Imposed Efficiency of Treaty Ports: Japanese Industrialization and Western Imperialist Institutions

• Published date: 01 May 2014
• DOI: http://doi.org/10.1111/rode.12082
• Author: Masaki Nakabayashi
• Date: 01 May 2014

Imposed Efficiency of Treaty Ports: Japanese

Industrialization and Western Imperialist

Institutions

Masaki Nakabayashi*

Abstract

An intrinsic feature of a pre-modern society is in its fragmentary markets. Fragmentary markets are more

likely to fail in the coordination of resource allocation. However, if a concentrated market is exogenously

formed and the market could provide the only price to local markets, the market can work as a pivot of

coordination for development. Treaty port markets imposed on nineteenth-century Japan worked as the

pivot and ignited Japan’s industrialization. We examine the silk-reeling industry, which was the major

export industry and which led to Japanese industrialization, and the role of treaty ports in its development.

1. Introduction

Key Role of Treaty Ports Outside of Western Empires

The expansion of impersonal market trades has been the driving force of modern eco-

nomic growth. Third-party governance that emerged in Western states has thus far

been the only institutional arrangement to have stimulated this type of development

(North, 2005). Indeed, the “Westernization” of non-Western countries has generally

accelerated the growth of economies in the long term (Parente and Prescott, 1994;

Hall and Jones, 1999; Acemoglu et al., 2001). Market-oriented institutions invented in

the North Atlantic spread across the world from the mid-nineteenth century under

the imperialist integration of the global economy. The nexus of these institutions, rep-

resented by the free trade regime and the international financial system, functioned as

world-wide “public goods” (O’Brien, 2002). By the early twentieth century, almost

every economy had been incorporated into the global free trade regime. The question

then arises as to how some economies have been Westernized while others have not.

Synchrony of external openness and economic growth has been rigorously estab-

lished (Cies´lik and Tarsalewska, 2011). As for potential causalities between trade

openness and institutional changes, both directions have been argued for. Regions

annexed by empires or under the control of imperialist power generally enjoyed the

benefits of increased trade volume in a market integrated under efficient institutions

(Ferguson and Schularick, 2006 and Mitchener and Weidenmier, 2008), at least as

long as imperialist policies focused on market integration, though this did not neces-

sarily hold otherwise (Price, 2003). Meanwhile, Faber and Gerritse (2012) opines that

* Nakabayashi: Institute of Social Science, The University of Tokyo, Hongo 7-3-1, Tokyo 103-0033, Japan.

Tel: +81-3-5841-4936; Fax: +81-3-5841-4905; E-mail: mn@iss.u-tokyo.ac.jp. The author appreciates com-

ments from the anonymous referee, Mathias Hoffmann, Kaliappa Kalirajan, Eline Poelmans, Tetsushi

Sonobe, Kaoru Sugihara, Patrick O’Brien, Albrecht Ritschl, and the participants of Midwest International

Trade Conference Spring 2012, Rimini Conference in Economics and Finance 2012, and the workshops at

Osaka University, National Graduate Institute for Policy Studies, London School of Economics, The Uni-

versity of Tokyo, Tohoku University, Keio Univesity, and K.U. Leuven. JSPS Grant-in-Aid No. 22243022.

Review of Development Economics, 18(2), 254–271, 2014

DOI:10.1111/rode.12082

The copy right line for this article was changed on 201 after original online publication.

©201 The Authors. Review of Development Economics Published by John Wiley & Sons Ltd.

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use

and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations

are made.

January 709

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trade openness led to institutional changes. Japan, along with China, maintained inde-

pendence from the Western empires, was forced to join the free trade regime before

institutional modernization, and finally accomplished institutional changes and indus-

trialization through learning (Hsiao and Hsiao, 2004), providing an appropriate

example.

Pre-modern economies often consist of diverse and fragmentary markets, each of

which is governed by a specific institution. In such a context, country-wide coordina-

tion failure might be expected. For economies in which the coordination failed, the

outcome was not simply something that had yet to happen. Domestic commodity and

factor markets governed by domestic institutions, which were often characterized by a

personal and relational governance mechanism, could work together as obstacles to

the Westernization of governance toward a nation-widely integrated market.

However, if a concentrated market is exogenously formed, and if the market pro-

vides “the” price information to local markets, the market could serve as a pivot for

the coordination of local and diverse markets into an integrated market. East Asia in

the late nineteenth century provides such an example. In East Asia from the late

nineteenth to the early twentieth centuries, international commodity trades were gov-

erned under Western imperialism and domestic trades were governed by independent

states. East Asian countries that faced military threats from the British or the Ameri-

cans were forced to open several ports as “treaty ports,” to allow Western merchants

to settle, to admit consular jurisdiction and to commit to free trades under third-party

enforcement by the consuls within treaty port concessions from the mid-nineteenth

century. As a result, in several treaty ports, such as Yokohama in Japan and Shanghai

in China, there was a large influx of exports from the inland areas. In addition, the

ports were connected to international telegraph networks through Western trading

companies and to financial markets through Western banks. While treaty ports then

grew as extremely concentrated commodity markets, where information about

foreign markets was rapidly shared, the inland—outside of the treaty ports—belonged

to the sovereignty of the domestic states in Japan and China, neither of which was

colonized.

Another related point is that significant differences exist between the “first age” of

globalization in the nineteenth century and the “second age” driven by the financial

sector from the 1980s. In the first age, as compared with the second age, capital flows

between developed and developing economies were less responsive to economic con-

ditions and yields were more weakly synchronized (Mauro et al., 2002; Clemens and

Williamson, 2004). The commodity market therefore had a larger relative importance

as the driving force behind the world-wide economic growth.

Furthermore, the stipulations of the treaties between Japan or China and Western

countries enhanced the relative importance of the efficiency of treaty port markets.

While both Japan and China opened treaty ports for the free trade of commodities,

neither officially allowed foreigners to engage in any business outside of the treaty

ports. This implied that the financial claims of foreign businesses inland were not pro-

tected by the domestic court. Thus, treaty ports played a critical role as centers of

businesses.

East Asia in the First Age of Globalization

China and Japan were incorporated into the global market by imposed free trade in

1844 and 1859, respectively. Japan began to show clear signs of modern economic

growth in the mid-1880s. Responding to the free trade regime, relative prices drasti-

IMPOSED EFFICIENCY OF TREATY PORTS 255

©201 The Authors. Review of Development Economics Published by John Wiley & Sons Ltd.7