Why do Institutions Change? Case Studies of Changes in the Local Government Finance System in Japan

Abstract

This article discusses why and how institutional change occurs, incorporating power and resources into the analysis, using the example of the relationship between the central government and local governments in Japan before and after World War II. Institutional change is not the result of “rational” choices made by the institutional designers, but the “unintended consequences” of deviant behavior of the agents under their control that deviates from the guidance of the institutional designers.

Keywords:

• power
• resource
• conflicts
• institutional change
• unintended consequences

JEL Classification Codes:

• B52
• H72
• H77

Disclosure Statement

No potential conflict of interest was reported by the author.

Notes

1 John R. Commons ([1934] 1990) also argues that institutions are collective actions that restrain, liberate, and extend individual behavior.

2 The city data used in this article are digitized prewar city data that had been forgotten and stored in the “Municipal Specialized Library.” The data on local government fiscal accounts since 1936 do not exist in official government statistics (budget data are used) and are therefore very valuable.

3 Although Japan was also affected by the Great Depression, Korekiyo Takahashi, known as “Japan’s Keynesian,” assumed the post of Minister of Finance in December 1931 and adopted bold economic policies until his assassination in the “2.26 Incident” in February 1936, achieving good economic performance with high growth and low inflation. After Takahashi’s assassination, however, the country entered an era of “wartime-controlled economy” (Shizume 2009).

4 Henmi (1973) discusses in detail the failure of education administration by the central government and the response of local governments.

5 In Japan, prefectures needed permission from the central government to issue municipal bonds until FY2005. The amount of bonds authorized is used as the explained variable.

6 The ratio varies depending on the financial strength of the prefectures.

7 Current account balance ratio = general funds allocated to current expenses/current general funds. In other words, it is an indicator of how much of the general funds allocated to expenses that must be paid, such as personnel expenses, aid expenses, and bond expenses, account for the current general funds. The higher this ratio is, the worse the financial condition is, which means that there is no room for investment in infrastructure that can be spent discretionarily.

Additional information

Notes on contributors

Masato Miyazaki

Masato Miyazaki is a professor at Saitama University.