Capitalism
and the Capitalist Spirit in East Asia:

A
View from Europe*

by Prof. Hanns W. Maull, Trier University in Germany

* Presentation at the
Conference on “Capitalism and Capitalist Spirit in East Asia“
on March 24th
2000, organized by the Institute of Social Development, Seoul National
University and Friedrich-Ebert-Stiftung

Abstract

For
much of mankind´s history, East Asia represented the
largest part of the world economy. The industrial revolution
(as the manifestation of the rise of modern capitalism)
has changed this, though we are probably witnessing
a return to this traditional pattern of East Asia as
the largest cluster of economic activity. We do not
have good answers as to why did this revolution take
place at the periphery, rather than at the gravitational
centre of world economic activity in East Asia - but
we know that East Asia more recently has done exceptionally
well, developing its own forms of modern “East Asian
capitalism”, the capitalist developmental state. Japan
has been at the core of this success, and continues
to exercise considerable influence over the development
of modern capitalism in East Asia. But the crisis of
Japan since 1992, and the East Asian “financial crisis”
of 1997-1998, signal the end of the useful life of the
Japanese model of the developmental state. East Asia
will have to shift to a new paradigm which, however,
will certainly not be a copycat version of Anglo-Saxon
capitalism. In addition, East Asia will have to cope
with unprecedented demographic changes and solidify
as yet very fragile regional security co-operation and
integration.

For
much of the last 5000 years of history, East Asia represented the
largest part of the world economy. The industrial revolution (as
the manifestation of the rise of modern capitalism) has changed
this, though we are probably witnessing a return to this traditional
pattern of East Asia as the largest cluster of economic activity.
We do not have good answers as to why this revolution took place
at the European periphery, rather than at the gravitational centre
of world economic activity in East Asia - but we know that East
Asia more recently has done exceptionally well, catching up rapidly
and even moving towards the frontier of capitalist development.
What this paper sets out to do is to explore the failure of autochthonous
capitalist development in East Asia, the region´s later successes
and its most recent difficulties. Against this background, the paper
then speculates about the future of modern capitalism in East Asia.

1.
What is “Capitalism”?

What
do we mean by “capitalism”, and how do we define “modern capitalism”?
Max Weber draws a sharp distinction between the two. For him (and
I will follow his argument), capitalism simply means any economic
activity which aims at a sustained and growing balance-sheet surplus.
In this traditional sense, capitalism is a very venerable and universal
phenomenon. It centred around the exchange of  goods and services,
i.e. around commerce.

Modern
capitalism for Max Weber is a much more demanding category. It is
dominated not so much by exchange (though the scope for exchanges
certainly also widens dramatically under modern capitalism) but
by the quantity and quality production. Traditional capitalism satisfied
human needs and desires through trade, modern capitalism through
product multiplication and innovation. Where traditional capitalism
uses resources extensively, modern capitalism does so intensively.
One implication of the shift from one to the other was that the
territorial scope of economic activity could be reduced: long-distance
trade played constituted a much more important share of total commerce
under traditional capitalism than under modern capitalism. Modern
capitalism is intricately linked with the rise of the modern nation
state.

Specifically,
Max Weber argues that the rise of modern capitalism required a number
of essential preconditions, which together existed only in Europe,
namely

rational
capital accounting on the basis of private property over all physical
means of production,

free markets,

rational use of technology (mechanisation),

rule of law,

free labour,

the commercialisation of economic live, which
implied the transformation    of property into negotiable
paper and, related to this last feature,

speculation.1

This
still seems a pretty good description today. It makes clear that
“modern capitalism“ could be equated with “industrialisation“
or “modernisation“; it describes the fundamental changes Western,
but also many non-western societies have been undergoing through
the last two hundred years.

2.
Why did Modern Capitalism not Arise in East Asia? Some Western Views

That
capitalism did not develop spontaneously in East Asia is an indisputable
fact. How this fact can be explained, however, is another matter
- and trying to answer it is tricky for both Western and East Asian
social scientists, as we both may have our own axes to grind: we
Western may secretly indulge in triumphalism, while  East Asian
may wish to rationalise shortcomings.

In
any case, Western views on this question diverge widely, and we
clearly are far away from a clear and generally accepted answer.
By way of illustration, let me briefly review some Western explanations
for the rise of modern capitalism in Europe and its initial absence
in East Asia.

Max Weber

Max
Weber to my knowledge was the first social scientist to explore,
in a highly systematic fashion, the question as to why modern capitalism
developed in Europe, but not in East Asia. Others have dealt with
his analysis much more competently, and more thoroughly, than I
could have done. Suffice it to say here that  his culprits
with regard to China were, to simplify enormously, a) the pervasive
influence of kinship relations in Chinese society and economy (from
today´s perspective of Chinese capitalism of family networks, a
somewhat ironic position) and b) the structure of the Chinese state
which obstructed the development of modern capitalism.2

Gunnar Myrdal

To
use Myrdal´s monumental study on the “Asian Drama”3
as evidence is, of course, somewhat unfair: his analysis essentially
was confined to South Asia (though his definition of this region
curiously included much of today´s South east Asia, and it also
claimed broader relevance). Still, it may be worthwhile to recall
that he saw the origins of persistent, indeed escalating underdevelopment
in attitudes and institutions. Traditional religious beliefs and
traditional socio-political institutions top him represented the
core obstacles to development, which could be overcome only with
a “big push“. Note, however, that he had some very harsh things
to say about simplistic notions about “Asian values“!4

Jared Diamond

A
radically different approach to explain our puzzle has been taken
by the physiologist Jared Diamond. In his book “Guns, Germs and
Steel. The Fate of Human Societies”5
he looks to geographical and environmental conditions as determinants
of human history. From this perspective, both Europe and East Asia
turn out to have been favoured by nature. Indeed, the geographical
and ecological environment of East Asia was so favourable that it
enabled China to achieve the political unification of a large land
mass and huge population earlier, and to defend this political unity
more effectively than other civilisations. This, to Diamond, helps
to explain the technological advantages which China achieved over
others.

Yet
those advantages often remained unused, and China´s great historical
asset, its political unity based on advantageous geographic conditions,
became a major disadvantage. In geographically and politically heterogeneous
Europe, competition between states kept up the pressure for innovation.
China was also more isolated from other major civilisations, but
more exposed to the continuous onslaught of steppe people from East
Central Asia.

***

Why
did modern capitalism not arise spontaneously in East Asia? In the
end, this brief survey of explanations does not give us a clear
answer. Certainly, many necessary preconditions existed there, as
much as (if not more than) in Europe. Although we have a number
of plausible explanations and considerable supportive evidence about
barriers to modern capitalism in East Asia, in the end those explanations
and the supporting evidence are also not always compatible, sometimes
contradictory and certainly not easily reduced to elegant causal
theories. We are thus left somewhat puzzled by the question as to
why East Asia failed to shift towards modern capitalism on its own.
The simplest way to settle the issue may be to state it as follows:

Proposition
One: In East Asia, modern capitalism failed to develop autonomously
because there was no perceived need for it. This need in Europe
was provided by the competition of nation-states through endless
rounds of warfare.

3.
The Rise of Modern Capitalism in East Asia, 1868 to 1997

It
thus was the incursion of external factors - specifically, the geographical
expansion of modern European capitalism in the age and under the
form of  Western imperialism - which introduced East Asia to
modern capitalism. This historical process started with the first
(abortive) effort by the United Kingdom to persuade China to open
itself to trade with the West (the famous Macartney mission) in
1792-1794 and unfolded through the opium wars and subsequent external
interventions in China and the arrival of Commodore Perry´s Black
Ships to Japan in 1853.

It
was the latter event which in retrospect turned out to be decisive
for the implantation of modern capitalism in East Asia. The forced
opening of Japan triggered the (already shaky) breakdown of the
old order, and a determined effort by the new Imperial state of
the Meiji revolution to haul Japan into the age of industrialisation.

This
effort succeeded in a remarkable tour de force, though it also left
a highly precarious legacy of expansionist energies and social tensions.
Japan´s successful industrialisation, which was completed in its
first, most important phase by 1914, represented the first of four
successive waves of the expansion of modern capitalism in East Asia.
The second wave started in the 1960s and comprised the later so-called
Newly Industrialising Countries (NICs) South Korea, Taiwan, Hong
Kong and Singapore. A third wave engulfed from the mid-1970s South
East Asia, and the fourth wave has swept China since the initiation
of the four reforms in 1978.

The
impressive catch-up development of East Asia since World War II
has been extensively documented. According to the much-quoted study
on “The East Asian Miracle“ published by the World Bank in 1993,
the development of the region was marked not only by historically
unusually high growth rates of overall economic activity and per
capita output, but also by a quite remarkable degree of  distributional
justice  and  a successful assault against absolute poverty.
While the East Asian region may have been a late developer, by 1997
it certainly had been catching up very impressively.

In
sum, this leads to my

Proposition
Two: Modern capitalism has unfolded by and large very successfully
in East Asia. Like waves triggered by a stone thrown in a pond,
industrialisation spread from Japan throughout the region. This
suggests that many preconditions for successful industrialisation
already were in place.

4.
Why did modern capitalism in East Asia succeed in this century?

But
why did modern capitalism spread so successfully since 1868 in Japan,
and since World War II throughout the region, when it had failed
to develop spontaneously? And what were the reconditions which existed?
One obvious response to the first question is that it was precisely
the opportunities to catch up, hence to adapt experiences and practices
which already had been developed elsewhere, which explained the
rapid rise of modern capitalism in East Asia in the late 19th and
20th century.

Yet
this alone is not enough, as some blatant development failures such
as North Korea or Burma show. The success of modern capitalism elsewhere
was one necessary external, but certainly not a sufficient condition.
Others had to exist, as well, both internally and externally. My
argument would be that it was a confluence of existing internal
preconditions and external influences, which catalysed internal
changes and thus removed the traditional obstacles to modernisation.
The first external challenge was presented by the intrusion of the
West into East Asia, and the second by modernising Japan.

To
analyse in some detail this confluence of existing internal preconditions
and external challenges, the case of Japan may be instructive. What
catalysed the breakdown of the bakufu and the initiation
of the Meiji reforms was the perceived threat to Japan´s independence,
its external security and internal stability. Under the Damocles
sword of Western imperialism hanging over Japan´s head (and China´s
fate, which the Japanese elite followed closely, vividly reminded
Japan of what might be in store for Japan), Japan´s new leadership
launched an all-out effort to pull Japan up to the level of Western
power.

In
this effort, Japan´s reformers could build on strong foundations
in terms of prevailing norms and values, human resources, economic,
and social and political institutions:

Norms
and values: Japanese society had evolved at the beginning of
the Meiji era many of the intellectual foundations of a modern capitalist
society. Edo Japan was highly educated and strongly emphasised the
value of education. And it was in many ways meritocratic, secular,
pragmatic and empirically minded. The attachment to education reflected
the influence of Confucianism, but also the importance of the feudal
code of conduct for the Japanese warrior, the samurai, which came
to permeate the whole of Japanese society.  Bushido, which
amalgamated elements from Neo-Confucianism with those of Japan´s
own religious traditions, notably Zen buddhism,6
may be seen as the functional equivalent to Max Weber´s protestant
ethic in Europe. It emphasised live-long learning and striving for
perfection in all human endeavours. Central to bushido was loyalty
towards one´s superior and benevolence towards one´s vassals.
Although the samurai class lost much of its previous importance
during the Edo period, which effectively monopolised the use of
force and thus all but eliminated the samurai´s military role,
its norms and values retained their appeal. As Reischauer and Craig
put it:

“...the
Japanese of the Tokugawa period seem to have developed an extremely
strong sense of honour, duty and obligation and a dogged determination
to live up to all that society expected of them. These qualities
gradually spread from the samurai classes to other classes“.7

The
tensions between Confucian thought and Japan´s own intellectual
and religious traditions may also have helped Japan to sustain considerable
intellectual pluralism and creativity. Against this background,
pragmatism and a strong interest for Western scientific knowledge
flourished, while religious attachments declined, making Japan -
like China and Korea - essentially secular societies.

Human
resources: The strong emphasis on education meant that Japan
began its reforms with a strong base in terms of human resources.
Ronald Dore has estimated that by the mid-19th century, about 40
per cent of all boys and about 10 per cent of all girls had received
some form of education outside their home.8
The degree of literacy was almost certainly considerably higher
(which, given the characteristics of the Japanese script, is a much
taller order than with the Roman alphabet). This  level of
education was probably at least as high as that of, say, Britain
in Europe at that time.

Social
and economic institutions: By the end of the bakufu,
Japan had become something of a proto-industrial society. Economically,
it had become increasingly united and differentiated. Socially,
it was highly educated and meritocratic:  education had become
a road towards social advancement, as the aristocratic foundations
of the bakufu eroded: in the latter years of the bakufu,
bureaucratic appointments were largely made on the basis of merit.
There existed new middle classes, made up of rural land owners,
innovative merchants, and samurai bureaucrats with a strongly “modern“
orientation. At the same time, Japanese society remained very cohesive,
united by a strong proto-nationalism built on territorial, ethnic,
linguistic and religious homogeneity and strong common political
institutions. The dialectical “unity in diversity“, which in traditional
Japan had been built on the ferociously violent competition of the
han (the feudal fiefdoms) within the overall framework of Japan
(expressed by the institution of the Emperor), during the Edo period
had largely been suppressed. Instead, the ie (originally:
household) came to take the central place in Japanese society. The
ie, built on the moral relationships between the patriarch
and the other members of the family characteristic for the old feudal
system, became the key model for organising social and economic
activities, including firms. As such, the ie replaced both the traditional
han and the rugged individualism which had prevailed in Japan at
the time of civil war and anarchy preceding the bakufu. As
Lehmann puts it:

“By
the end of the Edo era, society had been significantly modernised...
Economically, Japan had emerged as a national market; major
centres, primarily Osaka, acted as the axes of economic life; there
developed a significant amount of inter-regional trade, diversification,
regional specialisation, improvement in transportation and so
on. This is not to say that geographic disparities in terms of distribution
of wealth disappeared. On the contrary...But geographic differentiation,
like social differentiation, has been a characteristic of all industrialising
societies.“9

Political
institutions: The Tokugawa state had played an important role
in this development of a proto-industrial society in Japan. It had
pacified and united the country and effectively ended the endless
civil wars of earlier days. It had developed a rational bureaucracy
and the foundations for enhanced commercial exchanges. A strong
sense of national identity, which found its political expression
in the Imperial Household and the Tokugawa shogun, held society
together.

Once
the new leadership (mostly made up of young samurai from
peripheral han) had achieved the overthrow of the old order,
it set out on a course of rapid industrialisation and Westernisation,
building on those existing preconditions. It did so with a remarkably
open, pragmatic and cautious approach. The aim was, with a slogan
borrowed from ancient Chinese traditions, to create a “rich country,
strong army“. National wealth and military-political power was
to be achieved through industrialisation, which in turn required
a complete overhaul of Japanese society.

In
this, the state would have to take the lead. The government created
a favourable environment for economic expansion by assuring internal
stability, improving tangible and intangible infrastructure (such
as laws and regulations governing economic exchanges) and sound
macroeconomic conditions. It also took a direct role in industrial
development.

None
of this was very surprising, nor particularly Japanese. Japan´s
path towards industrialisation reflected the thinking and experience
of industrial late-comers, such as the United States or Germany.
In the US, Alexander Hamilton had strongly argued for an active
role of the state and infant industry protection; in Germany, Friedrich
List had written extensively about national economic strategies
to catch up with industrialised Britain. What developed out of Japan´s
experience, the
“capitalist developmental state“ (Chalmers
Johnson),10 was neither particularly
Japanese nor particularly mysterious.

What
was this particular Japanese/East Asian variant of modern capitalism?
At the risk of grossly simplifying, and confining myself again to
the Japanese version of the developmental state, it could be characterised
as follows:

The impulses
for successful development ultimately come from the people, their
resourcefulness and the “will to develop“ (A. O. Hirschmann).
The primary objectives of development are national power, rather
than individual wealth.

The
state plays an important direct and indirect role in the process
of development, in a variety of ways. It generally provides for
a framework conducive to development, organises and allocates the
acquisition of knowledge and modern technologies, mobilises and
allocates credit to preferred investment activities, supports and
subsidises “national champions“, protects infant industries and
encourages exports, and acts as entrepreneur itself through state-owned
industries.

The state
mobilises society around the objectives of development, in particular
through  developing education and the abolition of social barriers
to modern capitalism. It also demands loyalty and dedication to
the state symbolised by the Emperor and, after World War II, appeals
to nationalism and the desire to rebuild Japan into a Great Power
on par with the West.

The state
tries to build support and legitimacy for its policies, appealing
to nationalism, a sense of external threat, and unconditional loyalty
and dedication to the state symbolised by the Emperor. During the
Meiji period, state Shinto was developed as a religious expression
of this. In the post-war era, economic growth became something of
a secular religion, and general material improvements and specific
side payments became the  primary means of assuring legitimacy
for the developmental state.

In
sum, the Japanese developmental state was not the only, perhaps
not even the most important reason behind Japan´s successful catch-up
development. It did, however, work very well for quite some time,
and acquired enormous importance for the shift of the whole of East
Asia towards modern capitalism. For it really was Japan which provided
the decisive external catalyst for the break-through of modern capitalism
in East Asia. It did so in four quite different ways.

First,
by way of example: Japan´s successes became a source of admiration
and inspiration throughout East Asia.

Second,
by way of brutal coercion. Japan learned the Western lessons only
too well, and from 1895 turned into an expansionist power in the
mould of the Western imperialism. Its military advances into Korea
and China (and later also into South East Asia) led to the establishment
of a quasi-colonial Japanese empire in which forced industrialisation
played a considerable role, particularly in Korea and Manchuria.
Japanese imperialism thus tore down many of the traditional obstacles
to modern capitalism which had stifled earlier efforts at modernisation
in East Asia, and it also established some of the physical and intangible
infrastructure of modern capitalism in its colonies - at the price
of terrible human suffering and to the almost exclusive benefit
of Japan.

Third,
by mobilising East Asian nationalism. Japanese expansionism tried
to instrumentalise anti-Western and anti-colonial sentiments throughout
the region, but its comportment alienated the other people in Japan´s
“Greater East Asian Co-Prosperity Sphere“ (an truly Orwellian
euphemism!). East Asian nationalism matured in the struggle against
the Japanese occupiers, and it was this anti-Japanese nationalism
which mobilised much of East Asian societies.

Fourth,
Japanese economic success and its particular form of modern capitalism,
the developmental state,  became a model for much of East Asian
modern capitalist development, from South Korea to China. Only North
Korea, Burma, Cambodia and Laos, and “among successful developers”
the formerly British colony of Hong Kong took their primary economic
policy inspirations from elsewhere. The importance of the Japanese
model was underpinned since the 1950s by

Fifth,
Japan´s active promotion of its particular form of modern capitalism
throughout East Asia through trade, aid and credit, and above all
through the foreign direct investment of Japanese firms which resulted
in the regionalisation of Japan´s industrial structures.11

All
this is summarised in my

Proposition
Three: What enabled modern capitalism to take off in east Asia was
a confluence of existing internal predispositions and building blocks
on the one hand and strong external influences, on the other. External
circumstances threatened the very independence, cohesion and socio-cultural
identity of East Asian societies, but they also provided enormous
(if far from obvious) opportunities. Under those circumstances,
Japan managed to free itself from the shackles of a restrictive
and status-quo-oriented ancien régime and during the Meiji
era initiated a series of radical internal reforms which very successfully
propelled Japan into modern capitalism. Within two generations,
Japan was turned into a mature industrialised country. But within
one generation, it had become an expansionist and imperialist power
in East Asia. The strains of  the modernisation process and
some of its idiosyncratic features pushed Japan into the arms of
militarism, with disastrous consequences for Japan itself and the
region. Still, it was Japan which catalysed the expansion of modern
capitalism throughout East Asia - by example, by brutal force, and
by co-optation and stealth.

5.
The Rise and Decline of the Japanese Model

The East Asian Miracle, 1965 to 1997

Japan
thus propelled East Asia into the age of modern capitalism and the
“East Asian miracle“. What the miracle meant has often be described
and need not detain us here much: very high growth rates in overall
economic activity and per capita output; a quite remarkable degree
of distributional justice; a drastic reduction of absolute poverty;
and the spreading of affluence to rapidly expanding middle classes.
That the developmental state had something to do with the successes
of East Asia, has been widely documented and recognised even by
the World Bank. In its already quoted study on the “East Asian
Miracle“, it identified the following causes for the economic success
of East Asia:

“Getting
the basics right“: above all, this involved the mobilisation of
investment capital and human resources, the promotion of agricultural
development, the lowering of population growth rates;

sound
policies: much of the first set of causes can be traced back to
sound policies, ranging from the macroeconomic to education. Those,
in turn, rested on what today would be considered aspects of “good
governance“: a competent and honest bureaucracy, a functioning
legal system, and generally a “strong but socially embedded state“12 capable of setting and implementing
targets and able to find societal support for its ambitions;

specific
but systematic government intervention in the economic process.
Those interventions have taken various forms, which may differ from
period to period and from country to country. They include credit
allocation and investment credit subsidies, the protection of infant
industries, subsidies for restructuring, public investments in research,
firm- and industry-specific export targets and subsidies, and so
on.13

Has the Miracle Come to an End?

In
July 1997, however, the East Asian miracle came to an abrupt halt.
The Thai baht was forced into devaluation, and this triggered a
sustained financial and economic crisis in South east Asia which
in the fall 1997 also spread to North East Asia (Hong Kong and South
Korea), In fact, Japan had been in a deep recession, which sometimes
threatened to turn into a depression, since 1992. East Asia now
followed with more or less significant declines in the growth rates
of economic activity through east Asia, and quite sharp economic
contractions in some economies (notably Indonesia, Thailand, Malaysia,
South Korea and Hong Kong). The much admired and reviled developmental
state paradigm was now derided as “crony capitalism“ and blamed
for East Asia´s failures.

Things
clearly aren´t that simple. The successes of East Asia have been
real ? as have been recent setbacks. Part of the explanation of
the crisis indeed relates to the very successes of the region: success
has involved catching up with the leaders and thus exhausting the
possibilities for easy catch-up growth. This has created an entirely
new competitive situation at least for Japan, and to some extent
even for Korea. Moreover, the crisis again represents a confluence
of internal problems and external circumstances: weak financial
systems and overexposed firms met with highly volatile international
financial markets. The result was the crisis. It has been overcome
in part already, and will be overcome completely, once internal
restructuring enhances resilience against external shocks and/or
once international circumstances change. Just as the developmental
state does not explain the East Asian economic miracle, so “crony
capitalism“ does not foretell its end. East Asian capitalism will
change, once more. And it will in all likelihood continue to be
successful. Already now, the crisis has receded: the most recent
forecasts for this year suggest economic growth between 3.5 per
cent (Indonesia) and seven per cent (South Korea) for the crisis-afflicted
economies. Even Japan is credited with one per cent growth in 2000
(and three per cent in 2001).14

Common Causes of the Crises in Japan and East Asia

Still,
the developmental state paradigm - or, more specifically, its specific
variants in the economies concerned - did play a role in the recent
setbacks. As one of its brilliant thinkers, Hitotsubashi economist
Murakami Yasusuke, recognised already in the 1920s, catch-up developmentalism
carries serious risks. While it is capable of delivering development
more rapidly than other strategies, it easily falls prey to immobility
and stagnation, as vested interests colonise the state apparatus
and risks political corruption through its close association between
bureaucrats, politicians, banks and large industries.15

Much
of what has happened in Japan and in East Asia during the 1990s
can be read as a confirmation of Murakami´s astute warnings. The
degradation of the developmental state into crony capitalism played
an important role in Japan´s crisis, which in turn again influenced
developments throughout the region. Japan´s crisis started with
its inability to recalibrate the developmental state in the early
1970s, when it had achieved its objectives. But Japan continued
to pursue export-led growth, and to keep much of its society and
economy closely regulated and shut off from (external) competition:
powerful vested interests which had been promoted by the developmental
state or needed to be bought off to ensure its legitimacy (such
as the farmers and the small retailers, traditionally strong supporters
of the ruling LDP). It also continued its policies of cheap credit
and financial regulation, to channel savings in politically desired
directions. The result was a misallocation of resources on an increasingly
vast scale, huge over-capacities, and massive but carefully hidden
bad debts.

Japan´s
perennial, and perennially rising, external surpluses triggered
increasingly difficult frictions with the United States. Rather
than addressing the real issues of over-regulation and over-protection
of much of the economy and society,  the Japanese government
settled for a quick fix: revaluing the yen. The result was massive
and highly speculative asset inflation; when the bubbles burst,
the economy nose-dived. It still has to recover.

The
rising yen had accelerated the drive of Japanese firms into East
Asia: both FDI and bnak loans to the region exploded from the mid-1980s.
Cheap Japanese money and FDI, in turn, fanned over-capacity and
asset inflation bubbles in East Asia. By making a major direct and
indirect contribution to the “East Asian financial crisis“, Japan´s
modern capitalism thus once more had a profound impact on the development
of capitalism in East Asia.

The
indirect contribution of Japan to the crisis relates, of course,
to the model of the developmental state which Japan has promoted
throughout East Asia by example and by its own efforts. With all
due respect for national and regional differences in the specifics
of the developmental state model, we still can identify outlines
and key features of an “East Asian developmental state“, which
characterise Japan as well as most other East Asian economies. Those
common features were:

the alleged
pursuit of development as a national security objective, rather
than for the sake of individual wealth creation,

active
involvement of the state in the economy, notably through close co-operation
between politicians, bureaucrats, bankers and industrialists,

extensive
corruption, nepotism and favouritism for personal gain, but also
to retain political support, award followers, and co-opt potentially
hostile groups,

a weak
financial system, cheap money policies and strong political influence
over bank credit allocation decisions, hence inefficient investment
decisions and speculation,

highly
leveraged large firms, which concentrated on market share and turn-over
rather than on profits, and thus produced low returns on investment,

promotion
of exports, but discouragement of import competition in sectors
considered strategically or politically important,

a general
erosion in the ability of the state and society to learn and adapt
- due to political repression or inertia, to arrogance bred by success,
and the smell of power, and, perhaps most basically

the intensely
nationalist, often parochial and sometimes adversarial approach
to development incorporated in this paradigm, which increasingly
ran counter to dominant trends towards globalisation in the technological
and commercial trajectories of the world economy.

Proposition
Four: The East Asian economic crisis during the 1990s was again
due to a confluence of internal and external factors. Again, external
influences came both from the West (or, more precisely, from international
financial markets) and from Japan. Their interaction with specific
internal weaknesses of East Asia´s modern capitalism produced the
crises.

6.
The Future of Modern Capitalism in East Asia

Where
does all this leave us at the end of the argument? I am not particularly
worried about the future of modern capitalism in East Asia per
se. Modern capitalism has taken root in this part of the world,
and I have no doubt that East Asia will have the strength to adjust
to the requirements of changing circumstances. For the immediate
future, this “adjustment“ will probably mostly concern the adjustment
of East Asia´s internal economic, social, political and even cultural
institutions to what many would see as a new phase of modern capitalism;
globalisation. In the longer term, I would hope and expect that
East Asia will also “adjust“, i.e. shape, the international institutions
and processes of modern capitalism in line with its own preferences.

Breaking Down Old Arrangements

In
the short term, changes in economic and political arrangements will
have to deal with the apparent deficiencies of the developmental
state, as it has evolved over time. The challenge is by far the
most profound for Japan, which simply no longer can afford to play
the developmental state role: it has arrived, and now desperately
needs to change track towards a new paradigm which would be compatible
with present international economic circumstances and its position
as the third largest economic power in the world. This would need
far-reaching reforms in the Japanese economy, its society, and above
all in its politics.16

For
the other East Asian countries affected by the crisis, adjustments
will probably not have to be so far-reaching; indeed, most of them
seem to have been able to come back impressively without much change.
They would be well-advised, however, not to become complacent. There
are at least three key areas were reforms to me seem urgent in most
affected economies:

The first
area concerns the problems of bad debt and its causes. They lie
deep in the banking and financial systems, in relations between
government and industry, and in political corruption.

The second
area concerns transparency. Again, this is a rather complex and
demanding item on the reform agenda, which ultimately relates to
issues of good governance and democracy.

The third
area concerns openness in a different sense. The issues here relate
to cross-cultural co-operative competencies, to the balance between
individual rights and freedoms and group cohesion and conformity,
and to what I have called above the adversarial aspects of modern
capitalism in East Asia. Modern capitalism can no longer be built
on exclusive territorial or cultural foundations - be they national
or regional. It needs to be global, inclusive and cross-cultural.

East Asia: “more like us”?

In
the longer term, East Asia should try to remodel modern world capitalism
to its own liking. Modern capitalism should be seen as a means to
an end, not to an end in itself. But its development through the
last two centuries resemble more a process of spontaneous cultural
evolution, rather than a project designed, implemented and carefully
controlled by man. This is dangerous: modern capitalism has been
a force of tremendous good, but also of enormous destruction. In
my view, it should therefore be firmly embedded in a broader vision
for mankind - one which focuses on a “good life“ not only in a
material, but a more comprehensive sense. This ultimately would
be a political project, in which modern capitalism would have to
be given its appropriate place.

In
any case, East Asia is not going to become a clone of Anglo-Saxon
capitalism, much as continental Europe will continue to adhere to
its own, different capitalist traditions. The notion that East Asian
economies should and would become “more like us“, which informed,
among others, the key decision makers on crisis management in Washington
(both at the Treasury and at the IMF) is misleading both factually
and normatively. Factually, this notion underestimates the complexity
and diversity of modern capitalist arrangements, which lend themselves
to an infinite variety of paradigms, many of which could be more
successful than what we have found so far (and, in any case, technological
conditions and economic circumstances will continue to change, throwing
up new challenges for all existing arrangements). Normatively, it
would be a sure receipt for decline of the presently dominant paradigm:
if it is not challenged, it won´t keep up with the changes. There
is no reason why the principle of competition should exclude competition
between different forms of modern capitalism. What needs to be done,
however, is to formulate global rules and norms for this competition,
so as to avoid its escalation into military confrontation. The setting
of such rules is one of the many reasons why we need more global
co-operation; modern capitalism increasingly requires a firm political
framework, a global infrastructure of co-operative political arrangements
and institutions.

This
agenda of change obviously is a tall order. Yet I would not be too
worried, were it not for two other challenges for East Asia which
have not been touched on so far: its demographic transition and
its festering regional security risks. Again, those two challenges
hit Japan particularly hard, but also will affect the others.

Overcoming demographic challenges

The
demographic challenge for East Asia consists in the large overall
changes in total population - down, in the case of Japan, up,
for most other countries in East Asia (and above all, China), and
in the rapid changes in composition towards a much older, and much
less balanced demographic pattern. It will be enormously difficult
to make the kind of passive and active adjustments discussed above
against this demographic background. The size and complexity of
the problems thus will need excellent political machinery, strong
leadership and broad-based participation.

Overcoming regional security challenges

The
regional security challenge concerns the as yet rather fragile,
under-institutionalised and superficial nature of regional co-operation
and integration. Yet it will be difficult, and probably even impossible,
to grasp the opportunities of global capitalism and meet the challenges
of adjustment without a serious, qualitative improvement in interstate
relations throughout East Asia. Here, the bad news is that the Asian
crisis has set back efforts at regional institution-building - but
the good news is that existing institutions and processes have not
(yet) been seriously damaged. Still, much remains to be done - and
the leadership will have to come from the region itself. As far
as I can see, there is only government which has seriously tried
to rise to this challenge, and that is your government here in the
Republic of Korea.

By
way of conclusion, let me therefore offer you my

Proposition
Five: The future of global capitalism will importantly be shaped
by East Asia - for good or bad. First, east Asia will have to change
itself - with Japan in the vanguard. Second, East Asia will have
to try, in co-operation and competition with other regions, to change
global capitalism and make it compatible with mankind´s new predicament
in the third millennium. In order to do so successfully, however,
East Asia will have to come to grips with the enormous implications
of demographic change and deal with its unfinished regional security
business.

footnotes

1
Max Weber, General Economic History, in: J.E.T. Eldridge (ed),
Max Weber: The Interpretation of Social Reality, London: Nelson
1971, pp. 275ff

2
Max Weber, Gesammelte Aufsaetze zur Religionssoziologie, Tuebingen
1992, pp.371-391, reproduced in: W.G.Runciman (ed), Max Weber, Selections
in Translation, Cambridge: CUP 1978, pp. 315-330

3  Gunnar Myrdal, Asian Drama, An Inquiry into the Poverty
of Nations, Harmondsworth: Penguin 1968 for The Twentieth Century
Fund (three volumes)

4
ibid., Vol.I, pp. 93ff

5
Jared Diamond, Guns, Germs and Steel. The Fate of Human Societies,
New York: Norton 1997

6
It was Zen buddhist monks who had brought Neo-Confucian thought
from China to Japan. See Edwin O.Reischauer/Albert M. Craig, Japan,
Tradition and Transformation, Tokyo: Tuttle 1978, p. 92

7
ibid., p. 93

8
Ronald P. Dore, Education in Tokugawa Japan, London: Routledge
and Kegan Paul 1965

9  Jean-Pierre Lehmann, The Roots of Modern Japan, London:
Macmillan 1982, p. 108

10
This concept was developed by Chalmers Johnson in his classic:
MITI and the Japanese Miracle: Thre Gorwth of Industrial Policy,
1925-1975, Stanford: Stanford UP 1982. Cf. Also Meredith Woo-Cumings
(ed), The Developmental State, Ithaca & London: Cornell UP 1999,
esp. Chapter One

11
Cf. Walter Hatch/Kozo Yamamura, Asia in Japan´s Embrace,
Building a Regional Production Alliance, Cambridge: CUP 1996 and
Peter Katzenstein/Takashi Shiraishi (eds), Network Power, Japan
and Asia, Ithaca, NJ and London: Cornell UP 1997

12
Peter Evans, Embedded Autonomy: States and Industrial Transformation,
Princeton: Princeton UP 1995, p. 59, quoted in: Woo-Cumings, op.cit.,
p. 15

13
World Bank, The East Asian Miracle, Economic Growth and Public
Policy, Oxford et al.: OUP for The World Bank 1993, pp. 5f

14
Far Eastern Economic Review, March 16, 2000, p. 62f

15
Quoted in Yamamura/Hacks, op.cit., p. 54

16
Cf. the interesting report of an official blue-rubbon commission
on Japan´s future international role, which makes those points
forcefully: