Transcript Asia I - Prof. Ruggero Ranieri

Japan’s catch up, its model of
Asian capitalism and its impact
on the Asian and global
economy.
Japanese capitalism
• Social model: strong emphasis on paternalism and
social solidarity. The industrial revolution in Japan
was a top down process, on imitation of the West. In
a short period the country made the transition from a
semi-feudal to a modern capitalistic society.
• Role of the State and State-business relationship.
The State in Japan has an important role in the
economy and it works in close contact with big
Business. Business, politics and the high levels of
bureaucracy are in close contact.
• Organisational model: within the Japanese company
there are strong loyalty ties. The permanent
workforce enjoys privileges. There is a strong
emphasis on team work and flexibility as well as
customer care. Management keeps in close contact
with the workforce on the shop floor.
Japanese capitalism: distinctive
features.
The zaibatsu, were large conglomerates, owned by important
family business groups. They included industrial and financial
interests. Companies belonging to a zaibatsu were financed
from inside the group, by the zaibatsu banks. The aim of the
zaibatsu was to keep the more modern sector of the Japanese
economy firmly within their boundaries. The zaibatsu formed a
powerful oligopoly, to which independent companies had to
defer.
Each zaibatsu was structured in a number of separate
holdings, which were linked informally to each other, by
personal and family ties.
The 4 main zaibatsu – Mitsui, Mitsubishi, Sumitomo, Yasuda –
controlled a dominant share of Japan’s banking and industrial
system.75% of all loans to Japanese business came from the
banks of the 4 zaibatsu.
Japan and the consequences of its WW2
defeat.
• The US occupation of Japan affected the country’s political
and economic structure. The US introduced reforms aimed at
transforming what had been a militarist, autocratic and
imperialist country into a Western style democracy.
• The reforms had a mixed outcome. Japan’s political system
was transformed into a democracy, but power rested in one
main party, the Liberal Democratic Party, which garnered a
large share of the vote. The opposition, which essentially
comprised the Left wing parties, was farily weak.
• Economically the zaibatsu were transformed into keiretsu,
which were more informal groups, no longer openly
oligopolistic and authoritarian but, in many ways very similar.
The zaibatsu dynasties lost their former influence and were
replaced by an elite of managers, bureaucrats and politicians.
Japan and the consequences of its WW2
defeat.
• The State remained very important for the Japanese
economy, mainly through “indicative planning”
mechanisms carried out through important ministries
such as MITI (Ministry for Industry and Technology).
Industrial policies were aimed at encouraging strategic
sectors. Trade policies were designed to boost exports,
while the domestic market remained virtually closed to
foreign products, through a panoply of protectionist
devices (tariff and not tariff restrictions) only very
gradually and partially affected by international open
market commitments (see GATT).
Japan’s post-war growth
• Japan experienced high and sustained levels of
economic growth.
• GDP grew by 9% between 1948 al 1960 and again
between 1960 and 1973.
• High rate of investment and a strong focus on making
exporting companies efficient.
• Very high family savings rate helps supply money to
finance investment. Postal savings played a key role.
The Japanese postal company became the largest
financial institution in the world. And by law they were
directed to finance the Japanese State, by servicing its
debt.
Japan’s post-war growth
• The engine of Japanese success were its exports. Japanese
exports were particularly strong in consumer-electronics,
automobiles. They were directed to the markets of
industrialized countries and particularly to the US.
• Imports into Japan were restricted by protectionist barriers.
• There were two kinds of companies: exporting companies
were very efficient, whereas companies producing for the
internal market were less efficient. Keiretsu were large
conglomerates, each organized around a banking institutions.
There was no central board, however members of the leading
companies of the keiretsu came together periodically to
determine strategies. There was a lot of cross-share holdings
within each Keiretsu and among the keiretsu.
• Central government offices steered banking institutions and
worked to consolidate the system, by giving direction to the
economy with planning decisions, incentives, informal cartels
etc.
Japan post war economic model
• Compared to Europe, Japan has kept social expenditure at a low level.
Also much lower than both the US and Europe has been Japanese
consumer spending.
• Labour productivity, measured per-hour, has been inferior to the Us and
Europe. However, in certain export oriented sectors productivity has been
very high, and in any case the gap is made up by a much higher number
of hours worked per worker.
• The system is highly hierarchical both among companies and within
companies. There is a strong sense of company loyalty, and this is also
translated into loyalty incentives, company bonuses, reliance on in-house
trade unions. Industrial relations are less adversarial than in the West.
• Technological innovation receives a high priority. The number of
engineers is very high. The school system is highly competitive and
geared to the requirements of the economy and of business.
• Organizational innovations: lean production and just in time methods
have resulted in running down inventories.
Japan’s GDP and productivity
growth rates compared.
Japan and Asia up to 1985
• Up to around the mid 1980s Japan showed little
interest for the Asian economy. Its main focus was on
the US and European markets. This was mainly
because there was scarcely a demand in Asia for
Japanese export goods, such as automobiles,
electronics, and other sophisticated industrial goods.
From its neighbours Japan imported foodstuffs and
raw materials. Japanese FDI in Asia went mainly into
mining.
The revaluation of the yen in 1985
• US trade pressure on Japan provoked the revaluation
of the yen by 30%. This hit Japan’s exports, raising
production costs and wages and depressing company
profits. Japan’s Finance minister reacted by
expanding public expenditure to fight recession. The
injection of new liquidity, however, encouraged
financial and real estate speculation eventually
leading to a serious financial crisis. Banks were
overexposed in the real estate building and suffered
when the bubble burst around 1990-1.
• La revaluation of the yen brought with it two further
consequences: the increase in financial capital
available to Japanese investors abroad and the end
of the previous export oriented model, with a change
of directions towards Asian countries.
Japan in crisis: the 1990s
• GDP growth slowed down dramatically between 1990 and 2004. Japan
entered a phase of stagnation, punctuated by short recessions.
• Banks emerged as the weak point of the system. They became overexposed since the businesses they had financed had invested heavily in real
estate. When the real estate boom burst banks were forced to call back their
loans some of which had gone bad.
• The government reacted by lowering interest rates, in order to give the
economy a boost. The government started large public works and other
expenditure programmes, borrowing heavily in the process. Banks were thus
saddled with public sector rising debt, as well as private sector insolvencies.
• The economy did not react as hoped to the generous fiscal policy enacted
by the government. In fact the traditionally low consumption habits of the
Japanese meant that they would not respond to low interest rates and would
not use their spending power to buy more goods.
Japanese GDP growth
Japan’s stagnation and the changes to the
Japanese model
• Japan’s stagnation brought with it a rise in
unemployment which, for the first time, reached
5%. Investment and consumption both fell.
Exports on the other hand remained strong, but
they increasingly went to other Asian markets.
• The investment strategy of Japanese business
changed. It started increasing FDI in other
Asian economies. This encouraged the creation
of an informal Asian regional economic bloc,
with Japan at its centre.
Japan’s Asian strategy.
• The focus on Asia started in 1985.
• Japan could have reacted to US pressures by
internationalising its economy, in the way the
US demanded. This would have meant
opening up its domestic market to foreign
imports of goods and services, liberalising its
economy and accepting an inward flow of FDI,
which it had always resisted. In fact Japan
could have reaped the rewards of further
exports and better foreign relations from such a
strategy.
Japan’s Asian choice
• Japan’s leadership made a different choice. It
chose to use its massive capital base and its
great technological and industrial potential to
create an integrated South-East Asian
economy. This also entailed the massive
inflow of Japanese capital into China. And it
had the further advantage of letting Japan off
the hook of US commercial pressures.
Japanese companies and the Asian
markets.
• The big Japanese corporations started to delocalize
some of their production lines in Asian cheap labour
economies. On the other hand the Japanese
government increased its level of aid to the rest of
Asia. The first countries to be affected were Taiwan,
South Korea and Hong-Kong. However the labour
costs in these rapidly developing economies were
rising and there currencies were strong. The second
wave of Japanese FDI moved into South China.
Japanese companies in Asia
• Japanese FDI was the preserve of the big business
sector which consisted mainly of the keiretsu. In the
1990s Japan became the largest FDI source for Asia.
By the end of the 1990s Japanese companies had
invested $ 100 bn. in Asia and 4500 Japanese
businesses, alone or through joint ventures, employed
1 million people. Naturally Japan was not the only
country to invest in Asia. Corporations from the US,
Taiwan, Hong Kong and South Korea also became
large FDI providers. The Chinese expatriate
communities were very active in channelling capital
towards the coastal areas of mainland China,
particularly through Taiwan e Hong Kong.
Network capitalism in Asia
• The big Japanese corporations acquire a regional Asian
dimension.
• They create vertically integrated supply chains (for example
in automotive and electronic production). The headcompanies located in Japan form the apex of the chain,
supplying the high tech production. Down the chain come the
subsidiaries in the more industrialized Asian economies, and
at the bottom those in the low-wage economies.
• Good are exchanged within these networks until the final
product, which was exported to the West or reimported into
Japan.
• The Japanese claimed to be supplying the brains, while
other Asian economies supplied the muscles.
Japanese’s overall overseas position
Japanese trade with US and with China/Hong Kong
Strategy or natural market development?
• Gilpin claims that there was a strategy at work, consisting in
an attempt to create a strong economic regional bloc.
Japanese corporation do not improvise, they closely follow
strategic guidelines imparted from the top.
• Proof of this may be seen that 1985 marked a watershed. Not
only after that date did the Japanese companies change their
behaviour, but at the same time the Japanese government
stepped up its foreign aid to Asian economies.
• Japan, however, kept a two-track approach. It still was eager
to export goods and capital to Western markets. However its
new Asian connections allowed it to maintain its traditional
economic export-oriented structure, and to rely less on mere
market mechanisms.
• Made in Japan is replaced by Made in Thailand or in
Malaysia.
The rise of the Asian tigers.
The four Asian tigers: Hong-Kong, Singapore, Taiwan
and South Korea start their rise in the 1950/60s. The rise of
Malaysia, Thailand and Indonesia starts in the 1970s.
There have been sharp differences: Taiwan and and South
Korea, former Japanese colonies, have many similarities
with the Japanese model. In Malaysia and in Thailand the
role of the State is more prominent and State-business links
are closer.
Common to all S. Asian economies has been the emphasis
on exports and on integrating as far as possible into the
world market.
Asian economies have benefited from Japanese FDI and
from Chinese informal community networks of trade and
finance.
Per capita income growth rates in select Asian economies
GDP per Head. Rates of Growth
South Korea and Taiwan
South Korea and Taiwan started developing in the
middle 1950s, after their devastating civil wars.
They first adopted import-substituting policies, but
with little success. In the late 1960s both countries
began to encourage their companies to produce
industrial goods for foreign, especially American,
consumers.
They used many techniques to push exports: cheap
loans and tax breaks to exporters; a very weak
currency to make Korean and Taiwanese products
artificially cheap.
South Korea and Taiwan
Unlike most of Latin America and Africa, the two
economies – like Hong Kong and Singapore – had
few natural resources and had to take advantage of
low wages to produce simple manufactures to sell
abroad. The new development strategy of exportoriented industrialization (EOI) promoted and
subsidized manufacturing for foreign markets.
South Korea and Taiwan
By the late 1970s South Korea and Taiwan flooded
world markets with toys, clothing, furniture, and other
simple manufactures.
Korean exports went from $385 million in 1970 to $15
billion in 1979, 90% of them manufactured goods.
International banks and corporations found the East
Asian exporters increasingly attractive. They were
stable dictatorships backed by the United States, and
their strong export performances promised a steady
stream of dollars to pay back foreign lenders.
South Korea’s industrialization
The two countries borrowed heavily, to build up their
industrial base.
S. Korea’s government pursued heavy industrial
development by sponsoring modern steel mills,
chemical factories, and a new auto industry.
By the early 1980s the country had the world’s largest
private shipyard and largest machinery factory.
Unlike most developing countries, Korea decided to
set up a car-making industry without multinationals.
In the 1970s the government helped local auto firms
borrow abroad and buy foreign technology and
expertise. Soon cars made by Hyundai, Daewoo,
and Kia were sold all over the world.
South Korea and Taiwan
• Korean chaebols are very similar to Japanese
zaibatsu. The 30 largest chaebol control 41% of
South Korean industry and 16% of GDP. The
Government influences and directs the economy
through the banks by encouraging the most
successful exporters.
• Trade unions are very militant.
• Taiwan is the result of a Chinese diaspora. Its
economy is based on small industry. Despite
bad bilateral ties with mainland China many
Taiwanese companies (in textiles, electrical
products and electronics) delocalize in China.
South Korea and Taiwan
• After a couple of difficult years during the early
1980s ”Asian Tigers” resumed their rapid
growth, shifting from simpler to more complex
manufactured goods – from toys to computers,
from clothing and footwear to bicycles and cars.
• Just as Japan had gone from simple low-wage
manufactures in the 1950s to more complex
machinery and consumer appliances in the
1970s, so the two former Japanese colonies
South Korea and Taiwan did much the same
between the 1970s and 1990s.
South Korea and Taiwan
• By 2000 South Korea produced nearly three
million vehicles a year, about half for export.
South Korea was also a world leader in ships,
television sets, and consumer electronic
equipment;
• Taiwan became the world’s third-largest
producer of computer products, after the United
States and Japan.
• During the 1990s the two countries
democratized seeming to contradict the criticism
that the East Asian model required dictatorial
regimes that could repress the working class to
keep labor cheap.
Hong-Kong and Singapore
• Hong-Kong and Singapore are two city states, which became
important financial centers. Both had been for a long time
British colonies (Hong-Kong until 1997 and Singapore
until1963).
• Hong-Kong was the gateway to China after 1949 and
functioned as a conduit for investments into the Chinese
mainland on the part of Chinese migrant communities scattered
across South East Asia. Furthermore Chinese exports used
Hong-Kong as a passageway.
• After going back to China Hong-Kong is now an “autonomous
region”.
• Singapore also developed as an investment center and a
location for international banks. It has become a hub for FDI
towards the rest of Asia.
The other Tigers
Thailand, Malaysia, the Philippines, and Indonesia, four
heavily agrarian countries, had failed to industrialize with
import substitution. While their governments continued to
protect national businesses, they soon abandoned ISI in
favor of export-led industrial growth.
• They benefited from the successes of the four frontrunners. As the first Tigers developed, their living
standards and wages rose so quickly that they became
unattractive to the most labor-intensive manufacturing.
Industries priced out of Singapore and Taiwan and found
cheap labor in Thailand, Malaysia and Indonesia.
The other Tigers
• In Malaysia Thailand and Indonesia most of the
economy is in the hands of Chinese immigrants. There
are strong ties between the State, ruling elites and big
banks.
• Foreign capital flooded into the three Southeast Asian
economies and eventually into the politically less stable
Philippines, and soon manufactured exports flooded out.
• Like the initial four East Asians, these four Southeast
Asian countries were close American allies and feared
Communist insurgencies. These strategic realities
undoubtedly made it more attractive for them to integrate
into the American-led world economy.
Answer Two of the following Three
questions.
• Outline the differences and
similarities between three Asian
“Tigers” of your choice.
• How did Mao-Tse-Tung attempt to
modernize China?
• Why is FDI so important to the
development of the Asian
economies?