EIJS Working Paper Series,
Stockholm School of Economics, The European Institute of Japanese Studies

Abstract: Japan has been slow in carrying out economic reforms that many astute observers of the Japanese political economy believe are needed but have been blocked due to the opposition by powerful interest groups. In contrast, South Korea undertook speedy economic reforms soon after the 1997-98 crisis. The difference in reform experience between the two countries may be due to the fact that, in comparison with Korea, Japan is a rich country and is suffering from an economic malaise, not a severe economic crisis. This paper argues that there is an additional, rather critical, factor that accounts for the difference: it is that for a country to change its institutions it, at least those advocating the change, must have a model of institutions that they and the society at large can accept as superior to the extant institutions. It argues that Japan has yet to find such a model whereas Korea has had one since the early 1980s. Japan is now in a paradigmatic crisis, a crisis in the beliefs held by many Japanese about their own political-economic system, and is in need of finding an alternative paradigm that the people can accepta process that inevitably takes a long time. By contrast, in Koreaeven before the crisis of 1997-98, there was a strong move to establish a liberal economic order and the crisis served as a catalyst for reform.

Keywords: Japan; institutional change; Korea; economic reform; banking crisis; paradigmatic crisis; political economy

JEL-codes: N15; O10; P16

136 pages, September 1, 2004

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