Transcript The Asian Model

The Asian Model
I. Introduction
1. Development from a low initial level per capita income in a
largely rural economy
2. Creation of capital and the drawing of labor out of
agriculture.
3. Strong state is needed to raise the formation of capital, to
allocate that capital and to draw labor from agriculture to
industry
4. High rates of savings and investment and the distinctive
organization of capital markets and corporate governance.
II. Origins
1. Based on history and religion.
2. Brief History:
– Tokugawa era (1603-1868)—military dictatorship brought peace, law, order,
and isolation.
– The forced opening of Japan by Admiral Mathew Perry 1854
– Meiji Restoration in 1868—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.
– 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.
– Korean War—increased demand for Japanese exports and caused the U.S. to
see Japan as an important ally.
3. Influence of Confucianism
encourages highest levels of social cooperation and equality of income (promoting
educational opportunity, emphasizing group over individual, virtuous government).
4. Principle of a strong state.
5. Relative Backwardness—a country’s gross underutilization of its
potential
– Alexander Gerschenkron’s model—to explain how a poor
country could rather quickly overcome underdevelopment
– 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.
6. Characteristic of Japan’s growth from 1953 to 1971 “econ miracle”:
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High and persistent econ growth.
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Sources of growth:
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Growth of capital stock—the largest contribution to growth, supported by
saving rate.
Technology—contribution of knowledge and technology to factor
productivity. Facilitated by the adoption of foreign technology.
Labor—growth in the quantity, working hours, and educational quality of
labor. Low unemployment was promoted by the “permanent employment”
system and flexible bonus income.
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Increasing equality in distribution
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state-directed growth
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high levels of investment
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high domestic savings rates
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export driven growth
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.
7. The Four Tigers-Hong Kong, Singapore, South Korea, Taiwan.
a) characteristics
– High and persistent econ growth
– Growth with increasing equality
– Used foreign trade to promote industrialization.
– have promoted exports of manufactured goods
– State policy supported export promotion over import
substitution
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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.
– 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, Japan
b) Factors for rapid growth of the four tigers
• Openness to international trade
• Export-led growth
• high levels of human capital investment
• high levels of private investment
• high levels of savings
• stable state policies
• foreign direct investment
• rapid demographic transition
III. The Lewis Two-Sector Model
1. Used to explain the rapid growth of Asia
2. Transfer labor from agriculture to industry.
3. What will cause the agricultural surplus to be transferred to
industry
Na→ Na’, Q a is produced, same wage
“surplus”= Qa – wages (in terms of agri goods)
surplus→ industrial investment → raises MPL (demand for labor)
Result: ↑ employment
↑ industrial output
4. Mechanisms that will cause agri surplus to be transferred from
agri to industry:
•use the market to transfer the surplus
•the state to impose taxes on agri population to force them to
save
•the state could “nationalize” agriculture to force transfer of
savings from agri to industry
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:
– Zaibatsu—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 holding companies.
– 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—are frequently grouped around a core
company, which plays a leadership role in group management. Such a company
may be trading company or bank.
– Zaibatsu origins—Mitsui, Mitsubishi, and Sumitomo
– Bank-Centered Groups—Sanwa, DKB, Fuji, Tokai
• 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.
• Small Businesses—99% of Japanese companies, employing 75%
of work force, employ fewer than 100 workers.
• Subcontractors—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 of subcontracting.
• Retail stores—Average store has only 4 employees.
b) corporations are closely held by wealthy families or small groups
of individuals
c) extensive reciprocal (cross) shareholding by one company of
other company;
d) 2 types of contracting:
-Relational
-Market-based
relational contracting is the primary form of contracting
e) relatively small role of widely held publicly traded corporations
f) the owners are the managers
g) The rights of minority shareholders tend to be abused (cannot
influence management decisions)
h) hostile takeovers are practically impossible
i) Publicly traded Asian countries are not required to be transparent
2. The Capital Market
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limited purchases of stock by minority buyers
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Asian companies finance themselves by borrowing not by
selling new shares of stock.
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Asian corporations tend to obtain their financing from banks
that are closely related to the enterprises themselves.
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Has lower levels of return on equity than the U.S.
4. Labor Markets
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Combines the limited regulation of the Anglo-Saxon model with industrial
paternalism practices that protect employment during downturns
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Lifetime employment policies:
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Coverage—about 25-30 percent of industrial labor force. During the
1990s, the proportion of long-tenure (10-year plus) workers was 43% in
Japan, compared to 26% in the U.S.
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Advantages
• 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 from training.
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Disadvantages
• Companies cannot fire workers during bad times; redundant,
incompetent, unmotivated workers retained.
• For older employees and workers not included in system—greater job
uncertainty.
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Lifetime employment system is in decline
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Limits to the concepts of paternalism and lifetime employment:
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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
– subcontracting for industrial parts
– small firms have flexible employment and wages
• Seniority wages—
– wages are determined largely by the length of service of the employee.
System is in decline.
• Bonuses
– 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;
4. Income Distribution
• The Asian model has combined high growth with a relatively even
distribution of income.
• Factors to combine growth with equity—Governments adopted
policies to ensure that all groups benefited from econ growth.
Growth and equality both supported by programs of public health
and education, land reform, trade liberalization, and support for
small business.
• Less inequality usually means greater political stability.
5. Industrial Policy (IP)
• The active intervention of government to promote or change the
course of industrial development. Designates industries for priority
development based on growth potential and contribution to growth of
other sectors.
• Ministry of finance, the bank of Japan, Ministry of International
Trade and Industry (MITI)
• 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
– Inherently discriminatory—IP is a macro 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
• During the 1970s sustain growth.
• Dramatic decline in econ performance in the 1990’s:
– reliance on large companies retarded the growth of smaller and more
innovative businesses
– the relation b/w banks and large companies have caused banks to
make large unprofitable loans
– 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 efficient
– Inefficiency
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 the 1990’s.
There has been a gradual process of reform in financial
regulation, corporate law, in capital and labor markets.
Labor market:
• 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 parttime 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 also rising.
• 1993-2002, annual GDP growth 1.2% (compared to 2.9% average for
industrial countries).
• 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
6. Provision of Income Security
• the Asian model has largely rejected the European model of
state provision of income and healthy security
• smaller welfare state.
– Japan’s public pension system and public health insurance
was created in 1961
• Health care
– 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.
• Education
Total Health Expenditures as a Share of GDP, U.S. and Selected Countries, 2003
http://www.kff.org/insurance/snapshot/chcm010307oth.cfm
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 the
pharmaceutical spending category.
http://hspm.sph.sc.edu/COURSES/Econ/Classes/nhe06/