Transcript The Asian Model

The Asian Model
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I. Introduction
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
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distinctive organization of capital markets and corporate governance.
II. Origins
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.
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Meiji Restoration in 1868 which replaced the military regime w/ a new government of progressive officials
determined to embark in modernization.
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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
investment.
– 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
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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 individual3was
subordinated.
5. Asian econ development is based on the Relative Backwardness model
of Gerschenkron -a country’s gross underutilization of its potentials
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Asian econ development is described by the relative backwardness model of
econ historian Alexander Gerschenkron,
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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
backwardness.
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.
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6. Characteristic of Japan’s growth from 1953 to 1971 “econ miracle”:
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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 %
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Sources of growth:
– 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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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
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state-directed growth
– 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.
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high levels of investment
– thru significant domestic savings
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high domestic savings rates
– Excess savings was exported, as national savings exceeded gross domestic investments. Japanese savings flooded into
Southeast Asia, spurring econ development
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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.
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7. The Four Tigers-Hong Kong, Singapore, South Korea, Taiwan.
a) The ”Four Tigers” are frequently associated with one another because of
(characteristics):
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High and persistent econ growth
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Growth with increasing equality
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Used foreign trade to promote industrialization.
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have promoted exports of manufactured goods
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State policy supported export promotion over import substitution
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Export promotion -consists of state policies to promote export
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Import substitution -consists of policies that protect domestic industries from
foreign competition via tariffs or other barriers.
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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.
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The GDP per capita is relatively equal to the U.S in Singapore, Hong Kong,
Japan
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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 edu, 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,
skilled labor.
• 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
– Hong Kong and Singapore promoted foreign investment; Japan and Korea were
hostile to foreign direct investment
• rapid demographic transition
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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.
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Used to explain the rapid growth of Asia
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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).
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The main question in Lewis’s two-sector model is what will cause the
agricultural surplus to be transferred to industry
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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;
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Net result: the economy has not lost any agricultural output but has increased its production of industr output
4. Mechanisms that will cause agri surplus to be transferred from agri
to industry:
•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.
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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.
• 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
Japanese economy.
» 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
other.
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– 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
industries)
– 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
1568.
– 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
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finance.
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• 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) 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
company.
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•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.
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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:
– Relational
• based on personal relationship and trust
– Market-based
• 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
individual owners.
– 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.
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– 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
h) Cross-shareholding
– 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
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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
there are:
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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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This means that Asian companies are highly leveraged
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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.
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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.
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that is they have heavy debt burdens, which must be served by regular interest and principle
payments
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
risky lending).
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
companies.
Has lower levels of return on equity than the U.S.
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4. Labor Markets
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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
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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):
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Coverage
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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.
Advantages
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Security and loyalty of workers who are covered.
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May contribute to adoption of technology because workers have little fear of
technological unemployment and employers know their company will benefit
from training.
Disadvantages
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Companies cannot fire workers during bad times; redundant, incompetent,
unmotivated workers retained.
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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:
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only 30% of industrial labor is covered by some form of guaranteed employment
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• 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 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.
• 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
– 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.
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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,
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.
• Japan
– rapid econ growth caused property income to rise rapidly, causing income
inequality.
– Taxation
• 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.
– Transfers
• 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.
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5. 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
development.
– 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
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. 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
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its industries and firms.
– During the 1970s Japan had a sustain growth.
• Dramatic decline in econ performance in the 1990’s. Problems in econ::
– 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
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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 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
– 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.
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6. Provision of Income Security
• One of the prime features of the EM was the generous provision of
income security for everyone.
• 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 and31
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
costs.
• 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
pharmacies
– 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.
• Education
– 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
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Total Health Expenditures as a Share of GDP, U.S. and Selected Countries, 2003
http://www.kff.org/insurance/snapshot/chcm010307oth.cfm
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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
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pharmaceutical spending category.
http://hspm.sph.sc.edu/COURSES/Econ/Classes/nhe06/