factors" rather than "cash.cash" and that the difference between thehistorical costs and the current costs of production factors related with thecurrent revenue is not any "realized profit (or loss)" but it is still "un-realized" in the sense that they have not yet become freely distributable.
In this context "realization" is interpreted to mean "free availability of thefunds" expressed by the monetary income rather than a concept merely
requiring the recognition of revenue to be objective and definite.(20) Sucha realization concept may be justified on the ground that the traditional

concept of "realization" has been developed not only for the purpose of"objective" income computation but also for the purpose of recognizipg
business income at a stage when it has become "distributable" enoughthrough conversion of products into cash (or its equivalents). In thenormal case ofa going concern, however, it has gradually come to berecognized that "realization" in the latter sense of the term cannot be said

to have taken place merely by sales of products since the cash (or its
equivalents) received must immediately be reinvested to replace the consumed

production factors. "Real" realization occurs and the part of monetary(20) Such an interpretation of "realization" concept was once suggested by some advocates ofthe base stock method and the lifo method in the United States of America (Cf. Henry
B. Arthur, Inventory Profit in the Business Cycle, the American Economic Review,

March 1938, P.28), and recently taken over by Professor Karl Hax in his capital
maintenance theory (Cf. Karl Hax, Die Substanzerhaltung der Betriebe, KOIn und
Opladen 1957).

SOME INVENTORY ACCOUNTING PROBLEMS 129
income which has been reinvested into the production factors becomes freely

distributable when the business enterprise concerned comes to an end or atleast when long-term plans of business operations terminate. Then, thispart of income comes to be really realized and can be treated as business.

mcome.
As is well known, that part of monetary income has been called "inventory profit (or loss)" by advocates of the base stock method and thelifo method. And we may be allowed to designate the income computedby one of these methods as "real income". As implied above, this income
concept holds good only within a relatively short period (viz. so long as agiven plan of production is followed and no great change has occurred
relating to the kind of production factors used in the firm concerned).
And it must also be pointed out that even within this relatively short period
the profit or loss from speculative operations is most properly calculated as

the difference between "invested money" and "collected money" relating tothese speculative transactions.

Thus far we have fully explained the theory of the "dual systematization" of inventory pricing methods and pointed out that in this theory the"fifo" group aiming at calculation of the "monetary income" and the "lifogroup" intending to compute the "real income" are regarded as sharply
confronting each other and that in this theory the latter group is preferredto the former on the ground that the lifo group can exclude the"inventory

profit (or loss)" from monetary income and thereby make the businessincome a more correct reflection of the short-term reality of business act-

ivities. But why must we know about short-term realities? Is it not
more persuasive to think that the short-term income concept and the long-term income concept should be the same (homogeneous) and that the income concept relating to normal business operations should be the same asthat relating to speculative operations, since the ultimate purpose of a busi-

ness is to get the difference between invested money and collected money,
viz. the "monetary income"? This writer's answer to this possible questionis that the final test of any accounting concept or procedure lies in theusefulness of the informations provided by following that concept or procedure, and that adoption of the monetary income concept in annual reports

will lead to misinterpretation and misunderstanding on the part of the

130

ISAO NAKANO

readers. Decision-making made by readers of annual reports should bebased upon current, short-term realities of the business. Income which isneither "disposable" nor a good "measure of business efficiency" as longas the current plans of business operation are followed will be of no use
to investors. Since the distant future does not permit any direct prediction, they had best develop their predictions using the income figure whichis the most correct reflexion of short-term realities of a given enterprise,

namely using the "real income" explained above.

ORGANIZATIONAL SLACK AND ADAPTIVE
BEHAVIOR IN THE FIRM
Hideki YosHIHARA
I"The behavioral theory of the firm," as is developed by such persons

as R. M. Cyert and J. G. March, is anew theory of the firm. The theory
is concerned with an explanation and prediction of the behavior of firms.
That is, it is a descriptive theory of firm behavior.

The aim of this article is to examine through a case study the abilityof the behavioral theory of the firm to explain adequately the behavior offirms. The plan of the article is as follows. Section II gives a summaryof a case study which focuses on a cost-down behavior in a certain firm.
In section III, it is shown that the classical economic theory of the firm

can not adequately explain the cost-down behavior. In section IV, theconcept of organizational slack is clarified. In section V, an attempt ismade to explain the cost-down behavior using the concept of organizationalslack. The last section VI provides some concluding remarks.
II

This section presents a summary of a case study which was conductedby the writer. The subject of the case study is the cost-down behaviorof a certain firm.

The cost-down behavior was one cornponent of problem-solving activities which were motivated by a problem and were directed toward finding

a solution to the problem. So, before we enter into the cost-down behavior, we will have to answer the following two questions. (1) Whenthe problem was recognized by the firm? (2) What strategies were usedby the firm to solve the problem?
A problem is recognized when a firm fails to perform up to expectations or when such a failure can be anticipated in the immediate future.

Table 1 shows the movement of sales and profits of the firm which the132 HIDEKI YOSHIHARA
writer investigated. From Table 1, it is rather apparent that thefirm re-cognized problems twice. The firm faced a problem immediately
or during 1962 (business year) for the first time. The second

beforeproblem

was recognized during 1964 and the first half of 1965.

''

Table 1Business Year

Sales

Profits(1956=1oo)(1956=1oo)

1956
1957
1958
1959
1960
1961
1962
1963
1964

1'

1

(the first half)

1'

1 1

1965 (the latter half)

1'

2 3 8*

1966 (the first half)1'

6 o 6*

1'

6 6 5x1966 (the latter half)

1

9 9 7x1'

9 9 3*

les5

1 o

o

1

1 5 7

1 2 3
1

'

o o

4 8

1

6 1

2 6 8

4 1 3

4 2 7

5 o 9

5 9 4

5 6 5

5 8 7

2 9 1

9 o 6

8 5 2

4 2

7 7 o

3*

7 o 9*
9 e e*x Computations are made after doubling sales and profits respectively.

When a firm recognizes a problem, it starts problem-solving activities
to find a solution to the problem. This kind of problem-solving activities
are specifically called problemistic search and problem-oriented innovation,(i)The problem-solving activities taken by the firm to solve the first problem

consisted of the following three strategies. They were (1) the strategy toincrease sales, (2) the strategy to activate developing and commercializing

new products, and (3) the strategy to engage in export trade on a fullscale. And these three strategies were successful in solving the firstproblem.
(1) R. M. Cyert and J. G March, A Behavioral Theory of the Pirm (Englewood Cliffs,
N. J. : Prentice-Hall, 1963), PP. 120-122, PP. 278-279.

ORGANIZATIONAL SLACK AND ADAPTIVE BEHAVIOR IN THE FIRM 133'
It must be pointed out here that these three strategies were formulated

and executed upon the policy of "Sales First," The firm held the belief
that to increase sales led to the success of the firm. The firm's chief at-

tention was concentrated on sales activity, and research and development
activity. Cost problems were outside its attention focus at that time.

In order to solve the second problem, the firm employed the following

three strategies. They were (1) the strategy to increase sales, (2) thestrategy to expand export trade, and (3) the strategy of cost-down. As
has been indicated above, both the first and the second strategies werebased on the policy of "Sales First2' The strategy of cost-down, however,does not come out of that same policy. Before a cost-down strategy canbe formulated, it is necessary for the firm to pay special attention to costproblems in the firm. So, next, we have to examine the factors that turned
the firm's attention toward cost problems,

The second problem was perceived by the firm in the following way.

(1) A slight decrease in sales was accompanied by a sharp decrease inprofits. (2) Return on sales showed a downward tendency. (3) It
became necessary for the firm to reduce the cost of products while competing with foreign companies in export trade.

This perception of the second problem turned the firm's serious attention toward the cost problems in the firm for the first time. The firm im-

mediately set up an Efficiency Enhancement Departrnent (E. E. D.) toanalyse costs in detail.

Cost analysis by E. E. D. revealed that cost situations were steadily

getting worse. It became apparent that general administrative expenses

showed a rather rapid increase. Cost analysis also revealed that bothmanufacturing costs and financial costs showed an upward tendency.
The result of a cost analysis by E. E. D. seemed to convince the ex-ecutives of both the neeessity and the possibility of cost-down. Unlesscost-down was realized, the firm would not be able to expect high profitability and rapid growth in the future. There was much room for cost-down. The top management seemed to reach a judgment in this way.
The cost-down strategy was put into operation from the beginning of
the latter half of 1965. The costs which became the target of the costdown strategy can be classified into four cost classes. The first cost classHIDEKI YOSHIHARA

1sc

was "A Expenses." They consisted of fuel and light expenses, allowances
made for wear and tear, packing and transportation costs, communication
charges and office supplies costs. The second cost class was "B Expenses."
They consisted of repairs charges, travelling charges, entertainment expenses,

expenses for books and newspapers, advertising expenses and miscellaneous

expenses, The third was financial costs, while the last cost class wasmaterial costs.

What was the result of the cost-down strategy? Table 2 givesaroughealcu!ation of the result.

Table 2NSSS-

Xx-

fi kp.':g.eg}

Å~xx

Latterhalf of 1965

First

Latterhalf of 1966

half of 1%6
2.

3.

8

4.

Financial costs

1.

o

L o

Material costs

4.

o

5.

Total

8. 8

2

L 9
5.

2

1O.4

5

8

1O.2

(million of Yen)
The cost-down strategy achieved about a one hundred million yen cost-down every period for three periods successively. We may regard this as
an excellent result. To realize the bigness of a one hundred million yen

cost-down in one period, we only have to compare this figure with theprofits figure. Profits before tax in the latter half of 1965 were aboutfour hundred million yen. In fact, the top management was surprised at
the big figure of the cost-down result which was beyond expectation. In
sum, the cost-down strategy achieved a large amount of cost-down.

III
It is the' theory of the firm that deals with the behavior of firms ineconomics. The theory of the firm is now often called the classicaleconomic theory of the firm.
In the classical economic theory of the firm, it is assumed that (1) the

firm decides the output quantity and the price level to the point whereORGANIZATIONAL SLACK AND ADAPTIVE BEHAVIOR IN THE FIRM 135
marginal costs are equal to marginal revenues, and (2) the firm achieves
the least costly combination of factors of production. In other words, thetheory of the firm assumes that the firm behaves in a perfectly rationalmanner toward the goal of profit maximization. This is a skeleton of theclassical economic theory of the firm, presented as simply as possible.

Is the classical economic theory of the firm able to explain and predict

adequately the actual behavior of firms? Do firms actually behave in theway assumed by the classical theory? This kind of question has beenasked by many students interested in business behavior. At present thefollowing answer is given to the question.(2) The classical economic theoryof the firm can not adequately explain and predict the actual behavior offirms. The theory is primarily a theory of markets and purports to explain at a general level the way resources are allocated by a price system.

It should be noted here that the classical economic theory of the firmmeets insuperable difficulty in explaining the cost-down behavior presented

in the previous section. In the firm whose profits (before tax) in one
period were about four hundred million yen, about a one hundred million
yen cost-down was accomplished in three periods successively. This fact

can not be adequately explained by the classical theory. The marginal
productivity theory is that aspect of the classical theory of the firm which

deals with the costs of production. This theory assumes that the firm
achieves the least costly combination of factors of production. That is, inthe classical theory the firm is assumed to operate under a minimum costcondition. So, the vast sums of the cost-down result which show that thefirm did not achieve the minimum cost condition is a fact to illustrate theinability of the classical economic theory of the firm to explain adequately

the actual behavior of firms. In order to explain satisfactorily the vast
sums of a cost-down result, a new theory of the firm is necessary.

IV
In this section, the concept of organizational slack is clarified.(5)(2) foid.,PP. 15-16.
(3) This section is based on the following. R. M. Cyert and J. G. March, "Organizationalin the Theory of Oligopoly," Quarterly Journal of Economics, vol. 70, (February,
Factors

1956), PP. 53-55;R. M. Cyert, E. A. Feigenbaum and J. G. March, "Models ina

Behavioral Theory of the Firm," Beham'oral Science, vol. 4, no. 2 (April, 1959), P. 82,

P. 94;R. M. Cyert and J. G. March, oP. cit.,PP. ea-38, PP.278-279;C. P. Bonini,
Simulation of Information and Decision Systems in the Firm (Englewood Cliffs, N.
J. :Prentice-Hall, 1ee3), P. 19, PP. 37-38, P. 45,

136 . HIDEKIYOSHIHARA
In the classical economic theory of the firm, as has been seen, thefirm is assumed to be an omnisciently rational system. In contrast to theclassical theory, the behavioral theory of the firm characterizes the firm as

an adaptively rational system. Let us consider this difference from thestandpoint of decision making. .

The classical economic theory of the firm is essentially an explanationof business behavior under conditions of certainty. In the classical theory,the decision maker (entrepreneur, firm) is assumed to know all the coursesof action open to him and also what the outcome of any course will be.
He is also assumed to havea clear cut goal, that is, the goal of profit
maximization. Then, the decision maker selects that one best course ofaction which will maximize profits. In short, the rational behavior of thedecision maker in the theory of the firm is an optimal decision making.
In this optimizing model of decision making, it should be pointed out,
the decision maker evaluates all the alternatives at the same time andselects the one best alternative. Therefore, it can not happen that alter•
natives better than the alternative chosen are missed by the decision maker.
In the optimizing model, the alternative chosen is always the best alternative.

On the other hand, the adaptive behavior of firms may be portrayedin the following way. Figure 1 will be helpful in explaining.

alternatives

Is

CIG

No

search?

c: consequences attached toYeseach alternative

G: goalchoiceFigure 1

ORGANIZATIONAL SLACK AND ADAPTIVE BEHAVIOR IN THE FIRM 137
Let us suppose thata firm recognizes a problem. Then, the firm
will start a search activity to find a solution to the problem. The firm
will discover some alternative solutions by this search activity. Then, thesealternatives will be evaluated. That is, in Figure 1, C is determined andthe comparison between C and G is made. If there is an alternative which
satisfies the goal (C-22G), it will be accepted as a solution to the problem.

And the decision making process or problem-solving process will terminate.
But, if all the a!ternatives discovered on the previous round of search act-

ivity prove not to satisfy the goal (C<G), a new burst of search activity
will be initiated. If persistent search still fails to discover an alternative

which satisfies the goal, then attention will be turned to the goal that analternative must satisfy. The goal will be revised downward so that asatisfactory alternative can be found. With this new goal, the problemsolving process will be again tried. The above description gives us a
' sketch of the descriptive theory of decision making. It may beskeleta1
called the satisficing model of decision making as contrasted to the opti-

mizing model.
In the satisficing model, as is shown in Figure 1, if an alternative underconsideration satisfies the goal, it will be accepted as a satisfactory so!ution

by the decision maker and search activity will terminate. That is, if analternative which exceeds certain criteria of satisfaction is accepted, aneffort to look for new alternatives will terminate. The process of decision
making is coneerned with the discovery of not an optimal but a satisfactory
alternative. Therefore, the alternative chosen by the decision maker is notnecessarily the best alternative. It should be noted that, so long asdecision making is conducted under the satisficing criteria, there always is
the possibility of missing alternatives which are better than the alternativeehosen. And missing of better alternatives gives rise to a form of organizational slack.

In a word, organizational slack is an unrecognized better alternative

which results from the fact that decision making is concerned with thediscovery of not an optimal but a satisfactory alternative.

Then, how does organizational slack show itself in the process oforganizational equilibrium of the firm?

The process of organizational equilibrium, as Chester I. Barnard has

138 HIDEKI YOSHIHARA
made clear, depends upon two interrelated classes of process. They are
the process of effectiveness and the process of efficiency. In the former
process, organizational utility which is the source of inducements offered toparticipants are created. The latter refers to the process in which inducements are distributed among various participants in the organization.
In the process of effectiveness, organizational slack presents itself as

good opportunities missed by the organization. Unrecognized good opportunities are, for example, methods of marketing more profitable than thepresent one, promising investrpent opportunities or production methods lesscostly than the present one, unrecognized by the firm. In the process of
efficiency, organizational slack takes the form of excess payments. Excess
payments are payments of inducements to participants in excess of what isrequired to keep them within the organization. Dividends paid in excessof those required to keep stockholders within the organization, and wages
paid in excess of those required to maintain employees are example of excess payments.
In sum, in the process of organizational equilibrium of the firm organi-zational slack shows itself as unrecognized good opportunities and excess
payments.

Finally, we have to make clear the role which organizational slack
plays in the adaptive process of firms in a changing environment.

When a firm has been successful in achieving its goal for a period oftime in a favorable environment, it becomes satisfied with the achieve-

ments and tends to stop making further efforts to achieve a better performance. Pressures are relaxed in the firm and various forms of organizational slack begins to accumulate. The firm becomes insensitive to good
opportunities. It also tends to distribute excess inducements to participants.

Because of accumulation of organizational slack, the results of operations

do not rise so high in proportion to the rate of improvement of theenvironment. Accumulation of organizational slack acts as a kind ofretarder to the rise of performance of the firm.

On the other hand, when the environment becomes less favorable andthe firm fails to satisfy its goal, the firm begins to make serious efforts toachieve its goal. Within the firm pressures build up and various forms of

QrganizatiQnal slack are reduced, The firm discovers some previously

ORGANIZATIONAL SLACK AND ADAPTIVE BEHAVIOR IN THE FIRM 139
unrecognized good opportunlties for improving the performance throughsearch activity. As to distribution of inducements, it tries new bargaining

and cuts heavily into the excess payments introduced during geod times.
Because of reduction of organizational slack, the firm's performance does
not fall so rapidly as expected from the adverse change in the environment.

Reduction of organizational slack acts as a kind of accelerator to therecovery of performance of the firm.
In short, organizational slack plays an important role in the adaptive

behavior of firms in a changing environment. Adaptive process to chang-ing environment may be said, in one view, to be an accumulation oforganizational slack during good times and its reduction during bad times.

v
In this section, an attempt is made to explain the cost-down behavior
presented in section II with the aid of the concept of organization,al slack.

In the behavioral theory of the firm, as has been discussed, it is assumed that the behavior of firms is adaptively rational. It is assumed to bea satisficing behavior. Each firm has an aspiration level and takes this asa goal to be achieved. When the firm has been successful in achieving
its goal for a period of time, it tends to become satisfied with the result

and to stop making further efforts for better results. Once the firm fails
to satisfy its goal or anticipates such a faiure in the immediate future,
however, it begins to make serious efforts to achieve its goal. These efforts

are problemistic search and problem-oriented innovation. Since the firm
was satisfied and relaxed its efforts while it was successful in achieving its
goal, search activity of the firm is generally, successful in discovering somepreviously unnoticed devices for improving performance. Problem-solving
activities stirnulated by a problem cut heavily into organizational slack whichaccumulated during relatively good times, and this cutting leads to improve-

ment in performance of the firm.

Now, we have to return to the case of cost-down behavior presented
in section II.

The firm which the author investigated had been enjoying both highprofitability and rapid growth till it faced the first problem. There wasno problem calling for serious problem-solving activities of the firm. In

HIDEKI YOSHIHARA

140

the meantime, however, the firm failed to satisfy its expectations and recognized a problem. In order to solve the first problem, the firm employed
three strategies. They were the strategy to increase sales, the strategy toactivate research and development, and the strategy to begin export tradeon a full scale, These three strategies were successful in solving the pro-blem. And the firm again began to enjoy better performance.
It should be noted here that the firm had not turned its serious atten-

tion toward the cost side of the firm till it faced the second problem. It

did not conduct any search activity concerning cost problems. Thus, it
may well be expected that various forms of organizational slack accumulatedon the cost side of the firm. These accumulated organizational slacks
were discovered and reduced by the searching and innovating activities
which were stimulated by the second problem. And reduction in organizational slack resulted in the large amount of cost-down for the three successive periods.

As has been tried above, the behavioral theory of the firm, especiallythe concept of organizational slack, can explain rather satisfactorily the
cost-down strategy and the large amount of cost-down gained by the strategy.

VI
The behavioral theory of the firm came into the world as an alternative theory to the classical economic theory of the firm. It has at its
root a criticism that the classical theory can not adequately explain theactual behavior of firms. And it purports to explain and predict theactual behavior of firms, This article which showed that the behavioral
theory was able to explain satisfactorily the cost-down behavior of a certain

firm which could not be explained by the classical theory affords evidence,
though insufficient, for the adequacy of the behavioral theory of the firm.

KOBE ECONOMIC & BUSINESS REVIEWCONTENTS

NO. 1 (1953)
Present Day Significance of Free Ports ••••••••••••••••••••••••••••• •••••••••••••••Ginjiro Shibata

Development of Devaluation-Problem in Post-War Japan •••••••-•••••••••t•••Kiyozo Mlyata
Japan's Trade with South and South-East Asian Countries ••••••••••••••••••Fukuo Kawata
The Exchange Control Policy in Post-War Japan ••••••••••••••••••••••••••••••Masahiro Ful'ita
On the Official Statistics of Foreign Trade in the Post-War Japan••••••-••Hikoji Katano
On Business History ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••Tadakatsu Inoue

Problems of Regional Industrialization in Japan •••-••••••••••••••-••••••••-••••••••nttinoru Beika

A Research of Wage Income in Post-War Japan ••••••••••••••••••••••••••-•••••••••Nobuko Nose
Revaluation in Japan •••••t•••••• ••••••••-•-••••••••••••-•••••••••••-••••-•••••••••••••••Susumu VVatanabe

Last-In, First-Out Inventory Method under
the Japanese Tax Law •••••••••••••••••••••••••••••••••••••-•-•••-•Munehiro Mas"zakiNO. 2 (1954)
Movements for the Establishment of Free Ports in Japan •••-•••••••••••-••Ginjiro Shibata
Japan's Trade with Latin America in the Post-War Years•••••••••••••••••-•••Fukuo Kawata
The Maritime Competitions in the Early Meiji Era ••••••-•••-•••••••••••-••••••••••Seil'i Sasaki
Two Deflations in the Showa Era•-•••••••••••t••••••••••••`•••••-••••••••••••••••-•-••Masahiro Ful'ita

Estimation of the Effectiveness of Devaluation on
Balance of Payment Deficit in Japan ••••••••••••••••••••••••••••••-••Hihoji Katano

The Recovery Method of the Japanese Shipping Industry
in Post-War Period••••••••••••••••-••••-•••••••-••••••••••••••••••••-Hiromasa Yamamoto

Business Accounting and Tax Accounting ••-••••••••••--•••••••••••-•-••••••••••Susumu Watanabe
Spatial Characteristics of Industries relative to theirBusiness Features •••••••-•••••••••-•••••••••••ny•••••••••••••••••••••-••••••••Minoru Beika
Stages in Factory Organization••--•••••••••••-••••••••••••••••••••-•••-••••••••-•-•••••Tadakatsu inoue

Accounting for Fixed Assets Revaluation ; Recent Views in Japan-••M"nehiro Masuzaki
On the Structure of the National Income Distribution in Japan ••••---••••••••IVob"ko Nosti

NO. 3 (1956)
Industrialization and International Trade •-••••••••••••••••••t••••••••••••••••-•••••••Fukuo Kawata

Econometric Determination of Foreign Exchange Rate of Japanfor 1926-2953••••ny•-•••••••••••••••••••ny--••••••••••••••••••••-••-••••••••ny•••••••Hikoji Katano

Present Status of Japan's Shipping •••••••-•••••••••••••••••••••••••••••••••••••••••••Gtnjiro Shibata

The Distinction between "Shasen" and "Shagaisen" as Historical
Concepts in Japanese Shipping ••••••••••••••••••••••••••••••••-••••••••••••SeiJ'i Sasaki

The Banking System in the Middle Meiji Era (1870-1910) ••••••••••••••••••Masahiro Ful'ita
Disposition of Cost Variances in Japanese Tax Law ••• ••••••••••••••••••••Susutnu Watanabe
Structure of Industrial Districts in Japan •••••••••••••••••••••••••••••••••••••••••••••Minoru Beika

Note on the ZAIBATSU Combines •••••-••••••••••••••••••••-•••••••-••••••••••••••••Taelakatsu Inoue

On the Model--Building for Social Accounting Design •••••••••••••-••••••••••••••••Nobuko Nosti

NO. 4 (1957)
The Impact of Exchange Policy on the International Economy
of Japan during the Period 1930-1940•••••••••••••••••••••-•••••Laurence P. Dowd
A Note on the Recent Trends of Japan's Foreign Trade•••••-•••••••••••••••-••Fukuo Kawata

The Development of Overseas Banking System in Japanin the Meiji Era ••••••-•`-••t••i•-••••••••••••j••••••--JJJ•••••••-••-•---••-Masahiro Ful'ita

More on the Structure of National Income Distribution in Japan ••••-•••••••Nobuko Nosg
Reconstruction of the Theory of Purchasing Power Parity -•-••••••••••••-••-••Hihoji Katano
Tramp Shipping Freights and International Trade •••••••••••-••-•••••••••••••••Ginjiro Shibata

A Little Study on the Transition from the Sailing Vessel to
Steamer in Japan ••••••••-••••--••••••••••••••-••••••••••••••••i•-••••••••••••••Seil'i Sasalei

On the Regulating Policy of Japan against the Shipping
Conference-Especially in relation to the Refusal of
the Entry to New Comers •••••••••••-•••••••••••••-•••••••••••••Hiromasa Yamamoto
The Price Fluctuation Reserve System in Japan••••••••••••••••••••••••••••••Sttsumu Watanabe

Locational Problem in the New Major Branches of JapaneseIndustries from 1954 to 1956 •••••••-••••i••-•••••••••••••••••••••••+•••••Minoru Beika
Business Problems in an International Situation ••••••••••••-••••••••+-••••••••••Tadahatsu Inotte

NO. 5 (1958)
History of Yen-Its Developments in the Japanese Economy (1) ••••••••••-•Hiroshi Shin]'oFundamental Features of the Accumulation of Capitalin the Late Meiji Era t••••••••••-•••••••••••••••••••••••••••••••••••••••Masahiro Fujita

Some Aspects of Japan's Trade with South andSouth-East Asia, 1950-1957•••••••-••••••- ••••••••••••-••••••••••-••••••••Fuleuo Kawata

Curves of Diminishing Values of Japanese Merchant Ships
in Proportion to Their Age -••+•••••••••••-•-••••••-•••••J•-••••••••••••GinJ'iro Shibata

The Modernization of Japanese Shipping based on theTransportation of Hokkaido Marine Products ••••••••••-•-•••••-•••••Sei]'i Sasaki

Development of the Marine Insurance Industry in Japanin the Meiji Period -••••-••••••••••••••••••••••••••••••--•••••••••••i•Hiromasa Yamamoto
A Assimilagao do Imigrante Japonas no Brasil ••••••---••••••••••••-•••••••••••••••••Hiroshi Saito

Rate of Profit and International Specialization of Production ••••••••••••••••••Hihoji Katano
Replacement Cost and Lifo Cost ••••••••••••••••••-•-•-•••••••-•••••-••••••••••••••Susumu Watanabe
Spatial Problems of Business Activities ••••••••••-•••••••-t-••••••-•••••••••••••-••••••Minoru Beika
The Nature of the Morgan Control •-•••••ny--•••••-••••L••••••--••••••-••••••ny-•••••••Tadaleatsu Inoue

On the Effect of Accelerated Amortization for Tax Purpases ••••••••••••••••••Nobuleo Nosti

NO. 6 (1959)
History of Yen-Its Developments in the Japanese Economy (2) •••••••--••-Hiroshi Shinjo
The Central Banking Policy in the Meiji Era •••••••••+••••••••-•••••••••••••••••Masahiro Fuiita

Economic Growth, Balance of Payment and Capital Movement•••••••••••••••Hikel'i Katana
World Trade and Japan's Export-1953-1957- ••••••••••••••-•••••••••--•+•••••-••Fl"kuo Kawata
Alguns Aspectos da Mobilidade de Japoneses no Brasil --••••••••-••••••••••••••••Hiroshi Saito
Problems of Emigrant-Transportation in Japan ••••••••-••+•••••••••••••••Hiromasa Yamamoto
Port Labor Conditions in Japan ••••••-•-••••••••••••••••••-•-••••-•-•••••••••--•••••••-•Giniiro Shibata

The Development of the Concept "Operator" in Japan•••••-•••••••••••••••••••••••• Sei]'i Sasaki
Single Industry Towns in Japan•••-•••••••••••••••••••••••••••••-•••••••••••••••••-••••••••Minoru Beika

On the Application of the Socia! Accounting
Principle to Business Accounting ••-•-•••••••-•••-••••••-••••••-•-•••••••••Nobuko Nose'
Valuation of Work in Process•••••••••••••••••••••ny•••••••••••••••••••••••••••••••••••Susumu Watanabe

Developmental Stages relating to Theories
of Stock-Equity Accounting •••••-••-••••-••ny-••••••••••••••••••••-•••••••••Rynji Takeda
On the Rate of Interest in Business Administration•ny•••••••••••••••••••••••••••••••••••••Jiro Ono

Various Classes of Data Processing by Means of Electronic Computer •••••-ffidee Kitani
Company Histories in Japan ••••-••••••ny•••••••••••-•-•Tadakatsu Inoue and Yoshiro Ikushima

NO. 7 (1960)
Japanese Emigration and Its Effect on International Payments ••••••••••••Ginjiro Shibata
One-to-One Correspondence Between Goods and Factor Prices •••••••••••••••Hikoji Katano
The Gold Standard and Banking Capital in Japan••••••••••••••••••••--••••••••Masahiro F"iitaWorld Trade and Economic Growth•••-••••••••••••-•-•••••••••t•••••••••••••••••••••••••"Fbekuo Kawata

Singularity in the Structure of the Seamen's Union of Japan•••••••••Hiromasa Yamamoto
Some Reflections on Inter -Comparability of Social Accounting • - • • • • • • • • • • • • • • - • Nobuho Nose

The Meaning of Inventories••••••••••••-•••••••••t•••••••••••••••••-••••••••••••-•••-••Sptsumu VPratanabe

Structure of Income Determination on the Balance Sheet•-•••••••••••-••-•••••••Ryu7'i Takeda

On the Value of Stock Rights and its Significance in Corporate Finance ••••••liro Ono
Business Features and Management Policies of Industrial
Enterprises in Local Districts of Japan •••••••••••••••••••-••••••••••Minoru Beika

NO. 8 (1961)
The Industrial System and Industrial Education in Southeast Asia Now on
the Threshold of Reform; and Japan's Position therein ••••••Kiyozo Miyata
Industrial Structure and Educational System in India ••••••••••`•••••-••••••-Tadao Miyashita
Industrial Education in India••••••••••••••••••-•••••••••••••••••••••••••••••••••••••••••Tadao Miyashita
Technical Education in India•••••••••-••••••-••••••••d•••••••-••••••••••••••••••••-•••••Tadao Miyashita

Industrial Structure and Vocational Education in Thailand•••••••--••••••••••••Fukuo Kawata

The Industrial Structure and Industrial Educationin the Philippines •••••••-••••••••••••t••••••••••••••-••••••••••••••-•••Tei-ichi Tamosahi

Industrial Structure and Vocational Education in Indonesia-••--•••••••Hirontasa Yamamoto

NO. 9 (1962)
Problems in Port Administration and Finance in Japan••••••••••••••••-•••••••Giniiro Shibata
Types of Early Modern Japanese Shipowners •••••••--•••••••••••••••••••••••••••••-•••Seiii Sasaki

On the Employment System of Seamen in Japan •••••••-••••••-•••-••••-Hiremasa Yamomoto
A Study on Japan's Invisible Trade •••••••••••-••••••••••`••-••••••••••-••--••••••••••Fukuo Kawata

Problems of Industrial Location relating to Regional Development
in Japan •••••••••••••-••••••••••••-•-••ny••••••••••••••••••••••••-••••t•••••••••••••Attinoru Beiha

The System of Inside Contracting•••••-•••••••••`••••••••••••••`•••••••••••••••••••••••Tadakatsu Inoue

A Critique on Professor Mahalanobis Model of Economic
Planning in India ••••••-••--•••••••••••-••••••••••-••••••••••••••••••ny•••••••Hikoji Katano

National Income Concepts: Reconsidered •••••••••••••••-••••-••••••••••••••••`••••••••••Nobuko Nosti

Some Problems of the Installment Basis ••-••••••d-•-••••••••••-••••••••••••••••••Susumu JVatanabe

On the Purposes of a Going-Concers Valuation and its Natures `•••••••••••••••••••Jiro Ono
Die Betrachtungsweise der neueren betriebswirtschaftlichen
Kostentheorie ••••••••••-•••••••••••••••••••••••••••••••••••••-•-•••••••-•Tetsuo Kobayashi

NO. 10 (1963)
Revised Accounting Provisions of the Commercial Code of Japan-with Special Reference to the
Corporation Income Tax Law-••••••••••••••••••••••••••••••••••••Susumu WatanebeSocial Accounting as an Instrument of Policy •d•••••••••••••••••••-••••••••••••••••••••Nobuko Nose
Industrial Estates for Small Businesses in Japan•••••••••t••••••••-•••••••••••••••••Minoru Beika

Rise of the Mutual Financing Business in Japan ••••-•••-••••••••••••••••••••tTadakatsu lnoue

The Introduction of European-Style Vessels in Japan:
A Historical Survey •-•••••••••••••••••••••••••••••••-••••••••-•••••••••••••••••Seil'i Sasaki

On Industrial Relations in Japan's Shipping Industry-withSpecial Concern on Personnel Management- • • • - • • • • • • • • - • • Hiromasa Yainamoto

Regional Disparities in the Brazilian Economy:
A Case Study on the Brazilian Northeast••+••••••••••-••-•Yashiaki IVishim"leaiThe Basic Concepts of Going-Concern Valuation••-•••--••••••••••••••••••--••••••••••••-••••Jiro Ono

A Study on the Current Cost Theory of Fritz Sehmidt •••••••••••••••-••-••••••••lsao Nakano
Die Kostenbegriffe fUr die betriebliche Planung••-•••••••••••••••••••-••••••••••Tetsuo Kobayashi

Introducing Prof. Shinjo's "History of the Yen"•••••••••+••••••••••-••-••••••Zentaro Matsumura

NO. 11 (1964)
Accounting Profit and Taxable Incorne •••••-••••••••J••-•••••••-•••••••••••++•••Susumu Watanabe
On Integration in Economic Accounting•••-••••••••••-•••••••++••••••••••••••••---••••••••Nobuko Nosti--

Uber ,,Cost Accounting Standards" in Japan •••••••••••••••••••••••••t•••-••••••Tetsuo Kobayashi
A Note on the Lohmann-Ruchti Effect ••••ny••••+--•••••••••••••••••-••••••••••••••••••-••Isao Nakano

Management Approach to Regional Development Problems in Japan•-•••••-•Minoru Beilea
A Research Report on Office Automation of Middle-Scale Cities in Japan ••••••liro Ono
Die Geschichte der Privatisierung••••••••-•••••••••••••••••••••••-•-••••••--••••••••-•••••Masaya Okada

Recent Trends in the Balance of Payments of Japan ••••4•••••--•••••••••••••-•Fukuo Kawata
Long-Term Finance in Post-War Japan (1) ••••-•••••••-•-••••+••••••••-•••••••••-Masahiro Ful'ita

A Chronological Table of Modern Japanese Shipping-No. 1 ; 1600A"1799•-••••Seil'i Sasahi

The Continuous Employment of Seamen in American Shipping
Industry •••-i•t•••••••••••••ii-••••••••••••-•••••••••i•-•••i-•••••-•••-•••Hiroenasa Yamamoto

Some Problems of the Brazilian Economic Development Plan
(1963-1965) -••••••••••-•-•••••••••-••••-•••••••-•••••••+••••••-••••••Yoshiaki Nishimukai

NO. 12 (1965)
Special Depreciation and Reduced Entry•••••-i••••••--•--••••••L---•-••-••-••••••Susumu Watanabe
Electronic Data Processing System in Japan •-••••••••••••••••••••••••`•••••••••••••••Minoru Beika

A Chronological Table of Modern Japanese Shipping-No. 2, 1800N1912-•••••SeiVi Sasaki
Overseas Operations of Japanese Business Enterprises in Brazil •••••••••Tadakatsu Inoue
A Note on Economic Accounting for Government Sector•••••••••••••••-•-•••••••••Nobuleo Nosti
International Liquidity and the Tokyo Meeting of the International
Monetary Fund••ny•••-••••••••••••••••••••••••-•••••••••••••••••••••••••••••••Masahiro Fuj'ita

Intersectoral Transaction Table with Endogenous Foreign Trade Sector
in the Indian Economy: 1955/ss ••••••••••••-•••••••••••••••••d••••••••Hikoji Katano

The System of Reserved Members for Seamen before World War II-The Employment System of Seamen in Japan-•••-••Hiromasa Yamamoto
On the Automation of Banking in Japan•--•••••••••••••••••••t••••••••-••••••-•••-•••••••••••liro Ono

A Presente Etapa do Desenvolvimento Econ6mico do Japao •-•••••••Yoshiaki Nishimukai
Kostentheorie und dispositiver Faktor •-••ny•••••••••••••••••••••ny••••••••••••••••••Tetsuo Kobayashi
Grundprobleme der Privatisierung •••••••••••••-••••••••••••••••••-••••••ny••••••••••••••Masaya Okada

NO. 13 (1966)
Annual Income under the Corporation Income Tax Law ••••••••••••••••••Susumu rvatanabe
Trade Controls in Occupied Japan (1945tvl949)•••••••••••••••••••--•••••••••-•••••Fukuo Kawata

Patterns of Domestic Shipping Services-Characteristics of Japanese Coastwise Shipping- ••••••••••••••+SeiJ'i Sasaki
Approaches to the History of Individual Business Units •••••••••••-••••ny••••Tadakatsu lnoue
Cumulated Cost Ratios for the Japanese Economy in 1955•••••••••••••••••••-••••Nobuleo Nosti
Accelerated Growth of National Income ••••••••••••••••-•••••••••••••••••••••••••••••••Hikoji Katano

Technological Development and Labour Relationsin the Japanese Shipping- Industry •••••••••••••••••••••••••••Hiromasa Yamamoto
Brazilian Position in the Latin American Free Trade
Association ••••••••••t•`•••••••••••••••••••••-•••••••••••••-ny••••••••••Yoshiaki Nishimukai

Information Specification for Business Management (I)-A Case Study--••••••i•••••••••••••••••-••••••••••••••••••••••••••••••••••••-••--••Jiro One
Die Privatisierung der PreuPag •••-••••••-••••••••••••••--••-•••••--••t••-••••+•••••••t•Masaya Okada

NO. 14 (1967)
A Return on the Confirmed Settlement of Accounts ••••••••••••••••••-•••••Susumu rvatanabe

Problems of Regional Industrial Development
Relating to National Planning in Japan -•••••••••••b•-••-••-•••••••-•Minoru Beiba

The Development of Japanese Trade with the British
Commonwealth in Asia••-•••••••••••-••••••••••••p••-•••••••••••••••••••••••F"kuo Kawata

On the Kihansen (Japanese Wooden Coastwise Vessels) •••••••••-•••••••••••••••••Seil'i Sasaki
Approaches to Company History •••••ny•ny•-••••••••••••••-•••••••••••••••••••••••••••••Tadakatsu Inoue

Cumulated Cost Ratios for the ECAFE Countries -•••••••+•••••••••••••••••••••-•-•••Nobuko Nosti
International Liquidity Controversy in Japan (1) ••••••••••••••-•••••••-•-•••••Masahiro Fujita

Investment Criterion For Maximizing
the Rate of Capital Accumulation•-•••••••••••••+•••••••-••••-••-•••••••Hikoji Katano

Peculiarities of Maritime Labor -with special reference to the Supplyof Maritime Labor- -••t••••••••••-•••••••••••••••••••••••••••••••••Hiromasa Ya7namoto

Los Estudios Del Brasil En El Jap6n-Con Referencia a las Ciencias Sociales ••••••••••••-•••••Yoshialei Nishimukai

KOBE UNIVERSITY ECONOMIC REVIEW 1967
Edited by Faculty of Economics,
Kobe University, Kobe, JapanCONTENTS
Adam Smith on Demand••••••••••--`•••••••••••••••••••+•••••••••••••••••••••••••••••-

Kan-ichi Minakata

An Aspect of Industrialization in Japan-In Its Formative Stage- •••••••••••••••••••••••t••••••••••••••-••••••

Hiroshi Shimbo

On Mr.N.Kaldor's Growth Model •••-•-••••••••••••••••••••-•--••-•••••••••--••••••••••

Nobuo Ohishio

For the Development of the Comparative Costs Theory•ny••-•••••• ••••••---•••Kiyoshi themoto

A Note Towards the definition of the Term Ceorl-An Analysis of King Ine's Laws-•••••••ny•••-••••--•••••••••ny•••-•

Ha]'ime Togami

THE ANNALS OF THE SCHOOL OF
BUSINESS ADMINISTRATIONKOBE UNIVERSITY 1967
Edited by The School of Business Administration,

Kobe University, Kobe, JapanCONTENTSThe Consumed-basis Thought in Cost Accounting ••-•••••••••••••••••••••••••••••-Otojiro Kubota

Formation of Medium and Small Industries and their
Importance from a Quantitative Aspect ••••••••••-ny••-•••••••••--••••Noboru Inaba

Insurance Industry in the Formative Stage of Modern
Industries during the Meiji Period of Japan-•••••••••••••••••Kazuya Mizushima

Urform und Entwicklung der pagatorischen
Buchhaltung und Bilanz in Japan bis zum Jahre 1930••••••Masaatsu Takada

Der Abweichungen zwischen dem Unternehmungsgewinn
und dem steuerpflichtigen Einkommen in Japan ••••••••••••••••••Rynji Takeda

On Stability of the Balance of Payments Adjustment Mechanisms •t••••Akihire Amano

KOBE UNIVERSITY LAW REVIEWInternational Edition 1966

Edited by Faculty of Law,
Kobe University, Kobe, JapanCONTENTS
Seventy-years of Japanese Private International Law :A Historical Review •••••••••••••••••••••-••••••••-•••••••'•

Discovery in Japanese Criminal Procedure •-••••••-•••••-•••••••••-••-•••••••••••••••••••••Taro Kawakami
Shigetsugu Suzuki

THE RESEARCH INSTITUTE FOR ECONOMICS AND
BUSINESS ADMINISTRATION. KOBE UNIVERSITY
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HISTORICAL SKETCH
In 1919, a research organization named the Institute for Commerce wasfounded in Kobe Higher Commercial School, one of the chief predecessorsof Kobe University, with a gift made by F, Kanematsu & Company, aleading mercantile firm in Kobe. The organization was designed to carryon and facilitate integrated research on business and commerce and toformulate and publish the results of these studies and investigations in suchform as to make them available to the business community.
With the founding of Kobe University of Commerce, successor of Kobe

Higher Commercial School, in 1929, the Institute extended its research
activities by adding several divisions. One was the famous Latin-American
Library, which soon became the center of research in this field in Japan.
A room for statistics equipped with various computing machines was estab-lished and began publication of "Juyo Keizai Tokei" monthly and "Sekai

Boeki Tokei" annually. A filing room was prepared to deposit press
clipping files systematically arranged by topics and dates. Another room
was designed to become the center of all possible original records and data

having to do with the beginning and progress of Japanese business.

On the campus of Kobe University of Commerce, another organization
named the Institute for Business Mechanization was founded in 1941 utiliz-

ing business machines donated by the IBM Corporation and others. With
Professor Yasutaro Hirai as its head a broad and forward-looking plan forbusiness mechanization in Japan was developed.

In 1944, Kobe University of Commerce changed its name to Kobe
University of Economics. After the war, however, the University was
consolidated with three other colleges in Hyogo Prefecture to become Kobe
University. With this development, the two Institutes were also amalgamatedinto the Research Institute for Economics and Business Administration,
Kobe University. At present, the Institute, with its seventeen full-time
professional staff members, carries on studies and investigations in inter-national economy, business administration, and business mechanization in
Japan.

LOCATION AND BUILDINGSThe Research Institute for Economics and Business Administration is

located on the campus of Kobe University, Rokko, Kobe. It is a threestory building named the Kanematsu Kinenkan and has a floor space ofabout 2,900 square meters, which includes a president's room, forty-one
offices, six rooms used as a library, a room for statistics, three conference

rooms, etc. Adjoining is a one-story building recently built to installbusiness machines,

ORGANIZATION
Under the directorship of the president, the Institute operates with two

research groups, each has five sections respectively. Each research groupand its sections are as follows:

A Group of International Economy(1) International Trade(2) Economy of Latin-America(3) Maritime Economy(4) International Finance(5) International Law of Economy

B Group of Business Administration(1) Business Administration and Business Mechanization(2) Accounting(3) International Management(4) Business Statistics(5) Labor Problems
Besides the regular work of the Institute organized in this manner,research committees may be created to carry on any special work requiring

the joint study of academic and business circles. At present, there arethree committees, that is, the Finance Committee, Latin-America Committee,

and International Economy Committee.
For convenience and greater efficiency in carrying out its research
activities, the Institute has a general office which is responsible for, 1) thecollection and preservation of a comprehensive collection of books, periodicals, pamphlets, and original records and data of finance, trade, commerce,industry and business generally; 2) the classification, cataloguing, indexing,

arranging, annotation and compilation of these research materials; and 3)

the formulation and publication of the results of the investigations andstudies accomplished by the professional staff members of the Institute.
As an affiliated institute, the Documentation Center for Business Analy-

sis has been recently established. It is the first systematic information
facility in the field of business administration in Japan that has been re-cognized and authorized by the Ministry of Education. The purpose is tocollect and to make intensive control of all kinds of materials on businessadministration and to make them available to scholars, universities, govern-ments, and business world with the aid of modern documentation techniques.

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