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.
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