Explaining Asian economic organization

Social theorists are challenged to explain an increasingly complex economic order. It is clear that old theories that posited a developmental sequence from “undeveloped” to “industrialized” cannot explain the diverse patterns of industrialization that exist. Certainly, Japan is as developed as Western nations but its patterns of development, its economic norms, and its industrial practices are substantially different from the United States and even its Asian neighbors in Taiwan and South Korea. For example, the fact that Japan has the largest banks in the world, and Taiwan relatively few and weak ones (despite the world's largest per capita foreign reserve holdings), cannot be explained only by recourse to market or state factors, although each play a role. Both countries were literally awash in money in the 1980s, and both countries are clearly capitalist societies where banking institutions are assumed to be critical to economic development, as they have been in the West. But more than market and political economy factors are at work here. In Japan, historically developed institutional factors, dating from before the Meiji Restoration and industrial revolution, created conditions for business group self-financing. Modern-day keiretsu, such as Sumitomo and Mitsui, with their huge banks as centerpieces, trace their origins to pre-industrial merchant houses under family ownership. Inheritance practices in Japan are based on primogeniture, inheritance of the entire fortune by the eldest son. This practice allowed merchant family fortunes to remain intact under the stewardship of the heir. Successful families thus had huge sums of money available to finance the businesses of affiliated branches operating under the “badge” of the mother house. The descendents of the zaibatsu merchant houses, the keiretsu, continue to rely on their own sources of finance, now institutionalized in banks that serve their credit and other financial needs. To see large banks encapsulated within business networks as only the outcome of distorted market conditions, or as only the result of a powerful business class, misses the institutional origins and overlooks the contemporary institutional underpinnings of the Japanese banking system. Ironically, the weakness of Taiwanese banks can also be traced to a strong family system. Chinese societies practice partible inheritance, that is, division of a family estate equally among all sons. As a result, families divide their fortunes every generation, mitigating against the development of large sums of money. Instead, there is great pressure within families to develop multiple businesses so that at the death of the family head, each son can claim an independent enterprise. Because all Chinese families face the problem of setting up children in business (being an employee is not a desirable status in Taiwan as it is in Japan), a range of informal lending arrangements have arisen within families and among friends to generate investment capital. Strong social norms dictate that one assist financially a kin member or close friend. Banks play a relatively minor role in Taiwan because alternative institutional arrangements, also with preindustrial origins, have obviated the need for banks for some financial functions. Again, market factors are important to understanding the strong curb market and weak formal banking system in Taiwan, and political economy factors, notably the absence of a strong central bank, are also significant. But an institutional explanation integrates these factors into an explanation that begins with the character of the society being explained. We need theories that can account for difference without reducing cases to unique instances, that do not presume the individualistic character of Western social orders, and that are sensitive to an array of ideal as well as material factors operating in different locations. Although political economy, market, and culture theories each have contributions to make, an institutional perspective of the type I outline may be especially suited to the comparative analysis of emerging world economic organization. I think, ironically, that a sensitivity to institutional factors may yield better theories of the West. Rather than assume that the United States and Europe are the exemplars of advanced capitalism, the closest empirical instances of the idealized competitive market, Japan and other Asian nations are suggesting that the West is simply one form of capitalist economic development, an expression no doubt, of the West's own institutional heritage. When we relinquish ethnocentric perspectives we can begin to look at ourselves and our own institutional heritage more clearly.