Marija Beg, PhD

The lecture is mostly based on the book:

Steven Rosefielde (2013) Asian Economic Systems, World Scientific, Singapore
CORE ASIAN ECONOMIC SYSTEMS
 Asia has four mayor economic systems:
 Communism
 Market communism (China,Vietnam, Laos and Cambodia)
 Planned (command) communism (North Korea)
 Confucianism (Taiwan, Singapore, Hong Kong, South Korea)
 Teravada Buddhism (Thailand and Sri Lanka)
 Communalism (Japan)
 Some nations are excluded from the analysis (e.g.
Philippines) as they fall somewhere between or are
predominantly muslim (Malaysia) or Hindu (India)
CORE ASIAN ECONOMIC SYSTEMS

 Main difference is in the mode of governance, that is,

the primary source of demand that drives national
supply and distribution

 Similarity – limiting the maximization of an individual’s

utility through rituals, guilt, shame, and fear
Communism
 Communal state of equality, sharing and mutual support
where every individual enables everyone else to reach their
full potential
 There is no private property, market or state governance →
there is no mechanism to ensure this therefore, in
practice, communism is what political authorities say it is
 In China, Vietnam, Laos and Cambodia, communism =
achieving a harmonious, prosperous, egalitarian and socially
just society through the wise administration of the
Communist Party, which coordinates markets and plans
 Communism in these countries is unproductive and unjust
COMMUNISM – NORTH KOREA or
Democratic People's Republic of Korea
Recent history
 The Korean peninsula was annexed by Japan in 1910
 Japan introduced his style of business and industrial
organization
 After WWII, the then Japanese colony was occupied by
the victorious military forces, the United States (US) and
the Soviet Union (SU), with the occupation zone
boundary at the 38th parallel
 The SU and the US failed to agree on a way to unify the
country, and in 1948 they established two separate
governments – the Soviet-aligned Democratic People's
Republic of Korea and the Western-aligned Republic of
Korea – each claiming to be the legitimate government of
all of Korea
Recent history
 South Korea declared itself a state in May 1948 → North
Korea responds with its own proclamation, with Kim Il-sung as
prime minister
 Soviet Union is the first to recognize Kim Il-Sung as the only
legitimate representative of the Korean people
 In 1950 North Korea invades the South (Korean war involving
US, SU and China)
 North Korea initially was successful and occupied almost all of South
Korea - afterwards the US became more involved in the war,
expelled North Korean forces from almost the entire peninsula and
invaded the Chinese border – later China became involved in the
war and conquered territories in the north
 In 1953, a ceasefire was established establishing two Korean
states with the border at the 38th parallel (Korean
Demilitarized Zone)
Recent history
 Tension between the two sides continued
 Kim Il-sung led North Korea until his death in 1994
 He introduces communist dictatorship with a pervasive
personality cult with one party, Communist Party
 He also steered the country on an independent course in
accordance with the principle of Juche (self-reliance)
 His son successor, Kim Jong-il, due to severe economic crisis
caused by natural disasters and the collapse of the Soviet Bloc
in 1991, moved closer to an economically more prosperous
South Korea
 Despite the fact that the two countries signed the
Reconciliation, Non-Attacking and Cooperation Agreement in
1991, relations between them are tense today - the main
reason is the North Korean’s military nuclear program
Recent history
 After Kim Jong-il's death in 2011, his younger son, Kim
Jong-un, took over the presidential post
 At first, the situation in the Korean Peninsula worsened
 They openly threatened the US
 They withdraw from the truce signed in 1953 and cut off all
communications with South Korea
 In 2013, Korean authorities said the missiles were ready to fire
targets in America, and that the start of the war would be
decided by days
 In 2018, Kim Jong-un made a sudden peace overture
towards South Korea and the United States
About North Korea
 One of the most ethnically homogeneous countries in the
world
 Given Korea's secrecy and often dubious official reports,
demographic (as well as economic) data are largely the
result of estimates
 Although religious freedoms are guaranteed by the
constitution, the government in reality discourages them
 About 2/3 of the population declares themselves non-religious
 According to official data, illiteracy is only 1%
 Today, North Korea faces the problem of illegal expatriates
Communist Planned Economy
 Since its inception in 1947, North Korea has been
dominated by Stalin's concept of communism
 Criminalization of private property, private business and
entrepreneurship
 The control follows the top-down principle
 The Communist Party is on the top
 The means of production are nationalized
 Management is planned and centralized
 Cult of Personality - Kim Il Sungism (Great Leader) and
his descendants Kim Jong-il (Dear Leader) and Kim Jong-
un (Great Heir, Great Friend,Young General)
Communist Planned Economy
 Graet leader Kim Il-sung and his successors Kim Jong-il
and Kim Jong-un argue that the planned optimal choice
takes place at two levels of hierarchical control:
 Central planners collect data and determine production levels
 Enterprise managers (often called ”red directors”) prepare
operating microplans
 Microplans are done on the basis of past levels of
production and the policy guidelines of ministerial
supervisors who are ultimately responsible for the match
between microplans and centrally planned figures
Communist Planned Economy
 Red directors are responsible to fullfil the outlined plans
under the penalty of law
 If production is higher than planned, they are awarded
managerial bonuses (higher production = higher
bonuses)
 The positive effects are greater managerial effort, but also
employee discipline
 Negative consequences - companies that depend on other
inputs often fail to meet their plans because they do not
receive inputs on time
Communist Planned Economy
 Kim Jong-un relies on state laboratories, design offices
(bureaus) and new state enterprises - the goal is to
develop science & technology and new goods
 Established enterprises are managed by ministers and
design offices, while the wishes of red directors or end
consumers are not taken under consideration
 These institutions are paid in accordance with the quantity
of new products and inventions, not their effectiveness -
questionable economic results
 Red directors as entrepreneurs is better solution → but it is
considered heresy
Communist Planned Economy
 The state is committed to buy everything that is
produced
 It is a country with everlasting excess demand - it does
not produce what consumers want
 North Korea is a state that is always in imbalance
whereby microeconomic inefficiencies are partially offset
by overwork
Communist Planned Economy
 Hyper-production bonuses create a group of people who
aim to blind rulers and enrich as much as possible - these
rent-seeking networks is family circle
 These are managers, red directors and high-level friends
with the aim of diverting state assets, resources and
products to private use
 They conceal their tracks with a) elaborated accounting
scams, and often increase of the results
 Managers receive unearned bonuses
 Red directors receive undeserved promotion
 On paper, plans are fulfilled and overfulfilled, but not in
reality → it is possible because there is no transparency
Communist Planned Economy
 b) Red directors often collude with managers and price-
setters to falsely claim that goods have been improved –
spurious innovation
 What is the difference between three and four star cognac?
- The number of stars on the label. (Old joke)
 Frauds like this are hardly damaging
 Rising prices that (do) not reflect higher quality – hidden
inflation
 Earning undeserved bonuses
 The illusion of material progress (data are not realistic)
 The leaders of N. Korea secretly forgive this enrichment
(to prevent a coup d'état)
Communist Planned Economy
 The North Korean system works thanks to strict
disciplinary methods and lethal forced labor
 Kim Jong-Un understands that the North Korean
command system is inefficient, subject to moral hazard,
entropy, political intrigue and that the premise stated at
the beginning cannot be fulfilled!
 Kim Jong-il knew the same thing and tried to reform the
basic system
A reform in North Korea?
 The collapse of the USSR, North Korea's main economic
partner, was a major impetus for reform
 Kim Jong-il made improvements in the production of
agricultural and consumer goods in the 1990s
 He gave the red directors more discretionary power:
 They were permitted to buy and sell investment goods at market
prices and engage in foreign trade (enterprise liberalization)
 The cross from pure command to a mixed command-market
regime
 However, these and other measures such as the introduction
of farmers’ market (but without land ownership) had no visible
positive effects
Conclusion – North Korea
 North Korea is a society where many personal freedoms
are prohibited or restricted, including the right to housing,
access to education, choice of work, travel, right to
property, business, entrepreneurship, personal views,
religion, political opposition ...
 The North Koreans are being oppressed by the authorities,
including being dragoned into forced labor
 As long as North Korean leaders believe the command
economy is best for them, they will continue ruling with an
iron fist
Conclusion – North Korea
 A 2014 UN inquiry into human rights in North Korea
concluded that "The gravity, scale and nature of these
violations reveal a state that does not have any parallel in
the contemporary world"
 Throughout 2017, following Donald Trump's assumption of
the US presidency, tensions between the US and North
Korea increased, and there was heightened rhetoric
between the two, with Trump threatening "fire and fury"
and North Korea threatening to test missiles
 In 2018, an easing of hostility and strained relations
developed - a series of summits took place between Kim
Jong-un of North Korea, President Moon Jae-in of South
Korea, and President Trump of USA
MARKET
COMMUNISM -
CHINA,
VIETNAM, LAOS
AND CAMBODIA
Market Communism in China, Vietnam,
Laos and Cambodia
 An ideologically sovereign system in which communist
ideology and culture determine supply and demand more
than the autonomous preferences of the individual
 The system is non-competitive and repressive and
individuals cannot maximize their utility in it
 Proponents of this system emphasize that there is no
need for free ownership and democratic protections
because the Communist Party ensures that the system
works and that everyone gets what they need
 Despite high growth, China and Vietnam are extremely
unequal and inconsistent
 Laos and Cambodia, on the other hand, are one of the
poorest countries
The Evolution of Chinese Command
Communism to Market (1950-1978)
 In 1940s, Mao Tsetung (China), Kim Il-sung (North Korea) and
Ho Chi Minh (Vietnam) adopted Stalin's coercive command
communist model
 Mao Tsetung - a cruel ruler whose reforms brought China to
the brink of existence
 More than 40 million people died during the Chinese Great Leap
Forward (1956-1961) - economic and social reform project aimed at
industrialization - the Chinese Cultural Revolution (1969-1973) and
Cambodia’s dystopic killing fields (1975-1979)
 A period marked by persecutions and executions of dissenters,
taking control of universities, destroying cultural monuments,
confiscating property, relocating young people to the countryside ...
 This led to technocratic and administrative reforms in their
systems from 1975-1980
The Evolution of Chinese Command Communism to
Market: First Phase (1978-1989)
 Deng Xiaoping (Hsiao Ping) succeeded Mao Tsetung
 1978 - beginning of economic liberalization - „socialism
with Chinese characteristics" or dual system
 granting citizens the right to rent property from the state for a
fixed time (leasing, not private ownership)
 the right to participate in the business for profit
 right to start a business (managers in state-owned enterprises)
 This required the approval of the right to determine
wages and prices - abolition of the state determination
The Evolution of Chinese Command
Communism to Market (1978-1989)
 Communist Party is still the master puppeteer whose
strategy was to harness peoples’ productive energies
including foreign investors - the concept of power still
remained top-down
 The transition in China has happened more than it was
planned
 Transition starts from the countryside (80% of the
population was rural)
The Evolution of Chinese Command
Communism to Market (1978-1989)
 Deng Xiaoping implements a program of "four modernizations"
- agriculture, industry, science and technology, and the military
 By then, agriculture was organized in COLLECTIVES
 The peasants did not own the land
 Everything they produced belonged to the state
 At the end of 1978, the agricultural collective secretly divided
the land into households that had to meet the production quota
and could keep the surplus
 Efficiency increased as well as the surplus of agricultural products
 A market is developing in which price is determined by supply and
demand
 Authorities subsequently approved this mode of production
The Evolution of Chinese Command
Communism to Market (1978-1989)
 Also, the transfer of ownership rights to local administrative
units starts - TVE (town and village enterprises)
 TVE member households did not own land and capital forever,
but had informal right to operate assets and sell produce for a
long enough period to have an incentive to work for profit
 TVEs were flexible and discrete on their own activities thus
operating de facto as private companies - so-called dual track
system in which plan and market exist simultaneously
 Over 700 million Chinese farmers are considered semi-
independent (working on state-owned land and selling to
state-owned enterprises but enjoying significant operational
freedom)
The Evolution of Chinese Command
Communism to Market (1978-1989)
 Deng’s modernization is not limited to domestic production -
Special Economic Zones (SEZs) were established in the 1980s
with the aim of strengthening foreign trade
 They attract large amounts of foreign capital (cheap LF)
 Deng strengthens domestic large industries at the same time -
enterprise reform has not started spontaneously, but has been
initiated!
 State-owned enterprises are allowed to sell surplus
production (above the plan) at market prices
 By 1989, nearly 22,000 joint ventures were launched in SEZs
 Progress was slow at first, but it was spectacular in the 1990s
The Evolution of Chinese Command
Communism to Market (1978-1989)
 The reform of the enterprises took place in 4 phases:
1. In 1979 companies were enabled to retain some of their
profits
2. 1984 brought formalization of financial liabilities to the state
- income tax introduced
3. In 1987 the system of responsibilities and obligations of
managers formalized
4. In 1993 a modern corporate system was introduced
 China still holds a large portion of its companies state-
owned
The Evolution of Chinese Command
Communism to Market (1978-1989)
 This Chinese evolution of economic reform is often
referred to as Gaige Kaifeng, that is, reform and openness
 But the Chinese system is still a communist command-
planned economy
 The goal was not to become a market economy but to
get people to produce more and more efficiently - the
result is an economy in the form of Swiss cheese - a
regulated economy with many deregulated “holes” in
which the private sector developed
 The regime is still authoritarian and involves forced
criminal work, a huge military and a ban on civil society
Market Communism: Second Phase
(1992-present)
 In 1992, Deng continued its economic liberalization and
economic opening and he labeled China as “socialist
market economy”
 In 1994, the dual economy was abolished and uniform
rules were introduced for all sectors of the economy
 Red directors become managers of market competitive
state owned enterprises (SOEs) and then ulitimately into
menagers of private companies regulated by special law
which mimicked the rights of western companies
Market Communism (1992-present)
 However, the enterprises were still state-owned and the
emergence of moral hazard still exists - managers rely
on government subsidies and privatize usufruct and assets
to themselves
 Deng's successors, Zhu Rongji, Jiang Zemin, Hu Jintao,
solved the problem of moral hazard by allowing managers
to
 Lease state assets
 Close unsuccessful state enterprises
 Merger and acquire leased companies
 Enter into foreign joint ventures at home and abroad
 And in general to become billionaires while adhering to the
Marxist communist principle of criminalizing freehold property
Market Communism (1992-present)
 Chinese companies are classified into two broad categories:
 private firms - leased from the state but with majority private
proprietorship (there is no complete freehold property right, there is
no freehold capitalism in China)
 SOEs - majority state-owned and the state has a decisive influence
even though it leases them to profit-making managers
 The Party holds the discretion of hiring and firing managers
 SOEs are most commonly assigned to Party members, family, or friends
 SOEs are thus a way of enriching the privileged members of the
Communist Party
 SOEs control over 40% of non-agricultural economic activities;
they are profitable and grow thanks to subsidies, but they are
inefficient because they are committed to meeting government
policy goals
Sources of Chinese success
 The performance of China’s market communist system during
the second phase was excellent in terms of modernization,
growth and development
 Chinese statistics significally exaggerate accomplishments, yet
all other evidence confirms that China has become a
"workshop of the world"

 How could this be accomplished in an privilege granting system in

anti-competitive environment?
 Deng's reforms have improved supply response to demand
 Turning to the market was the basis of economic convergence
Sources of Chinese success
 The most important aspect of China's economic growth
was attracting more than a trillion dollars of FDI
 Foreign investors were attracted by cheap resources and a
disciplined workforce
 Benefits multiplied rapidly as the Chinese quickly copied
foreign technology which further accelerated growth
 The benefits of lagging are exhausting and China is on the
verge of technological advancement
 In order to keep rates high, China will have to implement
additional reforms
CONFUCIANISM - TAIWAN, SINGAPORE,
HONG KONG AND SOUTH KOREA
Confucianism
 Utopian prescription for constructing ideal imperial states
with harmonious societies, founded on virtuous
patriarchal households (hierarchy)
 The goal is to eradicate individualistic discords, foster
harmony and promote prosperity
 Every individual’s moral obligation is familial wellbeing
(not God, country, law or sth else)
 Confucian societies are based on pillars of instilled senses
of guilt for wrongdoing, and shame for disgraceful
behavior
 In Taiwan, Singapore, Hong Kong, and South Korea, family
rigidities have weakened significantly over the last two decades
Taiwan, Singapore, Hong Kong and South
Korea
 The economies of these countries (Asian tigers or 4 little
dragons) are influenced by classical Confucianism
 Confucianism cannot explain every aspect of these countries’
governance systems but its impacts on individual psychology,
values, communal norms, hierarchy, politics etc are profound
 Culture is what determines supply and demand for the most part, not
individual preferences
 They have traditionally favored the authoritarian state forms
 The individual is limited in maximizing utility, investment, job
selection, production and consumption, while the state is
limited in providing social programs (which are offset by family
safety and mutual assistance systems - selfishness is amoral)
Taiwan, Singapore, Hong Kong and South
Korea
 Over time, family restrictions weaken and personal
freedom increases, which increases productivity
 This adaptation has pulled women from households into
the job market, which strengthens their role in the family
 In parallel, the size of the family is being reduced and the status
of women and men is being equalized
 All this reinforced attitudes towards free enterprise and
profit making
Taiwan
 The Republic of China (ROC) or Taiwan is a partially
recognized country (considered part of the People's
Republic of China)
 Turbulent history; in brief:
 First Chinese settlements were recorded in the 7th century
 In 1624 The Dutch occupy the island
 In the 2nd half of the 17th century China conquered it
 From 1895 to 1945 it was a Japanese colony
 From 1945 to 1952 it belongs to China
 The Chinese Civil War begins, the communist forces of Mao
Zedong take power in China, and the nationalist forces of
Chiang Kai-shek (leader of the Kuomintang Party) flee to
Taiwan and establish a dictatorship,1949-1975.
Taiwan
 Chang's main goal was rapid modernization and secession
 To achieve this, he used family aspirations for wellbeing
 He encourages private jobs while diverting them into desirable state
projects
 Taiwan has been able to profit thanks to cheap resources,
easy access to the US and Japanese markets, and
technology transfer
 In addition, traditional Confucianism's pursuit of
education became an engine for skill growth
 It records a high drop in inequality unlike China; a
democratic order is established, social protection grows
Taiwan
 After the escape of Chiang Kai-shek, both governments
considered themselves the real government of China (ROC vs
PRC)
 Thanks to the fight against communism, the ROC receives
international recognition (and represents the PRC in the UN)
 In the 1970s, the UN adopted a resolution confirming that the
representatives of the PRC are the only legal representatives of
China in the UN - the ROC was thus expelled and has the same
status to this day
 China considers Taiwan to be part of it even though it is self-governing
 USA - "strategic independence" - recognizes that Taiwan is part of
China, but wants China to leave Taiwan alone (under military threat)
 Taiwan does not accept the idea that it is part of China, they consider
themselves independent, and on the other hand, they do not insist on
recognizing independence (status quo)
Source: https://www.bbc.com/news/world-asia-china-59900139
Taiwan
 Changes come with Trump getting closer to Taiwan (Biden
continues) and the change in the political climate in 2016
 President Tsai Ing-wen took over from a pro-Beijing president
 China's handling of the protests in Hong Kong in 2019 was
push factor
 Military equipment of China and Taiwan, and US troops in
Taiwan (potential for war)
 Taiwan - important location (especially for Japan)
 Microchip (semiconductor) industry - 90% of the smallest and
most advanced microchips are produced in Taiwan (about 63%
of the world total) - essential for the production of high-tech
products such as phones, airplanes, solar panels...
GDP growth rates, Taiwan, 2010.-2023.

Source: Statista
South Korea
 South Korea had, like Taiwan, a turbulent past
 In 1945, under US influence , Syngman Rhee launched a
democratic government run in an authoritarian manner in
the South Korean Peninsula
 Despite constitutional formalities, electoral democracy
established in 1988
 Confucian symbiotic relationship between politicians,
ministers and technocrats on one hand and chaebols on
the other began in 1961 when General Park Chung Hee
came to power
 Chaebols are familial business conglomerates
South Korea
 General Park Chung Hee's mission was to industrialize the
country
 The center piece of planning regime was the Economic Planning
Board (EPB) and the Ministry of Economy, Trade and Industry (METI)
 The EPB collects data, evaluates production functions and
delivers programs in accordance with Park's wishes
 Park favors "friendly" companies with government contracts
and helps them become mega-conglomerates
 Chaebols are evolving into global giants (Samsung, Hyundai
Motor, LG, SK, Hanhwa, Kumho Asiana) capable of competing
for state aid and subsidies, and in turn providing political
support
 Over time, the Chaebols developed sufficient power to impose
their will on the government
South Korea
 Judging from South Korea's rapid economic development, it
can be inferred that neither the military dictator-chaebol
alliance nor its fractiuos democratic successor were
destructive enough to offset the gains from occupational
mobility, urbanization, education, capital widening, foreign
outsourcing, US aid and technology transfer
 But the 1997 financial crisis proved clan governance, massive
corruption and wasteful subsidization
 Variuos reforms occured; professionals hired instead of family
managers
 According to Confucian principles, the state and society are
inseparable, so there is no pressure to claim rights from the
state (in particular, women’s roles are tightly constrained)
THERAVADA BUDDHISM - THAILAND
Theravada Buddhism
 Religious culture (not doctrine) that views earthly desire
as the cause of human suffering
 The cure is a meditative quest for enlightenment
(Nirvana)
 It rejects neoclassical utility maximization as a delusion
 It encourages a harmonious, spontaneous interaction with
nature and community (including enlightenment seeking) as a
superior mode of existence
 The Thai economic system is heavily influenced by the
Theravada Buddhism
COMMUNALISM – JAPAN
Two significant events in the modern history
of Japan
 In the 17th century, isolationism (the Tokugawa shogunate)
began - closing of Japan to all foreign cultural influences
 foreigners were not allowed to enter, and if Japanese left the country
and returned, they were often killed
 Despite its isolation, Japan was a pro-capitalist society
 First event: The Forced Opening of Japan in 1854 (Matthew C.
Perry)
 The opening came as a shock because they believed in their cultural
superiority over everything else
 For them, the forced opening was a humiliation from which they
learned that they had to modernize in order to protect themselves
from foreign enemies
 Japan sends young people to the west for education
Two significant events in the modern history
of Japan
 Second event: Meiji Restoration 1868-1945
 The feudal system was abolished
 Territorial division of the country is over
 In order to create a strong centralized government, they buy
up land and introduce a land tax that serves as the main source
of revenue
 Administrative reorganization and modernization of the army
was carried out
 Deprived of land, Samurai became government officials or
entrepreneurs
 A change from a military regime to a new system of
government with officials focused on modernization
 Japan's rapid economic development began
Two significant events in the modern history
of Japan
 An important political move was the redistribution of
land that few owned and given to farmers (who never
owned their own land)
 Created the first class of people who had excess income to
buy goods
 They had an incentive to produce efficiently, which enabled
Japan to have surpluses for export - especially important for
maintaining technology imports
 Many created companies started to develop products for
farmers, such as agricultural machinery - some of the biggest
car companies started with the production of agricultural
machinery
Japan keiretsu
 Much of the economic and industrial power was held by a few
large companies, known as zaibatsu
 In the center are the family owners and the family bank (as with
chaebols)
 After WWII Zaibatsu reformed into keiretsu (large, modern
industrial enterprises)
 Zaibatsu were initially subsidized and protected by the state,
and the factories were financed by the central bank
 There were four main zaibatsu, namely Sumitomo, Mitsui,
Mitsubishi and Yasuda
 Sumitomo is the oldest, initially focused on copper mining and silk
imports; controlled about a quarter of the nation's copper mining
licenses, and branched out into coal mining, machinery, forestry,
warehousing and banking (the engineering part of the concern is
now known as Mazda)
Japan keiretsu
 Mitsui started out as a soybean seller and pawnbroker; parts of the
group are eg Toshiba,Yamaha, Toyota and Sony
 Mitsubishi started out as a ship insurance company - with money
from the insurance business, the company bought a coal mine
(needed to power their steam ships); in addition to mining, Mitsubishi
entered the production of steel, glass, paper, shipbuilding and banking
and branched out into optics and heavy industry - parts of the group
include, for example, Mitsubishi motors and Nikon
 Yasuda started as a money changer - focused on banking, finance,
warehousing and food processing and branched out into optics and
heavy industry (Hitachi, Canon and Nissan)
 These four zaibatsu formed cartels and managed to isolate
their business empires through various legal mechanisms, and
the trading system further protected their interests at home
Communalism
 A collective form of governance where group welfare
supersedes individual self-seeking
 The community (commune - communalism)
 It can take many institutional forms, but always entails
placing duty before self-interest, substituting group for
individual preferences
 The obligation to accommodate others leads to no
maximization of self-satisfaction
 Communalism and neoclassical optimizing behavior are
mutually exclusive approaches to creating ideal societies
Japan
 Japan’s economy is strongly influenced by its 2,500 year
old communalist tradition
 The state is authoritarian, though authoritarianism is
mitigated by communalist consensus
 The private sector places more emphasis on community
harmony than kinship (blood relations)
 Japanese depend more on each other than on the state,
substituting direct community assistance for government
transfers
 It may be assumed that the communal system is
unproductive, but this paradigm requires Japanese to
work immaculately for the community
Japan
 Japanese are conditioned to place group obligations above
their own interest
 Thus, individuals either adopt the group's preferences as
their own or subordinate their preferences to the wishes
of the community

 Doing what the community expects is ahead of efficiency and

wealth accumulation
Japan
 The Japanese paradigm is conflict averse within families
and across society
 Companies and communities strive to avert discord by
retaining workers whose marginal value added is less than their
wage, rewarding them equally, providing special assistance if
needed, building consensus on issues of mutual concern etc.
 It is shameful to be selfish, and virtuous to be communally
altruistic
 These cultural mechanisms are not always effective -
although they have a relatively uniform distribution of
income and social satisfaction, real growth is stagnant
Japan - Shame and Guilt
 Shame regime makes Japanese more communally
attentive and self-disciplined
 The correct behavior is determined by the group attitudes,
approval and fear of communal reproach, which is often
contextual
 This implicit moral code is extremely complex and demanding
 If the team considers overwork appropriate, shame will force
other members to obey it
 Japanese intellectuals appreciate the power of shame-based
situational ethics and consider the mechanism superior to
inflexible Confucian and western morality and guilt-based
discipline → it is tailored better to life complexities
Japan – consensus building
 Japanese society is a consensus building, where group
wellfare supersedes individual utility-seeking
 Shame-based norms of right and wrong are not dictated
by authorities, but the opinion of high-ranking individuals
carries great weight (hierarchy matters)
 E.g. in Japan, an assembly that engages in exhausting
political debates ends only when everyone agrees that a
solutions are best
 some individuals may still harbor reservations, but they
embrace and support the group consensus with greater
commitment than under the principle of majority rule where
losers are often disgruntled
Japan - Pareto inefficiency
 Japanese shame-based communalism is intrinsically anti-
competitive
 Communalist profit seeking is satisficing, not maximizing -
this is why Japanese workers enjoy jobs for life, causing
sustained overfull employment
 In addition, people overwork, factors are misallocated,
goods are not produced with optimizing characteristics
(e.g. cars) and are over-exported, wrong prices are set…
 Japanese work twice as many hours a year from Germans to
earn the same per capita income
Japan - Pareto inefficiency
 The Japanese overwork for free!
 Both employees and employers feel communally obligated to
work overtime without direct material compensation
 Supervisors stay on jobs to show their dedication, and loyalty
compels employees to stay on the job until the day’s tasks are
done
 This means that everyone works more hours than they
would in the individualistic competitive model, although
that does not affect their income
Japan - Pareto inefficiency
 Japanese firms will only operate in at the competitive
equilibrium accidently, and normally will be in a state of
acute disequilibrium
 Communalist labor practices are an obstacle to the
invisible hand
 The willingness of Japanese to work overtime for free disables
the Walrasian wage adjustment mechanism, and disorients the
Marshallian quantity adjustment (profit maximizing) mechanism
 Japanese workers could enjoy more leisure without reducing
their total utility, and Japanese shareholders could enhance
their wellbeing if Japanese firms maximized profits
Japan – epochs
 The Japanese communalist model (miraculous) proved to
be a formidable engine of economic modernization and
development until the great bubble of 1989
 Causes of stagnation: aging population, "zombie banks"
(has an economic net worth less than zero but continues to operate because its
ability to repay its debts is shored up by implicit or explicit government credit
support), deflation, growing Asian competition, the
disorienting effects of liberalization, and more recently
the 2008 financial crisis, yen appreciation, 2011 tsunami…
 Also, Western leisure ethics started appearing making the
compensating factor that once masked the shortcomings
of communalism to exaggerate them