Political Culture, Economic Structure and Policy: The Laffont-Tirole Model Extended to Modern Japan. (New Perspectives on Transition Economics Asia)

Beginning of article

I

Introduction

IN THIS PAPER we discuss the interaction between economic policy and political culture and identify an intriguing correlation between the economic policy system and national culture. A measure of culture (Hofstede 1980, 1991) can be coupled to the typical nature of the state and its political manifestation (Olson 1965; Stigler 1971; Wade 1990; Laffont and Tirole 1991, 1993). The imperative task in our paper emanates from two sources. The first is the recent search for alternatives to the "Developmental State" explanation regarding economic structure and policy making in general and in the Japanese case in particular (e.g., Fine 1999; Chan et al. 1998). In this regard, we propose a number of alternate models, including the "Bureaucratic State," to explain the Japanese case. The second is the lack of explanation beyond the regulatory capture model, and here we propose alternate forms of capture, including "bureaucratic capture."

We show that variations of the capture or interest group theory apply, given the particular cultural predispositions of people in countries. We present an extension of the static Laffont-Tirole (L-T) model (1991, 1993) covering four types of capture in economic policy making. The case study of atomic energy in Japan and the United States is then used to evaluate the predictive efficacy of the extended L-T model. The extended model is evaluated in terms of stability, resulting in the conclusion that only the regulatory capture is truly incentive-compatible if one assumes that government agents are self-maximizing. The use of the term "rents" in this paper, therefore, refers to rent-seeking behavior of bureaucrats and politicians; that is, the replacement of market decisions by government control or another type of collective decision making that benefits a small group of bureaucrats and politicians or individual bureaucrat or politician accordingly.

II

Culture and its Dimensions

SOCIAL SCIENCES differ in the degree to which they attach importance to the consequences of culture. Anthropologists, sociologists and political scientists largely agree on a dominant influence of culture, as do most psychologists, but economists often still deny the relevance of culture as a direct determinant of economic behavior, despite the work of Wildavsky and others (e.g., Wildavsky 1994; Wildavsky et al. 1990; Trentmann 1998; Inglehart 1998; Abrams and Lewis 1995; Grief 1994). Moreover, the economics mainstream and many economists have forgotten that in his works, Veblen looked upon human behavior and economic activity as cultural behavior (e.g., Veblen 1898, 1904, 1906).

Since culture has several meanings, a definition is needed here. The first meaning of culture is "the training or refining of the mind." The second meaning may be captured as "the collective programming of the mind" (Hofstede 1991). This definition of culture distinguishes individual members of a group from individuals who are not members of the group. It corresponds to the use of the term in anthropology, and is the meaning that we will use throughout this paper.

Several crucial features of culture should be stressed. First, culture is always a collective phenomenon. It is the collective meaning that is attached to values, symbols and norms. Culture is always learned. It is not inherited, but rather derives from extensive interaction with one's context. Culture is not human nature and it is not individual personality. It is in between. Culture may be traced back to one's nationality, one's residence, one's social class, one's generation or one's employment. We focus on the first root of culture: the nation state. It should be stressed that features of national culture probably take ages to develop. They are largely history-dependent, and only major catastrophes seem to change cultural predispositions in the short run.

Geert Hofstede (1980, 1991) has derived five main dimensions of national culture. Hofstede labeled these dimensions as power distance (attitude toward hierarchy and communication), uncertainty avoidance (attitude toward rules and risks), individualism (attitude toward oneself and others), masculinity (attitude toward rivalry and consensus), and long-term orientation (attitude toward status and social order).

Power distance and individualism are rather strongly correlated with the level of per capita GDP. A large per capita GDP generally means small power distance and strong individualism. A small per capita GDP generally means large power distance and strong collectivism. This seems to relate to education and personal freedom as well, but for the sake of argument here, it does not really matter which causes what. Only countries that are characterized by a strong long-term orientation (Confucianism) seem able to balance relatively large power distances and collectivism with relatively high levels of GDP per capita.

In the Hofstede dimensions, the Western world differs most significantly on the scale labeled masculinity (M). Northern Europeans are typically more consensus-minded, less competitive and more focused on solidarity ("feminine") than other Western countries. The United States and most Commonwealth countries are characterized by more assertive and decisive behavior, combined with a larger eagerness to "fight out" conflicts ("masculine"). These latter characteristics are shared with the Latin and German-speaking countries. This M-dimension may be equated to performance-driven, rent-seeking behavior.

The dimension labeled uncertainty avoidance (UA) creates another substantial separation within the Western world, but now primarily between the southern European countries and the rest. The southern European (Latin) countries are most uncertainty avoidant, followed by the German-speaking countries, the Anglo-Saxon countries and the northern European countries. The UA-dimension relates very closely to mutual trust and mutual openness between agents (i.e., not withholding information).

III

Political Culture

WE WOULD LIKE to emphasize correspondence between the cultural variation across countries and the variation in political systems. It seems that cultural predispositions are directly related to the manifestation of political culture and economic structure.

According to the correspondence, Japan has a strong cultural inclination to be bureaucratic: strong forces to withhold information (UA), and simultaneously strong forces to seek rents (M). The same holds (to a lesser degree) for countries such as Mexico, Belgium, Greece and Italy. The political system fitting these conditions is bureaucratic: strong principals, relatively weak agents and a political capture by way of collusion under imperfect information. Balanced rents and transfers are key components of this bureaucratic capture.

On the other extreme, the northern European countries are characterized by a cultural inclination towards a "consensual state," typically based on mutual consent, middle ground and common interest. People are hardly inclined to withhold information (avoid uncertainty) nor to seek rents. This results in a "soft" political system, characterized by compromise decision making. Political capture is realized by way of collective agreement under relatively perfect information. In essence, regulatory capture is reversed, as interest groups are to actively participate in the decision process ("participatory capture"). Agents are captured to commit themselves to accept the finally resulting social welfare.

The various Anglo-Saxon political systems are adversarial. Conflicts are fought out, preferably in public and one-on-one. This means a strongly competitive environment, characterized by a culture that tolerates and encourages masculine, opportunistic behavior. Politics often revolves around "playing out" adversarial opponents. The basic assumption is almost by definition the self-maximizing, self-interested agent. And policy making is determined by classic regulatory capture. Excessive rent seeking is controlled by legal conditions. The risks are accepted as an unavoidable feature of the system.

Finally, the third quardant of the cultural coordinates may be labeled "developmental" in terms of the political system. Uncertainly avoidance entails a far from perfect flow of information, but the relatively feminine culture stands for a limited inclination to seek rents. The combination provides ground for relatively benevolent autocrats that respect the feminine preference of the people. The principals can capture the agents by providing a seemingly "good" state the appeals to the solidarity principles (note that information is scarce).

Hofstede's sample regrettably does not include the eastern European countries, but in …