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DEMOCRACY CAPITALISM Asian and American Perspectives


The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the

rmilti-faceted problems of stability and security, economic development, and political and social change. The Institute is governed by a twenty-two-inember Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Comm eree, and professional and civic organizations. A ten-man Executive Gommittee oversees day-to-day operations, it is chaired by the Director, the Institute's chief academic and administrative officer.


i 4



CAPITZLISM Asian and American Perspectives

Robert Bartley Chan I-[eng Chee Samuel P. Huntington Shiiuro Ogata


Published by Institute of Southeast Asian Studies Hens Mui Kong Terrace Pasir Padang Singapore 0511 All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. .r

© 1993 Institute of Southeast Asian Studies, Singapore First reprint 1994 II.


Cataloguing in Publication Data

Democracy and capitalism; Asian and American perspectives/by Robert L. Bartley. . . [et at.]. 1. Democracy-Asia. 2. Democracy-United States. 3. Capitalism 4. Capitalism-United States. 5. Economic policy. I 6. United States-Economic policy. I. Bartley, Robert L. HB50 l D38 1993 S1S93*44407

ISBN 981-3016-60-4

The responsibility for facts and opinions expressed in this publication rests exclusively with the authors and their interpretations do not necessarily reflect the views or the policy of the Institute or its supporters. Typeset by The Prototype Business Printed in Singapore by Stamford Press (Pte) Ltd

Dedicated to the merry,ory Qf P'rofe.9so'r KS. So/rzdlw Dfzlfrecéoaf' Qf ISEAS, 1972-/992


I Democracy: Evolution and Implementation An Asian Pa-xspectWe


II American Democracy in Relation to Asia SAMUEL P. HUNTINGTON 27



III Capitalism and the Role of the State in Economic Development The Japcrfnese Expe~1"l,'e1w,ce SHIJURO OGATA


IV Capitalism,

the Market Mechanism, and the State in Economic Development An [email protected]?, Perspective








intellectual interest in the growth and study of demo . cracy is not a post-Cold War

phenomenon, but its intensified interest is. The last decade produced several projects focusing on transitions to democracy in developing countries, the conditions facilitating

the emergence of democracy, and the transition process itself, to better understand the opportunities for liberalization, the breakdowns and the reversals. Recently a new question has been asked, that is whether the widespread democratization process will yield similar end-products in different parts of the world which are endowed with vastly different heritages and history, or whether we will see the emergence of variants in democratic models. In the same way, the growth of the capitalist system and practice of a free market in each country and region may be shaped by individual and special pressures and forces which in some situations lead the state to play a role not anticipated in the traditional free market modeli


The differences in the capitalist, free market model of East Asian countries have been observed to be distinct from those in the industrialized West, and most certainly different from that of the United States. It has been the growing concern of many academics and policy-makers that in the post-Cold War era, these differing perspectives and practices of democracy and the free market could become the substance of the new ideology debate in the coming decade between countries in East Asia and the West, led by the United States. To bridge the gap and to provide a forum for an exchange of views and discussion, the Asia Society, the Institute of Policy Studies, the Singapore International Foundation and the Institute of Southeast Asian Studies organized a conference on "Asian and American Perspectives on Cap . fatalism and Democracy" from 28 to 30 .January 1993 in Singapore. The conference brought together a number of distinguished. academics and journalists from the United States, Japan, Korea, Taiwan, Hong Kong and the ASEAN countries to reflect on the two key themes. The conference recognized much common ground as well as some differences in perspectives. The four essays published in this volume were presented

as keynote papers defining the major themes of the conference. We believe they will be useful contributions to the current rigorous and ongoing debate. CHAN HHNG CHEE

June .1993 5%/'1,gc1,po're

Director Institute of Southeast Asian Studies



ROBERT L. BARrLEY, Editor and Vice President of the Walt Street Journal, has been responsible for the Journal's editorial pages since 1972. He won a Pulitzer Prize for editorial writing in 1980, the Gerald Loeb Award for editorials on the international economy in 1979, and a Citation for Excellence from the Overseas Press Club of America in 1977 for dispatches from China after the death of Mao Zedong. He written a book on recent economic history, The Seven Fat Years: And How To Do It Again (1993). CHAN HI-8NO CHEE is concurrently Director of the Institute of Southeast Asian Studies and of the Singapore Interna-

tional Foundation. She is on secondment from her post as Professor in the Department of Political Science, National University of Singapore. She has served as a diplomat and has been an adviser and member of numerous panels and committees that focus on issues pertaining to Southeast Asia. Her long list of articles, conference papers and publications xi


includes The Dgraafrnics of Ofrze-Pa.-rty Do'rn1ina'rz,ce.' The PAP at Me Gfrassfroolts (1976), The UW." Fromm, Peace-Keeping to Peace-Mtmkcing (1992), and "Singapore 1991: Dealing with a Post-Cold War World" (ed. Lee Tsao Yuan, 1992).

Siuvrust P. HUNTINGTON is the Eaton Professor of the Science of Government and Director of the John M. Olin Institute for Strategic Studies at Harvard `University's Center for International Affairs. From 1973 to 1989 he served as Associate Director and then as Director of the Center for International Affairs. In 1977-78 he took a brief hiatus from Harvard to serve as so-ordinator of security planning for the National Security Council in Washington, D.C. He has also served as a chairman of the Harvard Department of Government, Associate Director of War and Peace Studies at Columbia University, and Professor of Government at Harvard. Professor Huntington is widely published in the areas of military politics, strategy and civil military relations, American and comparative politics, and political development. His books include American Politics: The Prowivlse of Dasharrmony (1981), and The Third I4/twe.° Domoomtrlzattora in the Into Twefntvieth Oentwry (1991). SHIJURO OGATA was educated at the University of Tokyo and the Fletcher School. of Law and Diplomacy. He was fOrmerly Deputy Governor for International Relations at the Bank of Japan (1984-86) and Deputy Governor of the Japan Development Bank (1986-91). He is currently Director of Barclays Bank and Fuji Xerox, Adviser to Swire Group, 'ramaichi Securities, Imperial Hotel and Coudert Brothers; Member, Chemical Bank's International Advisory Board, the Group of Thirty, the Trilateral Commission and New York Stock xii


Exchanges Japan Advisory Committee, and Vice Chairman of Japan National Committee of the International Chamber of Commerce. I-Ie is author of I'nte'r'rz,atfLo'nal FZ'aa'rzc,"£cLl Integrrztlriofm The Policy (Jw,llew,qe.s' with Richard N. Cooper and

Horst Schulmann (1989), and several articles on international monetary issues.


I Democracy: Evolution and Implementation An Asian Perspective


ernocracy is the legitimlating myth of the 20th century. It does not take long for a beginning student in Political Science to learn there is a bewildering list of democratic claims. There is

"constitutional democracy' ', "liberal democracy' ', "populist a



democracy' 'J' 'democratic centralism' "people's democracy' "guided democracy" among many. Once it has been declared that all men are created equal, it is impossible to roll back the belief, Pareto and Hayek notwithstanding. And it develops

into "the sovereignty of the people" and "the will of the people". Performance legitimacy is an alternative but, by itself, is neither sufficient nor enduring. Even totalitarian or authoritarian regimes do not rely on performance alone for their legitimacy. For that matter, neither is democracy 1


by itself enough. The de-legitiinizing of a non-performing democratic regime has led to its replacement by other forms of government. This has happened not only in developing states, but in established industrialized democracies as well. This paper takes off where Professor Huntington's The Third Warne left off. Professor Huntington made a valuable

and significant contribution by tracking the patterns of democratization and their reversals, and explaining the hows and whys of democratization of the most recent wave.1 For the many now engaged in the democracy debate, it was useful to be reminded by Professor Huntington that the Schumpeterian formulation of democracy as a procedural arrangement, an "institutional arrangement for arriving at political decisions in which individuals acquire the power to decide by means of a competitive struggle for the people's vote' ', is the definition of democracy that has gained the widest consensus today. Democracy is the selection of leaders thro ugh competitive elections, or put another way, a democratic system is that which practices free and fair elections. Although Schumpeter meant his definition to be a. "valuefree" functional specification, even this definition contains a margin of ambiguity and requires value judgement. The alTlbigu.ity lies in the degree of freedom and degree of fair-

ness considered essential, for not only is the electoral process itself scrutinized, evaluating accompanying political rights is a source of debate and differences as well. There are plenty of differences on the question of degree of deviation tolerable before a country should not be called "democratic" because it is seen to have fallen below the bottomline. It is also clear the degree of deviation tolerable changes with the prevailing ideological mood in the West. Take the United States and Switzerland for a start. Until the 1950s, 10 per cent of the U.S. black population did not have the vote, yet Z


the United States was never described as partly democratic. Again, until 1971, Swiss women did not have the vote but Switzerland has never been criticized as a country that was undemocratic or backward. Today, if we compare the Freedom House Survey 1991-92, Professor Huntington's Third Wave classification and Fukuyama's classification , we find slightly differing views on some political systems. I will focus on the classification of Asian countries. The Freedom House Survey ranked Asian countries in order on a 1-7 scale of combined ratings based on political rights and civil liberties, 1 being the most free or democratic (see Table 1.1). TABLE 1.1 Freedom House Survey, 1991--92 Cou'rm~y

RanA;'i:fray (1



South Korea


Philippines India

3 3.5







Thailand Indonesia


Brue i

5. 5



Pally free

5.5 Not free

The classification according to Huntington is shown in Table 1.2, and that of Fukuyama in Table 1.3. 3


TABLE 1.2 Hunt;ington's Classification, 1991 LEkn€irzg


Singapore Thailand



India Korea Pakistan Philippines


Tai welrl

(Possibly from 1990 but not fully consolidated)


Democratic bm, not consolidated beca1.1se' of absence of turnovers.

Clearly, there is no agreement among the three analyses. Is democracy then in the eye of the beholder? Is it according to how many accompanying tests are held up in the check-list besides the essential test of free and fair elections"

And how free and how [air is free and fair" A number of countries fall into what would be considered by Western

observers as a grey area. And still there is a final caveat. lt has been argued by Professor Huntington in the To,-im! W'o;1.=e that there should be an added condition to be considered. A democracy has not met the full test of democracy unless consolidation or institutionalization has taken place, that is, that it has passed the test of two turnovers of power. By this criterion, Japan which is universally regarded as a democracy has not passed 4

Di" MO(



TABLE 1.3 Fukuyama's (,»lassifica.t.io11. 1990 Lab( mil Demo( 1 cLcl'ps Wbtidu pdf


Japan India Philippines Singapore

Theiler d South Korea Sri Lenka

No'n~:s: * (61 countries on list.)

Criteria: Market economy, represe11tative= g7°l¢ Times, 2.3 January 1990, p, 1.

8. New York Times, 14 August 1985, p. A13. 9. Lucian W. Pye, "Asia 1986 of,


An Exceptional Year", Freedofrz, Issue 94 (January-February 1987): 15.


III Capitalism and the Role of the State in Economic Development The Iapanese Experience


]he end of the Cold War is often interpreted as the victory of capitalism and the defeat of communism. But what is "capitalism' ' Q Looking around the world, there are many countries where the

economic system is considered a capitalist economy. Nevertheless, capitalism differs from North America to Western Europe and Japan, from East Asia. to Latin America. What are the minimum common denominators of capitalist eco romes? What are the major factors which differentiate one capitalism from another? In my view, despite apparent differences in man;-* respects, the capitalist economies seem to have at least the following two common denominators.



First, the existence of private enterprises, which are owned and managed by private citizens who seek greater profits through a variety of economic activities on their own initiative. Private ownership of the means of production an d distribution is a very important element. Of course, not all are entirely free to act, and all of them have to comply with regulations, controls, and guidance of the state to different degrees, but they are at least privately owned and managed. in many capitalist economies, there are state-owned enterprises, but even in the countries where the state-owned enterprises are very influential, the areas they cover are still a part of the entire national economy. There are an increasing number of countries where state-owned enterprises are gradually privatized. The second common denominator is the market mechanism, through which prices are more or less determined by market forces, that is, the balance between the demand for and the supply of goods, services, and capital. Of course, in many capitalist economies prices are regulated when the supply of certain items is not sufficient, or when control of the prices of particular items is considered crucial for the entire national economy, or in cases of national emergency. Even then, however, the authorities are prepared, perhaps reluctantly, to adjust these controlled prices if and when they clearly divert too much and too long from the equilibrating level of demand and supply. Such adjustment of controlled prices can be delayed very often, but if delayed too long, controlled prices will not be observed, and free market prices or black market prices will inevitably prevail. Eventually the authorities will be forced to adjust their controlled prices. Private enterprise and the market mechanism thus seem to be the two minimum common denomin atoms of capital is economies. But there are many other factors which make 46


many capitalist economies different from one another. The most important of these other factors are the role of the state and the corporate structure. The extent of the state's intervention in economic activities can differentiate one capitalist economy from another. In the most passive case, the role of the state is minimum. There, the state is only responsible for such affairs as internal and external security, primary education, public health and safety, and basic infrastructure. in other broad ranges of economic activity, th.e role of the state is primarily to let market forces function as smoothly as possible with minimum intervention. This was an ideal form of market economy, envisaged by the classical economists in the West, based on their belief in the autonomously equilibrating function of "invisible hands' '. In reality, however, the national economy closest possible to this most passive approach is probably that of Hong Kong. In many other capitalist economies, the role of the state is much more active. In the first place, the size of the public sector is fairly large, not only because of various administrative functions, particularly those related to social welfare programmes, but also because of business activities operated by the state or state-owned agencies themselves in areas such as transportation, communication, utilities and even certain industrial activities. Secondly, many states deliberately protect and promote certain industries or certain regions through so-called industrial policies. The aims of these industrial policies could be diverse, but often they are to promote exports and to develop certain important

industries or regions. The instruments of these policies could also be varied, ranging from physical controls over production and distribution, to controls on prices, restriction of new entry into certain businesses, direct subsidies, tax incentives, IT


preferential financial schemes, and even simple guidelines for recommendable industrial activities. The character of the capitalist; economy can be quite different, depending upon the size of the public sector and the degree of governmental intervention under industrial policies. Corporate structure and practice can also differenciatc capitalist economies. The following points are of particular importance: (1) the relationship between the ownership and management (whether the companies are managed by owners themselves or by appointed executives), (2) th.e relationship between management and labour (whether there is some mobility from labour to management, or is there class distinction or even confrontation between management and labour ; whether labour wants to participate in management or is mainly interested in economic conditions such as wages and working hours), (3) the relationship between companies (whether they are competitive or tend to form monopolistic or oligomonopolistic relations), and (4) the relationship between the companies and the state (whether they cooperate or confront each other). With respect to both the role of the state and the corporate structure, the Japanese experience is rather unique. The state played an active role, particularly after wbria War II. Almost

totally destructed by the war, Japan had to promote exports in order to cover import bills for essential raw materials and foodstuff. The supply of essential goods was limited, and the balance of payments position was vulnerable. TherefOre, without waiting for the autonomous recovery of private companies, clear-cut iNdustrial policies were adopted to promote domestic savings, industrial investment, exports of manufactured products, and imports of essential raw materials and modern technology. This was done through administrative guidance, subsidies, to; incentives, preferential 48



financial schemes, and exchange controls, while restricting the importation of manufactured goods from abroad. These micro economic policies were supported by the traditional emphasis on education and also by macro-eeononiic policies aimed at domestic price stability and a sustainable balance of payments position. In major companies in Japan, (l) the labour-m anagement relationship has generally been peaceful, except during the

most difficult years immediately after the war and at the time of such drastic social and economic changes as the closure of major coal mines. This harmony is due to a kind of classless society based. on the relati.vely equal distribution of income and the upward social mobility of labour. The major concern of labour, usually5/ organized in the form of company-based trade unions, has been job security rather than simple wage rises or participation in management. Usually, jobs in major companies are secured regardless of business cycles, by the so-called life-time employment practice based on the seniority system. (2) Most major companies have been managed by what I call the "selfperpetuating corporate bureaucracy", the core of which consisted of those recruited fresh from colleges, trained on their jobs and expected to serve, first, as employees and

trade union members, but later, if successful, as managers and even executives. The companies have tried to retain as much of the profits as possible under their control, without distributing too much as wages or dividends, and to expand their market shares, by investing effectively not only in physical equipment but also in research and development. (3) The competition among companies has generally been keen in most industries, but there have been very close business ties between certain companies based on capital holding ardor subcontracts. (4) The companies' relations 49


with the state have been very close. The companies have usually been willing not only to comply with the guidelines

and policy measures of the state, but also to make suggestions about the possible course of industrial policies. On balance, the Japanese type capitalism worked well during the early post-war years, partly because of favourable conditions of the world economy during this period. The economy grew fast, the standard of living rose quickly, the international competitiveness of Japanese industries strengthened; and Japan's balance of payments position improved. in the meantime, the modalities of its industrial policies were gradually changed from emphasis on direct controls to greater emphasis on indirect devices such as taxation and finance.

By around 1970, Japan had become a country with a current account surplus, and it began to face criticism both at home and abroad. In view of Japan's rising surplus, its export-oriented industrial policies were considered as no longer justifiable. The keen competition for market shares by Japanese companies in overseas markets aroused protectionist reactions from Japan's trading partners. Since the penetration by foreign business interests into Japanese markets remained difficult, partly due to the close business

relations among Japanese companies, external pressures strengthened not only for liberalization of import and (inward) investment restrictions but also for greater transparency of Japanese practices. Finally, in the late 1980s, the sharp appreciation of the Japanese yen forced Japan to abandon its export-led growth policy and to open its markets. The role of the state in the Japanese economy has thus now changed, and is no longer what it was in the immediate post-war decades. First, the size of the public sector has contracted with the privatization of the remaining state-owned 50


industries such as aviation, telecommunications, the railways, and tobacco businesses, though the bulk or all of their shares are still held by the state. Secondly, most prices have been liberalized, though the prices of rice, public transportation, and public utilities are still controlled. In.tcrest rates have been substantially deregulated, but commission for securities transactions is still fixed, and the financial sector is still closely monitored by the state. Thirdly, industrial policies are being maintained, but instead of focusing on export promotion, their main emphasis is now placed on energy development and conservation, urban and regional development, and environmental protection. Their instruments are mainly tax incentives and moderately preferential financial schemes rather than direct controls. Fourthly, competition policy, the policy to protect free and fair transactions in the markets by preventing the emergence of monopolistic or oligomonopolistic practice, has been being strengthened . On the home front, traditional Japanese corporate practice, if not the structure, has also been challenged. First, the resurgence of their country's trade surplus has reminded many Japanese of the great difference in corporate practice between Japan and its major trading partners in North America and Western Europe. There has been much self criticism with regard to the Japanese practice of excessive emphasis on market share with little regard to working conditions and the interests of shareholders and the community. Secondly, the disclosure of financial scandals has led to an awareness of the lack of market discipline (the

lack of self-discipline of market participants) in the tightly controlled financial markets. Thirdly, employees have finally realized the adverse effects on their family life of' such working practices as long working hours and preoccupation with company affairs even after business hours. Despite these 51


sentiments, the current stagnation of the Japanese economy seems to have delayed any drastic changes in corporate practice. Indeed, it is argued that Japan will lose its international competitiveness if the traditional corporate practice based on disciplined work ethics is modified or abandoned. Nevertheless, there are signs of some new trends. What can we learn from the Japanese experience? It may not be appropriate to generalize the Japanese case, because each country has a different historical, geographical, cultural, and social background. However, the following general observations based on the Japanese experience can be made, with some reference to other countries. In the first place, greater intervention of the state may be desirable and necessary when the following conditions exist: when ordinary citizens are neither well educated nor well informed, when the supply of essential goods and capital is clearly insufficient, and/or when the balance of payments position is extremely vulnerable, or more generally when economic development is still in its very early stages. Greater freedom of private activities and less intervention by the state become more desirable when the following conditions are fulfilled; when the general public is fairly well educated and has access to accurate information, when the supply

of essential goods and capital is adequate; and/or when the balance of payments position is more or less sustainable, or more generally when the stage of economic development is fairly advanced. In addition, the globalization of economic activities can accelerate the shift of transactions to more liberalized markets and thus create pressures for further liberalization of less liberalized markets.

Secondly, it is difficult to expect the government to be always correct in its judgement about; the economy which is



becoming increasingly complex. Though market forces often fluctuate, nobody can ignore the fact that the law of supply and demand eventually prevails. The most important role of the state, therefore, is not to ignore market forces but to moderate fluctuations by taking precautionary measures. If adequate and timely policy measures are not taken, violent market reactions will eventually force the state to take necessary action even though belatedly.

Thirdly, those in Japan who advocate an active role for the state seem confident of the integrity, impartiality, and unoorruptability of the officials. While .Japanese officials are generally honest and highly disciplined, it is not possible to rule out the danger of their decisions being partial, arbitrary, an.d linked to the interests of specific sectors rather than based on the benefit of the entire national economy. The concentration of too much power in officials may not be wise, and can lead to abuse of authority. On the other hand, those who advocate greater liberalization and less state intervention tend to demand protection by the state if and when they face economic difficulties which are primarily of their own making. It should be emphasized that liberalization of economic activities requires that the private citizen takes greater responsibility for the outcome of his

own economic actions. Fourthly, in addition to providing internal and external security and primary education, the state can adopt industrial

or structural policies to promote structural improvements. Even some people in the new U.S. Administration are talking about the need of such policies for the United States. In my view, it is very useful to have a national debate to discuss the direction the economy should take for structural improvement. industrial or structural policies, if any, should




be directed to improve the strength of private enterprises and the efficiency of the markets, and the policy instruments should be mainly indirect devices such as tax incentives.. Fifthly, the most difficult problem is.»'the how the different forms of capitalist economies relate. If and when large trade and payment imbalances emerge, such imbalances could be attributed to the different roles of the state and the different corporate practices in different countries. 'fb alleviate such problems, one possible approach is to try to equalize domestic practices of different countries, as has been tried in the U.S.-Japan Structural impediment Initiative talks. But this is not always an easy solution since many business practices are n.ot only supported by domestic policies but are also deeply rooted in individual countries' traditions. However, two points can be made: (1) So long as international trade relations are to be maintained, some internationally acceptable rules of conduct have to be found. Even when the rules and practices in different countries continue to differ, the transparency of such differences should be increased . (2) Those countries which have been accumulating a trade surplus or a deficit continuously should seriously review their economic policies and practices. Japan's policies and practices designed to protect domestic industries and to

promote exports were retained even after it had reached that stage whore it should "graduate" from such policies and practices. Of course, it is often difficult to recognize the right time for such graduation . Before concluding, I would like to touch upon the relationship between the capitalist economy and political freedom and democracy. Theoretically as well as empirically, it is possible to have a capitalist economy without sufficient political freedom and democratic representation. In the case of those countries which used to be under communist control 54


and are now trying to reform their political and economic systems, political liberalization and democratization have preceded economic reform. It has thus become extremely difficult for them to introduce an orderly market economy because of the enthusiasm of the politically liberated people for uncontrolled freedom. In some of those countries, democratically elected officials are often not enthusiastic about economic reform, while the officials who want to promote economic reform are trying to retain a powerful central authority. in view of the experience of Japan and other countries in East Asia, it seems to be more practical to .promote economic reform first, to establish an efficient capitalist economy based on private enterprise and the market mechanism. However, those countries which have already started with political liberalization before economic reform cannot easily reverse the sequence of events. We should not forget, nevertheless, that an Mcreasc in production as well as productivity, expansion of foreign trade, and the advancement of intellectual as well as living standards of the people will increase their desire for greater freedom not only in economic activities but also in political life. The people will become unwilling to share the costs of economic management unless they are properly consulted, as often stated as the democratic principle of "no taxation without representation' '. The capitalist economy eventually requires greater political freedom and democratic representation. Freedom to think and express, 1 believe, will promote the further progress of economic life.


IV Capitalism, the Market Mechanism, and the State in Economic Development An American Perspective ROBERT L. BARTLEY


n sketching an American perspective on economic development, capitalism and democracy, let me* begin by asserting that the fundamentals of human nature are universal. The proilt-maxilnizing model I

beloved to classical economics exhausts neither the range of man'$'

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TABLE 4.1 (Continued)