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East Asian model

The East Asian model (), pioneered by Japan, is a plan for economic growth whereby the government invests in certain sectors of the economy in order to stimulate the growth of specific industries in the private sector. It generally refers to the model of development pursued in East Asian economies such as Japan, South Korea and Taiwan. It has also been used by some to describe the contemporary economic system in Mainland China after Deng Xiaoping's reform and opening up during the late 1970s and the current economic system of Vietnam after its Đổi Mới policy was implemented in 1986. Generally, as a country becomes more developed, the most common employment industry transitions from agriculture to manufacturing, and then to services.

The main shared approach of East Asian economies is the role of the government. For East Asian governments have recognized the limitations of markets in allocation of scarce resources in the economy, thus the governments have used interventions to promote economic development. They include state control of finance, direct support for state-owned enterprises in strategic sectors of the economy or the creation of privately owned national champions, high dependence on the export market for growth, and a high rate of savings. It is similar to dirigisme, neomercantilism, and Hamiltonian economics.

Although there is a common theme, there is not one single approach to the economies of Asian countries, and it widely varies in economic structure as well as development experiences among the East Asian economies, especially between Northeast and Southeast Asian countries (e.g. Malaysia, Indonesia and Thailand relied much more on FDI (Foreign Direct Investment) than Taiwan or Singapore).

Success of the model

East Asian countries saw rapid economic growth from the end of the Second World War until the 1997 Asian financial crisis. For instance, the percentage of annual average growth between 1970-96 was 3-5% in China, Hong Kong, Taiwan, South Korea and Singapore. Within this period, developing East Asian countries were growing at three times the growth rate of the world economy. Hence, these countries attracted a significant amount of foreign and private capital inflows. During this period, East Asian countries also achieved dramatic reductions in poverty. In Indonesia, the percentage of people living below the official poverty line fell from 60% to 12% between 1970 and 1996. Furthermore, Indonesia's population increased from 117 to 200 million. Between 1980 and 1992, average wages in newly industrialized Asian countries increased at a rate of 5 percent a year, while employment in manufacturing increased by 6 percent a year. Overall standards of living saw improvements during this growth period in East Asian countries.

Causes of GDP growth

Behind this success are export-oriented economies, which brought high foreign direct investment and greater technological developments, consequently leading to significant growth of GDP. Corporations like LG, Hyundai, Samsung were successful due to government backing and intervention into the banking sector, so banks gave credit to big companies. The governments in those countries helped control trade unions, provisions, justice and provided the necessary public infrastructure (roads, electricity, education, etc.). All this just attracted foreign investors to these countries. Additionally, Asian countries received foreign aid from the West (especially from the United States as a Cold War Containment policy, in order to discourage communism) and get better access to the Western markets.

Examples

"Eight countries in East Asia–Japan, South Korea, Taiwan, Hong Kong, Singapore, Thailand, Malaysia, and Indonesia–have become known as the East Asian miracle." Beside successes of the East Asian economy mentioned above in the success of the model, there are two other examples why they are called 'Asian miracles'.

  • Japan: The East Asian model of capitalism was first used in Japan after The Second World War in 1950. After war and American occupation, recovered Japan was considered a developing country (e.g. In 1952 Japan had lower total export value than India). The main development was between 1950 and 1980. It took Japan about 25 years, a non-competitive country (in steel production), to overcome Germany in producing cars (Germany was at that time the largest exporter of automobiles in the world). 5 years later, Japan produced more automobiles than the US. In a post-war period, the Korean War (1950-1953) can be seen as a turning point for the Japanese economy, as the country moved from depression to economic recovery. Japan, being occupied by the US military, was a staging place for the US-led United Nations forces deployed in the Korean peninsula. The country found itself in a good position to make a profit as Japanese goods and services were procured by the UN troops. This, along with economic reform, gave an initial boost for the economy that would experience rapid growth for the next half-century. In the 1950s and early 1960s average annual growth rates were around 10% and later will even climb to 13%. In the early post-war years Japan initiated economic reform, Zaibatsu corporations were dismantled, empowering small agricultural producers to earn profit as opposed to the pre-war years where big land lords were owners of agricultural land. In 1960s Japan developed a consumer-oriented economy, with industry orienting towards production of high-quality technological products aimed for export, as well as the domestic market. Japanese exports rose rapidly and in subsequent years it became a world leader in car manufacturing, shipbuilding, precision optical devices, and high technology. Beginning in 1965 Japan started having a trade surplus and the next decade saw Japan having the third-largest gross national product in the world. In the 1970s the growth will significantly slow down partly due to the oil crisis, as the country was heavily dependent on oil and food imports. In the 1980s Japan diversified its raw material sources, due to economic misfortunes of the previous decade, and shifted its production’s emphasis towards telecommunication and computer technologies. Even though Japanese economic expansion ended in the early 1990s, today Japan is the leader in highly sophisticated technology along with its traditional heavy industry products. Tokyo is one of the world's most important financial centres, home to the Japan Stock Exchange Group's Tokyo Stock Exchange and Tokyo Commodity Exchange, among others.
  • Korea: Korea followed Japan and despite its lower industrial development, was in nearly 40 years able to compete in chip manufacturing, surpassing the United States. In the 1950s South Korea was one of the poorest countries in the world, heavily dependent on foreign help, provided mostly by the US. Beginning in the early 1960s, the country’s autocratic leadership initiated economic development reforms that paved the way for rapid economic expansion. Heavy protectionist policies only allowed imports of raw materials, which initiated domestic production of consumer goods. By 1990 average annual growth was around 9%. Family businesses (chaebol) that turned into big conglomerates (i.e. Samsung, Hyundai) had government financial help, for instance in a form of tax breaks, thus spearheading economic growth. South Korea became a highly industrialised country with a skilled workforce and along with Taiwan, Singapore and Hong Kong ended up being one of the Four Asian Tigers. However, in the 1990s economic growth significantly slowed, which resulted in huge financial aid from the International Monetary Fund of 57 billion USD, which was the IMF’s largest intervention. In the early 21st century South Korea enjoyed a stable economy and the country initiated slow liberalisation.

Ersatz capitalism

Ersatz capitalism is Kunio Yoshihara's analysis of Southeast Asian economic development as a sort of 'pseudo-capitalism', referring to governments and businesses pushing their citizens to undertake economic activities that provide their country comparative advantage. These activities include capital investments and technologically intensive production.

Crisis

Besides many secondary actors in bringing out a crisis (such as a property price bubble, macroeconomic mistakes or a fall in a rate of growth of experts) the core of the crisis was in The East Asian model itself. The over-investment, misallocation of foreign capital inflows (big corporations getting money from each other, whether investment was sufficient or not), and other problems in the financial sector. Another side of the government-controlled market was massive corruption, which was due to close relationship between government and business. This so called “crony capitalism” (which means influence of government and businessmen) led to a crisis of confidence in the economies, firstly in Thailand and then other Asian countries, leading to the 1997 Asian financial crisis. Because of the crisis GDP and exports collapsed, unemployment & inflation both went up, and as result of all this the governments accumulated huge foreign debt.

Limitations

Japan: The ongoing and deepening economic malaise of Japan reveals the potential failures of a model pioneered by Japan. In an article entitled The "Hidden" Side of the "Flying-Geese" Model of Catch-Up Growth: Japan's Dirigiste Institutional Setup and a Deepening Financial Morass, author Terutomo Ozawa explains that Japan's initial economic success was directly caused by the same factors that have led to its stagnation. Indeed, the country has faced and continues to face three decades of economic stagnation that has led to what has been called the Lost Decades and shows no current signs of ending.

South Korea: Due to government interventions such as directed credits, regulations, explicit and implicit subsidies, the market had a lack of discipline which has contributed to the problem of unproductive or excessive investment which had contributed in causing the crisis.

Indonesia: "Trade restriction, import monopolies and regulations have impeded economic efficiency, competitiveness, reduced the quality and productivity of investment.”

Thailand: Political connectivity with the market have led to giving priority to political affairs at the expense of the economic decisions. For instance, delaying the implementation of necessary policy measures due to the general election in November 1996. In this and other cases, special interest has often influenced the allocation of budgetary resources and other public policy actions.

Overall in a number of countries, there were inadequate disclosure of information and data deficiencies, direct lending. In general, there has also often been a lack of transparency in policy implementation, for example decisions with regards to public infrastructure projects and ad hoc tax exemptions.

See also

Further reading

References