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Greater flexibility, greater growth


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Greater flexibility, greater growth a comparative study of labor and capitalist models in Japan, Germany, and the United States
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Thompson, Jay Arthur
University of South Florida
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Free market
Government control
Post World War II economic policy
Dissertations, Academic -- Government and International Affairs -- Masters -- USF   ( lcsh )
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theses   ( marcgt )
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ABSTRACT: After the end of the Second World War, three major economic powers emerged. Japan in Asia, Germany in Europe, and the United States in North America, quickly became the economic engines of their respective regions. Japan, with its "catch-up" and producer centered economy, grew so fast and so large, that there were worries in America that the Japanese would end up winning the economic war. West Germany, supported by the capitalist world, became a miracle economy, and the economic power of the European Union. In the past fifteen years however, these two economies have faltered and stagnated. In Japan, the nineteen nineties are referred to as the "lost decade". In Germany, unemployment continued to grow throughout the decade, and in the former East Germany remained at near catastrophic levels. Much has been written about the reasons for this, referring to the quick and somewhat chaotic reunification of Germany, and the focus of the Japanese on "catching up" to the West. Yet these are not adequate explanations. The problems lie deep in the systemic level of both economies, particularly in the area of labor policies, both in formal written laws and policies prevalent in Germany, and the informal cultural guarantees that are seen in the Japanese systems. The area of the non-liberal capitalist model, particularly the banks and capital investment also contributes to the continued economic stagnation of these two states. Comparing these to the liberal economic policies in the United States, this thesis will show that greater flexibility in both the capitalist and labor models allow sic for greater success in the globalized economy.
Thesis (M.A.)--University of South Florida, 2007.
Includes bibliographical references.
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by Jay Arthur Thompson.
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Greater flexibility, greater growth :
b a comparative study of labor and capitalist models in Japan, Germany, and the United States
h [electronic resource] /
by Jay Arthur Thompson.
[Tampa, Fla.] :
University of South Florida,
3 520
ABSTRACT: After the end of the Second World War, three major economic powers emerged. Japan in Asia, Germany in Europe, and the United States in North America, quickly became the economic engines of their respective regions. Japan, with its "catch-up" and producer centered economy, grew so fast and so large, that there were worries in America that the Japanese would end up winning the economic war. West Germany, supported by the capitalist world, became a miracle economy, and the economic power of the European Union. In the past fifteen years however, these two economies have faltered and stagnated. In Japan, the nineteen nineties are referred to as the "lost decade". In Germany, unemployment continued to grow throughout the decade, and in the former East Germany remained at near catastrophic levels. Much has been written about the reasons for this, referring to the quick and somewhat chaotic reunification of Germany, and the focus of the Japanese on "catching up" to the West. Yet these are not adequate explanations. The problems lie deep in the systemic level of both economies, particularly in the area of labor policies, both in formal written laws and policies prevalent in Germany, and the informal cultural guarantees that are seen in the Japanese systems. The area of the non-liberal capitalist model, particularly the banks and capital investment also contributes to the continued economic stagnation of these two states. Comparing these to the liberal economic policies in the United States, this thesis will show that greater flexibility in both the capitalist and labor models allow [sic] for greater success in the globalized economy.
Thesis (M.A.)--University of South Florida, 2007.
Includes bibliographical references.
Text (Electronic thesis) in PDF format.
System requirements: World Wide Web browser and PDF reader.
Mode of access: World Wide Web.
Title from PDF of title page.
Document formatted into pages; contains 84 pages.
Adviser: Dajin Peng, Ph.D.
Free market.
Government control.
Post World War II economic policy.
Dissertations, Academic
x Government and International Affairs
t USF Electronic Theses and Dissertations.
4 856


Greater Flexibility, Greater Growth: A Comparative Study Of Labor And Capitalist Models In Japan, Germany And The United States by Jay Arthur Thompson A thesis submitted in partial fulfillment of the requirements for the degree of Master of Arts Department of Government and International Affairs College of Arts and Sciences University of South Florida Major Professor: Dajin Peng Ph.D. Susan Northcutt, Ph.D. E arl Conteh Morgan Ph.D. Date of Approval: November 2, 2007 Keywords: free market, government control, unions, reunification, post world war ii economic policy, globalization, liberalis m, neo liberalism, capitalism, non liberal Copyright 2007 Jay A. Thompson


Dedication This thesis is dedicated to my dear wife Michelle who has shown more support, patience and love than one should have any right to as k for during this process.


Acknowledgments This thesis would never have been possible without the knowledge, support, patience and contributions of my advisor Dr. Dajin Peng. I also gratefully acknowledge the support and contributions of the other memb ers of my thesis committee, Dr. Susan Northcutt and Dr. Earl Conteh Morgan. I would like to thank Ms. Lois Henton of Pasco Hernando Community College for her assistance in the proof reading and grammar corrections. I also thank the Department of Governme nt and International Affairs of USF personnel for all of their work in support of the thesis, especially Ms. Doris Kearny. Finally, I thank my family and friends for the innumerable acts of assistance during this process.


i Table of Contents List of T ables i ii Abstract iv Chapter One: Introduction 1 Research Problem 3 Thesis and Methodology 4 Conceptualization 5 Literature Review 5 Chapter Two : Economic Performance 12 GDP 12 Inflation 17 Unemployment 22 Conclusions 27 Chapter Three : Genesis of the German and Japanese Economic System s 28 Chapter F our : Negotiations at the System Wide Level: The German Model 34 Conclusions 42 Chapter Five : Informal Guarantees Carved Into Stone: The Japanese Model 44 Conclusions 52 Chapter S ix : The Spoils of Victory: The United States Model 54 Conclusions 64 Chapter Se ven : Catching Up and Slowing Down: Comparisons and Contrasts 66 of the United States, Japan and Germany Influence of Labor on Government and the Influence of 67 Government on Labor Formal Guarantees and Informal Guarantees: What do they 69 Actually Guarantee? Banks and Capital Markets 72 Producer Driven vs. Consumer Driven 74


ii Challenges of Globalization 75 Conclusions 77 Chapter Eight : Greater F lexibility Greater Growth: An Accurate Assumption? 78 Works Cited 82


iii List of Tables 1. US GDP 1970 2000 13 2. German GDP 1970 2000 14 3. Japan GDP 1970 2000 16 4. United States Growth in Inflation Rates, 1970 2000 18 5. German Growth in Inflation Rates, 1970 2000 19 6. Japan Growth in Inflation Rates, 1970 2000 21 7. US Unemployment Rates, 1970 1999 23 8. German Unemployment R ates 1970 1999 24 9. Japan U nemployment R ates 1970 1999 26


iv Greater Flexibility, Greater Growth: A Comparative Study of Labor and Capitalist Models in Japan, Germany and the United States. Jay A. Thompson ABSTRACT After the end of the Second World War, three major economic powers emerged. Japan in Asia, Germany in Europe, and the United States in North America, quickly became the economic engines of their respective regions. J producer centered economy, grew so fast and so large, that there were worries in America that the Japanese would end up winning the economic war. West Germany, supported by the capitalist world, became a miracle economy, and the economic power of the European Union. In the past fifteen years however, these two economies have faltered and Germany, unemployment continued to grow throughout the decade, and in the former East Germany remained at near catastrophic levels. Much has been written about the reasons for this, referring to the quick and somewhat chaotic reunification of Germany, t. Yet these are not adequate explanations. The problems lie deep in the systemic level of both economies, particularly in the area of labor policies, both in formal written laws and policies prevalent in


v Germany, and the informal cultural guarantees tha t are seen in the Japanese systems. The area of the non liberal capitalist model, particularly the banks and capital investment also contributes to the continued economic stagnation of these two states. Comparing these to the liberal economic policies in the United States, this thesis will show that greater flexibility in both the capitalist and labor models allow for greater success in the globalized economy.


1 Chapter 1 Introduction After the end of the Second World War and the beginning of the new g lobal economy, three economies began to grow and then ultimately dominate the world economic system. The United States, Germany, and Japan were considered to be the economic engines of this system, with production levels to back up such claim s Japan and Germany were devastated at the end of the Second World War, economically, politically and mil itarily. Yet the way they bounced back and dominated world to emula te Ind eed the Japanese model became th e base of the East Asian model and the German model became the economic engine for the European Union. Beginning in the nineteen nineties however, both Japan and Germany began to face serious economic challenges. Both syst ems encountered stagnant growth, high unemployment, l arge and bloated industries not adaptable to the fast paced global economy, and labor practices that made change difficult. What happened to the two economic miracles since the nineteen nineties ? Indeed this has been a matter of much discussion and analysis recently Scholars in general and German scholars in particular often lay the blame on the reunification of Germany While the quick reunification that was completed under the leadership of Helmut Kohl


2 was a shock to the West German economy, it does not adequately explain the continued stagnation of the German economy. The economic system of the United States however, has continued to flourish and grow. While there have been downturns, such as th e deep recession in the early nineteen nineties, the United States economy recovered and grew at a high rate, including the longest period of expansion since the end of the Second World War, during the same time that Japan and Germany were struggling with sustained economic decline in the 1990s economies. Thi s required an emphasis on labor and on mass production, at the expense of innovation and creative education. Solid ties were required between the government and labor, giving much power to the unions. Such g uarantees as lifetime employment, paid sick leave, paid vacation time, assured employment, generous pensions and unspoken assurances against unemployment were, in the eyes o f the governments, necessary to build their economies. In addition to the emphasis on labor and on mass production, the capitalist system liberal style of capitalism, so mething that seems on the surface to be a contradiction. Featuring hea vy investment from banks which, especially in Japan, are influenced or for over forty years an attractive alternative for developing economies that were not entirely convinced by the la iss ez faire economic model of the United States but did not wish to adopt a command and control economic system similar to the Soviet Union. For


3 a time it seemed as United States. Then they caught up. Research Problem The research problem addressed in this paper is the non liberal economic model and its limitations as an alternative to the United St ates laissez faire economic model. This subject is important as the world watches the rise of non liberal capitalist economies such as China and Singapore and developing countries look to a system that will allow them to develop and succeed yet not necess arily bow to the liberal democratic altar of the United States and the United Kingdom. Azar Gat speaks of this at length in his article from the July/August 2007 Foreign Affairs onomically successful non democratic states as the formation of a new second world, and that this new second world would be regarded as 1 Considering the failure of the United install a liberal democracy in Iraq, this is definitely within the realm of possibility. The non liberal subjects of this study, Japan and Germany, cannot be considered authoritarian powers by any means. Both feature well developed democratic institution s though not based on the United States democratic model as both are closer to a parliamentary system. However, their economic systems are somewhat closer to an authoritarian model, funded by large banks that are often in the control or influence of the federal government, and inexorably tied in with a highly educated and well trained labor force. 1 Gat 2007 p. 67


4 defining features that separate it from a U.S. type model: the symbiotic ties t o labor, and a capitalist system that is based on credit and bank investment. Thesis and Methodology It is the hypothesis of this work that the capitalist system and inflexible labor policies that are prevalent in Japan and Germany are major underlying fa ctors to the economic stagnation of their systems. These policies, important and necessary in a catch up economic system, include strong ties between the government and labor, a high level of governmental control of the direction of the economy, formal, c odified guarantees to labor, such as the right of arbitration, paid sick leave, extended paid vacation, a high level of authority given to the unions, and informal guarantees that are part of the society and culture. Using the United States as the preemin ent example of a liberal laissez faire economy, comparisons will be made using a variety of economic performance measures from 1970 to 2000, including GDP, growth in GDP, unemployment, change in unemployment, inflation levels, among other factors. This th irty year period gives ample time to show economic upswings, downturns, and recoveries, as well as the explosive growth exhibited by Japan and Germany before the nineties. The methodology will be comparative and qualitative in nature. The economic perf ormance of the three states for the time period of 1970 to 2000 will be examined. There will then be an examination of the genesis of the German and Japanese systems, followed by separate chapters examining each of the three systems in regards to their la bor policies and capitalist models. There is then an overall analysis, as well as a final chapter listing conclusions. This project should show that the inflexibility inherent in the


5 non liberal systems is a catalyst for stagnation and that greater flexi bility leads to greater growth. Conceptualization In this paper, the following terms are utilized: Neo Liberal This is the economic model that is globally based, with little or no trade barriers such as tariffs and quotas. It shares many features with th e liberal capitalist model. Liberal Capitalism this is the economic model used in the United States. A laissez faire system, liberalism is a flexible system with little or no control from the government, consumer driven, and is funded primarily by capita l investment. Non Liberal Capitalism the economic model found in Germany and Japan. The non liberal economic model is a top down economic model, funded primarily by banks and is a producer driven model. The system differs from a command and control syst em in that it is still a capitalist system with both personal and corporate private ownership. Globalization Globalization is defined in this paper as the global export of the neo liberal economic model. Literature Review The topics of the failure of the Japanese and German systems over the last fifteen years has been a subject that has been discussed widely and frequently, with many n ging from maintaining the status quo to outright economic revolution, the research studied runs the gamut across all ideologies and theoretical frameworks.


6 Certainly the role of labor in both the success and failings of these economic systems has been examined. The role of labor in the era of globalization is a matter of much debate. Germany and Japan have two of the most symbiotic relationships between government and labor in the world. It was labor that was a primary cause for the economic resurgence of Germany and Japan, and the governmen ts that developed policies that were beneficial for labor. It can be expected then that the labor would fight what they would see as threats to the guarantees they have come to expect. What would be the impact of the lowering of labor standards? This is a specter of globalization: that in an effort to remain competitive, states would end up engaging in a The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking A merican Living Standards the toughest unionization laws win investment from American and European 2 While it is unlikely that we will see labor standards in Germany an d Japan fall to third world standards, the idea of losing their generous benefits worries labor organizations in those states. This view however, may not be necessarily true. In their 2004 article for The Cambridge Journal of Economics Vicente Navarro, John Schmidt, and Javier Astudillo make a case that under the current system of globalization the state welfare systems that exist in such countries such as Denmark and Sweden the social safety nets are not only maintaining their current levels, but actua lly 2 Tonelson, 2000. The Race to the Bottom


7 increasing. 3 This is contrary to the current wisdom that in order to remain competitive, The race to the bottom is not necessarily inevitable. Several works, in addition to the article m entioned above, take a more optimistic view of the current trends in labor issues in this age of globalization. Can Labor Standards Improve Under Globalization takes a qualitative look into the state of labor and the roles of international organizations i n enforcing global labor standards, especially the I nternational L abor O rganization or ILO The central argument in this book is that these organizations are necessary and that it makes economic sense to enforce global standards, such as freedom from forc ed labor, nondiscrimination, abolition of forced labor, and freedom to unionize. 4 In other words, the book makes a case that not only can standards improve, but these improvements will a study by Thomas Palley published in the January Cambridge Journal of Economics titled The Economic Case for Labor Standards that shows the economic benefits of instituting the core labor standards that are listed in the Elliott book. In this study he shows that such standards could promote economic stability, using the case study of South Korea and Indonesia in the aftermath of the Asian financial crisis of the late 1990s. South Korea thrived while Indonesia experien 5 economy, how may it be hypothesized, as it is in this thesis, that high labor standards are crippling the Japanese and German economies? It may lie in the inflexibility of the 3 Navarro. 2004 4 Elliott & Freeman 2003 p.8 5 Palley. 2004 p. 31


8 system. United States labor also enjoys very high standards and the economy remains flexible and able to adapt. Wolfgang Streeck and Kozo Yamamura edited two volumes for the Cornell Studies in Political Economy series, both an invaluable resource fo r this project. These two volumes The End of Diversity? Prospects for German and Japanese Capitalism and The Origins of Non Liberal Capitalism: Japan and Germany in Comparison pr o vide an excellent background for the study. The Origins of Non Liberal Cap italism is a look into the systems of Germany and 6 In Japan and Germany, according to these editors, there exists government controlled ous forms of hierarchical and organizational coordination that sometimes require heavy interjections of public authority with vertical control or horizontal collective bargaining often overriding contractual exchanges as entered into by private agents on t 7 In other words: governmental control over nearly all aspects of a free market economy. Seemingly contradictory, the system was remarkably successful for many decades. The selections in the book examine su ch topics as the beginnings of the system in Germany, how the German model impacted Japan going back even further than the end of the second world war and the trading regimes the two states were a part of. The other volume, The End of Diversity?: Prospe cts for German and Japanese Capitalism is also an edited volume, examining the two economies in a more contemporary setting. One selection, written by Peter Katzenstein, looks at Japan and 6 Streek. 2001 p.6 7 Ibid.


9 Asia. It looks at the different systems of integration, from the formality of the EU to the informal networks of East Asia. 8 Looking at these two methods of integration is interesting especially, as with regards to labor standards: formality in the wes t and informality in the East. In other words, German guarantees to its workers are formal, codified, and written. In Japan, they are understood more so than written, part of a cultural system in place for hundreds of years. Not only does this make it n otoriously difficult to research, but makes the solution even more difficult, as it requires deep systemic changes that will not only be difficult for the people to accept, but may also cause short term damage, making the benefits of such reform difficult to see and in democratic systems, where the government is ultimately responsible to the people, difficult to maintain. The edited volume The Future of the German Economy: An End to the Miracle? looks at this in some detail. It was the continuing economic stagnation that caused the Christian Democrats under the control of Helmut Kohl to lose control of the Bundestag for the first time in decades in 1998. Despite electoral hardships, Chancellor Gerhardt green coalition maintained control in the 2002 election 9 allowing them to continue their reforms. The book take s a slightly different path tha n most works regarding the future of the German economic model. It is optimistic; bringing up positive indicators such as low 8 Katzenstein. 2003 9 This was likely caused by Schroe popular with the German public


10 inflation and large ex ports it is the third largest exporter in the world. 10 Despite its optimistic tone, however, the editors admit to serious flaws in the model. Many of these flaws also exist in the Japanese model. It is interesting how similar these two economies are in their makeup, their strengths, their weaknesses, even their history. Sheldon Garon looks at the history of Japanese labor and its impact with the state in his book The State and Labor in Modern Japan. This book is an overview of the labor movements in Ja pan in the period from 1868 1945. Primarily historical in nature, the work shows that many of the features of the Japanese economy and labor existed long Okuma Shigenobu declared his nation s modern social policies to be firmly grounded in 11 This supports the hypothesis that the flaws in the system are deep and systemic, and change will be difficult. Looking at some of these difficulties, Ikuo Kume writes Disparaged Success Labor Politics in Postwar Japan again from the Cornell Studies in Political Economy. This work takes a look a t the Japanese state and labor after the Second World War, directing attention to the role of unions and their strength in shaping the post WWII economic system. Kume feels that labor in Japan has not gotten its fair due of credit in the success Japan exp 12 This is an assessment that is merited. Labor in Japan and Germany ha s been possibly the most 10 Harding & Paterson 2000. p. 127 11 Garon. 1987 p. 11 12 Kume. 1998 p. 3


11 instrumental fact or in the amazing success that the two states experienced, coming out of devastation. As will be shown in later chapters, though labor does not extend its influence in Japan in the same manner as in the west it is a force that is not taken lightly by the Japanese government. In Germany, labor and the unions are a central part of the economic system, and are often pandered to by the government. What is seen in the research examined above is excellent background for the purpose of this study. There has a lso been several works produced for a more popular The Lexus and the Olive Tree. 13 These works give a good overview of the non liberal capitalist models for a more general audience. It is important and interesting tha t the idea of different capitalist models is gaining more and more attention, especially as authoritarian powers such as China become more powerful and influential in the global economy. However, the weaknesses and failures of the non liberal economic mod els, particularly in the area of labor and labor policy, make a convincing argument that these non liberal models are not conducive to long term sustained economic growth. 13 Friedman, 1999.


12 Chapter 2 Economic Performance The economic performance s of Japan and Germany ha ve faced downturn s in the past decade and a half. Can this be explained as merely a normal though long lasting downturn? To answer that, economic performance will be examined for thirty years, 1970 to 2000, for Germany, Japan, and the United States. T his period may show any economic downturns and recoveries within the three states central to this study. The factors examined will be the following: G ross D omestic P roduct and changes in GDP, u nemployment rates and changes in unemployment, and the change s in inflation rates. These three factors will give a n overview of the performance of the respective economies over a significant period of time. GDP The gold standard of economic indicators, GDP is perhaps the most often used indicator for econ omic perf ormance, as well as that rates annual change. We will first look at t he performance of the United States. The following data comes from the Econwatch website. 14 14 EconStats


13 Table 1 US GDP 1970 2000 Year GDP real (2000$) Change from Previous Year in $ Change from Previous Year 2000 9817 346.7 0.04 1999 9470.3 403.4 0.04 1998 9066.9 363.4 0.04 1997 8703.5 374.6 0.04 1996 8328.9 297.2 0.04 1995 8031.7 196.2 0.02 1994 7835.5 302.8 0.04 1993 7532.7 196.1 0.03 1992 7336.6 236.1 0.03 1991 7100.5 12 0.00 1990 7112.5 131.1 0.02 1989 6981.4 238.7 0.03 1988 6742.7 267.6 0.04 1987 6475.1 211.5 0.03 1986 6263.6 209.9 0.03 1985 6053.7 240.1 0.04 1984 5813.6 389.8 0.07 1983 5423.8 234.5 0.04 1982 5189.3 102.4 0.02 1981 5291.7 130 0.02 1980 5161.7 11.7 0. 00 1979 5173.4 158.4 0.03 1978 5015 264.5 0.05 1977 4750.5 209.6 0.04 1976 4540.9 229.7 0.05 1975 4311.2 8.4 0.00 1974 4319.6 21.9 0.01 1973 4341.5 236.5 0.05 1972 4105 206.4 0.05 1971 3898.6 126.7 0.03 1970 3771.9 3771.9 X Units : Billions o f 1996 dollars. In Table 1 there are only two years of negative GDP growth, 1974 and 1982, both years of deep recessions. By this figure, it is seen that even during downturns, the US economy was active and growing at a sustainable rate.


14 Table 2 look s at the German GDP data. Table 2 German GDP 1970 2000 Year Gross domestic product in $ GDP Change from Previous Year in $ GDP Change from Previous Year 2000 1877.513 234.979 0.13 1999 2112.492 36.927 0.02 1998 2149.419 35.966 0.02 1997 2113.453 274.206 0.13 1996 2387.659 75.561 0.03 1995 2463.220 364.286 0.15 1994 2098.934 139.898 0.07 1993 1959.036 63.986 0.03 1992 2023.022 244.301 0.12 1991 1778.721 273.24 0.15 1990 1505.481 322.614 0.21 1989 1182.867 11.662 0.01 1988 1194.529 85.933 0.07 1987 1108.596 217.358 0.20 1986 891.238 266.536 0.30 1985 624.702 6.751 0.01 1984 617.951 36.851 0.06 1983 654.802 0.317 0.00 1982 655.119 26.316 0.04 1981 681.435 130.029 0.19 1980 811.464 52.692 0.06 1979 758.772 118.597 0.16 1978 640.175 125.477 0.20 1977 514.698 68.74 0.13 1976 445.958 27.088 0.06 1975 418.870 37.887 0.09 1974 380.983 34.494 0.09 1973 346.489 88.532 0.26 1972 257.957 44.168 0.17 1971 213.789 29.491 0.14 Units in Billions of U.S. Dollars Table 2 tel ls a different story compared to the United States. The German GDP rate was in a word phenomenal during the 1970s. For example in 1973 Germany had a


15 growth rate of 26 percent. Such growth, however, was not sustainable. From 1990 to 2000, Germany had five years of negative growth some of it quite significant (2000 and 1997) Later growth rates have not been encouraging. Table 3 looks at Japan.


16 Table 3 Japan GDP 1970 2000 Year GDP$ Change in Dollars Change from Previous Year 200 0 4763.239 262.845 0.06 1999 4500.394 559.241 0.12 1998 3941.153 369.509 0.09 1997 4310.662 388.813 0.09 1996 4699.475 585.245 0.12 1995 5284.720 479.818 0.09 1994 4804.902 436.518 0.09 1993 4368.384 567.822 0.13 1992 3800.562 316.881 0.08 1 991 3483.681 434.604 0.12 1990 3049.077 89.028 0.03 1989 2960.049 18.305 0.01 1988 2978.354 520.692 0.17 1987 2457.662 434.943 0.18 1986 2022.719 658.562 0.33 1985 1364.157 81.062 0.06 1984 1283.095 80.001 0.06 1983 1203.094 102.028 0.08 1982 11 01.066 83.104 0.08 1981 1184.170 113.709 0.10 1980 1070.461 59.39 0.06 1979 1011.071 40.215 0.04 1978 970.856 279.38 0.29 1977 691.476 129.956 0.19 1976 561.520 61.143 0.11 1975 500.377 41.465 0.08 1974 458.912 44.236 0.10 1973 414.676 109.811 0 .26 1972 304.865 74.839 0.25 1971 230.026 26.305 0.11 1970 203.721 203.721 Units in Billions of U.S. Dollars Like Germany, Japan experienced remarkable growth in the 1970s and even into the nineteen eighties. However, in the 1990s the poisoned frui begin to be seen. Like Germany, Japan experienced five years of negative growth, and


17 later growth rates have not been strong. Again we see unsustainable growth as compared to the United States. Inflation The term that brings a collective shudder to both Germans and Americans, inflation which is based on consumer price index or CPI, is the increase or decrease in the cost of living. Low inflation is an indicator of stability, high inflation the reverse. It was the high inflatio n levels of the nineteen thirties that paved the way for the fascist seventies that helped to elect Reagan in the United States. The specter of inflation has been somewhat muted in the last few years in the United States however, as t he following table shows. The following figures come from EconStats. 15 15 Ibid.


18 Table 4 United States Growth in Inflation R ates 1970 2000 Inflation Rates Year Change from Previous Year 2 000 1.19 1999 0.64 1998 0.79 1997 0.59 1996 0.12 1995 0.2 1994 0.34 1993 0.08 1992 1.2 1991 1.17 1990 0.57 1989 0.75 1988 0.42 1987 1.76 1986 1.65 1985 0.75 1984 1.09 1983 2.92 1982 4.2 1981 3.22 1980 2.3 1979 3.62 1978 1.1 3 1977 0.76 1976 3.74 1975 1.91 1974 4.87 1973 2.97 1972 1.02 1971 1.55 As seen from the above chart, inflation rates for the decade of 1990 2000 have been what most economists would consider insignificant. This is an important indicator of the continuing strength of the US economy.


19 Table 5 looks at inflation rates for Germany. Table 5 German Growth in I nflation R ates 1970 2000 Year Percent Chg per Year 2000 2.10 1999 0.70 1998 0.60 1997 1.50 1996 1.20 1995 1.70 1994 2.70 1993 4.50 1992 5.00 1991 3.70 1990 2.70 1989 2.70 1988 1.30 1987 0.30 1986 0.10 1985 2.10 1984 2.40 1983 3.30 1982 5.10 1981 6.40 1980 5.60 1979 3.90 1978 2.70 1977 3.70 1976 4.30 1975 5.90 1974 7.00 1973 7.00 1972 5.50 1971 5.20 1970 3. 40


20 the United States. Between the years 1993 to 1995, Germany saw an inflation rate of nearly ten percent. This is not an indicator of stable growth.


21 Table 6 looks at Japan. Table 6 Japan ese Growth in I nflation R ates 1970 2000 Year Percent Chg per Year 2000 0.80 1999 0.30 1998 0.60 1997 1.70 1996 0.00 1995 0.10 1994 0.70 1993 1.20 1992 1.70 1991 3.30 1990 3.10 1989 2.30 1988 0.70 1987 0.10 1986 0.60 1985 2.00 1984 2.30 1983 1.90 1982 2.80 1981 4.90 1980 7.80 1979 4.00 1978 4.20 1977 8.20 1976 9.40 1975 11.70 1974 23.10 1973 11.70 1972 4.80 1971 6.40 1970 7.60


22 Japan has not experienced such fluctuation in inflation rates as Germany. Indeed, it can be said that Japan has had more success with containing inflation rates. It must be remembered Unemployment The final economic indicator examined, unemployment, is the most politically charged as it is the indicator that most directly affects the voters that determine the government in democracies. Many US presidents have discovered to their chagrin the results of high unemployment, particularly during an election year. Bumps in the unemployment rate can be expected as part of the business cycle, yet continuing and long lasting unemployment and growth in these indicators is indicative of larger problems.


23 Table 7 US Unemployment R ates 1970 to 1999 Year United States Change from previous year 1999 4.2% 0.3 1998 4.5% 0.4 1997 4.9% 0.5 1996 5.4% 0.2 1995 5.6% 0.5 1994 6.1% 0.8 1993 6.9% 0.6 1992 7.5% 0.7 1991 6.8% 1.2 1990 5.6% 0.3 1989 5.3% 0.2 1988 5.5% 0.7 1987 6.2% 0.8 1986 7.0% 0.2 1985 7.2% 0.3 1984 7.5% 2.1 1983 9.6% 0.1 1982 9.7% 2.1 1981 7.6% 0.5 1980 7.1% 1.3 1979 5.8% 0.3 1978 6.1% 1.0 1977 7.1% 0.6 1976 7.7% 0.8 1975 8.5% 2.9 1974 5.6% 0.7 1973 4.9% 0.7 1972 5.6% 0.3 1971 5.9% 1.0 1970 4.9% X


24 I n twenty of the thirty years analyzed, rates were negative, meaning that unemployment dropped. The longest period of positive growth of unemployment was three years. The unemployment rate of 4.2 percent in 1999 meant that for most purposes, unemployment was nearly nonexistent. Germany has not experienced similar results. Table 8 German Unemployment Rates 1970 1999 Year Germany Change from previous year 1999 9.0% 0.4 1998 9.4% 0.5 1997 9.9% 1.0 1996 8.9% 0.7 1995 8.2% 0.3 1994 8.5% 0.6 1993 7.9% 1.2 1992 6.7% 1.1 1991 5.6% 0.6 1990 5.0% 0.7 1989 5.7% 0.6 1988 6.3% 0 1987 6.3% 0.3 1986 6.6% 0.6 1985 7.2% 0.1 1984 7.1% 0.2 1983 6.9% 1.3 1982 5.6% 1.6 1981 4.0% 1.2 1980 2.8% 0.1 1979 2.9% 0.4 1978 3.3% 0.1 1977 3.4% 0 197 6 3.4% 0 1975 3.4% 2.8 1974 1.6% 0.9 1973 0.7% 0 1972 0.7% 0.1 1971 0.6% 0.1 1970 0.5% X


25 nearly ten percent in 1997. This rate is high for any economic system. Since 1990 th e unemployment rate has increased by over five percent. It is the unemployment rate that eighteen years. Table 9 examines Japan.


26 Table 9 Japan ese U ne mployment R ates 1970 to 1999 Year Japan Change from previous year 1999 4.7% 0.6 1998 4.1% 0.7 1997 3.4% 0 1996 3.4% 0.2 1995 3.2% 0.3 1994 2.9% 0.4 1993 2.5% 0.3 1992 2.2% 0.1 1991 2.1% 0 1990 2.1% 0.2 1989 2.3% 0.2 1988 2.5% 0.4 1987 2.9% 0.1 1986 2.8% 0.2 1985 2.6% 0.2 1984 2.8% 0.1 1983 2.7% 0.3 1982 2.4% 0.2 1981 2.2% 0.2 1980 2.0% 0.1 1979 2.1% 0.2 1978 2.3% 0.3 1977 2.0% 0 1976 2.0% 0.1 1975 1.9% 0.5 1974 1.4% 0.1 1973 1.3% 0.1 1972 1.4% 0.1 1971 1.3% 0.1 1970 1.2% X following years has continued to grow. Japan has experienced more than a decade of unemployment that has remained constant or in most cases has increased. The nearly


27 five per cent unemployment is catastrophic for a state that never had an unemployment rate over 2.9 percent in twenty five years. Conclusions In the preceding sections it is shown that Japan and Germany are experiencing stagnation that is continuing and unrelentin g. By comparing them to the United States, the standard of success, one can see that there are definitely severe and deep problems in the economic systems used by the two states.


28 Chapter 3 Genesis of the German and Japanese Economic Systems Now tha t it has been shown that these states are experiencing slowdowns, the question is why. There are many reasons. However, looking at why and how the economic systems of Germany and Japan developed is a necessary starting point. The major countries of the European Union and Asia maintain a strong control over labor policies in their respective countries. 16 Germany and Japan are no exception to this standard. This is a hallmark of a non liberal capitalist system. The Schroeder and Koizumi governments attemp ted several reforms, but met with only limited success. There are several reasons for this, which will be examined in more detail. These include the influence of labor unions on political parties, particularly those parties that are considered left leani ng that may cause some problems in the short term, such as higher unemployment and the loss of certain guarantees considered almost sacred by the members of that state. To understand the reason for the development of non liberal capitalist and labor models, it is necessary to go back to the beginning of the modern era, the end of the Second World War. According to estimates, the Germans lost a staggering 3.5 million 16 An excellent example of this is the 2006 French labor ref orm which was eventually defeated by popular revolt.


29 soldiers (not incl uding the millions that were injured and incapacitated for the rest of their 17 Given the makeup of martial forces in the mid part of the twentieth century, it can be stated that the maj or portion of these casualties were young men, the core of any working force. Near the end of the war, as the Axis was forced to use young boys, they lost a portion of its next generation of workers. The end of the war found the two countries in shambles their governments killed, arrested, or in hiding, their infrastructures destroyed, their economies in ruins, and a large part of their labor forces in graves or in pieces. Labor was at a premium and a near blank slate had been created for a new economic system. Those who in control of the direction that the state would take in its future economic course. Adding w government as the fascist systems had collapsed under the boot of the Red Army or the mushroom cloud of Hiroshima. This brings up an important point. The Soviet Union lost nearly three times as many soldiers during the war 18 yet did not see the kind of change that occurred in both Japan and Germany. This is largely due to the fact that the totalitarian systems in the defeated states had fallen (though the Japanese emperor had been allowed to stay on the throne, with symbolic power only) while Stalin rem ained secure in the Kremlin (even more so than before the war, as he was now seen as the savior of the Motherland). With a near blank slate to work with in Germany and Japan, a new age might come to pass. 17 City University of New York. 18 Ibid.


30 This blank slate is not without historical precede nt. Seen here is a similar feudal systems that existed in Europe relied on one major factor: the abundance of labor. Basic economics tells us that as supply for a product or service is high, the price is low. The serfs were plentiful in number, so the owners of the land did not have to pay much for their services. When th e plague hit, no one was spared; but as the serfs made up the from the plague. Exact figures have never been tabulated, but it is estimated that over a quarter of the population of Europe may have died from the pandemic. This mass loss of labor in such a s hort time (1347 1348 in the first outbreak) caused labor to no longer be abundant, but rather at a premium. Harvests had to be gathered. Human labor was needed to gather the harvests. The serfs who survived were now able to sell their one commodity, the mselves, for a much higher price. The pandemic did not just strike the serfs. No one was safe from its ravages and of three factors: 1) The loss of a large portion of the workforce 2) The removal of the governing class 3) The elimination of the accepted status quo Compare this to the aftermath of the Second World War in Japan and Germany. These three factors that had existed after the rampage of the plague were now in pla ce in the two defeated states. Germany and Japan lost a sizeable portion of their primary


31 workforce, giving those who survived the ability to sell their labor at a premium. 19 Not enough, the workers also demanded the ability to chart their own course. T o put it another way, the unions were now in charge. This upheaval of the status quo was made possible due to the removal by the victorious powers of Adolf Hitler and the military government of Japan. Our third test case, the United States, a victorious party, did not suffer these effects described above. Its economic model would develop much differently. This paper is not an account of the creation of the West German and Japanese economic systems. But some points are brought up to illustrate the histor ical roots of a political/economic system where labor and government are so intrinsically tied together that separating them is impossible. Added to this, however, was the unique global situation that immediately followed the end of the Second World War. The USSR, another victorious party in the Second World War admittedly a victory earned at an incredibly high cost had brought nearly every European state east of Germany and part of that state under its sphere of influence and command and control styl e economic system. A similar situation would likely have occurred in Japan and the Pacific had the atomic attacks on Hiroshima and Nagasaki not taken place. 20 The United States, the major occupying power of both West Germany and Japan was now embroiled i n yet another global conflict albeit not a shooting conflict and determined to demonstrate the 19 Note that the workforce at the time was defined as young males. There is no question of the impact of female workers, on both sides of the conflict, and nearly universally accepted that this conflict began the large scale entrance of women into the workplace. However, in the late 1940s, it was still held that the women would return home when the men did. 20 It is felt by some scholars that this was the primary r eason the United States used the atomic bombs.


32 benefits of a liberal economy. However, the situation was made complicated by the fact that its two show states West Germany and Japan were rubble. The wor kforce was devastated. The government was dead or in Al lied prisons. And the physical infrastructure the status quo was gone. All of these were casualties of the worst conflict in human ess prepared to build, support, and maintain an economic system that required innovation and a large consumer base. Those two states would have to go a different direction than the one the United States perhaps would have preferred to have laid out. They would first need to The modern capitalist systems of Japan and Germany cannot be described as a copy of the United States model, despite the guidance of the United States in developing those economic systems after the end of the Second World War. described earlier, the situation that existed in Japan and Germany at the end of the Second World War was unprecedented. As the new governments developed, so did the econom ic systems. What resulted was a system that, while certainly not command and control, r elied on government control and guidance most importantly in the form of capital and credit from large banks that were often either part of the federal government or h eavily influenced by the federal government. Another important aspect that has developed in this system has been an emphasis on the producer side of the economy In other words, Germany and Japan are producer driven economies, as opposed to the United St consumer driven economy. This is perhaps the defining feature of the non liberal capitalist model. To put it another way, the two economies touted by the United States during the Cold War as the success stories of capitalism we re neither liberal no r


33 consumer driven; they were in fact a new capitalism that shared some features with command and control economies. The developmen t of these economic systems has been extensively documented and analyzed, and will not be covered in this paper. 21 It is impor tant, however, to understand the beginnings of the systems, to understand why the capitalist and labor phases in Japan and Germany. Indeed, it can be said that the systems in those two states de veloped the only way they could if they were to attain the successes that were sought. With Japan and Germany in a state of such devastation, a liberal economy was not an option, at least not in the short term. And with the massive numbers of victorious U.S. troops still in the streets of Tokyo and Germany, a move toward a Soviet Marxist type economic system was not a viable option either. The systems and models that emerged became a third way, a way that seemed for many years to be a viable long lasting alternative. The features of these models, difficult to change and adapt once instituted, even if the models had failed, became thoroughly entrenched as Japan and Germany became economic miracles. After the downturn of the nineteen nineties, the questio n of whether a non liberal capitalist model in particular the models of Japan and Germany could sustain economic development began to arise. The following chapters examine the results of the development of those models, and what those models have done f or sustained economic development. 21 The Origins of Non Liberal Capitalism for the


34 Chapter 4 Negotiations at the System Wide Level: The German Model Germany is called the economic engine of the European Union, and not without cause. The economic miracle that followed the Second World War and th e resulting partition of the state was incredible by any standards, and this miracle was powered by an economic model that was unique in the West. Relying on a well educated, well trained and loyal labor force, coupled with major investment from central b anks and state laws sympathetic to workers, Germany recovered from its destruction in a remarkably short period of time, only to face difficult challenges when its catch up economy caught up. r will examine the flaws found in a system that requires such strong ties between the state and labor, and the difficulties encountered when large banks are the primary source of capital, coupled with an indirectly controlled producer driven economy. The focus of the German capitalist system is a producer driven economy, meaning that it is companies, not consumers that dictate the direction of the economy. In a state such as Germany where the large producers, the banks, and the government share such clos e relations, it is an indicator of an economy that has strong, though indirect, direction from the central government. Given that a similar situation exists in Japan, study of this phenomenon will take place in a later chapter.


35 The central government als o exerts some indirect control over economic direction the end of the Second World War was built around a nucleus of powerful, multi industry wide collective bargaining organizations. 22 These coordinated unions were supported at the plant level by work councils which, while not bargaining for wages, had authority 23 such as hiring procedures. In 2000 there were twelve multi industrial unions which bargain for workers in the most important sectors of the German economy, such as the Metal Workers union. Though these twelve organizations bargain separately, they tend to follow the pattern set b y the Metal Workers Union. 24 It goes without saying that this system affords the German worker with very strong protections. Even more interesting is that these protections are enshrined into law, including the Works Constitution Act. 25 There is in Europe a certain penchant for written agreements and laws, often enshrined in the constitution. This penchant certainly makes its presence known when examining the capitalist model in Germany. Wol fgang Streek states that in Germany d its economy and shapes its performance are politically 26 To put it another way, the German capitalist and labor models are formal systems, with guarantees and co 22 Thelen & Kume. 1999 p. 479 23 Ibid. 24 Ibid. 25 Thelen and Kume: 1999 p. 482 26 Stree k 1995 p. 8


36 operations that are in writing and oft en even in law. This is a unique feature of the German capitalist model, as seen later in the examination of Japan, and a feature that causes unique difficulties, especially in the age of globalization. Union strength and viability has been called into q uestion in the research of the last decade. Indeed, the push toward the popular view of globalization seems to almost require the adoption of neo liberal norms giving employers much more power than they once held even in states and systems such as Germany However, others point to the victories of German unions in the late nineteen nineties as evidence that neo liberalism is not becoming the norm. 27 This is, according to one researcher, due to the German employers need for peaceful employee relations or r un the risk in this age of hyper global competitiveness of having their market disappear. 28 These agreements however, can actually be detrimental to the unions, due to this reliance of labor peace over wage moderation. Thelen and Wijnbergen state that th e employers are using the threat of the collapse of employer associations rather than the traditional lockout. As more employers drop out of these associations or ignore collective bargaining agreements, it is not the unions that are losing their strength but the employer associations. 29 In the German system, however, both are necessary and complement each other. What ends up developing is a negative feedback loo The question remains as to whether or not such a system is indeed a major factor in the end of the German miracle. As mentioned before, the Ossies are often the factor at the end of the pointed figure. The idea is not without merit. At the time of unification, 27 Thelen & Wijnbergen 2003 p. 862 28 Thelen &Wijnbergen 2003 p. 863 29 Thelen & Wijnbergen 2003 p. 870


37 West German productivity was ten times that of East Germany, the jewel of communist dominated Eastern Europe. However, time and statistics have not borne this out. If the then how does one explain the success of the Czech Republic and Poland since the fall of the old regimes. Both countries, it could be convincingly argued, were even more enshrined in the Soviet system and neither had the advantage o f a benefactor such as West Germany. Both, however, were objects of the s that led to disastrous consequences in post communist Russia, yet the sudden liberalization contributed to consistent economic growth for those two states. Even more telling is the fact that it is the former East Germany th at continues to have the most difficulties. Unemployment in the former East Germany, as of 2000, remained steady at 16.5 percent 30 (compared to 9% overall for Germany). While at first glance this may indicate that it was the quick unification at work, exa mine this more closely. Poland and the Czech Republic have both been successful, yet neither had the economic productivity of East Germany prior to the fall of communism. East Germany, all things being equal, should have excelled at liberalization. It c ould be argued, then, that is it in fact the West German system, superior in the catch up so desperately needed after the destruction of the Second World War, that caused the malaise of the East German system, and as a direct result, put and end to the mir acle. How this occurred will be covered in subsequent chapters. The flaws that made the integration of the East German economy so difficult are also some of the defining features of the German economic model. In the German non 30 Selinger. 2007.


38 liberal capitalist economy perhaps the institutions with the most influence on the German system are the banks. As the primary source of capital, the banks in Germany also have a seats on the supervisory boards of the one hundred largest industrial corporations in 31 In addition, the ratio of bank loans to corporate financial liabilities remained constant in Germany at 60 to 70 percent, indicating an obvious reliance on banks. 32 In ter ms of publicly held shares, banks hold nearly 10 percent in Germany. 33 Indicating further bank control of the German capitalist system is the German proxy voting system, which according to Pauly and Reich often leaves banks with control of 50% of the votin 34 This does bring up the question as to who controls the banks, or to put it another way, are the banks under the control of th e government. This is an important point as it is a strong indicator of how much control (albeit somewhat indirect) the central government has over the economic system, particularly in systems where the major source of capital is bank loans. In the case of Germany, the Bundesbank is independent of the Ministry of Finance, yet one wonders how much informal influence the government has ove r the federal bank which has built its credibility on price stability. 35 This goal is an interesting one for a capitalis 31 Pauly and Reich 1997 p. 11 32 Pauly and Reich 1997 p. 9 33 Pauly and Reich 1997 p. 8 34 1997 p. 12 35 Boyer 2003 p. 160


39 as open as possible, but keeping prices from going too high, sometimes in spite of the market forces. It is quite a difference from a liberal capitalist system. Another difference from the liberal capitalist system represented by the United States is this idea of system wide negotiation. The development of negotiation at the system wide level can be understood by going back to May 1945. The benefits of collective bargaining are ex tensively documented: higher pay, generous leave and sick needed what was left of its workforce after the end of the conflict, it is not surprising that concessions were given. However, one can also guess that these men, young and old, understood their position, that their work was now a premium; again, looking at the historical precedent of the black plague and the end of feudalism, and also taking into account that it w as not just the societal structure and human structure that was decimated, it was also the actual physical structures of the state and nation. For some, their families were dead or gone. For many others, their family was all that remained from what they remembered before they left for the steppes of the Baltic. There was little, if anything, keeping them in the country that had failed them so miserably the prior six years. The state was in no position to bargain with those who remained, and they formed together one can guess military indoctrination from early childhood had much to do with this to get themselves and their comrades the best This is a major reason for the system wide model that is seen in Germany, as well as a European sensibilit y for legal frameworks. Establishing a legal framework would take a national government, again something destroyed by allied bombs and guns. This national government would be forced to develop a system that guaranteed labor rights and benefits.


40 Germany set the standard with guarantees to labor in Europe, up to and including clauses in the federal constitution that guarantee the right for collective bargaining. 36 The effects of collective bargaining will be detailed in a later chapter, but deserves some e xamination in this context. Collective bargaining, especially at a quasi governmental level like what is seen in Germany, removes wage determination from a market based model. In other words, it is an artificial level of pay, which has several consequenc es, both positive and negative. This is an important point for the German model as it is a system wide collective bargaining in the case of the largest industries, which leads to the conclusion that the government, in an indirect yet strong way, determine s the wages for labor. Returning to the starting point of this system, the end of World War II, one can make the reasonable assumption that these wages would be unnaturally high. This is particularly true in the lower wage earning brackets. Statisticall y speaking, lower wage jobs tend to have greater elasticity in the amount of compensation. However, in states such as Germany, these jobs have less elasticity, which may have effects that would not be immediately apparent, which will be discussed in a lat er chapter. 37 In addition, especially considering the chaos that many of these men experienced, guarantees of continued employment would be at the top of the list. Horst Siebert of the University of Kiel discusses the idea of employment security at some l a 1997 article from The Journal of Economic Perspectives speaking of the protections 36 Sieb ert. 1997. p. 39 37 Siebert 1997 p. 45


41 that European governments mandate for workers. 38 He further states that in some cases, hi ring a worker can be a longer term investment than even a capital investment such as new machinery. 39 Again, the effects of this will be discussed in a later chapter, but one can begin to imagine the consequences of such policies, both positive and negativ e. We also must take a look at the required workers councils and the mandated worker representation on supervisory boards. The 1976 codetermination law requires that half the members of the supervisory boards of major firms must be worker representatives 40 In addition, the plant level contains protections and representations for workers in the form of work councils. From the very top of the economic control levels, the very constitution of the republic, to the industry wide collective bargaining, to wor kers councils at the plant level, we see a system that acquiesced to the demands of labor. Indeed, the symbiotic relationship between labor and government was by and enjoyed for over forty years after the defeat and destruction of World War II. T his 41 Unfortunately, as time and later statistics have suggested, a catch up economy runs into massive difficulties o nce they have actually caught up. This will be further borne out in the examination of Japan. Another consequence of catching up and the movement toward a globalized neo 38 1997 p. 49 39 Ibid. 40 Siebert 1997 p. 41 41 Siebert actually maintains that Germany caught up in the 1970s, and that the end of the miracle came to fruition in the 1980s.


42 re 42 Globalization, or the new global economy, relies not only on foreign investment, but also the ease at which foreign investment occurs. Ev idence seems to indicate that the German non 43 It is another unique challenge of the German model. Conclusions Examining and comparing the labor and c apitalist systems in Germany yields interesting results. One can see how the two systems are complementary and even symbiotic. A formal system does have some advantages. In a state governed by the rule of law, these agreements are easy to track and easy to examine if any changes are to be made. When changes are deemed to be necessary, however, it is this rule of law that may make those changes difficult to institute, especially if the state is governed by a democratically elected leadership. As will be examined in a later chapter, making changes that are beneficial in the long run but cause short term pain higher unemployment, higher inflation are detrimental to the goal of keeping power. More so in rule of law states is that the companies, the gover nment, the people are subject to the rule of law. These agreements, these constitutional guarantees, must be adhered to or negative consequences will result. What this results in, especially in regards to constitutional guarantees, is a system that is no t easily changed and a system that makes 42 Parnell 1999 p. 33 43 Parnell 1999 p. 39


43 changes on an informal basis, i.e. the company level, very difficult if not impossible to accomplish. Take for instance, the formal ties between government and labor. Labor guarantees are enshrined into the const itution. Major unions bargain for wages on the system wide level with the government. These ties between labor and government end up with the net effect of making change very difficult, as workers are the large majority of the electorate in a West Europe an liberal democracy. Making things more difficult, however, is the capitalist model that requires such influence from banks. Banks are interested in long term credit; in other words, they are not as adaptable as a stock or investor based capital system. In short, b anks are patient. Investors are not. The effects of this will be examined in more detail in later chapters. With a non liberal capitalist system such as in Germany, it is not surprising that what has developed is a producer driven economy. Second World War, the non liberal capitalist system, with the strong and formal labor ties, was the strongest system to achieve the goals of both Germany and the United States. However, in the examination of this cha pter, deep flaws have been found that could lead to a continued malaise that cannot be solved easily. The question remains as to whether or not the non liberal system of Germany can remain mostly intact and still compete with the United States, integrate into the globalized economy, and counter the challenges of developing economic powers such as China and India.


44 Chapter 5 Informal Guarantees Carved into Stone: The Japanese Model The economic engine of the Asian nce the early nineteen nineties has been caused by a combination of a changing world economy, labor policy, and a non liberal capitalist model that cannot adapt quickly to changing d/control nor liberal, with strong influence by banks and producers. Also like Germany economic model features strong ties between government and labor. What makes the Japanese model unique, howeve r, is the informal nature of the se ties. The in formality of the ties makes the Japanese model difficult to research and even more difficult to change. model has been successfully exported throughout the Asian Pacific region The economies of East Asia are often referred to as the East Asian Tigers, ferocious, powerful, and fast moving. Building on the model created in Japan, East Asia has become an economic powerhouse that is a marvel to the developing world, a model exported from Japan. What remains to be seen is if these states face the same challenges as Japan. Those challenges are examined in this chapter. Looking at labor and the non liberal capitalist model in Japan, the causes of a slowdown that shattered th e illusion of a Japanese economy poised to conquer the world will be shown.


45 I remember as a child my father, who at the time was taking economics classes as part of his baccalaureate program, telling me about an editorial cartoon showing the United States on the deck of a battleship signing economic surrender papers to the Japanese delegates. Indeed, in those heady days of the late seventies to the end of the nineteen eighties it did seem that perhaps the monster that we had helped create after the mushro om clouds of Hiroshima and Nagasaki would overtake and defeat us. After all, fas hioned Big Three vehicles? guarantees, internal promotion ladders, and flexible job design became export items in themselves 44 The Japanese non liberal capitalist model shares quite a bit in common with the economic model of Germany, not surprising considering that the two states were forced to rebuild their economies at the same time with the same goals in mind, overseen by the same power. As explained earlier, Japan and Germa ny were in a unique position after the end of the Second World War with infrastructures in shambles, a major portion of the workforce killed or injured, and governments in prison. What makes Japan unique 45 In other words, there are few laws that shape the economic system. One must be careful with this however. There are some laws or formal associations that do not exist in Germany. For an example of this, one needs look no further than the Bank of Japan which, according to 44 Th elen &Kume 1999 p. 477 45 Streek 1995 p. 8


46 46 This is an importa source of capital and corporate governance comes from banks. 47 What this means is that in Japan, even more than in Germany, the government controls the direction of the economy, albeit in an indi is to keep the system stable. The method of accomplishing this task is through the Bank of Japan. The Japanese model was utilized to great effect by the East Asian tigers, each attempting to ou t japan Japan. However, just as with Germany, the Japanese catch up model began to run into problems when it finally caught up. As opposed to the German model, the Japanese model that developed after the end of the Second World War was much less centrali zed and much less formal. Rather than industry wide mega unions that developed policy from the top down, the Japanese guarantees to their labor developed from the firm level. This is an interesting dichotomy, and speaks to the East Asian model of infor mal informal networks of Asian expatriates, Peng concluded that these networks contributed in a major way to the continued development of the East Asian Tigers 48 Such networks were not necessarily common to all expatriate groups; Russian expatriates for example, 46 Boyer 2003 p. 160 47 Pasca 2004 p.18 48 Peng. 2002. p.430


47 reasonably be assumed to be part of the culture of those groups. This cultu ral phenomenon of East Asia does carry into Japan, as the guarantees given to Japanese workers are as much cultural as legal. Consider Somewhat misnamed, the lifetime employment system, however, is a powe rful term referring to the strong protections that Japanese workers have against dismissal, which come from two major sources: labor law and the labor movement 49 Looking at labor law first, it is shown that outright dismissal for reasons other than malfeasance is quite difficult, requiring firms to show that they have an excess number of employees, that the firm has attempted to avoid redundancies, and that they have a pro per procedure in place for selecting those to be dismissed. Large firms have usually found their dismissals to be invalidated by the courts due to these strict conditions. 50 The labor movement, on the other hand, has produced some interesting results. As stated before, the majority of labor protection in Japan is informal in the sense that it is centered around the plant or firm level rather than at a governmental level. These plant level firms, covered in more detail later, will actually accept nearly s tagnant wage 51 Compare this to an inflation increase of close to twelve percent over the s ame period. In other words, real wages, or the purchasing power of the yen that was brought home, 49 Genda & Rebick. 2000. p.90 50 Ibid. 51 Genda & Reibeck. 2000 p. 88


48 decreased by approximately ten percent. This is a significant trade off by the unions at large for not letting workers go. It is the Asian group dynamic th at plays a major part here, the informal, invisible linkages. Even these guarantees are not enough to stop the decline in employment, in particular the manufacturing sector. Industrial productivity in the since 1990 rose only slightly, and over one milli on manufacturing jobs disappeared between 1992 and 1996. 52 To be sure, manufacturing is the economic sector that has taken the hardest hit in nearly all developed countries in the age of globalization, but it is interesting that in a state and system with such strong protections to labor that the losses in both jobs and productivity would be so severe. Overall in face, during 1992 to 1998, the growth in employment on average for Japan was 0.3 percent. Compare this to a growth rate of 1.6 percent in the Un ited States during the same time period. 53 The Japanese tradition and culture causes some unique challenges of its own in the new globalized economy. Globalization is not necessarily seen in Japan as a benefit; many in fact blame the globalization movemen t for the economic bubble that caused the late nineties Asian financial crisis in Japan. 54 Globalization also puts an emphasis on economic efficiency, and according to Gao is the main priority of industrialized countries in the new age. 55 Efficiency has no t been achieved in Japan, at least in terms of labor costs, which are now twice as high as labor costs in the United States. 56 52 Cowling & Tomlinson 2000 p.359 53 Cowling & Tomlinson 2000 p. 361 54 Gao 2000 p. 437 55 Gao 2000 p. 447 56 Gao 2000 p. 448


49 Some economists feel that this efficiency has been sacrificed for the benefit of equal outcomes. Indeed, economist Nakatani Iwao 57 Looking at this system, one might be begin to question how the capitalist model in Japan can actually be called capitalist. Chalmer s Johnson answers this question by achieve its goals; market players, enjoying private ownership of property, respond as they see fit in order to secure their personal ad 58 In other words, private property owners including businesses, consumers and producers are under no legal obligation to do as the government asks. To put that another way, the ties that bind are informal. As stated when examining labor, this ph enomenon can be partially explained by the culture and traditions in Asia. This point has to be understood, as this is what provides the reason why an informal system as in Japan does not break down. It is a somewhat safe assertion that what you see in J apan could not happen in the United States or in Europe (and indeed has not in the case of Russia). That culture does not exist. Also like Germany, Japan has built its economy around producers rather than consumers. Corporations are seen as national ass ets in Japan, and as such it is not surprising that they are looked at by the government and by the society as resources to be used for the benefit of the state, much like oil or natural gas. In a culture and society such as Japan where the informal linka ges are perhaps the strongest, business owners see themselves and their 57 Ibid. 58 2001 pp. 57 58


50 companies as part of the state, and as such feel an obligation to the state. This plays out with the labor policy described above and a willingness for the central bank and the bureau cracy to dictate economic policy. It is much more so than in Germany command and control without being command and control. This fascinating aspect of the Japanese economy is the foundation on which the entire economic model is built. It is also what makes change in the system so difficult. Taking a look at another defining feature of the Japanese labor model, the (again misnamed) seniority wage system, this i dea of informal guarantees play s out again. More accurately described as a skill based syste m (meaning that the increase in wages is commensurate to the learned skills and training achieved by the worker over the course of his/her employment) 59 this system, not enshrined by any law, guarantees worker s higher pay the longer they are with the firm (under certain conditions). This informal guarantee, considered a bedrock of Japanese labor policy to the extent that Japanese workers are willing to take a de facto cut in pay to preserve it, ties in directly with lifetime employment as powerful incenti ves to stay with the firm. This is a direct consequence of needing to keep workers in a devastated Japanese homeland. To keep workers in a devastated Japan, to institute these guarantees, there had to be some organization to the labor that had survived. U nlike the German model, however, which coalesced around industry wide unions, Japanese unions are more fully based 60 It is these unions, while only representing twenty 59 Thelen & Kume 1999 p. 483 60 Ibid.


51 two percent of workers in Japan that set the standar d for the other unorganized firms. 61 It is also these unions that have accepted the real wage drop as described above. Also a question that remains is what the advantage of such an informal system would be. In the chapter examining Germany, the advanta ges of a formal system were looked at. The informal system of the Japanese, however, hold many advantages, not the least of which is using the culture of the Japanese, and indeed of Asia, in building up an economic model that is an attractive alternative to the model of the United States and even as an alternative to the non liberal model of Germany. In other words, the success of the Japanese model up until the 1990s showed that massive changes not only to the economic ture and way of life was not only unnecessary, but possibly even harmful to the state. The Japanese economic model was a true third way, a rational economy, neither socialist nor Anglo American capitalist in orientation or 62 Little wonde r that states such as South Korea and Taiwan decided to duplicate it rather than a U.S. style model. In many ways, it can be said that the Japanese non liberal capitalism is a perfect fit for Asia and Asian culture. Furthermore, it is these informal guar antees that make the Japanese model so difficult to adapt and reform. These guarantees have their genesis in the very culture of Japan, which itself is not easy to change. Government s can pass laws and courts can set mandates, and in the West, such as Ge rmany, the culture is centered on the rule of law. This is not the case in East Asia. It is far easier to change and adapt a written law than 61 Genda & Reibeck. 2000 pg. 95 62 Johnson. 2001 p.57


52 one that exists merely in the core of a culture, making reform of the Japanese labor system a difficult task. An other way these ties are apparent is in the system of shareholding. Examined in some detail in following chapters, the shareholding system is a good indicator of the direction of the economic system. In Japan, banks and non financial firms both hold 25 p ercent of the publicly available stock. The banks owned a quarter of the publicly listed countries, to look at it another way. 63 Moreover, the banks in Japan as in Germany corporate financial liabilities, f rom 60 to 70 percent of those liabilities. It is not surprising then that the se banks have a steering function, as in Germany. 64 Like Germany, a producer driven economy was an excellent match for the goals that Japan wished to achieve when rebuilding the state during the American Occupation. Also like Germany, the population was not in a position to support a consumer driven economy. While there is little surprise that such an economy developed, the question as to whether or not it is sustainable in the age of a globalized economy remains. Conclusions The Japanese capitalist model is perhaps one of the more interesting studies. Built on culture and tradition rather than rule of law, perhaps one of the most interesting aspects, especially to those who h ave a Eurocentric mindset is the fact that such a system however. What can be debated is 63 Pauley and Reich. 1997 pp. 8 9 64 Ibid.


53 whether an informal system b ased on culture and tradition, in unwritten guarantees and promises can be competitive in the new world. The very nature of this system makes change very difficult, for the state and the people are being asked not just to change laws, but to change the ve ry essence of a society that they hold dear to their hearts. In many ways, this can be seen as a far more difficult task than changing policy in a state such as Germany. One can ask though whether it is necessary to change the culture, or if it is possib le to adapt the new global economy to the culture. This culture has much that is not compatible with the new global economy, making change even more difficult. Obviously, change has occurred before, or the economic miracle of Japan would not even be spok en of, much less exported to the Pacific Rim. Further study of how those other states South Kor ea, Taiwan, and of course China might give some insight into how to Economic growth breeds political liberalism, an effect that should be of much interest as China becomes a stronger player on the world stage.


54 Chapter 6 Spoils of Victory: The United States Model The gold standard of a consumer driven, innovative, market bas ed liberal capitalist model, the United States has experienced constant growth since the end of the Second World War, without the prolonged periods of stagnation experienced by Japan and Germany. This chapter examines the liberal model embraced by the Uni ted States, and how the flexibility granted by a model that is not intrinsically tied with labor and is funded by a market based system allows for the ability to adapt quickly to changing international economic norms. The liberal economic model in the Uni ted States developed over t he course of two hundred years and did not have to be rebuilt in the same manner after the end of the war as Japan and Germany did. The war was actually an economic boon to the United States, which up until 1941 was still strugg ling with the effects of the Great Depression. Being a victorious party of the Second World War, along with being the only major Allied power that did not suffer any physical damage to the home country put the U.S. in a unique position at the end of the c onflict. The casualty level of over half a million men, though significant, paled in comparison to the losses sustained by Japan and Germany, or by


55 some of the U.S. allies. 65 Just as important was that the United States suffered no damage to its infrastru cture. Unlike their defeated German and Japanese counterparts, U.S. veterans did not return to rubble but rather to a bustling economy and a country eager to reward their heroes. As a result of post war economic development followed a highly different tr ack, one that gave the United States the ability to adapt far more quickly when the economic model changed so drastically following the end of the Cold War. The liberal capitalist system in the United States, much like the labor system, differs from the s ystems in Germany and Japan in several key aspects. Perhaps the most interesting aspect of these differences is that all skew towards allowing more and quicker flexibility in the economic system. Three key aspects that differentiate the U.S. capitalist s ystem from Germany and Japan are the stock market, the role of banks, and the focus of the liberal economy, namely the consumers. The United States was not in the same situation as Japan and Germany, a primary reason that a very different system developed. Labor, while still important especially in a manufacturing based economy that was running at a fever pitch did not have the same footing to call the shots as did the survivors of the defeated Axis powers. Another way that the United States system deve loped differently was the capital financing system. Unlike Japan and Germany which are not only steered but also financed largely by the central banks, corporations in the United States are financed by investors, often through the well developed stock mar ket (public ownership). This type of system results in corporate governance that does not share the patience that is a defining feature of the non liberal systems. With close to 90 percent of the voting shares in publicly listed 65 City University of New York. 2007


56 corporations owned by pen sion funds, mutual funds, and individual households, 66 it can be expected that year after year of continual corporate losses will not be tolerated especially by those looking at their retirement portfolios and those who make their livings on stock market t rading. These shareholders are also going to be interested in continual innovation. Attempting to put this another way, shareholders, whether large organizations or small day traders, understand that in the American economic system, those who rest on the ir laurels will quickly be passed by. These shareholders or rather the shareholders who hold voting stock in a corporation are the ultimate authority. Just like politicians those in power, i.e. CEOs, wish to stay in power. Upsetting the majority of voti ng shareholders, even if the corporation is doing well, is not the best way to keep Going further with this case, innovation or research and development is not just encouraged in this type of system, it is required. The United States econ omic system is oriented toward innovation, and it can be argued based around innovation. 67 This emphasis on innovation carries over to both the role of the banks and the consumer basis of the United States economic system. In other words, the United States innovate. This innovation based economy required a large amount of flexibility for both labor and the employers. This plays itself out in a number of ways in the labor system, such as the low levels of union ization, the mobility of the American worker, the average 66 Pauly and Reich 1997 p.8 67 Pauly and Reich 1997 p. 23


57 tenure of a worker, and the unique system of reeducation available for the United States worker. Unionization in the United States has a long and interesting history. There is no doubt, however, t hat unionization has been in decline since the end of the Second World War with coverage of only fifteen percent by the mid nineteen nineties. 68 While this does vary from industry to industry and from region to region, the cumulative effect is that the Uni ted States has one of the lowest levels of unionization in the developed world. The reasons for this are varied, such as governmental interference, management resistance, free shop regulations, and a general indifference on the part of U.S. workers, espec ially those who were not reared in areas with a strong union presence. Opinion of labor unions in the United States is actually mixed, with many seeing unions as a hindrance to economic growth rather than a benefit. 69 There is not a cultural attachment to unions in the United States as in Japan and Germany. Unions fail, according to some literature, due to a lack of their own will and must share a part of the blame for the decline of the union movement since the end of the Second World War. 70 Accepting the thesis that the genesis of the labor movements in Japan and Germany came from an entirely different situation than existed in the United States, one can see the reason for this apathy. There was no emergency situation that required the labor to coalesce and demand greater control. Indeed, what ended up happening in the United States, according to Clawson and Clawson, was that unions and 68 Nickell. 1997. p.63 69 Rasmussen Reports, 2006. 70 Clawson & Clawson. 1999. p.98


58 became the de facto allies of mana gement, helping to regulate and co opt worker 71 Even this accord was not enough to maintain what little true power the unions had, as management resistance became more and more pronounced. With the rise of globalization and neo liberal economic theory, unions became more and more a roadblock to what the corporations thought was progress. As such, management began to resist both existing and new union movements, using a variety of methods to discourage unionization. These methods included passi ve interference such as delay tactics, to compulsory company meetings where anti union presentations were made without any equal time provision all the way to the forced quitting or outright firing of those who engaged in union activity. 72 This resistance was aided by laws and political developments that further eroded the influence of unions. United States labor has the right to organize, yet at the same 73 a situation unique am ong all industrial democracies. 74 Even if a union exists or is formed, the most powerful weapon organized work stoppage or striking is curtailed by law. Many unions are prohibited by law from striking, usually for reasons of public safety or order, and in cases where organized work stoppages are allowed, the employers maintain 71 1999. 96 72 Clawson & Clawson. 1999 pp. 102 73 Clawson & Clawson. 1999 pp. 100 74 Ibid.


59 the right to continue production and bring in permanent replacement workers. 75 Striking workers would then be reassigned, often into undesirable positions. In addition to the conti nued weakening of the power of unions, the political clout of the unions continues to weaken as well. The rise in power and six year near absolute control the anti union Republican Party enjoyed from 2000 2006 severely curtailed the influence of labor org Party has curtailed this influence even further. This is a bitter pill for unions as the Democratic Party has been the traditional ally of organized labor. 76 As with unions, banks in the Un ited States share little of the clout of their counterparts in Japan and Germany. Banks in the United States fill much different roles than the banks of Germany and Japan. Not centralized or under the control of the government save for regulatory functio ns, such as the FDIC and key interest rates, banks in the United States do not have a steering function in U.S. corporations. In terms of bank loans to corporate liabilities, a factor examined with both Germany and Japan, the ratio is only 25 percent, as opposed to 60 70 percent in Japan. 77 Therefore, it can safely be said that banks are not the major source of capital in the Unites States. They do fulfill important functions including secondary financing, cash management, selective advisory work and othe r finance related services. 78 However, the trend is for corporations to rely on retained earnings or capital markets to fund investments. 79 75 Ibid. 76 Clawson & Clawson. 1999 pp. 97 77 Pauly and Reich 1997 p. 9 78 Ibid. 79 Ibid.


60 This is an important distinction that again shows an economic system that relies on flexibility. The process of a ttaining bank loans is a cumbersome process, and for small or even medium businesses can be difficult to gain access to bank loans. The ease capital via the market does not require collateral or a lengthy application process. The trade off for this is that some control of the corporation is ceded to the shareholders who are looking for quick results in many cases. It is a rare shareholder who is willing to invest in an inn ovation that will not return profits in a reasonable amount of time. In terms of bank ownership of publicly available stock, the rate in the United States is less than one percent, as opposed to 10 percent in Germany and 25 percent in Japan. 80 It is a rea sonable conclusion then, looki ng at that figure and the ratio of bank loans to corporate liability that the U.S. banks are not in the business of capital allocation and as a result not a large player in steering economic direction. The United States labor model, like the capitalist model, has several unique features. In addition to the influence or outright control of organized labor, another feature of the United States labor system that is unique is the comprehensive system of reeducation available to ex perienced workers. This system has its roots as well in the period following the Second World War. With thousands of veterans returning, there was a need to prevent the situation that had existed immediately after the end of the First World War when soldi ers returned to high unemployment. There was also a desire to reward the victorious soldiers, and some of this reward came in the form of the GI Bill, part of which included a payment 80 Pauly and Reich p.8


61 voucher for college tuition. 81 With the large number of returning soldi ers spread out across the country, the existing system of a small number of large four year universities made higher education, even with tuition vouchers, inaccessible for many veterans. The two year or community college system, already in place, began t o expand in great numbers, doubling in enrollment between 1944 and 1947. Enrollment further increased after the end of the Korean War, and quadrupled in the nineteen sixties, as the baby boomers came of age and the Pell grant system came into place. 82 Howe ver, it should be noted that the evolving community college system is more important for U.S. labor. Originally instituted for the express ed purpose of awarding Associates of Arts degrees, or degrees that allow for the transfer into a university system, t he community college has expanded into vocational training, workforce development, and continuing or non degree seeking programs. 83 While the crown jewel is the Associates of Arts, it is these Associate of Science and Vocational Certificate programs that p gear themselves toward serving the so student who does not fill the standard definition of a student who has just finished hig h school, usually in age from 17 19 and supported by their parents. This definition of the in 1997 close to thirty percent of students enrolled in higher education are over the age of 30. 84 Com munity colleges achieve this through a number of methods, including lower tuition, gearing class 81 Kane & Rouse. 1999. p.64 82 Ibid. 83 Ibid. 84 Seftnor & Turner. 2002. p.338


62 schedules for working students, such as weekend and evening courses, and reaching out to part time students. For American workers that have been laid off or are in an industry that is in decline, the availability of re ability to change careers. Financial aid programs make education at the community college with an average annual tuition of $1,2 83 for full time students 85 affordable for most working adults, particularly those attending part time. Current research does indicate that a large number of non traditional students are taking advantage of the Federal Pell grant system, to the point that 86 likely have the following profile: They are over the age of 30, attending school part time while ho lding down a job to pay the bills, pursing a program with the major purpose of being trained for a specific occupation once the program is completed in other words, a nursing degree rather than a political science degree and is utilizing the financial ai d programs available to them. In some cases, this is their first time in higher education, and therefore is in need of remedial classes, another specialization of the community colleges. Other times, they have already secured employment, and their educat ion is being paid by their new company, with the understanding of a work contract to last several years. This system is important as it is an indicator of the course that the United States took with their labor system after the end of the Second World War. The fact that such a 85 Kane and Rouse 1999. p. 64 86 Seftnor and Tuner. 2002. p. 337


63 system is in place, along with the financial aid programs, gives employers the moral cover they need when they announce downsizing or realignment. It is also a n indicator of greater f lexibility in the liberal system. Despite these p eculiarities in the liberal capitalist system of the United States, the biggest and most important difference is the main player in steering United States economic policy: the consumer. The United States liberal economic model is a consumer based system. What this means is that the consumers, not the producers, decide what is produced. This is a direct result of the innovation based economy. In other words, the economic direction of the United States is directed by where the dollars go. Personal techn ology is perhaps the greatest example From VCRs to cellular phones to MP3 players, items that are at first considered to be novelty quickly become household mainstays. This is not due to Apple deciding that MP3 players need to be in the American consume portable music system. Another interesting aspect of this is that it is consumers, not producers, who decide on which model, which design, or which format will be the industry standard. Take for examp le the so home video recorders. Two competing and incompatible systems, the VHS and Beta, were introduced to the market at roughly the same time. Beta was widely considered to be the superior system in terms of quality, but VHS had the advantage of a longer recording time. VHS also allowed the licensing of the system, allowing other companies to market clones of the system, as opposed to Sony, who kept the Beta system proprietary. The resulting reduction in pr ice and growth in availability of the VHS system allowed for the inferior product to gain the large r market share, and by the mid to


64 late nineteen eighties, VHS was the industry standard. 87 It was the consumers who had decided this. Walkmans were replaced by portable CD players, which in turn were replaced by portable MP3 players. VHS was replaced by DVD, and even now a new format war rages to replace the DVD. Consumers demand innovations, those who do not innovate are left to the dust pile of history. To innovate, there must be flexibility room to grow and adapt. This is the defining feature of the liberal capitalist system. Conclusions The United States has a very different system. The reasons for this are varied and it can be expected that it shoul d be different from Japan and Germany given the differential outcomes of the Second World War. However, it is these differences that make the United States economy much more versatile and able to withstand the shocks and changes in the worldwide economy. There are some unfortunate side effects to this liberalism including f lexibility to let go of workers, to move overseas, to institute programs in other states with very little oversight by the national government. It can be argued that the re is too much flexibility in the United States system, that the continual need to innovate in order to please the consumers that feed and direct the economy causes massive abuses in the system, and that these abuses are morally covered by lower prices for the consumer or by the comprehensive retraining programs offered in the United States. These too are difficulties and challenges that are not easily remedied. However, in an objective analysis of the global economic system, it is sure that the 87 A near exact situation occurred with the IBM PC and Apple Macintosh systems. Apple kept their systems proprietary, IBM allowed for the PC to be cloned, leading to near complete dominance of the home computer market by PCs.


65 United St ates system has been the most successful, especially of the three systems examined in this paper. In the following chapter, the differences of those three systems will be compared and contrasted, along with the effects of these differences.


66 Chapter 7 Catching U p and Slowing Down: Comparisons and Contrasts of the United States, Germany and Japan. Exactly what is the best model, or more appropriately, what are the advantages the United States model has and are they actually advantages? In the brief o verview of the three systems, differences have emerged in both labor and the capitalist systems. Major differences in labor systems include: The influence of labor on government, the influence of government on labor, the formal guarantees that are given to labor by company management and the government, the informal guarantees granted to workers, and the ability to retrain or change careers in the middle of employment lifetime. In terms of the capitalist systems, the differences examined include the role of banks, the major sources of capital and the central force of the economy. These differences all restrict or enhance the flexibilities that seem to stimulate economic growth. The major differences addressed in this paper: Influence of labor on govern ment and the influence of government on labor, formal and informal guarantees to labor, banks and the capital markets, producer driven economies vs. consumer driven economies, and finally the challenges of globalization are each examined with overall concl usions at the end of the chapter.


67 Influence of Labor on Government and the I nfluence of Government on Labor Germany and Japan both operate under a simple truth: Those who ignore labor do so at their own peril. Attempting to reform the economy is always a dangerous game, especially in democratic regimes that must eventually answer to the people who were affected by the reforms. those in power wish to stay in power. In d emocratic regimes, such as the three we are looking at, staying in power means keeping the populace you must eventually answer to happy. Ancient Rome utilized to great effect the concept of Bread and Circuses, or in lay terms: keep the people fed and ent ertained. This powerful concept is still in place today, and even the democratic governments utilize it to some degree. While the bread and circuses are not provided by the state, the means by which the populace buy bread and attend circuses are very muc h dependent on what the state can provide: an economy that will self generate jobs, but more importantly, jobs that will provide enough compensation that workers can not only provide for their necessities on a long term basis but also advance in their car eers. In Japan and Germany, the catch up models, these goals are achieved by a state that has instituted a symbiotic relationship with labor. The governments, in other words, need labor to shore up their power, and vice versa. In contrast, the United States, particularly since 1994, has adopted what could be described as an adversarial relationship to labor. What are the effects of this on the flexibility of the economy and its growth?


68 Going back to the idea of ignoring labor at the peril of power, i this can cause the governments of Japan and Germany to be cautious about reform. Economic reform, especially when changing to a more liberal model, can often be painful for workers as layoffs, closures, pay cuts often can be the result However short term these effects may be, unless the government in power is remarkably fortunate, an election cycle is likely to occur during the negative effects of these changes. The result of this goes without saying: the government responsible for those changes, beneficial or not, only roll back the so called reforms but also to strengthen the old system. In societies such as Germany and Japan, where organized labor is a powerful part of the populace, attempting such reforms without the support of organized labor can be most dangerous. Contrasting this with the case of the Unit ed States, which, especially since the 1994 Republican takeover of Congress has developed a near adversarial relationship with organized labor not unexpected, as unions have always been one of the mainstays of the we see an unexpec ted result: greater freedom to pursue reforms that may cause some harm to established labor. Take, for example, the recent attention that has been paid to the struggling manufacturing sector of the United States economy. Once a stronghold of union power the manufacturing sector has weakened with the rise of globalization and neo liberal political economy. 88 With the dropping of trade barriers, both formal and informal, companies have been freer to pursue different business models, including a heavy reli ance on foreign factories and the lower wage foreign workers. The 88 Clawson and Clawson 1999 p. 101


69 results of this model are greater profits for the business, supposed lower prices for the American consumer and the loss of jobs in the manufactu ring sector. However, the growth in GDP doe s indicate that this model increases national GDP. The growth in GDP for the United States in 1981 1990 averaged 1.9% per year. From 1991 to 2000, commonly considered to be the advent of globalization, American GDP increased to an average growth of 3.2%. This growth in GDP is tempered by the loss of jobs in the American manufacturing sector, evidenced by the growth of the infamous Northeast and Middle West This change in direction however, would have been difficult for the United States to pursue had there been more effective resistance by the labor movements. In fact, the opening up of trade barriers began in earnest by a Democrat, P resident Bill Clinton. By instituting the North American Free Trade Agreement ( NAFTA ) and spearheading t he growth in influence of the G lobal A greement on Tariffs and T rade. (later renamed the WTO, or World Trade Organization), this member of the traditionally labor union friendly Democratic Party took a leading role in the further weakening of the unions po litical influence. While there has been a backlash that has grown in strength in recent years against globalization and the neo liberal movement, the dropping of trade barriers is continuing at a fast pace for the United States, evidenced by the passing o f the Central America Free Trade Agreement ( CAFTA ) in 2006, f iercely opposed by organized labor. Formal Guarantees and Informal Guarantees: What do they actually guarantee? We see above that there is strong evidence that the flexibility enjoyed by the Un ited States due to the waning influence of organized labor has benefited it, at the very least in terms of economic growth. Turning now to the unions themselves, the question


70 must be asked as to whether or not the guarantees that organized labor gives to its members (and non members, as organized labor does seem to set the tone for all other worker guarantees) help or impede economic growth. This is a difficult and multi layered question. It can be argued that any guarantee given to workers will impede e conomic growth. Take for example the minimum wage. The argument against this is quite simple: There is a natural limit for which people will not work for. As companies would be required to pay less, they could hire more employees willing to work at t hat price. Theoretically then, unemployment would cease to exist. While compelling, the hypothesis ignores a number of concerns, including that there is no guarantee that companies would take those savings and invest in more human capital, that if worker s are earning below subsistence wages, there is no discretionary funds to bottom line in a consumer driven economy and that at a certain point it is more profitable to just go on welfare and be a ward of the state. This is brough t up because it should be pointed out that guarantees to workers are not necessarily an impediment to growth, and in fact, could be a benefit. The question, complex as it is, is at what point the guarantees start to impede growth, and which ones impede gr owth faster or more severely, to the point that the costs outweigh the benefits of these guarantees. The major guarantees given to Japanese and German employees include lifetime employment, strong protections in terms of both wages and workplace protectio n, and protections against layoff or firing (excepting termination due to negligence or malfeasance.) Workers in t he United States, at le ast on a system wide level, do not enjoy


71 these benefits. How do these benefits restrict economic f lexibility and does this greater f lexibility translate into greater growth? All these guarantees boil down simply to once you have a job, you will keep that job. This was a powerful motivator to keep a short supply of labor in place after the end of the Second World War. This paper has gone back often because it is important to understand what it must have been like for those who had survived the war both on the battlefront and the home front. Everything they had known was destroyed, and worse, they were the losing party Nothing was guaranteed. But Japan and Germany needed them to rebuild, and the economic system that developed had the double advantage of both catching up and keeping the workforce in place. Now that they have caught up, the cost is becoming clear. T hese guarantees do limit the flexibility for companies to adapt to the changing global economy. In business, the greatest expense is human capital, particularly in the developed world. Protections and taxes are a weight on businesses. With each technolo gical innovation, there is a cost for labor, as these innovations cut down on the need for labor. As a result, these innovations meet with strong resistance from labor the infamous case of the Dutch workers throwing their wooden shoes into the mechanical looms and innovation does not necessarily have to come in the form of technology. A contemporary example, the movement from on site storage t o the Just In Time (JIT) model (ironically developed by the Japanese) cut down on the need for warehousing and t hose jobs. The movement of manufacturing to semi peripheral nations has had a decimating effect on the manufacturing sector of developed nations. However, we have shown already the advantages of these innovations. These innovations come at a high cost t o workers


72 however, and in the case of Japan and Germany, it makes it difficult at best to institute these c hanges. Pressure from the rank and file of the unions becomes pressure on the leadership of the unions, which in turn becomes pressure on elected le aders. This symbiotic relationship in fact becomes a brake on the ability to adapt economically. This ability is shown in an interesting and unique way in the United States. In the preceding chapter, the system of the community colleges was examined in some detail. How this sho ws the flexibility of the United States system is an interesting subject. It is an example that shows an often overlooked aspect of the American economic system. Workers have the ability to adapt to the changing economy, even at later stages of their career. This f lexibility has two major benefits. First, it gives American workers the chance to improve their own footing, and second, it gives American companies the moral cover necessary to engage in activities such as shutting d own factories or workshops that are the economic lifeblood of a community. It can be argued that American companies take advantage of this moral cover at far too great a rate, regardless; it is still an indicator of the greater f lexibility of the liberal system. It is also, just as the German labor economic sys tem reflects the German culture and the Japanese labor economic system reflects the Japanese culture, this unique f lexibility reflects the American ideal of taking rese arch shows it does have a positive effect, both in the education level of American workers as well as their own economic performance. Banks and the Capital Markets The banking systems in Japan and Germany have two defining features: They perform a steeri ng function in the economic system itself, and they are the primary source of capital in those systems. This allows for two things. First, the producers in these


73 economies have the benefit of a system that by its very nature is patient and more mindful o f the long term implications of capital allocation. They are not subject to the whims of an investor wanting immediate return or a consumer wanting the newest and greatest innovation. Given the structured nature of loan payback over a long period of tim e with the money generating interest immediate return on investment is not a concern. Second, given the nature of the banks in Germany and Japan, the central government has some formal and informal control over the direction of the state economy. To put it simply, the governments perform a steering function over the banks, and the banks perform a steering function over the economy. This type of system could not exist in an economy where the capital market is the primary source of capital. When that hap pens, economic control devolves to shareholders, and in true liberal capitalist countries, the banks hold very few shares of p ublic companies. In the United States the case s tudy of liberal capitalism, the primary capital allocation institution is the ca pital, or stock market. What this means is that public corporations trade off a portion of their controlling interest for capital. The effect of this is a system that demands a much faster return time. Individual investors and mutual funds are not willi ng to wait twenty years for a return on their investment. In many ways, this is liberal democracy in an economic form. (After a fashion. Corporate voting i s certainly not one shareholder/ one vote.) In order to meet a faster return time and satisfy capi tal market demands a free market is required and is the result. Government has little influence over the allocation of market funds, and has even less influence on the consumers that drive the economy. To put the point clearly, in the liberal capitalist


74 model, the central government has little direct or indirect control or steering ability of the market. Producer Driven vs. Consumer Driven The distinction of a consumer driven economy versus a producer driven economy is perhaps the defining feature of th e two systems. Germany and Japan are producer driven economies, the United States consumer driven. This difference, more than any other, directs the economic direction of the three states, and clearly shows why more flexibility is necessary in a consumer driven economy. In order to please the constantly changing, constantly improving, constantly adapting consumer, innovation has to be quick, affordable, convenient and accessible to the everyday user. Easier said than done, but as companies such as Commo dore and Atari discovered those who are unwilling to continually innovate will be left behind, and there is little if any chance of catching up. A consumer driven economy is by definition a free market, subject to the whims not of a government or central bank, but to the consumers who feed it and the shareholders who fund it. To put it another way, a consumer driven economy cannot exist in Germany or Japan today. However, it must be noted that it would have been impossible to build a functioning and sust ainable consumer driven economy in Japan and Germany after the end of the Second World War. Such an economy requires a consumer base that is able to afford the goods and services that such an economy would produce, and after the shock of that conflict, th ose factors did not exist in those two states. A producer driven economy was the result. Still capitalist in nature, with private ownership and decision making a feature, the producer driven economy is as has so often been stated in this work a third way that


75 shuns socialist control yet is not a laissez faire Anglo American economy. This economic model relies on capital from banks rather than a capital market, and on a government that is steering, though not controlling, economic and monetary policy. Pr oducers must take direction from somewhere either from the bottom up as in a consumer driven economy, or in the top down as in a producer driven economy. While governments in non liberal capitalist countries do not own or control the means of production, they do, through institutions such as the banks, control the direction that the economy takes. Producers are seen, as stated before, as national assets, much like oil or natural gas. They are resources for the state to use for the benefit of their inter national standing, their economic strength, their wealth and power. This fits in so well with both developed in those two states. One can see then the inherent loss o f economic flexibility in a producer driven economy. Producers yield not to the people, or the consumers, but to the steering power of the state. This can make quick adaptation difficult, especially in states where the government derives their power from the electorate. Challenges of Globalization There is no doubt that for over forty years the non liberal economic systems of Japan and Germany were incredibly successful, and showed little or no signs of slowing down. They were doing so well that in the 1970s and 1980s there was legitimate concern that the non liberal capitalist model might well overtake the liberal capitalist model and this did not go unnoticed by developing states. However, in the nineteen nineties there


76 came two shocks to both systems that began to truly show their weaknesses and brought an end to both miracles. First was the actual catching up of both economies. Both systems were built and developed with one goal: To rapidly rebuild their industrial base and become a global player on par with the largest economies. This they achieved remarkably well. However, once caught up, the non liberal economies were not well suited for innovation or for the rapid adjustments necessary in an economy that is leading rather than following. Thi s effect may not have been so hard felt had it not been for the second shock of globalization. In the case of Germany, there was also in the nineteen nineties a large movement towards economic integration in the European Community. This integration began soon after the Second World War and by the late nineteen nineties had progressed to integration of several of the major economic currencies in Europe, including the German mark and French franc. While this economic integration certainly had an impact on the German economy; those effects are outside the scope of this paper, which focuses on the non liberal economic model of Germany and the challenges of that model in the age of globalization. When speaking of globalization, it is important to make the distinction that the globalized economy tends to take on a neo liberal model. In other words, it is the United States model taken beyond borders. With the fall of the Soviet Union the major roadblock to the exporting of the United States system worldwide was dismantled.


77 long simmering conflicts of non liberal and liberal capitalism finally ca me to a head, with the non liberal economies on the losing end. In such a global system that requires lower costs, faster innovation, and greater overall economic efficiency, the non liberal systems are at a distinct disadvantage. Conclusions In the c omparison and contrasts for this chapter, one can easily see where the liberal capitalist economic and labor models grant more flexibility for the consumers and the producers. Taken with the long term economic performance already described in earlier chap ters, it is a reasonable conclusion that greater economic flexibility yields greater economic growth, particularly in the age of the neo liberal globalization. One must be most careful however. Abrupt changes to economic models rarely lead to positive re sults, and there are massive flaws in the liberal capitalist model that cannot and should not be ignored, particularly in regard to labor and the lessening of the spending power of consumers.


78 Chapter 8 Greater F lexibility Greater Growth: An Accurate Assumption? While it does seem from the evidence presented in these case studies that greater economic flexibility leads to greater economic growth, one must be careful not to go too far with the conclusions that this paper has drawn. At first glance, t his paper may seem to be an attack on labor unions labor guarantees and governmental influence of economies. Such is not the purpose of this paper. The case studies do seem to indicate that the less influence and fewer guarantees labor and producers hav e from the central government, the greater the ability for the economic system to adapt to changing conditions, leading to better economic performance. However, this paper also highlights how such influence and guarantees were not only necessary, but natu ral considering the massive shock that Japan and Germany had endured at th e end of the Second World War. The United States system, however, also endured some shocks after the end of that conflict. The community college system truly began to come into its own with the massive number of returning veterans who had been promised an education once they were mustered out of service. It must be understood how important the community college system, coupled with the federal student aid system, is to the thesis o f this paper. Greater flexibility must be available at all levels, from the systemic level to the individual, and there must be both an accessible higher education system and a financial


79 aid system available to students at any age and any level for the in dividual system to be viable. While it should not be sugar coated the difficulty in changing careers at mid age: the returning student is often saddled with a mortgage, a young family, miscellaneous debts, along with the difficulty in returning to, or pos sibly even attending for the first time, the rigorous demands of the post secondary system, even attending part time. Yet it is a unique feature of a uniquely liberal American labor system. There does remain a question as to whether or not the extended d ownturn in Japan and Germany are the result of faults in the non liberal economic system or the result of normal, long term cyclical changes in the global economic system. Is it possible that, all things being equal, Germany and Japan will start to experi ence a natural turnaround while the Unite States starts to falter? Indeed, as of 2007 there is some evidence of this, particularly with the continuing weakening of the dollar vs. the Euro and the Japanese Yen. However, it must also be noted that empirica l evidence does not show that the economies of Japan and Germany are improving, despite the economic power of a rising Asia and a confederated Europe. Germany and Japan since the 1990s on have experienced continual malaise after over forty years of phenom enal growth. While it is downturn, this cycle would be far longer than the time examined in this paper. What developed in Japan and Germany in the time covered in this pap er was a marvel not only because of the impressive results for almost forty years, but also because of how perfectly the system came together in those two states. It is little surprise that this third way of producer driven economies became such an attrac tive model to other developing countries and economies. The situation that existed in Germany and Japan in


80 1945 however, was so unique that true duplication is impossible without the complete destruction of another world conflict, a conflict that most in the world are quite keen on avoiding. It may well be impossible to truly export the German and Japanese producer driven models, as the infrastructure and even the political systems developed in tandem with those economies. It is this fact that makes the flaws in those systems all the more difficult to rectify. At any time that guarantees are given, or agreed upon, it must be understood that an opportunity cost of such an agreement is the limiting of the ability to adapt. Agreements often become archaic and a burden to at least one of the sides very soon after they are signed. In Japan and Germany, however, there are unique challenges that have to be met if the continued malaise is to be bro ken. What is difficult, indeed, what makes it such a challenge is that these guarantees are so intertwined with the Japanese and German political cultures, that changes to these systems is difficult are the traditional sense that such changes would almost certainly cause short term (a relative terminology, to be sur e) hardship for the very group they are trying to help. It is also difficult in that a politician is asking their people, their culture, to go against the values and traditions that have existed in some case for centuries. To make an impossible sell even more impossible, these politicians and leaders are asking their people to adopt a system from a state that is vi ewed by some in pure contempt. However, such changes are necessary. The purpose of this paper was to examine the unique aspects of each of th ese capitalist economies, and determine whether the economic system s differences. We have seen the differences and how they could restrict the ability


81 for economies to adapt and grow While the actual, specific changes that should be made are outside the scope of this work, further research is warranted. B alance is necessary in all things. Greater f lexibility does lead to greater growth. What must be guarded against, however, is t he temptation to free the economy too quickly. Greater f lexibility done too quickly, will not lead to greater growth, but rather last decade.


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