Editor JAMES A. CAPORASO, University of Washington Managing Editor JANET WILT, University of Washington Book Review Editor ANTHONY GILL, University of Washington Editorial Board Donna L. Bahry, Vanderbilt University David G. Becker, Dartmouth College Bruce Bueno de Mesquita, Hoover Institution Valerie Bunce, Cornell University Stephen Chilton, University of Minnesota, Duluth John R. Freeman, University of Minnesota Geoffrey Garrett, Yale University Barbara Geddes, University of California, Los Angeles Peter A. Hall, Harvard University Stephen Hanson, University of Washington Robert Harmel, Texas A&M University Ronald J. Herring, Cornell University Robert Jackman, University of California, Davis Anthony James Joes, Saint Joseph’s College John T. S. Keeler, University of Washington Desmond S. King, St. John’s College, Oxford Herbert Kitschelt, Duke University Masaru Kohno, Aoyama Gakuin University Joel S. Migdal, University of Washington Will H. Moore, Florida State University Alain Noël, Université de Montréal Gianfranco Pasquino, Johns Hopkins University, Bologna Center David Pion-Berlin, University of California, Riverside Robert D. Putnam, Harvard University Ronald Rogowski, University of California, Los Angeles Richard Rose, University of Strathclyde Michael Shalev, Hebrew University Henry Teune, University of Pennsylvania Michael Don Ward, University of Washington Spencer Wellhofer, University of Denver For Sage Publications: Yvette Pollastrini, Dawn Trainer, Corina Villeda, Kathryn Journey, and Tina Papatsos volume 34, number 10 / December 2001 contents The Crisis of German and Japanese Capitalism: Stalled on the Road to the Liberal Market Model? STEVEN K. VOGEL 1103 Japan and the United States as Development Models: Classifying Asia Pacific and Latin American Political Economies STEVE CHAN 1134 Explaining Party Formation and Nonformation in Russia: Actors, Institutions, and Chance MICHAEL MCFAUL 1159 A Tool, Not a Master: The Use of Foreign Case Law in Canada and South Africa SHANNON ISHIYAMA SMITHEY 1188 Coalition Policy in Parliamentary Democracies: Who Gets How Much and Why PAUL V. WARWICK 1212 Coordinating Party Choice in Founding Elections: Why Timing Matters GARY M. REICH 1237 Book Reviews A Fistful of Rubles: The Rise and Fall of the Russian Banking System by Juliet Johnson ANDREW BARNES 1264 Audacious Reforms: Institutional Invention and Democracy in Latin America by Merilee S. Grindle JODI S. FINKEL 1267 Index 1271 COMPARATIVEVogel / CRISIS OF POLITICAL GERMAN & STUDIES JAPANESE / December CAPITALISM 2001 German and Japanese opinion leaders demand a decisive move toward the liberal market model, yet their governments have been slow to act. Why can’t Germany and Japan reform? To unravel this puzzle, we must understand how the German and Japanese models of capitalism bind the potential winners from liberal reform, such as competitive manufacturing exporters, to the potential losers, such as workers and protected service industries. Competitive exporters are reluctant to embrace reforms that might undermine valued relationships with workers, financial institutions, and other business partners. Moreover they cannot forge a strong reform coalition because they must work through industry associations and political parties that represent both competitive and protected sectors. As a result, Germany and Japan proceed cautiously with reform; they package delicate compromises, often compensating the potential losers; they design reforms to preserve core institutions; and they seek novel ways to build on the strengths of these models. THE CRISIS OF GERMAN AND JAPANESE CAPITALISM Stalled on the Road to the Liberal Market Model? STEVEN K. VOGEL University of California, Berkeley n the space of 10 years, Germany and Japan have gone from paragons of Ieconomic success to models of political paralysis. A decade ago, would-be reformers in other countries looked to Germany and Japan for lessons. These AUTHOR’S NOTE: The author would like to thank Robert Fannion for research collaboration and feedback; Kenneth Haig, Gene Park, and Masaya Ura for research assistance; Karen Adelberger, Tilmann Braun, John Cioffi, Josef Joffe, Peter Katzenstein, Jeffrey Legro, Philip Manow, Herman Schwartz, and Kathleen Thelen, participants in the project on “Germany and Japan: the Future of Nationally Embedded Capitalism in a Global Economy” and seminars at the University of Virginia, Harvard University, and Stanford University, and three anonymous reviewers and the editor of Comparative Political Studies for valuable comments; and the Abe Fellowship Program, the United States–Japan Program at Harvard and the Center for Japanese Studies at Berkeley for financial support. Some of the Japanese material in this article builds on the author’s (1999a) work. COMPARATIVE POLITICAL STUDIES, Vol. 34 No. 10, December 2001 1103-1133 © 2001 Sage Publications 1103 1104 COMPARATIVE POLITICAL STUDIES / December 2001 two countries had somehow discovered how to balance competition and coordination in a modern economy. They fostered cooperative relations between government and industry, financial institutions and manufacturers, and labor and management, and they delivered growth with equity (MacDougall & Kabashima, 1999; Yamamura, 1998). Yet today the German and Japanese models of capitalism confront a pro- found crisis. Germans and Japanese now openly question the institutions that comprise these models: the Hausbank and main bank systems, collective bar- gaining and lifetime employment, interfirm networks, and close govern- ment-industry ties. In both countries, an increasingly influential number of economists, journalists, and political leaders call for a decisive move toward the liberal market model. These groups seek to eliminate protection and embrace competition: to open labor markets, liberalize finance, reform cor- porate governance, deregulate industry, cut welfare spending, and restructure taxation. Yet these reformers find themselves frustrated with their govern- ments’ inability to act. They blame the political systems for blocking sorely needed reforms. The Germans have even coined a term for this dilemma: Reformstau (reform logjam). Some have suggested constitutional changes to break the impasse. Hans-Olaf Henkel (1998), a leading spokesman for Ger- man industry, proposes reducing the power of the upper house (Bundesrat) and reforming the electoral system so as to eliminate coalition governments. Ichiro Ozawa (1994), the leader of Japan’s opposition Liberal Party (Jiyuto), favors strengthening the powers of the prime minister and dramatically increasing the number of political appointees in the bureaucracy. So why can’t Germany and Japan reform? To unravel this puzzle, we must look at how the German and Japanese systems bind the potential winners from liberal reform, such as competitive manufacturing exporters, to the potential losers, such as workers and protected service industries. Frieden and Rogowski (1996) contend that internationalization should increase con- flict between the competitive and the protected sectors of the economy and strengthen the hand of the competitive over the protected sector. In Germany and Japan, however, the competitive sector cannot push through liberaliza- tion at the expense of the protected sector because the two are linked through business relationships and political ties. I develop this argument by focusing on how economic ties between the two sectors shape industry policy preferences and how political ties between the two affect the aggregation of these preferences. First, those groups with the greatest apparent stake in liberal reforms, such as large manufacturing exporters, are reluctant to embrace reforms that might undermine the com- parative institutional advantages of close long-term relations with workers, Vogel / CRISIS OF GERMAN & JAPANESE CAPITALISM 1105 financial institutions, other business partners, and the government (see Soskice, 1999). Second, those who do favor liberal reforms cannot forge a strong political coalition because the major industry associations and conser- vative political parties incorporate both the potential winners and the poten- tial losers from reform. Thus the associations and the parties must work out internal compromises between constituent groups before proposing reforms. The other political parties are even less likely to support liberal reforms. As a result, Germany and Japan wind up with a distinctive pattern of economic reform: They proceed with reforms slowly and cautiously; they package deli- cate compromises, including considerable compensation for those who might be disadvantaged by the reforms; they design reforms to preserve the core institutions of their respective models as much as possible; and they seek novel ways to build on the strengths of these models. I will review in a later section how this pattern plays out in four specific issue areas: labor market reform, financial reform, corporate governance reform, and regulatory reform. In the United States and Britain, in contrast, industry has supported liberal reforms more strongly; industry groups have been more likely to lobby on their own or to form ad hoc coalitions rather than to work through national peak associations; and the conservative parties have embraced the liberal market model much more wholeheartedly. As a result, the United States and Britain have moved much more boldly with liberal reforms than have Ger- many and Japan (King & Wood, 1999; D. Vogel, 1989; S. K. Vogel, 1996). THE GERMAN AND