Transcript The Asian Development Experience

Neoliberalism and the
Developmental State in
Asia
C.P. Chandrasekhar
The Asian Story
Different countries in Asia have served as example of
development success with transition from low to
middle and even developed country status.
Japan the first Asian success.
But three tiers of development after Japan
First tier: Korea and Taiwan.
Second tier: Malaysia, Indonesia, Thailand
Third tier: China (and India?)
The success of Asian late
industrializers
Between 1970 and 1995, the share of the industrialised
countries in global manufacturing value added fell
from 85 to about 78 per cent, while developing
countries registered an increase in their share from 10
to 20 per cent
Almost all of this shift in manufacturing production
was to countries in East and Southeast Asia, the
combined share of which more than doubled from 4
per cent to 11 per cent over this period
The paradox
Early Asian success was attributed by many to the
Developmental State which “got prices wrong”: Japan, Korea
and Taiwan. But this too privileged growth based on
exports.
Subsequent tiers of industrialization were seen as founded
on letting markets work or adopting neoliberal policies.
Support from the1997 crisis and subsequent trajectory of
the early miracles?
With the transition in China and India, Asia became the
showcase for neoliberalism when it had failed elsewhere.
Amsden and late
industrialization
Countries that industrialize without the competitive edge of
a monopolized original technology
Different from countries that experienced the first and
second industrial revolutions. Former had the benefit of
invention (search for new products and processes), the latter
of innovation (mass commercialization of invention).
The mode of late industrialization has been one of
borrowing technology from more technically advanced
societies, or what may be called learning.
True of all successful industrializers in Asia, including Japan
Similarities
Important role for the State even if with differences. The
state in Korea, Japan and Taiwan has been more effective
than other late-industrializing countries because it has had
the power to discipline big business, and thereby to dispense
subsidies to big business according to a more effective set of
allocative principles.
Intervention rather than market determines prices: interest
rates, exchange rates, export subsidies, directed credit, etc.
“If the metaphor of the First Industrial Revolution is ‘laissez
faire’, and that of the Second ‘infant industry protection’,
then that of late industrialization is a category
comprehensive enough to overcome the penalties of
lateness—call it ‘the subsidy’. “
The interpretation
Industrialization is constrained by demand, both internally and
externally.
Any country, particularly a small one, can produce without regard
to the size of its home market, so long as it can export. The
problem is that most Third World countries cannot export
because they are not competitive internationally, despite low wage
rates – problem is that raising productivity and creating international
competitiveness, not effective demand
Issue not one of inadequate effective demand, but of too much.
What is needed is more foreign exchange, savings and public
revenues; for these, and not effective demand, are the constraints
on exoanding the pie.
The Korean case
High profits in Korea’s mass-production industries
have been derived not merely from investments in
machinery and modern work methods (what Marx calls
‘relative surplus-value extraction’ and what the school
of regulation calls an ‘intensive’ regime) but also from
the world’s longest working week (what Marx calls
‘absolute surplus-value extraction’ and what the
regulationists call an ‘extensive’ regime).
In Korea these two forms of profit making operate side
by side, and characterize the same group of workers
simultaneously. Land reforms also plays a role.
Differentiating features
Central coordination linked to broad diversification may be a
unique competitive advantage, or scope economy, of late
industrializers, for it allows them to enter new industries quickly
and efficiently.
Subsidies in Korea (as in Japan and Taiwan) have been allocated to
big business according to the principle of reciprocity, in exchange
for performance standards, whereas in other late-industrializing
countries subsidies have tended to be dispensed as giveaways
The corporate office, inclusive of R&D functions, tends to be the
strategic focus of companies that compete on the basis of
innovation, because it is at the administrative level that new
technology is developed and marketed. By contrast, the shop floor
tends to be the strategic focus of firms that compete on the basis
of making borrowed technology work.
Challenge to export pessimism
The fallacy of composition argument
The price effect of UDC competition
The state of the world economy argument
The concentration of LIC exports
The concentration of relocative FDI flows
The obstacles to migrating from labour to technologyintensive exports
Export dependence and the transient miracle
The Indian alternative
Export pessimism and import substitution
Implications of geography and demography for the size
of the domestic market
The legacy of industrialization at Independence
Commitment of the State
Belied promise
The share of manufacturing in GDP did rise from around 9 per
cent in 1950-51 to 13 per cent in 1966-67. But it did not cross the
14 per cent mark for a little more than a decade after that, and
touched 16.4 per cent at its peak in 1996-97.
In 1960, industry contributed 37 per cent of GDP in Brazil, 45
per cent in China, 19 per cent in India, 19 per cent in Indonesia,
around 25 per cent in South Korea, 19 per cent in Malaysia and
19 per cent in Thailand. By 1985, the figures were 45 per cent in
Brazil, 43 per cent in China, 26 per cent in India, 36 per cent in
Indonesia, 39 per cent in South Korea, 39 per cent in Malaysia,
and 32 per cent in Thailand. By 2010, industry’s share fell in some
(due to the rise of services) but increased further in others. The
figures now were: 28 per cent in Brazil, 47 per cent in China, 27
per cent in India, 47 per cent in Indonesia, 39 per cent in South
Korea, 44 per cent in Malaysia and 45 per cent in Thailand.
Limits to growth
Failure to implement land reform meant that mass
market for manufactures remained constrained and the
system was faced with an agricultural constraint.
Failure to finance public expenditure with taxation
Wage goods constraint:
Profit squeeze due to a rise in the product wage in the
non-agricultural sector;
Inability to sustain public expenditure in the context of
persisting agricultural inflation.
Is export-led constraint free?
Not really for a number of reasons. Consider Japan,
Korea and the second-tier industrializers:
Lose of cost competitiveness
Infrastructural bottlenecks
Exchange rate appreciation
Shift to non-tradables and speculative investment
Need to open up market, especially financial markets
Implications for financial firms
Vulnerability to boom bust cycles
Impact on overleveraged firms
Lessons from the 1997 crisis
Limits to externally driven growth
Banks and financial institutions are not merely prone
to over-exposure in individual markets, but to exposure
reflective of unsound financial practices.
Corollary: supply-side factors were likely to result in
boom-bust cycles in financial flows to developing
countries
Sudden and whimsical turn-around in flows can set off
currency speculation in the host country
Increased MNC presence
 In current dollars, the value added of U.S. MNCs grew
at an average annual rate of 3.1 percent, to $3,593.0
billion in 2009 from $2,644.7 billion in 1999.
 The value added of parents grew at an average annual
rate of 1.7 percent to $2,453.4 billion, and the value
added of foreign affiliates in U.S. dollars grew at an
average annual rate of 7.0 percent to $1,139.6 billion.
 Faster growth abroad was concentrated in emerging
markets, such as China, Brazil, India, and Eastern
Europe.
Lessons from the 1997 crisis 2
When the surge in capital flows is reversed, a massive
liquidity crunch and a wave of bankruptcies result in
severe deflation. Asset prices collapse and pave the
wave for international acquisitions of domestic firms at
low prices.
A crisis triggered by finance capital becomes the
prelude for conquest by international capital in
general, with substantial changes in the ownership
structure of domestic assets.
US MNCs value added in
2009
Annual percentage change in value
added 1999-2009
Some evidence on relocation
Developing countries not a major beneficiary and
India not a major beneficiary among developing
countries.
Relocation can be be associated with very low value
addition in the exporting hub.
China’s example suggests that this is likely to be truer
in large countries where MNC interest is in the
domestic market.
Implications for policy?
The China experience
 The large increases in the value added of affiliates in
manufacturing in China were widespread by industry
and mainly reflected expanded production to serve the
large and growing local market.
 Roughly two-thirds of the total output of these affiliates
was sold to local customers in both 1999 and 2009.
The share of these affiliates’ total output that was sold
to U.S. customers actually declined to 10.2 percent in
2009 from 16.3 percent in 1999.
Implications for Miracle growth
Difficult to sustain
Shifting location of the current miracle
China and India recent favourites
The age of finance
Global finance after the 1970s
The pressure to exploit the opportunity
Understanding financial liberalisation
Impact on cross border flows
Implications for successful countries
Reduced trade dependence?
One striking feature of recent growth trends in the region is
that in most of the important economies, net exports (or the
excess of export over imports) is not an important
contributor to GDP, and therefore a major stimulus to
growth.
Amounted to less than 10 per cent of GDP in China and
Thailand and less than 5 per cent in Korea during the
2000s. Malaysia is an outlier, with its ratio of net exports to
GDP fluctuating between 16 and 23 per cent in this period.
The perception that the leading economies of the Asian
region are benefiting from a stimulus from external markets
is true, if at all, only of China and to a much lesser extent
Thailand.
Investment as driver
The two countries that have been topping the growth league tables
in recent years, China and India, have been recording increases in
their gross capital formation to GDP ratios. The ratio for China is
way above that in other countries, approaching half of GDP in
recent years. The ratio in India rose sharply between 2001 and
2007, but is showing signs of slipping since.
While Indonesia, Korea and Thailand too have recorded relatively
high investment ratios, their levels in the 25-30 per cent range are
not such as to warrant the conclusion that autonomous
investment has been the principal driver of domestic demand.
Some implications
However, in both China and India, questions have arisen about
the mode of financing such investment, with excessive reliance on
borrowing. This is acceptable so long as the returns from such
investment are high enough to ensure a profit after meeting
interest and amortisation costs. Initially, this may indeed be true.
But as a larger number of projects are brought into the credit
ambit, the share of projects offering lower returns would rise.
This threatens the viability of the projects and therefore the
sustainability of the investment boom and viability of the financial
system as well.
Domestic demand: Consumption
In most Asian economies final consumption
expenditure contributes around 65 to 75 per cent of
GDP, serving as an important source of demand. The
exception is China. In China extremely high
investment rates have meant a decline in the final
consumption expenditure to GDP ratio from a low of
around 60 per cent to less than 50 per cent in recent
years.
It is in the other economies of the region that
consumption seems to matter as a source of demand
and inducement to investment.
Autonomous demand?
Increased consumption, since it is tethered to increases
in income, is not normally seen as a stimulus to
investment and growth, but an outcome of the latter.
However, there is one way in which consumption can
be “autonomous” in the sense that it is not tethered to
current income. That would be true if a significant
share of incremental consumption is financed with
credit.
Unfortunately, this kind of path is not sustainable.
Regime of accumulation
Less noted associated tendency:
Similarity in the regime of accumulation
Shift to dependence on growth led by household debt
financed expenditure away from public expenditure
Substantial rise in household debt in more than one
Southeast Asian country
Worst off is South Korea but problem exists or emerging
elsewhere in Asia as well
The South Korean problem
In 2010 (2011 survey), six out of ten households in
Korea were in debt, and more than a third of them
were unable to meet their annual expenses with their
incomes
Debt also weighed heavy on current incomes. One in
every 10 households spent more than 40 per cent of
annual income on servicing that debt.
Having to borrow more to stay afloat, a large
proportion of households could be caught in a debt
trap that would force default.
Magnitude of the problem
Growth in household debt a longer-term phenomenon. From
KRW 210 trillion in 1997, the debt of households in Korea rose to
more than KRW 450 trillion in 2002 and stood at KRW 922
trillion at the end of June in 2012.
The ratio of household debt to net household disposable income
rose from less than 100 per cent before the turn of the century, to
the 3-digit mark in 2001, more than 140 per cent in 2006 and an
unsustainable 160 per cent in 2011.
The 2011 figure is higher than the level that prevailed in the
United States before the subprime crisis broke.
The household savings rate in what used to be a high-saving
nation fell: from more than 15 per cent before the 1997 crisis to
around 10 per cent in 2000 and a low of 2-3 per cent recently.
Household loans in total loans(%)
Three phases in Korea
Directed credit from a predominantly public banking system
to private corporates in the industrial sector. Finances
investment otherwise induced.
Shift (post financial liberalisation) of lending away from
productive investment to sectors like the stock market, real
estate and housing. Partly financed with low-cost foreign
finance. Self-reinforcing up to a point.
Increase in lending to the retail sector—housing, automobile
purchases and personal credit—with securitisation and
transfer of risk. Borrowing by the bottom quintile in terms
of income was increasing the fastest. Based on expansion of
the universe of borrowers.
Implications
Displacement of exports and public expenditure with
debt financed household expenditure as stimulus.
Credit expansion driven not by prior induced
investment (JR). Autonomous public expenditure
financed with debt and expansion of the universe of
private borrowers.
Requires liquidity expansion. Requires also financial
liberalisation that triggers shift to fragmented credit
assets, with no external collateral and securitisation.
Other instances
In Malaysia too, the ratio of household debt to GDP has
risen from 33 per cent in 1997 to 78 per cent in 2011.
Household debt to disposable income ratio at 140 per cent
Before the crisis households accounted for a third of loans
provided by the banking sector, and credit to the corporate
sector accounted for 67 per cent of loans outstanding. After
the crisis that ratio moved up and now stands well above the
50 per cent mark.
Housing loans account for 55 per cent of household debt,
automobile loans for another 23 per cent and credit card
advances for a little more than 5 per cent.
The Indian case
Sharp increase in credit financed housing
investment and consumption, facilitated by
financial liberalization.
Credit served as a stimulus to industrial demand
in three ways:
Financed a boom in investment in housing and
real estate.
Financed purchases of automobiles
Expanded demand for consumer durables.
Commercial Bank Credit
Expansion
Personal loans as per cent of total outstanding credit of commercial banks
1996
2000
2007
State Bank of India and associates
9.5
10.7
22.0
Other nationalised Banks
9.1
10.9
15.8
Foreign banks
8.8
17.1
24.8
Regional Rural Banks
10.5
18.8
20.5
Private sector banks
9.7
7.9
37.3
All Scheduled Commercial Banks
9.3
11.2
22.3
China: Debt finance and
growth
In the early 1990s China’s government decided to accelerate
growth. With the mandate to raise investment and promise of
rewards if they did, provincial leaders went on a spending spree.
The result was a borrowing and spending spree, to finance not just
infrastructure but large “prestige projects”, which were not revenue
earning. They were helped by the fact that provincial governments
substantially influenced appointments to and the operations of
regional bank branches.
The inflationary spiral that followed and the evidence that
provincial governments were finding it difficult to service the
debts they had accumulated to finance these projects, led the
central government to ban borrowing by provincial governments
in 1994. But investemtn kept going through LGFVs.
The post-crisis stimulus
Credit growth in China has accelerated since the beginning of
2009, facilitated by the government’s decision to relax informal
quantitative limits on bank credit growth as a response to the
growth slowdown resulting from the deceleration in export
growth. The resulting credit boom raised the level of net new bank
credit by 50 percent compared with its level 2008 as a whole.
Such credit has financed a surge in public investment which when
mandated by government is not constrained by expectations of
market demand and profitability. But it has also hiked private
investment, particularly in real estate. A credit surge of this kind
encourages speculation, leads to asset price inflation and runs the
risk of fuelling a bubble based on loans of poor quality.
Property bubble
According to a 2013 survey (by Gan Li), about 65 per
cent of China’s wealth is invested in real estate. A lot
of this investment could be speculative with 42 per
cent of housing demand in the first half of 2012
coming from those who already own at least one home.
In many areas, these new properties remain
unoccupied, indicating that some of the construction
is in areas where demand is low. This has led to price
declines that can be damaging since investment has
been financed by credit that needs to be repaid.
Debt burden
According to an audit conducted in the middle of 2011
in the aftermath of stimulus spending, local
government-associated debt had risen to $1.65 trillion
or around 27 per cent of Chinese GDP. In comparison,
central debt was estimated at around 20 per cent of
GDP. The audit showed that that outstanding local
government debt rose by 62 per cent in 2009 alone,
when Rmb 9600 billion was pumped into the system as
part of the stimulus.
Overall, credit in China is estimated to have risen from
130 to 210 per cent of GDP over the last five years.
Signs of trouble
But the wisdom of concealing a proactive fiscal policy, by
making state-owned banks lend to state-sponsored financing
vehicles, which in turn lend to state-backed projects is now
in question. Defaults are on the rise.
The five biggest banks which account for ore than half of all
bank loans, wrote off Rmb569 ($9.5bn) million in debts
according to their 2013 results. That was 127 per cent more
than in 2012.
According to figures released recently by the PBC, loans provided
by trust companies that populate the shadow banking sector rose
by an annual 23 per cent to touch RMB17.3 trillion ($2.9 trillion)
or 30 per cent of credit advanced in 2013. Around $650 billion of
trust loans are expected to fall due in 2014, raising the possibility
of further defaults in different parts of the economy.
Conclusion
The regime of accumulation under neoliberalism
It is indeed true that neoliberal policy has come to play
an important role in Asia. It has, however, not
succeeded everywhere. But only the success stories
receive attention despite the 1997 crisis.
Even among successes what is missed is that the factors
explaining the expansion of domestic demand, which
supports this growth, are not necessarily sustainable.