Democracy in an Age of Cyber-Financial Globalization: Time, Space, and Embeddedness from an Asian Perspective
Eiko Ikegami
THE Asian financial crisis of 1997-1998 highlighted one salient feature of contemporary global capitalism, which I term “cyber-financial globalization.” Over the past decade, the United States has had a strong ideological commitment, under both Republican and Democratic administrations, to the desirability of the free movement of capital. This ideology maintained that the free circulation of financial capital would benefit the great majority of people in the world, not just in North America. The 1998 collapse of Asian financial structures has demonstrated to a worldwide public, however, that this assumption was too optimistic. But although economists and policy makers have eagerly analyzed the causes and implications of the Asian financial crisis, social theorists have rarely discussed the ramifications of the emerging “cyber-financial globalization” on the future of democracy in general.
The term globalization has often had a positive association with the expansion of democracy in social scientific literature. At all points along the ideological and methodological spectrum in social science, one can easily find positive views regarding the effects of globalization on the future of democracy. To be sure, optimistic opinions of the connections between globalization and democracy have some historical precedent. A review essay in the Annual Review of Sociology (1998) entitled “Globalization and Democracy,” was apparently written before the worldwide financial crisis that occurred that same year. The essay opens on a positive note about the new wave of democratization by remarking, “In the last several decades, the world has experienced a democratic revival. By 1996, 66% [of the world’s nations] were using elections to choose their top leaders.” In contrast, in 1974 only 25% of the world’s independent nations had democratic governments (Schwartzman, 1998, p. 159). On the other hand, some scholars argued for the possibility of an emerging global “civil society” that would be produced by transnational political movements based on a sense of identity that cut across national boundaries. This social transformation would be facilitated by advancements in technology and communication as well as by the swelling tides of international migration. Consequently, some enthusiastic supporters of globalization predict the weakening or eventual decline of nation-states.
In this paper, however, I do not intend to join the ongoing vigorous debate among political theorists regarding the future of nation-states in an era of globalization (e.g., Habermas, 1996; Mann, 1997; Shaw, 1997; Hirsch, 1998). I will, however, concentrate my analysis on a particular aspect of globalization, namely, “cyber financial globalization,” in order to call attention to the new role of liberal democracy in preventing the logic of the universal global market from completely dominating social relations in non-Western societies. My normative viewpoint is based on concrete reality as well as the intellectual debates currently taking place in Asian politics regarding the project of economic reform after the 1997-1998 financial crisis. In the second half of this paper, I will investigate the Japanese experience because Japan’s capitalism developed in a unique way as a result of its inclusion within a local institutional and cultural matrix. The dilemmas and struggles confronting the Japanese economy in the face of cyber-financial globalization offer some useful insights into the implications and ramifications of ongoing financial globalization.
A Temporal-Spatial Challenge to Democracy
Cyber-financial globalization is a phenomenon that has emerged from the combination of technological advances and the hegemony of Wall Street capitalism. It has produced fundamental alterations in the operational time/space matrix of the world economy. Cultural theorists often discuss alterations in people’s sense of time and space as a salient feature of post-modernism. In fact, the trade and circulation of tremendous amounts of capital at cyber-speed in virtual space has dramatically transformed perceptions of time and space with regard to economic transactions. By contrast, the concept of democracy has always been linked, from the time of the ancient Greek city-states, to concrete spatiality. The nation-state is the primary site of contemporary forms of democracy. The result is that the ideology of cyber-financial globalization, predicated as it is on the desirability and inevitability of unrestricted international capital flows, appears to challenge the territorial-spatial foundations of democracy. Furthermore, the temporal pace of the collective decision-making that characterizes the democratic process appears glacially slow in comparison to the speed of cyberspace transactions, in which investors can move huge capital sums in a matter of seconds.
Although globalization as such has evolved over a long period of time, primarily as movements of commodities, people, and services, the emergence of cyber-financial globalization and its demonstrated impact on international politics has brought the world community to a new stage of globalism. The high mobility and fluidity of cyber-global financial capital is also distinguished from global industrial capital because of the detached and disembedded relationship of cyber-capital to the object of investment. Cyberspace transactions breed a competitive, short-term mentality in fund managers, in contrast to the more conservative attitudes found among managers of global industrial capital. The latter tend to scrutinize the quality of their investments more carefully, with a higher degree of interest in long-term financial commitments.
We can summarize the foregoing by stating that the movements of free capital in cyber financial globalization and the socially and historically embedded nature of democracy stand in apparent contradiction. Democratic polities founded within nation-states are intertwined with and anchored in the history, culture, and institutions of each country. Without this anchorage in social and cultural institutions, a political community cannot mobilize its members in a crisis or stabilize their loyalty and sense of belonging. In contrast, the fund managers who control the transactions of cyber-financial capitalism are detached from the objects of their investment. Instability and volatility are thus predictable characteristics of cyber global markets. Given this forceful challenge from cyberspace financial globalization, must we simply accept “the retreat of the state” (Strange, 1996) from the global economy, and the subsequent decline of democracy based upon nation-states as a means to achieve collectively desirable ends? The present author does not subscribe to this position. Cyber-financial globalization may weaken the power of nation-states to influence economic activities in their territories to some degree, but it does not imply a decrease in the normative functions of their democracy. I would argue that democratic nation-states have an important role to play in recovering some of the embedded quality of an economic system.
Cyber-Financial Globalization and the Asian Meltdown
The Asian financial crisis of 1997-1998 alerted the public to the fact that global capitalism has entered a new stage of “cyber-financial globalization.” For a variety of reasons, the countries of Korea, Indonesia, Malaysia, Thailand, and the Philippines opened their economies to foreign capital after 1993. The result was that global banks and institutional investors poured into the region. In 1996, the total influx of private capital to Indonesia, Malaysia, South Korea, Thailand, and the Philippines was $93 billion, up from $41 billion in 1994. The Asian meltdown began in July 1997 with the currency crisis in Thailand, which quickly sent shock waves to the currencies of neighboring countries, especially the Philippines, Indonesia, Malaysia, and Korea. The values of all five currencies dropped precipitously. The 1997 currency crisis in turn reversed the enormous inflow of short-term private capital to a sudden outflow of $12 billion (Bhagwati, 1998). Thus, the Asian crisis was not touched off simply by poor economic performance, nor was it produced by loan defaults, as in the crisis that affected Mexico and other Latin American countries when their governments announced that they could not meet payments on long-term overseas loans. The Asian financial crisis was triggered by the influx of short-term capital into the private sector. This inflow in turn was facilitated by the enormous amounts of capital that move freely across political borders and the chains of currency linkages that fluctuate from moment to moment according to a few keystrokes at a computer keyboard. Prior to the rise of cyber-financial technologies in the 1990’s, massive amounts of short-term capital did not usually find their way into such developing countries as Malysia and Indonesia. In contrast, the Korean economy was generally doing well during that period. Although Korea suffered serious short-term foreign debts in 1997, its situation was unlike the Latin American cases because it was clearly beset by “temporary illiquidity rather than fundamental insolvency” (Feldstein, 1998). The Asian countries’ financial illiquidity and currency crisis, however, precipitated a second round of serious recessions in the real economy of these countries in 1998. The industrial development of Thailand, Malaysia, Indonesia, Philippine, and Korea, once praised as “Asian tigers,” was sinking under the deep water of a major recession.
The story of Asia’s financial meltdown, however, does not end with a temporary storm in cyberspace capitalism. The International Monetary Fund (IMF) entered the scene by imposing aggressive economic restructuring programs to overhaul the economic structures, financial institutions, and political processes in Korea, Indonesia, and Thailand. In Indonesia, for example, in exchange for a $40 billion package, the IMF imposed a long list of economic recommendations from the price of gasoline to the manner of selling plywood (Feldstein, 1998). The IMF programs embodied the ideology of the “Washington Consensus,” which assumes that global free-market capitalism is the only real option for the future of the world. The Fund’s professionals tried to strengthen the Asian economies with an infusion of the pure Anglo-American mentality of free competition and maximizing of short-term profits. Labor laws were to be changed to make it easier for management to fire workers. Regulations of foreign ownership were to be lifted and insolvent banks and firms closed. The Western media generally portray opponents of this ideology–the West’s favored style of deregulation–as if they are outdated “reactionaries.”
The Asian financial crisis had an ironic outcome as far as democracy was concerned. The activists and liberal intellectuals in the countries affected by the crisis, who had eagerly advocated and helped to implement significant improvements in the procedural aspects of democracy, faced a contradictory situation. The citizens in these countries could not decide the directions of economic policies through their own political processes. In particular, the citizens of Korea, who democratically elected a new president Kim Dae Jung, a life-long opponent of the military regime, could not celebrate their democratic achievement wholeheartedly. The victory of democracy did not provide the Korean people with an opportunity to decide for themselves their country’s economic policies and mechanisms of wealth redistribution. Although they might accept the political and economic realities of world politics, a sense of humiliation clearly haunts the Asian intellectuals who were forced to accept the IMF restructuring programs. The imposition of detailed economic restructuring policies on a democratically constituted sovereign government is questionable. In particular, such sensitive political issues as labor policies should be left to public debates open to the people, and to the political, economic, and jurisdictional processes of a sovereign state.
The Disembedding Effects of Cyberspace Speed and Virtual Space
Unlike globalization based upon real exchanges of commodities, labor, and services, financial globalization in cyber-space presents three major challenges to democracy: 1) the fact that the enormous amount of wealth that circulates around the globe is largely unregulated; 2) the high speed of electronic transactions in cyberspace, which is virtual space; and 3) the impact of these developments in advancing the process of “disembedding” economic systems from social relations.
I have already mentioned that democracies have historically arisen within the dimension of time, at a humanly acceptable pace, and within the actual space of their constituent political communities. Such theorists as Robert A Dahl have argued, that of the various aspects of political institutions incorporated in the notion of democracy, the democratic process of making collective decisions is central to modern forms of democracy (Dahl 1989). Collective and binding decision-making in a democratic nation-state is inevitably a protracted process. In contrast to the deliberate pace of political change in a democracy, however, the players in global markets make speculative decisions to mobilize or circulate large sums of capital in a matter of moments in virtual space with the aid of superspeed computers.
In the world of cyber-finance, economic activities are removed not only from normal social relations in the “real” world but also from the “real” economy. This tendency is exacerbated by the increasing role of institutional investors. Due to their responsibility to maximize their investors’ gains, the agents of institutional investors in cyberspace have accelerated the process of “disembedding” that Karl Polanyi in The Great Transformation, and taken it to extremes. “The idea of a self-adjusting market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society; it would have physically destroyed man and transformed his surroundings into a wilderness” (Polanyi, 1957, (1944), pp. 3-4) When a self-adjusting market takes on a life of its own, in the end social relations become embedded in an economic system instead of the economy functioning as a part of the society. Five decades after Polanyi presented his disembedding thesis, socially disembedded market economies have entered a new stage of development with the arrival of cyber-financial globalization.
Compared to global industrial capitalists, who invest in a firm with the intention of controlling its management, the agents of institutional investors in cyberspace typically work with a very short time frame, and lack long-term commitments to the objects of investment. The IMF report notes that “U.S. mutual funds need to meet performance standards over a very short time horizon, and open-ended funds face the risk of sizeable net redemption if their quarterly performance lags behind their competition” (IMF, 1994, p. 18). Fund managers of mutual and hedge funds, who face growing competition within the industry, develop a short-term mentality; they move quickly and decisively according to the momentary rhythm of the market to maximize their performance records. Otherwise, the individual investors who are often also in cyberspace these days would redeem their shares in a quick moment of decision. In other words, the short-term mindset affects individual investors as well as institutional money managers. Additionally, the pay and bonus structures of fund managers’ salaries emphasize high yields rather than risk exposure, and their performance is frequently evaluated, usually every few months (Harmes, 1998). As a result, these managers often do not take sufficient time to evaluate risks in emerging markets rationally and independently. Rather, they are often driven by the wish not to disagree too often with the decisions of other institutional investors. Thus, a combination of market volatility, disembedding, and a panic-ridden mentality operating at cyberspace speed precipitated the Asian meltdown of 1998 (Sakakibara, 1999). “[T] he market not only frees itself from society but also imposes its logic upon politics” (Altvater and Mahnkopf, 1997, 455). The logic of the free capital market is now translated into an ideology of a self-regulating global free-market capitalism inventing itself as the scientific and rational economic philosophy of the future. The political implications of the disembedding process for democracy–particularly in terms of political participation–are significant. The disembedding process in cyberspace runs contrary to the reality of the democratic political processes that are embedded in the historico-institutional contexts of real-life political communities.(1)
Democracy and Re-Embedding
Modern capitalism has self-perpetuating expansionist tendencies that whet human appetites for the maximum. Not only material opportunities, but the possibility of having ever more exciting and challenging lives drives us to join the game of global capitalism. For the last two decades in particular, under both Republican and Democratic administrations, the desires of individual market players were given free rein in the name of individualism and freedom. The effective operation of a market economy, however, requires a measure of stability and regularity in its social institutional contexts. The operation of global financial capitalism is no exception. Although the current direction of discussion in Washington is aimed at fostering “deregulation” in other countries, the international regulation of cyber-finance will inevitably appear on the agenda after the present phase of deregulation. But if the stage of re-regulation is based on the uncritical assumption that financial markets are everywhere the same, the resulting “Americanization” of the various patterns of local economies in the name of a universal market will undermine the stability of these other societies.
Asian societies have developed their own forms of capitalism that are embedded in a variety of distinctive patterns of social networks, institutional settings, and their historical roots. Some readers may ask, then, whether one must accept uncritically all indigenous institutions or Asian ways. Respect for local practices and indigenous knowledge may be the norm of global civil society, but should that respect be extended to the widespread corruption in some Asian societies, such as the special business privileges given to Suharto’s family and the political allies that maintain his regime? It is of course not my intention to justify all kinds of Asian practices simply because they are locally and socially embedded practices. After all, the lack of public rules that increase accountability and trust in financial institutions in some Asian countries deepened the economic crisis in these countries.
It is also not my intention to do no more than lament the inherent contradiction between the internal logic and dynamics of the cyber financial market and those of democracy. Briefly put, I consider that in an age of cyber-financial globalization, democracy based on the nation state has a critical responsibility to restore some of the embeddeness of a market economy within the social and historical contexts of each country. I consider the effective practice of liberal democracy to be a cornerstone of the healthy development of a market economy in these countries. I submit that there are three aspects of democratic functioning worth particular notice.
The first point is related to the inclusive and participatory nature of liberal democracy. The development of the institutional-organizational aspects of a market economy must reflect not only business interests, but also the political representation of others, including the weaker parties. If the values of social justice and fairness are not respected as the foundation of the political community, the fairness and transparency of economic transactions will not be firmly institutionalized in Asian economies. This weakness would in turn undermine the institutional foundation of such a market economy. In relation to the first point, democratic values become even more important during an economic depression. The Asian financial crisis illustrates the impact of new technologies and globalization. Regional economies are now so closely linked with one another that an economic crisis can arise and spread with unprecedented speed. Once a crisis of sufficient severity occurs, a democratically constituted nation-state whose constituency represents a broad range of people has a better chance of relieving the distress of those who are most seriously injured by the crisis than a nation-state without a democratic government. In a country whose wealth has been privatized by ruling families and business interests through corruption, citizens who lost their livelihood in an economic downturn would have no political representation. The protective functions of liberal democracy are most necessary at the time of an economic crisis such as the recent Asian case (Sen, 1999). Overtly unjust distribution of resources, as a negative consequence of the new and sudden dynamics of financial globalization, may eventually weaken the foundations of the market economy itself.
Third, public discussions through democratic political institutions help to form values and set priorities when market pressures abruptly introduce new social dynamics. At this point, I must state that my emphasis on the re-embedding capacities of democracy does not mean that the process of re-embedding would mean resistance to changes. In fact, contrary to the conventional view, tradition in Asian societies is not simply a conservative force but can serve to create a new consensus for change. I have elsewhere discussed at length that Japanese samurai culture includes the twin themes of control and change. The Japanese samurai constructed a culture that was conducive to self-control, as well as an individualistic attitude that encouraged risk-taking. The remarkably swift program of modern nation-building in Meiji Japan (1968-1914) was carried out primarily by former samurai (Ikegami, 1995). Likewise, Asian people have often drawn on traditional cultural resources in the course of their history to institute their own forms of modern institutions and culture.
People, in Asia as elsewhere, often enjoy the new experiences and opportunities in life that the expansion of capitalism can bring into their life. Global capitalism has allowed many more “ordinary” people to cross boundaries into previously unknown territories. It is also true that globalization also has the potential to provide more people with greater and more stimulating opportunities in life. At the same time, however, we do not thrive without some regularity and constancy in life. Situations that demand independent and rational decisions at every moment about appropriate measures in constantly shifting and emerging contexts and encounters would be too stressful to most of us. Continual uncertainty would exhaust us rather than liberate us. Values, norms, ways of life, these repertoires of cognitive habits that are sometimes called “traditions” help to provide social structures with some regularity.
In the real world, these two tendencies–the drive for change on the one hand and the necessity for stability on the other–interact with each other in a dynamic fashion. Democratic political processes have a value structuring function that can establish a new set of priorities in values, norms, and ways of life in the face of new stimuli entering through the force of global markets. This value structuring process is also linked to the state’s institutional power to establish new rules for economic transactions and organizations. The learning and institutionalizing process of democracy is an integral part of what I mean by “re-embedding” a market economy within a society. Re-embedding means more than patching together a compromise between existing indigenous institutions and the logic of the market economy.
It is important to note, however, that the process of re-embedding through democratic processes usually requires a slow pace geared to the needs of human beings rather than machines. The re-embedding process is situated in the concrete space of a nation-state, and is thus very different from cyberspace. It requires legitimate democratic processes for institution-building through sufficiently open public discussions. A healthy re-embed- ding process can develop only through the learning and institution-building processes of democracy. Western media should focus on the social and political adjustments within the Asian countries affected by the crisis, including their own sense of pace and timing, not just on the region’s economic recovery. Outside observers are hampered by their inability to easily distinguish between local liberal intellectuals concerned with protecting the position of the weak in the face of economic crisis, and entrenched economic establishments whose only concern is their self-interest. Both camps would use similar language to criticize the logic of the worldwide global market. One remedy for this tendency, in my opinion, is to learn more about the historical and social contexts of these regions. I will use the Japanese experience to illustrate this point.
Japanese capitalism at a Historical Turn
The effect of the global financial market on local institutions does not always take a dramatic form, as it did in the case of the Asian financial crisis of 1997-98. Japan’s economic problems are less dramatic but not less serious or less pervasive. The Japanese Prime Minister, Obuchi Keizo, notes in the New York Times, “The systems and processes that made us so successful in the past no longer work.” He continues, “We realize that unless we adopt a more flexible economy driven by the market, Japan is doomed to economic and technological decline.” These remarks appeared in the op-ed page of the Times on April 29, 1999, on the occasion of the Prime Minister’s visit to Washington. The Western media tend to discuss Japan’s sluggish economy only from the viewpoint of economic policies. Yet a review of Japan’s current situation from a historical perspective reveals the seriousness of the country’s entanglement.
Among non-Western societies, Japan has so far developed the most distinctive system of capitalism, one that has been until recently considered the source of its remarkable economic success. Japan’s style of postwar capitalism was based on a network of intricately interconnected institutions that emerged through a set of complex historical contingencies. Because of this historical process, however, the challenge to the Japanese economy of cyber-global capitalism is not simply a matter of economic recovery in the present. Japanese intellectuals have perceived that Japan faces a serious historical challenge to its unique style of postwar democracy and capitalism.
At the heart of Japanese postwar capitalism lies a distinctive relationship between labor and management. The large Japanese corporations had generous employment policies, including life-long employment for regular employees; pay scales and promotions based on a combination of seniority and merit rating; company-based unions; a career system within the firm; and a variety of company welfare benefits. Top management executives were typically promoted under this in-firm career system (Aoki and Dore, 1994).
This distinctive style of labor relationship and corporate management generated a so-called kaisha, or company, ideology in postwar Japan according to which the corporation belonged to its work force. This notion is more easily understood if one thinks of kaisha as a “property relationship,” but not as a thing or object “out there.” Kaisha is, rather, a nexus of relationships embodied in actions and enacted through social interactions. In this usage, “property relationship” refers to a set of social agreements regarding the control of various resources that a “corporation” posses and creates. In other word, “property relationships” of postwar style of Japanese “corporation” is distinctively different from stereo-typical Anglo-American style of capital centered conception of corporate governance in which shareholders essentially governs the company. A further brief explanation will suffice. In the typical large Japanese corporation, it is unclear in practice whether the company’s stockholders really “own” and control the firm. Although Japanese corporations are legally defined as entities owned by their stockholders, the combination of low reliance on the open market for obtaining capital, high rate of stable shareholders who are affiliated companies, and high reliance on long-term loan gives management a relatively free hand vis-a-vis the short-term profit interest of individual floating stockholders. The major portion of shares of a large corporation was usually cross-held by multiple related companies that created “credible commitments” for long-term transactional relationships. This network of alliance structures embodied by stable share cross-holdings protected employees from the hostile takeover.
In short, the distinctive practice and corporate identity formation was possible because the postwar Japanese approach to the management of large corporations has appeared to outside observers to be the direct antithesis of contemporary Wall Street’s “cowboy capitalism.” Although Japan’s labor relationships are often considered a product of Japan’s traditional culture, it is a relatively “new tradition”, discussed in further detail below, that was permitted and formulated by the Japanese distinctive style of corporate governance and financial structures.
In other words, if Japanese corporations had had to depend heavily on a supply of capital from open bond and stock markets, their management might not have achieved a relative degree of autonomy from shareholders primarily concerned with short-term performance. On the other hand, because of this complex network of interdependent sources of stable capital, i.e., banks and mutual shareholding among related companies-one could argue that a competitive and efficient style of cyber-financial technology on the Wall Street model, a system that mobilizes available capital from a wide variety of sources, could not have developed rapidly in Japan. Furthermore, the global mobility of capital in cyberspace undermines the institutional basis of Japanese businesses, which include long-term commitments, credit, and interconnected shareholding. The emerging importance of global cyberspace capital market thus threaten the foundation of people’s long-term commitments to the Japanese system–today’s urgent political issue in Japan.
Historicizing Japan’s Entanglement: The 1940 System Debate
The complicated intellectual discussions among Japanese intellectuals related to the perceived threat of globalization cannot be understood apart from this background. The central point is not simply different policy options for economic recovery, but their more pervasive effects on the restructuring of Japanese society. The impact of the global market on Japanese society will require a serious and lengthy process of re-embedding. An illustrative example of intellectual political discussions is the “1940 system” debate, regarding the historical origins of the postwar economic system. The debate concerns interpretive as well as normative issues.
The present debate was set off by an opinionated popular book by Noguchi Yukihiko, called 1940-nen Taisei: Saraba Senji Keizai [The 1940 System: Good-bye to the Wartime Economy] (1995), that traced the origins of Japan’s postwar alliance capitalism in the wartime reorganization of the nation’s economy. As the title suggests, the author advocated the overhaul of the postwar style of Japanese capitalism that he claimed had originated during World War II. The historical argument of Noguchi’s book was based on a number of scholarly economic histories that emphasize the role of economic policies of wartime mobilization in the creation of postwar Japan rather than the aspects of discontinuity and renewal after 1945 (e.g., Dower, 1993; Okazaki, 1991; Okazaki and Okuno, 1993; Okazaki, 1994 Nakamura, 1971; Nakamura, 1981). The historical thesis can be summarized in the words of economic historians Okazaki Tetsuji and Okuno Masahiro: “The origin of many elements of modern Japan’s economic systems goes back to the period between the 1930s and 1945. The Japanese economic system before this period was basically close to the Anglo-Saxon style of classical market economy” (Ozaki and Okuno, 1993 p. ii).
Social scientists usually regard the prewar Japanese state as a strong regime that forcefully imposed economic modernization on the country. In terms of regulating its already lively areas of economic activities, however, the Meiji Japanese government’s (1868-1912) style was surprisingly liberal–somewhat comparable to that of the British. Prior to World War I, the Japanese economy had a well developed competitive infrastructure of capital markets, including commercial banks, savings banks, national banks, banks for long-term credit, and a variety of insurance companies, together with a small but lively market for stocks and bonds. This young and relatively unregulated capitalist economy was animated by a competitive entrepreneurial spirit.
This brief outline of the development of Japanese capitalism and democratic institutions may lead to the question as to why the Japanese version of capitalism did not move in the direction of the American form thereafter. The simultaneous institutional changes in various levels of property relationships during the period preceding World War II played a critical role in formulating the pattern of postwar Japanese capitalism. In fact, there was a clear aspect of continuity between the social structure of wartime economy and that of postwar Japanese capitalism in many levels as it is shown in Table 1 (see next page).
TABLE 1. THE WARTIME MOBILIZATION AS THE PLATFORM FOR THE POSTWAR JAPANESE SYSTEM
Pre-war Wartime
The Japanese Not yet clearly A platform
Style of developed for the present
Management style formulated
Employment Higher rate of Long-term
turn-over among commitment
blue collars encouraged
Pay-scale Meritocratic pay Wage control
scale law of 1939
encouraged
seniority pay-scale
Labor Union Labor not highly Unions break up;
organized, yet company-based
many labor “Patriotic Indus-
disputes trial Association”
institutionalized,
including blue and
white collars
Corporate Stockholders Stockholders
Governance owned the control over
corporation; management
high rate of decreased;
dividend rate of
dividend regulated
Source of Stock market + Loans became 77%
capital for bonds form 87% of capital source
corporations of capital source in 1944; decline
in 1931 of stock market
Number of 500 in early 61 in 1945
commercial 1930 controlled by
banks MOF
Personal 6% of personal 30% in 1940
savings rate income in 1930
Health Very limited Expanded to cover
insurance many
Social None Started in 1944
Security
Tax Decentralized; Centralized;
indirect tax direct withholding
Agriculture Highly Tenant farmers’
contentious rights protected
tenant farmers for maximizing
food production
No subsidies Food price control
Bureaucratic Limited indus- Increased bureau-
control over trial policies cratic power
industries throughwartime
regulation;
the infamous
“administrative
guidance”
emerged
Post-War
The Japanese Institutionalized
Style of in the high growth
Management period
Employment Institutionalization of
life-time employment
in big companies
Pay-scale Seniority pay-scale
became common
Labor Union Company-based unions
including blue and
white collars
institutionalized
Corporate Management largely
Governance autonomous from
stockholders
Source of Bank loans driving
capital for force of growth,
corporations as 80% of capital
source in 1964
Number of About 60 until 1990’s;
commercial collaboration with
banks and protected by the
government
Personal 20% in 1960
savings rate
Health Universal public
insurance health plan
Social Expanded to
Security cover all citizens
Tax Centralized;
direct withholding
Agriculture GHQ’s land reform;
land distributed to
tenant farmers
Rice price control;
Small independent
farmers support the
LDP
Bureaucratic Less affected by
control over GHQ’s purge than
industries politicians and
business leaders
In the late 1930s and 40s, the Japanese government implemented a number of drastic policies that remolded the socioeconomic system in order to prepare the country for war. The enactment of the Law of National Total Mobilization in 1938 represented this change. The total impact of these radical changes brought about the prototypical social system that is now often referred to as the Japanese System. As the reader will observe from Table 1, there are notable discontinuities between the prewar and wartime systems in various areas of the Japanese political economy. In contrast, we find notable institutional continuities between those of the wartime and postwar Japanese capitalism. The five major characteristics of the so-called Japanese style of corporate management–lifelong employment; pay scale and promotion based on seniority; company-based unions; and reliance on bank loans rather than the stock market as the major source of capital–resulted at least in part from wartime regulations. For example, the 1937 law of dividend regulation restricted the shareholders’ right to receive a high dividend rate. A 1939 law that controlled pay scales led to the introduction of a pay scale differentiated by seniority. The rapid increase of labor disputes in 1937 induced the government to institute a system of company-based unions called “Patriotic Industrial Associations.” These unions encouraged labor to cooperate with management for the sake of increasing productive output. Since these company-based associations organized both blue-collar and white-collar workers under one umbrella, they helped to generate a sense of community among employees. In the area of finance, the number of commercial banks indicated most clearly the impact of wartime regulations. During the pre-war period, even after the significant decrease by the Great Depression, the number of Japanese commercial banks still totaled about five hundreds in early 1930. However, 1945 reduced the number of Japanese commercial banks reduced to 61 under the strict control by the Ministry of Finance. It must be noted that until recently, the number of Japanese commercial banks stayed around 60. The origin of the Japanese style of corporate governance and capital mobilization centering on bank loans can be found in this schema.
These wartime government restrictions on free capitalist activities were coupled with redistributive policies in the areas of health insurance, social security and agricultural subsidies, as indicated in Table 1. The tenant farmers’ rights over the land that they farmed were expanded, while the landowners’ control of agricultural land was restricted in order to guarantee adequate food production. In general, the components of the Japanese system included in the table reinforce each other. For example, the shift of capital from the stock market to loans and the resulting decrease in the stockholders’ control over corporate management facilitated the development of communitarian features and feelings in Japanese corporations. In addition, a high rate of personal savings became a major feature of Japanese capitalism after the war, and was a critical factor in the emergence of strong banks within the new financial system. The decentralized Japanese tax system was reorganized into a heavily centralized system that relied on direct withholding taxes, a move that strengthened the fiscal power of the central bureaucracy. In this way, the simultaneous introduction of the full complement of wartime institutions enabled the emergence of many characteristics that we now associate with postwar Japanese capitalism.
Although a number of economic historians support this line of historical interpretation, a political/intellectual debate on the future of the Japanese system begins only from this point. Noguchi himself advocates the straightforward introduction of the logic of the global market–to say “good-bye to the wartime economy”–and move Japan to a new stage of rational competitive market economy. Basic welfare measures should be provided by the state rather than by such mid-range organizations as business corporations. Although this line of argument is persuasive, given the negative image of the Japanese wartime economy, many liberal intellectuals are opposed to the political conclusions that Noguchi draws from it.
Public attention was most heavily concentrated on the argument of Sakakibara Eisuke, a high official of the Ministry of Finance who was nicknamed as “Mr. Yen.” More than twenty years ago, he co-authored a paper on the 1940 system with Noguchi (Sakakibara and Noguchi, 1977) that focused on the history of Japanese financial policies and markets. Even though he shares Noguchi’s historical understanding, however, Sakakibara has been a vocal critic of Noguchi’s and the “market fundamentalists” view that the Japanese system, even under the impact of changes resulting from global influence, should search for its own identity, including its own style of labor relations. Japanese corporate management is much more “democratic” compared to the typical American style. The operation of the Japanese government and its bureaucracy is also much more decentralized than the conventional picture might suggest (Sakakibara, 1993, 1996, 1999).
A more systematic criticism of Noguchi’s argument was presented by Satake Keishi, a Japanese liberal intellectual. Satake partly supports Noguchi’s proposal to revise the current Japanese system, including the corporate kaisha mentality and bureaucratic control over the market. On the other hand, Satake criticized Noguchi’s basic assumption of market universalism. “Historically, even in the West, civil societies in various countries are very different from each other. Rather, there is always coexistence and conflict between two social forces, the one urging rationalization and modernization of society and the other desiring to limit rationalization and trust the social accumulation of people’s unconscious habits … even under globalization, the world would not become homogenized” (Satake, 1998, p. 270). The important point is the revitalization and re-creation of the institutional sets of the Japanese system.
The intellectuals who advocate moving Japan toward a “global standard,” i.e., the introduction of the competitive logic of the worldwide market, used the “1940 system” thesis as if the postwar Japanese system had resulted from top-down planning and regulations, the perceived legacy of the wartime mobilization system. The wartime system, however, had contributed only some institutional grounds–such as the structure of the financial markets–from which modern Japanese corporate cultures developed complex interdependent networks of alliance. The democratization policy of the American occupation force after 1945 also decreased the authoritarian aspect of the Japanese system while keeping the basic structure of financial institutions intact as well as the trend toward expanding the welfare systems. The postwar Japanese corporate culture grew in this institutional and organizational field of recontructed liberalism, which was intimately connected to the Japanese style of postwar democracy.
Japanese Democracy and Capitalism through Corps intermediaires
Japan’s so-called “postwar democracy” was implanted by the Western powers. Yet, democracy appeared to acquire a solid institutional basis and moral legitimacy in Japan over the past several decades. Under closer examination, however, the Japanese practice is naturally and legitimately different from the stereotypical Western understanding of democracy. Instead of developing a modern civil society based upon Western styles of individualism, modern Japan was organized through the mobilization of individual loyalties into such mid-range organizations as corporations, and regional organizations. The reality of the working of modern Japanese society is far removed from a top-down state-centered view. The consensus, however, that appears to be emerging from recent studies of modern Japanese political economy emphasizes the complexity of the system; its direction cannot be attributed to a single dominant source of power.(2) Power is not exercised from above in a straightforward manner but through a series of lengthy and implicit negotiations among those involved that often look ambiguous to observers outside the circle. In place of the precise application of procedures articulated in the courtroom or legislature, the direction of the Japanese political process from village politics to the national level is decided by the ambiguous outworking of reciprocal negotiations of middle range organizations. The results are sufficiently inclusive and participatory for those involved in the negotiating process, but are experienced as alienating and unsatisfactory for those excluded from decision-making.
The reader should recall that the presence of strong corps intermediaires has been frequently regarded as an instrumental component of democracy since Montesquieu and Tocqueville. It was through the vigorous associational life, Tocqueville thought, that Americans were instilled from an early age with the habits of cooperation and civic-mindedness, resulting in a healthy foundation for American democracy. The social and organizational basis of modern Japanese democracy bears a family resemblance to this civic associational picture, but is very different in other respects. The Japanese have a stronger sense of belonging to these mid-range organizations and a comparatively weaker sense of belonging to the public beyond them. Yet, unlike some other Asian societies, Japan is relatively free from corruption and private domination by traditional kinship networks. The Japanese corps intermediaires are primarily modern organizations, though not civic organizations in the Western sense. The democratic political participation and collective decision-making in Japan is related to these associational characteristics of Japanese society. One problem, however, is that the mid-range organizations often monopolize their members’ loyalty, and a sense of public life outside them fails to develop fully. The formation of mid-range organizations and associational ties was the Japanese style of naturalizing democracy, which was also linked to postwar Japanese capitalism and the logic of the Japanese market economy that grew, in part, out of the 1940 system.
Trust and Value-Structuring Functions of Democracy
On the other hand, the strength of the postwar Japanese system was the development of various organizations that encouraged trustworthy behavior in their members. This social trust was based on warm long-term social relationships in the mid-range organizations as well as a sense of egalitarianism and responsibility in the workplace. The decline of Japanese corporations’ long-term labor relations has undermined an important component of this sense of trust in Japanese society. Trust is a highly important form of social capital; a capitalist market system cannot be either stable or efficient without it. Trust in relational transactions is built up over the dimension of time. Human beings cannot remove all unpredictability from future courses of action. Yet, healthy social relationships require some measure of decreasing the uncertainty of future actions. Capitalism, in fact, has historically benefited from the existence of values, cultures and laws that decrease the level of uncertainty in the transactional parties’ future course of actions. Still, even at its best, a mechanism of enhancing social “trust” through the workings of mid-range social organizations has its own share of problems. The problem of civic ethics that Japanese intellectuals are discussing these days tend to focus on the fact that the identities and loyalty of members of these organizations are absorbed at the middle level, and do not extend to the broader public interest. At the same time, financial globalism is threatening the cornerstone of Japanese social trust by eroding the long-term employment system of corporations. The real challenge to Japanese society in an age of global capitalism is to keep some strength and warmth of social relations through mid-range groups while constructing some new system of trust to monitor the transparency of these organizations toward the construction of new civic ethics. It will be a highly political process as well as a process of re-creating values for the Japanese people.
Social institutions, values, cultural and historical conventions and legal codes usually help to increase human predictability. Each society produces its own mechanisms for ensuring trustworthiness in human transactions to support a measure of social stability. At this point in contemporary life, it is very difficult to live with ever-changing standards of value, and where there is no reliable institutional system to encourage the trustworthiness of human behavior over time. Without encouraging investments in the capital of societal “trust,” we cannot achieve reasonable stability in the economic system. Public discussions and negotiations through democratic political processes help to recreate values and set priorities in the world where global dynamics of market constantly introduces changes.
The Japanese public generally accepted the necessity of economic restructuring and supports a trend toward deregulation and the increased transparency in corporate governance, and financial market operation. It does not mean, however, the Japanese people are ready to move to the economic rationalization of the American style: there should be a Japanese way of handling globalization. The Japanese reactions to deregulation and globalization represent a difficult search for a way to re-embed the effects of the global market into their own social institutions as well as cultural and historical contexts. The market as such is not self-adjusting as if it were a machine; it functions sufficiently only when it is properly embedded, through democratic processes, within social networks that are deeply connected to its history, social structures, and cultural background. Japan’s efforts should be respected as its own pattern of democracy, even though it may look slow and sometimes confusing to outside observers.
Notes
(1) We should not, however, regard this disembedding process naively as no more than an apolitical and unintentional effect of the market’s inner logic. It was clear from the outset that cyber-financial globalization came into being because it was enforced and supported by the market standards of the most powerful nation in the world. In other words, cyber-global capitalism is linked to the economic interests of the United States, which has developed universal standards for financial markets and has become the magnet of the world’s surplus money. In fact, given the high rate of investment in savings accounts among Asians, Asian surplus money has flowed into the American financial market. This money–in particular, Japanese money–supported the American financial boom. Ironically, it was in part Asian money invested in the American market that triggered the Asian financial crisis.
(2) Since the publication of the influential work of Chalmers Johnson, MITI and the Japanese Miracle, postwar Japanese economic development is often regarded as a typical success story of a bureaucratic state. More recent scholarship on Japanese political economy, however, offers a more complex picture of postwar development. The state bureaucrats are indeed influential actors in Japan, but so are the large corporations and politicians. For example, the Japanese political scientist Inoguchi Takashi proposes the term “bureaucratic-led, mass-inclusionary pluralism” in partial reconciliation of the divergent views of other scholars. In addition to the roles of the government bureaucracy and big business, mass participation in politics through party politicians representing local interests has played a role in defining the direction of state policies. Kent Calder has underscored the role of the corporate managerial elite with the term “strategic capitalism. More recently, Michael Gerlach has used the term “alliance capitalism” in order to emphasize the structures of institutional arrangements that enmesh its primary decision-making units in complex networks of cooperation and competition. The outline that I am sketching belongs with these more complex understanding of the Japanese political economy.
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Eiko Ikegami is Director of the Center for Studies of Social Change and Professor of Sociology at the New School University’s Graduate Faculty. Her book Civility and Aesthetic Publics in Japan is forthcoming.3
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