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Which way for Japanese capitalism?

by Florian Coulmas

THE END OF DIVERSITY?: Prospects for German and Japanese Capitalism, edited by Kozo Yamamura and Wolfgang Streeck. Ithaca and London: Cornell University Press, 2003, 401 pp., $24.95 (paper), $49.95 (cloth).

This book is about the future of capitalism and its national varieties. “Free market capitalism and democracy for all” is the sermon preached by development-aid dispensers in the rich nations of the Northern Hemisphere, whose representatives like to believe that their countries’ wealth is the result not of the exploitation of the rest of the world but of the felicitous combination of capitalism and democracy. If only the poor countries of the South would follow their lead — welfare and peace would reign supreme around the world.

This plea obscures the fact that capitalism and democracy come in different forms. The dissolution of the Soviet Union has been celebrated as a triumph of capitalism, but this is not the end of history.

In the age of globalization it is no longer a question of whether there is any alternative to capitalism; but rather, what kinds of capitalism are there? Should recipients of Japanese development assistance in the third world adopt the Japanese model of capitalism? What if assistance comes from various sources?

What kind of capitalism is best? Just a couple of decades ago, the Japanese way of organizing the economy was not just good for Japan but also a promising model to be emulated by others, while American-style capitalism was on the defensive. The tables have turned, but the question of whether there will be one capitalism in the future, or many, remains. International integration through trade regimes, technological innovation and unrestricted communication the world over have increased capitalism’s relevancy.

After their cities and industries were laid waste in World War II, Japan and Germany built institutional frameworks for their national economies that were suitable for the reconstruction task at hand and remarkably competitive internationally. Both countries rose from the ashes to become economic star performers. Japanese and German capitalism appeared to be viable alternatives to the Anglo-American model. However, the “economic miracles” didn’t last.

The past 15 years have seen stagnation and economic crisis in Germany and Japan, though for different reasons. Roughly at the same time that Japan’s economic bubble abruptly deflated, forcing far-reaching economic, financial and social reforms, West Germany found itself confronted with the formidable task of rebuilding East Germany to the tune of about $100 billion a year, the largest wealth transfer in economic history.

Japanese and German capitalism were thus put to the test by local events that triggered calls for reform. In both countries the possibilities of state intervention were pushed to their limits. Government funds were drying up, as public debt rose to frightening levels. Whether the ensuing changes will lead to convergence of Japanese and German capitalism on the Anglo-American model of liberal market-driven capitalism is the main question addressed in this thoroughly researched and informative book.

The editors, economist Kozo Yamamura and sociologist Wolfgang Streeck, have brought together a roster of internationally renowned experts on the German and Japanese economies and their institutional structures to discuss whether the performance crisis observed in both countries since the early 1990s will bring about “the end of diversity.” They examine the peculiarities of Japanese developmentalism and German consensus economy, which differ significantly from the political-economic institutions of liberal capitalism and are, therefore, referred to as “nonliberal.”

In this context “nonliberal” means something like nationally embedded, organized, state-guided or institutionalized capitalism. Among the more salient features of this kind of capitalism are a strong welfare state in Germany, and a penchant for state intervention and industrial policy in Japan.

In both countries, market forces, especially in the labor market, are being curbed by involving organized labor in corporate governance and, by consequence, rating job security higher than shareholder value. What is more, both in Japan and Germany, the bureaucracy wields more power than in Anglo-American economies.

Does the crisis of the Japanese and German economies indicate that nonliberal capitalism will be blown away by the cold winds of globalization? Will national economies lose their distinctiveness before long? Recent changes in the two countries point in the direction of more liberal ways, deregulation and less direct state control, as well as to a weakening of organized labor. Nonetheless, it is not a foregone conclusion that this will lead to a clean sweep by the Anglo-American model of liberal capitalism and self-regulating markets.

The 11 chapters of this book offer in-depth analyses of the various economic, financial and social aspects of the ongoing transformation of German and Japanese capitalism from which it must be concluded that a number of changes are inevitable. It also emerges, however, that the embedded capitalism of the German and Japanese kinds had, and continue to have, their strong points.

At times of rapid change they are inflexible and, bound by legal-political and organizational arrangements, cannot react quickly to changing conditions. But they are very efficient at times of consolidation, quality improvement and maintenance of high standards.

The book’s bottom line is that diversity will survive. The unqualified convergence of the German and Japanese models to a liberal market-driven shareholder value model is not likely to happen. It is not just nonliberal capitalism that is embedded, for market processes are everywhere mediated by a host of legal provisions, organizational structures and educational traditions. Capitalism cannot operate without them. Certain features of nonliberal industrial and capital relations of Japanese and German corporate culture will, therefore, be retained giving rise to hybrid models.

While this book concentrates on comparing and contrasting Japanese and German capitalism with Anglo-American capitalism, it should not be overlooked (and is not overlooked by its authors) that, notwithstanding a number of striking parallels, the German and Japanese models also differ from each other. Elucidating the characteristics of these two varieties of capitalism is but one of the merits of this well-argued book.