The Asian Model
The Asian Model
The Asian Model
The Asian model (AM) applies to those countries located in South and East Asia.
Japan is notable pioneer on the Asian model, followed in the second half of the 20
century by the four tigers (Hong Kong, Singapore, S. Korea and Taiwan). Another
country with Asian development features is China, a country that has experienced
rapid growth in the last 3 decades. China began its development as a planned
economy and now it appears to be developing as a mkt socialist economy.
1.The AM applies to countries that began their development from a low initial level
per capita income in a largely rural economy
2.The main task was not the more efficient utilization of resources but the creation
of capital and the drawing of labor out of agriculture, where workers were
underemployed or redundant into industry.
• Capital formation in industry was necessary and this requires savings from the rural
sector or foreign capital.
3.Strong state is needed to raise the formation of capital, to allocate that capital and
to draw labor from agriculture to industry
4.The unifying feature of the AM is the high rates of savings and investment and the
distinctive organization of capital markets and corporate governance.
1. While the ASM and the EM has econ and philosophical foundations, the AM was developed
in Japan and China in isolation from western influence; it is based on history and religion.
2. Brief History:
– Tokugawa era (1603-1868)—military dictatorship brought peace, law, order, and isolation.
Till 1854 Japan was a stable, isolated, agricultural (rice-based), reasonably prosperous, and feudal society. Modern
Japanese History began with 2 important events:
– The forced opening of Japan by Admiral Mathew Perry on his second voyage to Japan with 8 military ships in
February of 1854.
Meiji Restoration in 1868 which replaced the military regime w/ a new government of progressive officials
determined to embark in modernization.
The forced opening taught Japan that it must modernize to protect itself
Japanese were sent to the west to learn from universities,
The Meiji Restoration refers to the period when Japanese economy was opened up to Western technology.
– Japan opened the door to foreign trade, equality of classes, eliminated feudal guilds, divided agricultural estates among
the peasants, instituted monetary taxes and established businesses and supported private industry through loans and
subsidies. Growth continued until 1938 and WW II.
– Land was redistributed to the farmers. Japanese students went abroad in large numbers to learn about western
technology, The Japanese government invested also heavily in industry, infrastructure, and the military, and many
industries were nationalized until a fiscal crisis in 1883 encouraged their privatization. A postal savings system was
developed to encourage savings by average Japanese citizens, and the resulting savings eventually allowed for more
– Japan's modernization, high savings rate, export orientation, capital formation, and rapid industrialization led Japan
during the Meiji Restoration to become the world's fastest growing economy at the time. Japan became an exporter to
the west in many labor-intensive manufactures, such as textiles, and Japan's military also became more powerful.
World War II—destroyed 1/4 of buildings and 1/3 of industrial machinery. Japan was not surrounded by other
countries with expanding markets; Recovery initially was slow.
3. Influence of Confucianism
the religion of the educated classes in ancient Japan and China. Confucianism teaches a positive role for virtuous
government, emphasized the qualities of loyalty, nationalism, collectivism, faith and bravery.
encourages highest levels of social cooperation and equality of income (promoting educational opportunity,
emphasizing group over individual, virtuous government).
4. Japan’s economy was organized on the principle of a strong state to which the individual3 was
5. Asian econ development is based on the Relative Backwardness
model of econ historian Alexander Gerschenkron -a country’s gross
underutilization of its potentials
to explain how a poor country such as Japan at the end of the19 century could
rather quickly overcome underdevelopment (its relative backwardness)
If the country becomes aware of the dangers of backwardness, can take steps
to accelerate its econ growth. In Japan’s case, the necessary shock was
Admiral Perry’s forced Japan to confront the gap b/w it’s actual and its
potential econ achievements and to find innovative ways to overcoming its
Adopt western methods
The state substituted industrial policy for mkt decision making
Gerschenkron’s empirical prediction was that relatively backward countries
would grow more rapidly than the industrialized countries once they decide
upon a policy of industrialization
A major reason for attention to the Japanese economy over the years has been
an interest in the high rate of economic growth achieved in Japan.
6. Characteristic of Japan’s growth from 1953 to 1971 “econ miracle”:
High and persistent econ growth.
– higher rates of average growth-14% and capital grew at 9%. Since that the growth rates have declined reaching less
then 2% for the years 1990-2000. In 2003, econ growth is 2.7 %
Sources of growth:
– Growth of capital stock
• the largest contribution to growth, supported by saving rate.
• contribution of knowledge and technology to factor productivity. Facilitated by the adoption of foreign technology.
• growth in the quantity, working hours, and educational quality of labor. Low unemployment was promoted by the “permanent
employment” system and flexible bonus income.
Growth with increasing equality in distribution
– gov’t adopted policies to ensure that all groups benefit from growth-universal edu, public health, public housing
programs. Increasing equality in distribution
– the gov’t was directly involved in industrial projects thru low interest loans form the Japanese Development bank;
state industrial policy directed investment to specific targets.
high levels of investment
– thru significant domestic savings
high domestic savings rates
– Excess savings was exported, as national savings exceeded gross domestic investments. Japanese savings flooded into
Southeast Asia, spurring econ development
export driven growth
– from textiles exports shifted toward the high technology products that Japan could produce
The result -Japan’s dramatic rise in relative living standards was achieved.
The econ expansion for Japan’s rapid econ growth were a technology gap, a high rate of capital formation
and the availability of labor. After being a closed economy for centuries, Japan had a technology gap
and could absorb western technology thru imports of capital, a high propensity to save and the state
promotion of capital formation.
• In the 1980s there was a widespread sense among politicians, business leaders and
the media that Japan had discovered a new business model that would allow it to
overtake the US economy.
– The key aspect to the nation’s econ rise was greater government direction, which seemed
to work better to develop an economy than free market forces. This direction took
essentially three forms: government-directed capitalism, managed trade and patient
• The Ministry of Econ, Trade and Industry (METI) became a symbol of the Japanese
government’s management of the economy; directing business—the government works with
• “Managed trade” refers to a mixed strategy of blocking imports and offering subsidies to export
firms, with the result being large trade surpluses
• The US firms were forced by stock-market pressure into short-term thinking; in contrast,
Japanese firms were financed largely by capital from banks. With this patent capital, Japanese
firms could handle short-run losses, if necessary for the sake of long-terms gains.
7. Industrial Policy (IP)
• is a gov’t strategy to help important business sectors become more competitive
and to adjust to the changing structure of the economy. It is the active
intervention of gov’t to promote or change the course of industrial
– Designates industries for priority development based on growth potential and
contribution to growth of other sectors.
• Japan was the pioneer of the Asian brand of industrial policy. It can be said
that in the Asian model:
– the gov’t has played an important role
• the Ministry of finance and the bank of Japan are responsible for the traditional
functions of monetary control. Ministry of Economy, Trade and Industry (MITI) is
responsible for international trade, domestic production, and domestic industrial policy.
– State industrial policy directed investment to specific targets and develop
industries that would be the core of the econ growth, industries that are
competitive in the world markets-electronics, automobiles.
– Components of IP
• Strategic—the goal of helping industries to be more competitive and therefore, facilitate
the national econ growth. IP is future oriented, attempting to anticipate future
international trends and mkt developments.
• Inherently discriminatory—IP is a micro econ policy b/c government must decide
which industries/sectors are important for econ growth
• To facilitate adjustments to the constantly changing nature of production and markets,
IP tries to be mkt conforming—anticipating where the mkts will be. IP helps to change
the structure of the economy that foster domestic and international competitiveness of
its industries and firms.
– During the 1970s Japan had a sustain growth.
• Japan was astute in its handling of certain economic fundamentals
– The nation was an early strong investor in education. Universal compulsory primary
educ was instituted in the 19th century, and by the early 20th century, secondary educ
was widespread in Japan. Japan has traditionally spent a higher share of GDP on educ
than many other countries.
– Japan has had far higher rates of savings and investment that the US in the last few
decades. The rate of savings (30-35% of GDP) and investment as a share of GDP has
been about double that of the US economy (15-18% of GDP).
– Japan has been well known for many decades for bringing new technology to its firms.
Today, Japanese research and development spending as a share of GDP is similar to
that of the US.
– Japanese firms are among some of the toughest competitors in the world. They are
responsible for a number of innovations in business practices that have been adopted
worldwide, including just-in-time inventory management, and a philosophy of
– Japan has been accused of taking unfair advantage of its trading partners in a number
of ways but especially by subsidizing key future industries and through barriers to
– Japan’s bureaucrats often directed industrial subsidies to certain firms and industries,
but it is not clear that this policy, taken as a whole helped Japan’s economy. It appears
that the bureaucrats more often directed subsidies to low-growth (coal, textile) than to
high growth sectors (electronics, cars)
– Japan’s econ growth has been linked to unfair trade policies:
• Foreign trade is a smaller share of Japan’s economy than that of the US or many
European nations. However Japan’s share of world trade has risen as its economy
• Japan does have huge trade surpluses, but these can occur for several reasons; the
main factor behind trade surpluses in Japan is the country’s high savings rate.
Japan’s consumption of all goods including imports is relatively low.
• It is not all clear that Japan’s trade is more unfair than that of other developed
– The Japanese government controlled banking and financial institutions quite
rigidly in the decades after the WWII
• Consumers were encouraged to put their money in banks and had few other options
to invest. Consumer loans were discouraged with tax disincentives.
• The resulting high savings rate meant that banks had a good deal of capital, much
of which they directed to Japanese corporations. The regulations had an overall
effect of limiting the return to savers but ensuring a strong flow of capital to firms.
– In the late 1980s, Japans period of rapid econ growth came to a halt:
• Stocks and real estate prices plummeted, econ growth fell to 1% a year or less, and
the number of bankruptcies increased, as did unemployment.
• Japan unsuccessfully took on huge deficits and cut interest rate to stimulate the9
7. East Asian Tigers are the Four Tigers-Hong Kong, Singapore, South Korea, Taiwan,
and Indonesia, Malaysia and Thailand.
The ”Four Tigers” are frequently associated with one another because of
High and persistent econ growth (7 to 10% from the 1970s into the 1990s)
Growth with increasing equality
Used foreign trade to promote industrialization.
have promoted exports of manufactured goods
State policy supported export promotion over import substitution
Export promotion -consists of state policies to promote export
Import substitution -consists of policies that protect domestic industries from foreign
competition via tariffs or other barriers.
Although the ”Four Tigers” have used similar strategies for promoting
economic growth and industrialization, these countries differ significantly in:
population; per capita income; size as measured by land area.
The GDP per capita is relatively equal to the U.S in Singapore, Hong Kong,
They suffered a major econ setback during an international financial crisis in
1997-1998. Since then, they have resumed fairly rapid growth, but not as dynamic
b) Factors for rapid growth of the four tigers
Growth supported by "market friendly" government policies, avoiding regulation of
prices, interest rates, rents, and other payments, and by maintaining small budget
deficits, stable monetary policies, low levels of foreign debt, and low barriers to
internal and external trade.
• Openness to international trade (the most important factor)
• Export-led growth
• high levels of human capital investment (universal education, investments in human
capital, such as public health)
• high levels of private investment
– Secure property rights; the gov’t provide the physical infrastructure and human capital to
make investments possible and attractive—transportation, communication facilities,
• high levels of savings
– Gov’t role in creating and maintaining stable and accessible financial institutions, giving
savers confidence that their money will be safe
– Rapid income growth
• stable state policies providing stability, reasonably secure property rights
• Some gov’ts promoted foreign direct investment to supplement domestic savings
and attract new technologies from abroad
– Import machinery, license technology.
– Hong Kong and Singapore promoted foreign investment; Japan and Korea were hostile to
foreign direct investment
• rapid demographic transition
c) The econ implosion of the East Asian tigers in 1997 and 1998 was brought by a
“sudden stop” in the inflows of international financial capital
– International lending involves buying and selling currencies. Exchange rate movements
are a potential risk in international lending. At the same time, international financial
investments put pressure on exchange rates to change
• Most countries in the world borrow and repay money in US dollars (sometimes in euros or
yen). Thus, a bank in a given country borrows in dollars, exchanges funds for the local
currency in the foreign exchange mkt, lends it in the local currency, gets repaid in the local
currency, switches from the local currency back to US dollars, and repay the original loan. If
the exchange rate changes, then the bank may be unable to repay its foreign borrowing.
• In general, foreign investment flowing into an economy means there is a higher demand for
that currency, which keeps the exchange rate strong. Conversely, foreign investment flowing
out of an economy means a lesser demand for that currency, weakening the exchange rate.
Many East Asian currencies, however, were tied to the US dollar. The resulting fixed exchange
rates reduced the risk for foreign investors, who did not have to worry about exchange rate
– The story of the East Asian crisis unfolded with a strong inflow of capital in the form of
US dollars; when the exchange rate crushed, those debts could not be repaid. When the
foreign investment flowed out, the result was widespread bankruptcy of the banking
systems and a depression like econ slowdown.
• When the economies of East Asia were “discovered” by foreign investors in the first half of the
1990s, hundreds of billion of dollars flowed into these economies.
• Fixing East Asia’s exchange rates to the US dollar helped to encourage the inflow of financial
capital in the early 1990s. But when the value of the US$ went up in the mid-1990s, East Asia
saw its exports fall. When foreign investors started examining their loans more closely, they
saw potential problems with these loans and ran for the exits.
• Stock mkts and exchange rates across East Asia fell sharply when foreign investors pulled their
money out of these economies in the second half of 1997. The region experienced very untiger-like zero and negative econ growth rates for the next couple of years.
– The econ turmoil brought political change. The economies rebound slowly, only
returning to their pre-1997 levels of growth 3 to 5 years later.
• Several possibilities exist for preventing a repeat crash.
– Countries could opt to cut off the flow of international financial capital, but
countries that want to be well-integrated into the world economy will have
difficulty shutting down international capital flows.
– Several policies could reduce the risks of a sudden stop in financial capital:
flexible exchange rates, sensible banking regulation, and large foreign
• If exchange rates are known in advance to be flexible, then foreign investors and
financial institutions take steps to protect themselves against the risk that the
exchange rates will shift.
• When banks are better regulated, they are less likely to make numerous bad loans
or to find themselves in a position where they are unprotected against the risks of
shifting exchange rates. Across the region, the number of nonperforming bank
loans was significantly lower by the mid-2000s, and the extent to which
corporations relied on debt was also reduced.
• Foreign exchange reserves help to prevent panicky capital fligth, because when
investors know that the government is ready to purchase its currency if necessary,
they are less likely to flee the country
III. The Lewis Two-Sector Model
Published in 1954; A. Lewis was awarded the Nobel prize in econ in 1979 for his
contributions to understanding development.
Used to explain the rapid growth of Asia
Assumes a traditional agricultural sector in which labor is redundant, the
marginal worker produces no additional output, and agri output is located
among the farm population by tradition (divide the output evenly among
themselves) rather than by commercial decision making. There exists a
relatively small modern industrial sector in which decisions are made
commercially (on the basis of the standard marginal analysis). The task of
development is to transfer labor from agriculture (where labor is redundant)
to industry (where MP is positive).
The main question in Lewis’s two-sector model is what will cause the
agricultural surplus to be transferred to industry
The main task is to transfer labor from agri to industry—which will occur only if the demand for industrial labor is increased.
In order to increase industrial demand for labor, there has to be an increase in industrial investment. Additional investment
raises the marginal product of labor, hence increase the demand for labor. The supply of labor is horizontal, because there
will be a ready supply for labor to industry as long as the traditional agri wage is not bid up. The bidding up will not occur
until the agri surplus labor is transferred out of agri.
Na→ Na’, Qa is produced, same wage
“surplus”= Qa – wages (in terms of agri goods)
surplus→ industrial investment → raises MPL (demand for industrial labor)
Therefore: ↑ employment; ↑ industrial output;
Net result: the economy has not lost any agricultural output but has increased its production of industr output
•Mechanisms that will cause agri surplus to be transferred from agri
•use the market to transfer the surplus
•the farm population could be offered the opportunity to deposit savings in
banks which would then lend the money to the industry
•the state to impose taxes on agri population to force them to save, state
revenue will be invested in industry
•the state could “nationalize” agriculture to force transfer of savings from agri
to industry (collectivization in Russia in 1930’s and China in 1950’s)
According to Arthur Lewis’s two-sector model, economic development
in Japan and the Four Tigers is due to transfers of labor from
agriculture to industry.
IV. Characteristics of the Asian Model
1. Corporate Governance:
a) Industrial Organization:
• Big Businesses:
• family-owned holding company controlled shares in a diversified
group of industrial corporations, trading companies, and banks.
After the war, American-written anti-trust legislation dissolved
• Pre-war Zaibatsu were groups of companies owned and controlled by
a family holding company, the family industrial group (composed of
20 to 30 firms). This system led to the substantial concentration of
econ power in a relatively small number of diversified groups.
– Mitsui the largest from the pre war zaibatsu employed about 1.8 million
workers, Mitsubishi more then a million.
– After WWII the US occupation authorities radically restructured the
» All the major Zaibatsu were dissolved to smaller ones called
keiretsu, but gradually some splinter companies re-established
their former associations. They exchanged shares with other firms
which bore the common Zaibatsu name and did business with each
– Keiretsu—created after WWII, are conglomerates of horizontally or vertically
integrated companies, owned by a single owner or a small group of owners,
working close with government and banks. These groups usually involve cross
holdings of stock.
• Conglomerate Keiretsu Groups (those w/ activities in a broad range of
– are frequently grouped around a core company, which plays a
leadership role in group management. Such a company may be trading
company or bank. Trading companies that specialize in sales and
marketing, especially overseas, are institutions unique to Japan.
– The keiretsu with origins in the prewar zaibatsu are quite old tracing
their history hundreds of years ago
» Mitsui Group example, w/ long history and tradition, origins from
– Zaibatsu origins
» Mitsui, Mitsubishi, and Sumitomo
– Bank-Centered Groups
» Sanwa, DKB, Fuji, Tokai. Besides being the main financier of the
member companies, the group bank also holds large chunks of
shares of these companies and monitors their performances.
• Vertical Groups
– formed around a prime manufacturing company or production of a
single product. Around the major company and its important affiliates,
there are dozens and even hundreds of smaller suppliers and sales
companies. Nippon steel, Nissan, Toyota, Hitachi. Toyota group
focused on automobiles and parts, w/ involvement in distribution and
Mistake in Table 12.4 -- $ millions, not $ billions
• Small Businesses
– 99% of Japanese companies
– employing 75% of work force
• employ fewer than 100 workers.
– 2/3 of small firms in manufacturing.
– Large firms shift the cost of holding inventories to subcontractors, and
maintain their "permanent commitment" employment by adjusting the use
• Retail stores
– Average store has only 4 employees.
b) corporations are closely held by wealthy families or small groups of individuals.
c) The principle way in which these groups are held together is by the crossholding of capital (cross shareholding by one company of other company).
– instead of management and ownership being separated the owners tend to
be powerful families who also serve as the management team;
– these families or groups of related individuals own not one company but
group of companies in a complex pattern of cross-ownership
– in Europe-cross-ownership by banks, suppliers & customers is common, in
Asia instead of institutions, one family owns a number of companies.
– extensive reciprocal (cross) shareholding by one company of other
•Table 12.2 shows the extent of cross-holdings of shares in major keiretsu.
These data show that 38.2 % of the capital of all the members of the Mitsubishi group is held by
firms that are themselves a part of the group.
Greater than 55% probability that anyone firm within a major keiretsu will hold shares of any
other firm within the group.
d) Both Anglo-Saxon and European models rely on the “rule of the law” when
they enter into contracts. In Asian countries which w/ the exception of Hong
Kong and India use civil law, the “rule of the law” is less important.
•There are 2 types of contracting:
• based on personal relationship and trust
• impersonal based on formal contracts backed by a rule of law
The keiretsu system implies a closer relationship b/w purchaser and supplier.
The relationships are long term and largely non mkt;
Relational contracting is the primary form of contracting used in Asia;
– contracting based on trust rather than on impersonal transactions (by
relational rather than mkt-based contracting).
– And is used in countries with relatively weak rule of law—Russia.
– The company fails to use price signals in the decision-making by relying
on relational contracting.
e) Except in Japan publicly traded companies are owned primarily by family or
– Unlike the Anglo-Saxon model, where institutional investors own substantial
shares of stock, institutional investors are not prominent in Asia, and they are
rarely participating in management.
– Hence, relatively small role of widely held publicly traded corporations.
f) With family based ownership system, Asian companies appear to have
resolved the key principle-agent problem b/w owners and managers the
owners are the managers
g) The rights of minority shareholders tend to be abused
– cannot influence management decisions
– the family owner can divert assets from one company to another and hostile
takeovers are practically impossible
i) Publicly traded Asian companies are not required to be transparent as
companies that operate in the Anglo-Saxon model;
– no requirement to reveal transactions w/ related parties;
– losses due to declining asset values are not disclosed to shareholders
2. The Capital Market
Given the widespread use of relational contracting, the lack of protection of
minority shareholders and the limited amount of accounting disclosure
limited purchases of stock by minority buyers
Asian companies finance themselves by borrowing not by selling new
shares of stock.
This means that Asian companies are highly leveraged
Asian corporations tend to obtain their financing from banks that are
closely related to the enterprises themselves.
The Asian households have high rates of savings.
Given the reluctance of households to invest in stocks as minority shareholders, their
savings flow primarily into banks, if not abroad
In European model the banks act as the primary financial intermediaries;
the Asian flow of savings into the banks is similar to European model.
that is they have heavy debt burdens, which must be served by regular interest and principle
To a greater degree than in Europe Asian banks base their lending on political and
industrial-planning criteria. Most Asian banks are not subject to strong supervision.
Banks & other financial institutes are poorly regulated & large financial institutions
count on being bailed out by the gov’t if they are threatened by insolvency (bad and
Asian corporations tend to obtain their financing from banks that are closely related to
the enterprises themselves.
The Japanese companies are less dependent on the stock mkt than American
Has lower levels of return on equity than the U.S.
3. Labor Markets
Anglo-Saxon-“hire and fire” labor mkt that is flexible and moves labor resources
from one activity to another quickly. European model-rejects Anglo-Saxon
model as consistent w/ fairness to workers and replaces w/ highly regulated
model that makes firing difficult.
The Asian model combines the limited regulation of the Anglo-Saxon model with
industrial paternalism practices that protect employment during downturns
Asian model has features from both AS and EM
Lifetime employment policies, which protect workers from being laid off, they
work for the same company until retirement (family, children):
about 25-30% of industrial labor force. During the 1990s, the proportion of long-tenure (10year plus) workers was 43% in Japan, compared to 26% in the U.S.
Security and loyalty of workers who are covered.
May contribute to adoption of technology because workers have little fear of
technological unemployment and employers know their company will benefit
Companies cannot fire workers during bad times; redundant, incompetent,
unmotivated workers retained.
For older employees and workers not included in system—greater job uncertainty.
Lifetime employment system is in decline
Limits to the concepts of paternalism and lifetime employment:
only 30% of industrial labor is covered by some form of guaranteed employment
• Japanese firms have ways to create flexibility in employment
– temporary labor force and bonus system as inducement for employees to work hard
– subcontracting for industrial parts
– small firms have flexible employment and wages
• Seniority wages
– wages are dependent on length of service,
– like guaranteed employment the seniority wages system applies to those privileged
workers who have a lifetime commitment w/ the firm.
– Workers tend to be promoted & paid accordingly to time of service.
– System is in decline.
– account for 20% of pay in manufacturing.
– Benefits—employee motivation; savings—if the bonuses are regarded as transitory
income, permanent income hypothesis suggests that a large portion of the bonus
income will be saved.
• Labor unions are relatively week w/ exception of South Korea
– in Japan they tend to be enterprise union such as Sony union and do not represent
economy-wide branches or crafts.
– The degree of unionization in large companies is high but in small firms there is a
low level of unionization.
4. Income Distribution
• The Asian model has combined high growth with a relatively even distribution
• Factors to combine growth with equity
– Governments adopted policies to ensure that all groups benefited from econ
– Growth and equality both supported by programs of public health and education,
trade liberalization, and support for small business.
• Less inequality usually means greater political stability and measure more
equitable distribution of education & health. The most likely cause of low
income inequality is the more even distribution of human capital (edu &
health) in Asia.
– rapid econ growth caused property income to rise rapidly, causing income
• has a relatively small role in income redistribution. Personal tax rates are highly
progressive, an unusually large proportion of tax receipts come from business profit
taxes, and a small proportion comes from the regressive consumption tax. The overall
tax burden is relatively light.
• government has paid little attention to income redistribution because families and
businesses take care of their own. Social security costs will increase as a growing
percentage of the population reach retirement age.
5. Provision of Income Security
• One of the prime features of the EM was the generous provision of income security
• the Asian model has largely rejected the European model of state provision of
income and healthy security
– lesser role of the welfare state can be contributed to cultural factors, tradition,
the religion emphasize the role of the family & the obligation of younger
generation to take care of elderly in their retirement years
• The Asian countries (exc. Japan) have younger population; therefore they have a
smaller welfare state.
– Japan’s public pension system& public health insurance was created in 1961
• Health care
– Japan has the longest life expectancy--76 years for men and 82 for women--and
among the lowest infant mortality rates in the world.
– A prime factor in Japan's success has been the nation's health care system, which
offers universal coverage and stresses preventive care.
• 80% of Japan's hospitals and 94% of its physician-run clinics are privately owned.
Patients are free to select care providers, and competition ensures an adequate
number of facilities, except in rural areas.
• While recently on the rise, health care costs remain relatively low in Japan. Prices
are regulated through a "fee schedule" determined by the Ministry of Health and
Welfare in consultation with insurers, health care providers and consumers. All
doctors receive the same salary regardless of experience.
• Most Japanese employees and their dependents obtain health insurance through
their employers, financed largely through mandatory payroll contributions from
both employers and employees.
• The self-employed, people working for small businesses, and others not covered
can apply to the government for low-cost National Health Insurance, which
provides coverage similar to workplace-based insurance.
• The Japanese focus on preventive care has played an important role in containing
• Problems: Some in Japan have asserted that private practitioners, limited in the
fees they can charge, have a tendency to over-prescribe drugs from their attached
– public spending on health is relatively low
• Japan -8% of GDP on health, the private households spend 2%;
• EU-10% of GDP on health, where the state pays 7-8%;
• USA-15.2% of GDP on health, half of that is paid by private hhlds.
– Compulsory, free nine-year education followed by public and private uppersecondary schools and supplemented by preschool and after-school education.
Elementary school grades 1 through 6; lower-secondary school grades 7
through 9; and upper-secondary school grades 10 through 12. About 94% of
lower-secondary school graduates attend upper-secondary schools
Total Health Expenditures as a Share of GDP, U.S. and Selected Countries, 2003
US—National Health Expenditure, in billions of dollars.
Hospital care spending in 2006 was about $648 billion dollars. Physician services is second. A distant third is
prescription pharmaceuticals, which passed nursing home spending in 1999. Administration costs for private and public
insurance is fourth-biggest, having passed nursing home care in 2003. Further down, some lines are so close together that
one line shows and the other is hidden. The end of the dark purple public health line is hiding behind Other Professional
Care's line, for example. The research portion of national health expenditure includes funded research such as
universities, NIH. Research done by pharmaceutical companies is paid for by their sales of drugs, so it is included in
pharmaceutical spending category.
6. When Japan’s bubble economy burst
– Japan’s econ boom ended with a financial crisis that began with Japanese worries
about a strengthening yen, followed by overreactions by the bank of Japan and much
of Japanese financial sector, and ending in a debt crisis.
• Many of Japanese strongest industries are oriented toward exports. In the late 1980s, a
weaker US$ and a stronger Japanese yen had the Japanese government worried.
• Japan’s gov’t reacted to the stronger yen by using monetary policy to reduce interest rates
and using fiscal policy to increase gov’t spending. This combination was intended to keep
the economy growing and to offset any effect of the stronger yen.
• Japan’s real economy, that sector involved in the production of goods and services,
continued its healthy growth in the second half of the 1980s, but in the nation’s financial
sector, prices of stocks and housing began rocketing upward.
• By 1989, the Bank of Japan had come to believe that the increases in asset values were
unsustainable and potentially dangerous, and it raised interest rates sharply.
• Japan’s banks had significant holdings in stocks and real estate. When the econ bubble
burst and the values of their assets plummeted, these entities suffered huge losses.
– In the short run, the collapse in asset values discouraged bank lending and business borrowing,
leading to a credit crunch. The result was a severe econ slowdown.
– When bankrupt banks continue to extend loans to bankrupt firms, it’s hard for the economy to
move forward. Healthy firms have difficulty competing with the undead but still walking
“zombie firms.” The result is slow growth and downward pressure on prices.
• The controlled banking and finance mkt funneled credit to Japan’s corporations and
fostered an environment in which neither banks neither borrowers were overly concerned
with repayment. This situation set the stage for the long-run sluggishness of Japan’s
economy from 1990 into the late 2000s.
– reliance on large companies retarded the growth of smaller and more innovative
– the relation b/w banks and large companies have caused banks to make large unprofitable
– the close relation b/w government and business has created a vast system of corruption
– the lifetime employment has prevented large concerns from downsizing to become more
For Japan’s economy to move forward, it needed to clean up the banking sector and
encourage deregulation and competition
• The bank of Japan held the “call rate” ( a key interest rate comparable to the federal funds rate
of the US Federal Reserve) to near zero percent in 2001.
• Japan’s gov’t has run enormous budget deficits for many years in an attempt to stimulate its
economy through public works programs. The result has been an extremely large accumulation
• Deregulation is one possible solution to econ problems. Japan is often said to have two-tier
One tier includes the world famous Japanese firms that compete hard in world markets, producing such goods as cars
The other tier includes highly protected and regulated industries that do not compete in world markets, are often
inefficient, and weigh down the economy (construction, telecommunications, retail services, energy, finance).
• The bad debts incurred by Japanese firms to banks in the 1990s have been slowly worked down
in the 2000s.
The sun also rises, Oct 6th 2005, The Economist
Crashing stock- and property markets, mountains of dud debt, scores of
corruption scandals, vast government deficits and stagnant economic growth in
There has been a gradual process of reform in financial regulation, corporate law,
in capital and labor markets.
• most big companies chose to maintain their commitment, asking workers
to take pay cuts and waive bonuses rather than lose their jobs, but ceased to
hire new graduates.
• changes to employment law, firms found flexibility by hiring part-timers
and others on temporary contracts, both at far lower cost than for regular
workers. Canon, for example, a successful electronics firm that still firmly
maintains a lifetime commitment for its “core” workers, employs fully
70% of its Japanese factory staff on such “non-regular” terms,
• Since April 2005, the employment data have shown something new and
more promising: full-time employment is growing faster than the part-time
sort for the first time in a decade, and although some of that growth is still
in full-time contract work, regular employment is rising too. Wages are
• 1993-2002, annual GDP growth 1.2% (compared to 2.9% average for
• Since 2002 recovery in Japan began that still continues today.
• 2003—econ growth 2.7%; 2005—2.8% (but unlike the previous expansions when
growth rates were 5-10%).
• promotion of exports
– many Asian economies have used heavy-handed industrial policy combined w/ consistent
promotion of exports , e.g. South Korea. Korean industrial policy aimed to promote
exports, was executed thru a virtually free-trade regime for export activities.
– Asian firms that tied their fate to the export mkt and to competition according to world
mkt prices had to learn how to compete and how to introduce technology that would
allow them to do so.
On the surface Japan’s econ future may look bleak, but it also has fundamental
strengths and appears to be slowly sorting out its problems.
• Japan retains the foundation for a healthy, high income economy; it has skilled workers, high
investment levels, and good access to research and development, all operating in an economy
with a market oriented framework and well developed financial and legal systems.
• With Japan’s low birthrates, its population has peaked and in fact started to decline. Combined
with longer life expectancies, this decline means that Japan’s economy will need to deal with a
situation of fewer workers supporting more retirees.
• The targets for Japan’s future econ growth are all the industries that have not yet taken the big
leap to higher productivity.
Japan needs to improve productivity from such industries as retail sales, food processing, financial transactions, and
Japan also needs to push for new products instead of making incremental improvements to existing products. 40