Economies of Japan and Germany: A Comparison

In comparing and contrasting the economies of these two countries I find many similarities and differences; particularly in the aspect of government intervention. Both economies are generally influenced by the government with Germany having the most influence. Germany has what is known as social market capitalism, a system in which wealth is generated mostly from state policy and government created infrastructure such as schools, transportation systems, and financial control mechanisms among others. Japan has a state-directed capitalist structure with a balance between government policy, private enterprise and industrial development drive the economy. Japan has a stronger private sector controlled mainly by large corporations while Germany has a stronger balance of both public and private sector with a strong small business sector.

Both economies have an emphasis on hard work but the emphasis comes from different places. In Japan, religion dictates the value of hard work, while in Germany hard work is instilled by the government through educational programs and other institutions used to create a skilled labor force. Germany also promotes hard work and productivity through the creation of social programs. Germans are working to benefit Germans, with “cradle-to-the-grave” social welfare programs, whereas in Japan there are virtually no social welfare programs. The Japanese put emphasis on the family structure for the welfare of an individual while Germans rely on government programs.

Of course the most obvious similarity is the post-WWII effort to rebuild both the countries and their economies. Both Japan and West Germany were aided by the U.S. while East Germany was behind the iron curtain under communism. The United States took a larger role in the rebuilding of Japan: their new constitution was heavily influenced on western government principles, the zaibatsu (groups of businesses surrounding a single bank) was dissolved due in part to anti-trust laws modeled after U.S. policies, the occupation introduced consumer technology which the Japanese readily accepted and improved, and the Japanese received special gifts, low-interest loans and machinery to help turn the gears of the new economy.

While West Germany continued to practice capitalism, East Germany was under communism and seemed to be an industrial power. However, the ultimate fall of communism showed the world that the system instituted by the Soviets was a major failure due to deviations in the original intention of the system. The East German economy suffered from too much government intervention; the centralization of industry and finance within the government created large state-owned enterprises. The result of this was a highly controlled competition where businesses became both vertically and horizontally integrated; there was virtually no competition because all production was for the benefit of the state. This created a labor-intensive industrial model to meet the specific demand of the state. East Germany benefited, however, from more equally distributed income, virtually no unemployment and subsidized housing from the state. It is because of these benefits that East Germans developed a dependence on the state that continued long after reunification of east and west.

Due to the dependence on the state, East Germans suffered after reunification. Before the wall came down virtually all East Germans were guaranteed work even though the result was an inefficient use of labor and lowering of work ethic. After reunification unemployment soared in East Germany because it became obvious to the world how inefficient their industrial infrastructure really was. It was difficult to become competitive when nobody used to worry about competition. Their facilities were obsolete by western standards and the rebuilding process continues 14 years later.

Despite the collapse of their economic infrastructure, the East Germans have benefited from the unification in number ways. The standard of living is much higher, families have more disposable income, and wages are higher. Additionally, when the rebuilding process comes to a head East Germany will have a one of the most advanced transportation infrastructures in Europe.

The recovery speed was much higher in Japan due mostly to U.S. intervention but also to the fact that it was not a country divided like Germany. While West Germany benefited from similar forms of foreign aid as Japan, East Germany was rebuilt into a communist state that later failed causing a setback to overall German recovery. The Japanese industrial sector strengthened rapidly and became a leading world exporter in consumer technologies and financial services. There were fewer boundaries to a Japanese recovery, and the nature of their economic policy was rigorous and primed for success.

However, Japan faced hard times in the 1990’s during the same time as the German reunification; this is one similarity that cannot be overlooked. While the German unification represented another economic rebuilding process, Japan was facing an economic downfall due to unregulated financial transactions among other factors. Unregulated loans were made to real estate speculators within Japan and other countries. Loans were also granted to speculators in the Japanese stock market. When both the real estate and stock markets crashed in the early 1990’s, Japanese financial institutions were facing debts up to $1.5 trillion.

An important difference to note in the current economies of both countries is Japan’s resistance to outside influence. Germany, in contrast, has a very lenient immigration policy that grants legal immigrants immediate housing and financial support. This policy has not been without its problems, however, since it creates more competition for housing and employment.

Unlike Germany, local Japanese governments rely heavily on the national government for financing. The public sector in Japan is different from Germany in that it consists of small government consumption, large government investment, and control over the private sector through government intermediaries. Perhaps the biggest difference in the two economies is the fact that mostly all economic policy in Japan originates from bureaucratic ministries: The ministry of finance, the ministry of international trade and industry, the agency of industrial science and technology, and the ministry of posts and communications are some of the organizations that dictate most economic policy.

Both countries have similar aspects of labor relation in the form of labor unions but differ in their management-labor relationships. Japan has labor unions that are company-specific while Germany has trade-specific unions much like the US. Japanese unions typically compose either a single operational unit of a company or multiple units regardless of trade skills. Trade unions make up almost two-thirds of total employment in Germany, one-fourth in Japan. Management-labor relations in Germany are very strong, with both sides practicing codetermination to dictate policy. This gives workers more say in the business decisions of management. Japanese firms carry on negotiations with their labor unions much like the U.S. but very different from the democratic, almost egalitarian management-labor forums of Germany.

Japan’s economic strengths lie mainly in their technological and financial exports, automobile industry, aggressive research and development, highly skilled labor force, and a strong domestic market. Japan is second only to Canada in exports to the United States. Japanese products are typically valued for quality. Japanese automobiles are some of the most efficient and environmentally friendly cars in the market. It is also the leading creditor nation in the world, holding more investment in the U.S. than the U.S. has invested in Japan. Germany’s strongest asset is its foothold in the European Union. E.U. monetary policy follows that of the Deutsche Bank which is based on stability and has therefore benefited the German economy. It’s no surprise the E.U. is using this banking model since German banks are among the most competitive in the world. Despite this advantage, unemployment in Germany has been rising since the foundation of the E.U., passing 10% in late 2002 while Japan is enjoying a moderate unemployment rate of 5.3%.

Both countries are troubled by an aging population. Each have aging populations with decreasing workforce sizes. Japan is particularly concerned due to their high life expectancy and status as one of the world’s oldest populations. Two major factors in respect to this are the Japanese resistance to immigration, thus limiting their workforce, and the role of women, further limiting their productive capacity. Germans face problems with social security benefits, much like in the US. After unification, East German pensioners who had not contributed to the West German fun were still given pensions. As a result, the declining workforce is under increasing demand to satisfy the pensions of a growing aged population.

Currently each country has its own set of economic problems. Germany had a negative GDP growth rate in 2003 while Japan is boasting a 2.7% increase. Unemployment is on the rise in Germany at 10.5%, while Japan is at a comfortable 5.3%. Japan holds more public debt than Germany, 154.6% and 64.2% respectively. The Japanese are suffering from a financial crisis as a result of their world-renowned creditor status; banks have an estimated $1.5 trillion in bad debts.

In a comparison of these two economies one thing is certain: they are both very aggressive, based on a history of strong work ethic and collective innovation they have grown to be major world players. Despite current economic troubles for each country, the foundation remains stable and the message remains clear. The world at large is facing economic troubles in one form or another as a result of not only the current political climate but an exponentially increasing population that is reaching carrying capacity at an alarming rate.

References

I'm pretty sure I wrote this entire thing by comparing two chapters in a text book, the title of which I cannot remember.

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