Capitalism vs. Democracy; We Often Assume They Go Hand in Hand, but Recent Elections in Japan and Germany Provide a Sobering Reminder That There Are Deep Conflicts

By Samuelson, Robert J. | Newsweek, October 3, 2005 | Go to article overview

Capitalism vs. Democracy; We Often Assume They Go Hand in Hand, but Recent Elections in Japan and Germany Provide a Sobering Reminder That There Are Deep Conflicts


Samuelson, Robert J., Newsweek


Byline: Robert J. Samuelson

The recent German and Japanese elections deserve more attention than they've got because they illustrate the uneasy relationship between capitalism and democracy. Capitalism thrives on change--it inspires new technologies, products and profit opportunities. Democracy resists change--it creates powerful constituencies with a stake in the status quo.

Capitalism (by which I mean an economic system that relies heavily on markets and private ownership) and democracy need each other. The one generates rising living standards; the other cushions capitalism's injustices and, thereby, anchors public support. But this mutual dependence is tricky because if democratic prerogatives are overused, they may strangle capitalism.

Just how to regulate this relationship was the core election issue in both Japan and Germany. As is well known, their economies have faltered badly. Since 1997, their annual economic growth has averaged about 1 percent, roughly a third the U.S. rate. Compared with the late 1980s, Japan's joblessness has doubled; in Germany, the unemployment rate has bounced around 10 percent for a decade. The campaigns centered on these setbacks.

Voters seem to reach opposite conclusions. The Japanese gave a resounding triumph to Prime Minister Junichiro Koizumi, who made the election a test of his economic-reform agenda. By contrast, German voters seemed more timid. The pre-election wisdom was that Chancellor Gerhard Schroeder of the Social Democratic Party (SPD) would lose decisively to Angela Merkel of the Christian Democratic Union (CDU), who preached aggressive economic reform. The two parties actually ran almost even. The CDU got 35.2 percent of the vote; the SPD, 34.3 percent. It's unclear who will head the next government.

Despite the divergent outcomes, the prospects for economic renewal in both countries remain uncertain. Proclaiming economic "reform" and doing it aren't the same. In Japan, Koizumi has championed overhauling Japan Post, which is more than a mail system. It's also the world's largest bank, absorbing as deposits about 30 percent of Japanese household savings. The trouble, says Richard Katz, editor of The Oriental Economist Report, is that much of this money is wasted. It's funneled into government bonds that often finance dubious public-works projects--bridges to nowhere and paved riverbeds, as Katz says.

Koizumi wants to privatize Postal Savings--turn it into a profit-making company. That should favor more productive investments and, thereby, stimulate the economy. Although this sounds sensible, it's no economic panacea. …

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