IPE Systems of Political Economy

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Systems of Political Economy: Comparing the US, Japan and Germany: 

Systems of Political Economy: Comparing the US, Japan and Germany Linda Young POLS 400 International Political Economy Wilson Hall – Room 1122 Fall 2005

Systems of Political Economy: 

Systems of Political Economy Why important? Differences still exist Perception that all capitalist economies are the same Differences reflect national values Useful in thinking about development of other economies Tension due to increased integration Should these differences be maintained? How to deal with the tensions? (convergence, harmonization or mutual recognition?)

Systems of Political Economy: Components: 

Systems of Political Economy: Components The purpose of economic activity maximize consumer welfare? promote the power of the state? Role of the state in the economy interventionist or minimal? Structure of the corporate sector and private business practices fragmented business structure; or tight business alliances? banks and the provision of capital

American Market Oriented Capitalism: 

Most heavily based on neo-classical economic model Consumers maximize welfare Business maximize profits Assumptions of competition and perfect information Self-regulating economy American Market Oriented Capitalism

Powerful Bias Towards Consumption: 

Powerful Bias Towards Consumption

Managerial Capitalism: 

Managerial Capitalism Late 1800s emergence of large corporations shift from proprietary capitalism to large, oligopolistic corporations management separate from ownership 1930s and the new deal regulatory bureaucracy established unions organized/powerful passage of Full Employment Act of 1946 federal government to maintain through macroeconomic management John D. Rockefeller America's first billionaire, founder of Standard Oil

Structure of Government and of the Economy: 

Structure of Government and of the Economy Authority over economy very fragmented federal government (executive, judicial and legislative) state governments Lots of tension between all those Sharp contrast to Japan – Ministry of Finance monopoly power over financial system US: treasury, federal reserve, and other agencies

American Ethos of Suspicion: Government and Business: 

American Ethos of Suspicion: Government and Business Conservatives don’t want a strong role for the state Liberals worry about capturing government programs by private interests

Industrial Policy: 

Industrial Policy Government involvement to promote certain industries Talked about before (strategic trade policy, the developmental state, mercantilism) Support for R&D, policies favoring a particular industry US examples: Chrysler and Harley Davidson US much less than Japan and Germany US officials cannot pick winners (captured)

Corporate Governance: 

Corporate Governance Strong anti-trust and competition policies place constraints on sharing of information and some forms of cooperation Control is dispersed shareholders 1-2% of stock firms traded a lot – mergers and takeovers in Japan, 70% of stock jointly owned by keiretsu Different conception of shareholder and stockholder US responsibility primary to stockholder – profits Japan and Germany: wider social responsibility

Japan and Developmental Capitalism: 

Japan and Developmental Capitalism Economy to serve other objectives Desire to catch up with the West Meiji Restoration 1868 Pre-WWII strong army, industrial power With defeat, rejected notion of using labor-intensive products as comparative advantage Ministry of Trade and Industry (MITI) guided economy State assistance and regulation to increase the competitiveness/dominance of their economy globally Japan

“Shinto Capitalism” or Gilpin chooses “Developmental State Capitalism” : 

“Shinto Capitalism” or Gilpin chooses “Developmental State Capitalism” Different emphases and ethos than the United States Emphasis on economic development with state involvement On primacy of producer over consumer Subordination of the individual to the group Cooperation between government, business, finance and labor Commitment to domestic harmony

The Role of the State: 

The Role of the State Created a highly educated workforce Postal savings system fostered high savings rate Capital availability fostered rapid industrialization Complicated morass of legal rules and informal mores made foreign direct investment difficult Also the consumption of foreign goods

Keiretsu: 系列 : 

Keiretsu: 系列 Business grouping: long-term trust and relationships between business firms, suppliers, distribution and finance Bank supplying credit at the heart Many informal ties between members – on boards together; own same stock, and etc. Both horizontal (Mitsui and Mitsubishi) and vertical (Toyota)


Keiretsu Dominant firms both exploit and help junior partners help suppliers increase their capabilities – technological capacity, to improve the quality of their output, etc. Market share more important than profit maximization (long-term strategy) increase economies of scale and also benefits shareholders (not stakeholders) Argued to be rational and successful way to organize activity mutual trust and long term relationships minimizes transactions costs members protected against hostile takeovers reduces the cost of capital reduces information costs and increases strategic planning effectiveness

Keiretsu…successful, but closed: 

Keiretsu…successful, but closed Independence from shareholders long-term strategy most important contributed to successful R&D Perceived as closed to non-members focus of tremendous outside resistance cannot enter or takeover firms easily

Other Aspects of Japanese Business Ethos: 

Other Aspects of Japanese Business Ethos Dual labor market – core workers have life-long employment evidence that this started to change in the 1990s American firms obtain their capital from the stock market while Japanese firms obtain theirs from retained earnings and an affiliated bank

The State and Infant Industries: 

The State and Infant Industries Key role of the state – successful or not? Taxation and other policies to foster high savings rate Fiscal policies that kept consumer prices high and discouraged consumption Import restrictions that assisted infant industries Difficulties facing foreign direct investment Antitrust policies allowing keirestu and cooperation between firms Government support of steel, other key industries and R&D

German Model: 

German Model Balance concerns social equity and market efficiency classical liberalism: free market, but strong welfare state Government, organized labor and capital all cooperate “social market” – both efficient industry and commitment to social welfare both workers – shorter work week, unemployment insurance, health care, longer vacations benefits 80% workers pay Germany

The German System: The Bundesbank and Other Banks: 

The German System: The Bundesbank and Other Banks Bundesbank: defender of the mark (or Euro), can’t allow inflation great deal of independence (although not as separate as US Federal Reserve) Integration of finance and industry: representatives of banks on German MNC boards interlocking ties like keiretsu: sharing of information, less expensive capital, economic coordination and planning Long-term relationships (weaker with “globalization’)

German Banks: 

German Banks Can enter a variety of financial activities – commercial to investment to merchant banking industrial financing through banks, not through issuance of stocks banks own large portions of German industry –companies gain from lower capital costs and also insurance against hostile takeovers American system: different activities, different banks hostile takeovers guarantee companies are performing well

Capital Accumulation and Development: 

Capital Accumulation and Development Britain and the US: accumulation by individuals Germany and other continental countries: banks to accumulate to expedite industrialization Also tolerance of economic power and horizontal cooperation strong linkages industry and finance Daimler-Benz acquired Mersserchmitte –Bolkow-Blohm (defense) more independence from shareholders

How to Judge These Systems?: 

How to Judge These Systems? Performance during a period of time? Economic growth, the misery index, economic equality? Are different systems best for different stages of economic development? American economy in the 1990s a model, and a success but caveats apply Is productivity growth the right measure? a nation’s ability to renew itself?

Domestic Systems in the National Economy: 

Domestic Systems in the National Economy Convergence differences gradually eliminated through the operation of the market (both a fear and a desired result of globalization) evidence of some convergence of economic performance by advanced economies (divergence with poor countries due to initial and sustained advantage in terms of human capital) Limited convergence in terms of institutions; and Don’t need to converge – different institutions have demonstrated success


Harmonization Political negotiations to achieve convergence Many (most) aspects of business management outside of WTO and other multilaterals Competition policy – in the US antitrust policy attempts to prevent abusive business practices and the concentration of corporate power Regulated monopolies, trade-offs for consumers Japanese policies encourage corporate power concentration in form of keiretsu

Mutual Recognition : 

Mutual Recognition Every nation accept the principles by which other nations manage their economies Firms with subsidiaries operate by home country rules Approach adopted by the EU Will it work elsewhere? Western Europe similar what about US and Mexico?

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