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What future for ethno-capitalism?

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Economists generally like global capitalism (globalization). Despite its occasional crises, it produces prosperity. Ethno-capitalism (kinship capitalism) is another kettle of fish.

In the system of globalization (global markets), consumers are able to buy what they want, on the basis of price and quality, no matter who produced the goods and services or where they were produced. In the same vein, producers are able to produce what they want, wherever they want, based on what is most efficient. Also, savers are able to invest their savings wherever they want, based on the best rate of return. And investors can borrow finance where it is cheapest.

The basis of global capitalism is efficiency, not the ethnic identity of the person with whom you are transacting. Global capitalism has thus been a motor for efficiency, prosperity and poverty reduction.

Ethno-capitalism (kinship-capitalism) is quite different. It’s all about transacting – be it buying, selling, investing, borrowing – with members of your ethnic group wherever possible. It can also be about transacting with members of your ethnic group as a way of helping them. While no one theory will ever encapsulate the complexities of Japan’s economy and society, ethno-capitalism is certainly a key element.

From the very beginning of its post-war development, Japan decided not borrow money from overseas – in sharp contrast to most other dynamic Asian economies. Citizens were coaxed into stashing away their savings in the Japanese Post Office, the world’s biggest bank, thereby providing finance for the country’s development.

Sure, Japan traded. It had to, because it is very short on natural resources. But the concept of trade was very “dirigiste”. Trade is not about exploiting one’s comparative advantage.  Whatever you can, you produce at home.  Export revenues can pay for those necessary imports.  And exports can also be another way to create jobs, profits are a lesser concern.

Ethno-capitalism can be very costly. When you buy whatever you can at home, you are not necessarily buying the lowest cost or highest quality goods and services. And this is even more the case when you buy from suppliers just to help them stay afloat. So today, Japan’s high cost structures are one of the costs it is paying for its practice of ethno-capitalism. As Japan ultimately found out during its crisis, bad loans have to be paid for one or another And what’s more, despite the naïve appeal of brotherhood and solidarity, ethno-capitalism is usually riddled with corruption.

Are their any real benefits in ethno-capitalism? Yes! At the heart of ethno-capitalism is the notion of kinship, solidarity and trust. People honour agreements and contracts, as a matter of personal honour and integrity! People are not fired when times are tough. Japan’s unemployment has been consistently lower than that of most other countries for a long period of time. Many companies practice lifetime employment. Insolvent companies are kept afloat. Some innovation is focused on inventing robots in order to reduce the need for immigration.

Many Japanese believe that product safety and security of supply can be assured by ethno-capitalism. Scandals regarding food and other product safety of imports from China only confirm their worst fears. Also, agricultural protectionism is sometimes justified on the basis of food security. If you produce it at home, your supplies will not be cut off by a nasty supplier or at a time of international conflict.

Ethno-capitalism is not a very helpful policy for the management of a country’s international relations. Other countries may not appreciate you being “picky and choosy” about your international transactions. If everyone were so picky and choosy, the international system would not work so well. And how can you expect other countries to treat you as a real partner in the international system, if you are always so picky and choosy.

And in Japan’s case, ethno-capitalism shows up many inconsistencies in its policy approach. Japan wants to invest in other countries, but essentially blocks foreigners investing in Japan. And also, while Japan invests abroad, particularly in many East Asia countries, it does not want accept migrants from these countries. Japan wants to flood world markets with automobiles and consumer electronics, but does not want to have its markets flood with imports of agricultural products.

Ethno-capitalism may be coming to the end of its road. Japan’s economic structure is inefficient and innovation performance is poor. It needs new sources of growth. The population is ageing and declining. Maintaining prosperity will be difficult. And now that globalization has brought many emerging economies (especially China) into the global economy, Japan will have to play by the rules of the game, particularly if it wants to have an international leadership role in the 21st century.

It is time for Japan to integrate itself into the global economy. The selective engagement with the global economy based on ethno-capitalism will no longer do.


“The Social Contradictions of Japanese Capitalism”, and “A Pre-Modern Society” by Murray Sayle.  The Atlantic, June 1998.  www.theatlantic.com