|Understanding the Cultural
ATTACHMENT K: UNDERSTANDING THE 'CULTURAL REVOLUTION'
The following comments about the difficulty of applying Western style financial practices apply to
those communities in Asia which have been influenced in the past (as most in East Asia have) by
ancient Chinese traditions (eg China itself, the offshore Chinese who dominate economically and exert
great political influence throughout SE Asia, as well as Japan, Korea, Singapore and Taiwan). Those
traditions are quite different to those which Western societies inherited from ancient Greece, Rome
and from Christianity. They also apply, partially, in countries in Asia with other dominant cultures,
which have sought to apply variations on the Japanese economic development model.
The Core Issue
This basic issues involved can be illustrated by the case of Japan, some of whose 'ideal'
characteristics are along the following over-simplified lines:
- epistemology (ie the approach to knowledge) is quite different to that which Western societies
inherited from classical Greece. The prime difference lies in an emphasis on the 'real' rather than
on abstract ideas about that reality (such as law, theory, or money). Thus Confucianism (the
dominant basis for administrative traditions) essentially involves a means for managing
interpersonal relationships without reliance on abstracts like 'law' or 'legal contracts' (see Smith The
Religions of Man, 1958). And whereas Plato argued there was a relationship between abstract
'forms' and reality (the basis for rationality and scientific thought), Daoism holds that 'The Dao
(truth) which can be named is not the true Dao' (ie that ideas are an oversimplification of reality).
- Because abstract information is not believed to model reality, power implies an ability to avoid
decision making, rather than being able to make decisions. This is the basis of Japan's 'bottom up'
decision making. Power depends on position in a society which is based on hierarchy rather than
on equality. Concrete information is valued as a means to influence others, not as a means of
decision making by managers. Superiors are teachers and guides to subordinates, not judges of
their performance. They are authoritarian, but only in enforcing the decisions of subordinates.
- government is by bureaucracy, where the bureaucracy is selected as those proven through the
education system as best able to manipulate information. The 'democratic' process is supported
(and manipulated) by the bureaucracy, as Emperors were in the past.
- Reflecting a disbelief in universal ideas, there is a lack of 'universal' ethics - so that only those with
whom one has a direct relationship are owed obligation - apart from preserving 'face'.
- Society is defined as in terms of relationships, rather than as a collection of individuals, because
individuals or things are not seen separately
Business and Economic Consequences
These general characteristics lead to various consequences in a business and economic context.
- A communitarian market system applies where commercial transactions are a component of long
term social relationships rather than being based on arms length relationships under contracts or
- Primary emphasis is placed on managing the 'real' economy, not on understanding abstract
'models' by which it might be understood. Economists find employment only in universities, and are
not involved in government administration. Markets are tools to be manipulated, not independent
forces to be respected. <>.
- The means for manipulating markets used by MITI in accelerating Japan's economic development
(ie vision development and administrative guidance), primarily involved manipulating the flow of
information within social hierarchies. The allocation of financial resources was a consequential
- Competitiveness of firms has been driven by organisational innovation (ie by learning from others
technologies) rather than by technological innovation. The learning processes (through 'bottom up'
decision making) would not have worked had there been an 'owner' dictating what the business
should do. The business was its employees.
- Business is traditionally financed almost entirely by debt capital, with equity indicating business
relationship, rather than ownership and control. Whilst useful in enabling organisational learning,
this creates particular problems for banks when losses occur, because of the lack of an equity
- Financial institutions, which provided most debt capital, have been directly subordinates of the
bureaucracy (and have been run by the most senior (though nominally retired) officials of the
Ministry of Finance)
- There is no need for skill in managing finance as a problem in itself because it is the 'real' economy
/ organisation which is managed, not abstract symbols which represent it. Financial outcomes for
firms are not a result of financially based management. This is effective during the stage of
creating the ability to generate wealth, but ineffective once that wealth is created.
- Abstracts like money are not seen as the primary measure of economic success, or as the means
for managing organisations. Economic goals are defined in terms of market share (power) rather
than in terms of financial gains such as profitability (return on capital). This reflects a mercantilist
goal - ie to enhance the power of the 'community' (ie a racial / cultural nation).
- no distinctions are made between economic and other (such as military) means to advance national
interests. All segments in society are included. Even gangsters are the bottom (enforcer) end of
the nationalistic system of government eg yakuza in the case of Japan (Kaplan, Yakuza), and triads
in the case of offshore Chinese business groups (Seagrave, Lords of the Rim)..
Others have deployed a similar 'package' of characteristics in different ways - eg China places more emphasis
on organisation through families, rather than organising the nation as a whole (ie China has been described as
a 'tray of sand', where Japan is a 'block of granite'). And within Chinese communities there is a difference
between the 'state' focused political goals of North China (which Mao had represented), and the less centralised
commercial goals in southern China and amongst the offshore Chinese (which Deng had represented).
Consequences for Financial Management
IMF / investor expectations about the adoption of Western style financial management goals and methods in
affected Asian countries would require a 'cultural revolution', and radical changes in
- the way information is dealt with;
- commercial goals (ie a shift from power to financial returns)
- the distribution of social and political power
First, the IMF (and Western financial institutions) are seeking transparency and better information for investors.
This encounters core obstacles:
Recapitalization in Asia has been said to require greater acceptance of Western ownership of Asian businesses -
which in turn requires eliminating the fluid, opaque arrangements of past <476>. However with the approach
taken to knowledge described here, it is presumed to be impossible for outsiders to have the superior knowledge
needed to tell any group what to do. Opaqueness is taken for granted, and anything else is presumed naive. This
might usefully be considered by firms contemplating purchases of cheap assets in Asia.
Second, commercial and economic goals would have to shift from 'power' to financial returns.
There is no commercial tradition of profiting on the management of money (only profiting from the management
of 'real' factors. The style of problem solving (which does not involve abstract analysis) does not lend itself to
the management of abstracts like money. Ways of managing finance do exist (as shown by the commercial
success of the offshore Chinese) through decentralisation and short term trading finance, which reduces the need
for dealing with abstracts.
Asian economic goals tend to be communitarian and mercantilist - ie oriented towards developing the power
of national / cultural / racial groups, not towards the welfare of individuals as consumers. This reflects a view
of society as a set of relationships - rather than as a collection of individuals, where the interrelationships which
bind community together, are more important than individuals.
Mercantilism is an approach (eg in 18th century Europe) which treats the economy primarily as an extension
of national power. This is reflected in (say) Japan (and elsewhere) through: orientation to market share
(power) rather than to profitability<299>; directing resources to business groups (which are heavily controlled
by bureaucracy), rather than to consumers; and an 'adversarial' approach to trade. It is currently reflected in
Japan in refusal to reform financial system, which reform would have displaced the existing bureaucratic
faction's control of Japan's economy - and allowed resources to flow to consumers to stimulate growth.
Mercantilist responses are also involved in Taiwan <49>.
Third, for affected countries, IMF requirements are not just a technical matter, but cut across political
and social traditions about the distribution of power. For example, the IMF is seeking to separate
government and business, and to break up groups like the Korean chaebol..
- The crisis, which started with currencies, has become a banking crisis. But there is experience of these,
and what is needed is to let bad banks go bankrupt, and increase transparency. This is difficult (given
political opposition) but allows subsequent rapid growth. Asia has the advantage of selling goods in
demand. The problem is that reform may not happen. The crisis represents a challenge to the Asian
model, whose strength has been the way elites work together - whereas a credible regulatory regime
requires independent centres of power. This seems useful in West, but is unacceptable in Asia - and is
the main obstacle to resolving this crisis <237>
- Korean chaebol are based on families, with loyalty considered to be more important than profits - and
support given to even the dimmest children <388>
- Korea faces a severe economic challenge, yet the issue was not discussed in the recent election. Koreans
can make sacrifices and struggle - but this is not needed as much as reform of banking and industrial
structure which will break the unity of authority. South Korea's command capitalism requires all parts
pulling together. South Korea did not have a current account deficit or budget deficits. Its debts were high
and poor - but they were serviceable before the currency devalued. Confidence must be restored with
transparent financial arrangements, which will be hard for this most nationalistic people <404>
There has been strong resistance allowing major businesses to fail, because where the political,
social and economic power structures in a country are the same, economic failures must be
prevented or the whole social / political structure also fails.
- Calls for transparency and deregulation are a direct threat to existing patterns of economic and political power.
Mahathir is not alone in expressing concern <46>
- Indonesia resists meeting IMF conditions, connected with projects desired by President's family <76>
IMF support for Indonesia could fail <574, 606>. A default by Indonesia <610>could encourage Korea
to do so also and have a massive effect on Japan <606> in Indonesia, releasing economic resources
from trusted associates of the President would mean they would fall out of Javanese hands into the hands
of rival groups (especially the offshore Chinese who already own 70% of the wealth in Indonesia). In a
region where strong cultures have no obligation to, and would seek to destroy, weak cultures - this is a
matter of some moment. [solution can be to enable many more to succeed]
- in Malaysia, IMF support has not been accepted because the IMF would require ending of protection of
'bumiputra' at the expense of offshore Chinese.
- Japan's problem in recovering from the financial system losses after the 1980's 'bubble economy' burst,
was that the financial institutions which had lost vast sums were effectively owned and controlled by the
bureaucracy which are Japan's real government (behind the facade of democracy). Causing those
institutions to fail, the would erode the power of the faction which rules Japan (and it was certainly
impossible for officials in the Ministry of Finance to 'sack' their (nominally retired) superiors who controlled
the major banks). The means recently selected to 'resolve' the banking failures, involved government
investment in the banks to prevent their failure.
- in South Korea, IMF conditions have been seen as an attack on national sovereignty. The Korean
government has taken responsibility for 'private' losses, to ensure assets can not be acquired by others.
- An anti US reaction could emerge in Asia as a consequence of the crisis <607, 675>. Claims are made
that IMF increases bankruptcies so that US companies can buy them cheaply. <675> China accuses IMF
of being a tool of US - through imposing requirements which are politically and economically unfair. They
benefit multinationals, not affected countries <530>
Countries in East Asia were able to become market economies only because (under the Japanese
model) it was possible to do so while preserving the power and position of traditional elites. If both can
not be achieved simultaneously in future (because this has contributed to major losses), then there
is no guarantee that peaceful 'economic' goals would gain precedence over 'power' goals.
The history of China over thousands of years is one of constant conflict between authorities and
merchants - which has spilled over into SE Asia through repeated migrations of merchants offshore.
And allowing power to financiers, would cause a similar concern.
An anti US reaction could emerge in Asia as a consequence of the crisis <607, 675>. Claims are made that
IMF increases bankruptcies so that US companies can buy them cheaply. <675> China accuses IMF of being
a tool of US - through imposing requirements which are politically and economically unfair. They benefit
multinationals, not affected countries <530>
Asia's crisis can be seen as a struggle between Western 'baby boomers' (intermediated by financial
institutions) who want financial returns (and reform) and local political elites who want power for
themselves (the Western view) or for their communities (the Asian view)
Japan has struggled since the Meiji Restoration to build an economic power - and now finds that it
seems impossible for political authority to successfully manage finance. At risk is everything that
Japan has sought for over a century. Real change won't happen quietly, or quickly, or at all.
Fourth: there may be little of the framework of legal institutions needed to give effect to goals like
those which the IMF seeks.
It is seen that a system of law is needed to counterbalance administrative power in China <>. However
Confucianism, which is the administrative tradition amongst the economically successful communities
in East Asia, is (at its core) a way of governing interpersonal relations without reliance on law (Smith,
Religions of Man, 1958). Confucian authorities ideally govern through moral leadership on the basis of
wisdom derived from a study of history.
Except in countries which adopted British legal traditions through colonisation, there is no means to wind
up insolvent organisation, because of a limited commercial law system <487>. Investors have little
security given lack of effective bankruptcy laws <527> This implies firstly that creditors are unlikely to be
able to recover assets, and that insolvent enterprises may simply continue to operate - preventing any
rapid elimination of the constraint of bad debts on the economy as a whole <>.
There are fundamental weaknesses in corporate governance in Asia, which disadvantage minority
Economic Institutions Do Matter: Russia shifted away from communism towards a market economy - but
suffered economic decline - because the economy could not function without appropriate institutions. A
similar lack of appropriate institutions appears to have existed in East Asia - with the major difference that
Japan (and offshore Chinese) poured investment funds into Asia anyway - thus creating the 'success' which
encouraged Western investors to follow - but unlike the situation in Japan and Taiwan, Hong Kong and
Singapore, often no one was responsible for creating those institutional capacities. Japan and Korea's
problem was that economic institutional arrangements could not be altered as they ceased to be most
appropriate - because of their linkage to national political power structures.
Similarly machinery for governance may not be able to deal well with the challenges of the crisis.
Problems are very complex, and countries lack government expertise to deal with them <387>
Fifth, East Asian economies may not work well on an altered basis. The crisis has undermined the
engine of rapid Asian economic development and growth - government / business partnerships; and
a management approach which achieves gains through mobilising groups of people, rather than
through managing abstracts concepts like money. How and why this works is considered in Transforming the Tortoise: Ways to Improve Australia's Place in the Economic Race?
Such constraints are, however, receiving attention. For about 20 years in Japan (and 5 years
in Singapore) emphasis has been placed on 'learning to think' and on 'creativity' (ie on dealing
more effectively with abstracts).
Cutting government / business links and breaking up business groups like chaebol could result in
much weaker economic performance - because the performance of individuals and individual firms
is an area of weakness in Asia, not an area of strength as it is in the West. The strategies which
have made major east Asian firms competitive, are primarily linked to 'connections' rather
than to individuals <see 9A>
Furthermore, concern for the interests of investors, and gaining return on capital, would erode the way
in which companies have gained their competitiveness and strength.
Japan's Big Bang: Japan is supposed to deregulate its financial system in April 1998, and afterwards have
its financial institutions compete on international criteria of return on capital. This seems unlikely to work
because: there is no tradition of seeking a return on capital; consensual methods of problem solving do not
work for abstract problems; and the strength of Japanese firms (which is understood in terms of gaining
market share, not profits) relies on not heeding the needs of capital.