This paper treats the upswing of HPAE's and the resulting socio-economic effects. Crisis and new order of Asian economies are described, all according to the socio-political approach of N.Fligstein.
Table of Contents
1.1 Problem statement1
2. The field of world economic relations2
2.1 Defining the field2
2.2 Political culture of the field2
3. The emergence of Asia: challengers or invaders?4
3.1 Japan's economic miracle4
3.2 Overthrowing technologies4
3.3 Status of Japan in the field of the world economy5
3.4 Flying geese approach to the East-Asian miracle5
4. The Asian crisis and after9
4.1 Asian crisis9
4.2 Impact of the Asian crisis on world economic relations9
4.3 After the crisis: more cooperation10
4.4 China and the future10
1.1 Problem statement
The economic surge of Japan and several other Asian countries after the Second World War was a surprise to many, but once "awake", these countries seemed ready to take over the world.
The countries in focus, named High-Performance Asian Economies (HPAEs), are Japan, Singapore, Hong Kong, Taiwan, South Korea, Indonesia, Thailand and Malaysia. HPAEs indeed tried to join the incumbents in the field of world economic order, and western economies felt threatened ever since Japanese growth rates first surpassed theirs. According to the theory of fields, the challengers test the incumbents by imitation. One can wonder if this was indeed the case with the Asian miracle. Did these countries attempt to adopt the western model of capitalism? Furthermore, it is interesting to ask why they were not able to cling to their economic success and why they were not able to reproduce their newly acquired position in the field and could continue to increase their newfound economic power. Finally, future prospects concerning this topic might be interesting to examine.
First, the field of world economic relations and its culture are defined. Then the growth success of Japan and smaller HPAEs will be analysed, explaining it and assessing its impact on the field of world economic relations. The focus is then shifted to the Asian crisis of 1997 and its consequences for the field. Finally, a prospect is given with respect to the future role of HPAEs as well as that of the newly emerging economy of China. Finally, the main conclusions will be drawn.
2. The field of world economic relations
2.1 Defining the field
In this paper the field of the world economy is discussed. This involves the sum of ways in which different economic entities interact with each other (e.g. trade, foreign investment). It is important to notice that this field differs substantially from fields where the main actors are businesses. In this field, the actors are not involved in the zero-sum game that competitive markets confront companies with. Nations benefit from the wealth of other nations; therefore, it cannot be said that the economic success of one must lead to the decline of the other. Of course, there will in the end always be only a small number of leading countries, but it would not be unrealistic to assume that many successfully developing countries can join the ranks of incumbents, instead of competing them away.
2.2 Political culture of the field
We can find a few strong and powerful incumbents. The countries that have been able to reproduce themselves most successfully are all rich, industrialised nations. First of all, The United States. Second, there's Germany, France, Canada and now also Japan. Many smaller challengers, who do not have the power to set rules of exchange and conceptions of control, have accepted a role as follower of the larger incumbent economies. Furthermore, it must be noted that 15 European challengers and incumbents have created a single market among themselves, which also allows them to present themselves as one player to the outside world. Viewed this way, the US, the EU and Japan can be said to be the three most influential incumbents in the field of the world economy. The other rich, capitalist nations (arguably the remaining members of the OECD) can be seen as "challenger-followers."
Free-market capitalism seems to be the main characteristic that can be ascribed to rules of exchange, property rights and governance structures resulting from the leading conception of control described above. In fact, the dominant approach to all international economic development has presented itself in this form. Some important rules of exchange in the world economy are rules concerning trade. The governing institutions in this field define the rules of exchange. This governance structure comprises large international institutions such as the WTO and the IMF, that attempt to safeguard and dictate desired rules of behaviour that all players in the field should comply, and they try to settle problems that occur within or between individual countries. Obviously the large players in the world economy implicitly determine the rules of exchange. Free trade, by opening markets for incumbent industries, is in the natural interest of the most powerful nations. The powerful role of industry in the political process will generally cause capitalist countries to seek to open the markets for its exporting industry while at the same time protecting import competing companies. (Fligstein, 2002)
3. The emergence of Asia: challengers or invaders?
3.1 Japan's economic miracle
Japan's economic growth miracle is one of the most startling phenomena of our time. Since the 1970's, Japanese businesses have surpassed American and European businesses in such diverse fields as steel, cars, consumer electronics and watches.
Japanese keiretsu's, firms establishing and maintaining large intertwined networks, were said to be the key to the success of companies like Mitsui, Mitsubishi, Matsushita and Sumitomo.
The strengths of the Japanese economy are said to be its policy aimed at structural improvement of the country's competitive position, the devotion and hard working nature of its workforce, and its relatively high saving rate. Surely these factors can have a positive influence on economic growth, but they could never by themselves explain the rates of economic growth experienced in Japan and other Asian 'growth miracles', like Taiwan, Singapore, South Korea and Hong Kong during the 1960's, 70's and 80's.
Japan's startling growth rates came to a halt at the end of the 1980s. The past decade has shown feeble economic growth. However, Japan's per capita income levels are now as high as those of any other industrialised nation. Given its size, Japan can be claimed to have successfully positioned itself as an incumbent in the field of the world economy. Indeed, it is the second largest national economy in the world today. How did this rapid development take place?
3.2 Overthrowing technologies
Economic growth in Japan in the 1960's and 1970's was based on so-called "overthrowing technologies." Japanese firms started selling plain steel to American companies in the 1960's, thereby driving down prices by means of low production and labour costs. In similar manner, by producing an unpretentious type of car at low cost, Toyota managed to conquer the lower segment of the United States' car market with its 'Corona'. After penetrating this part of the market, they started focusing on higher market segments, and eventually developed to large corporations operating on a worldwide scale. Sony performed this trick with the transistor radio, the first portable black and white television and the 'Triniton'.
Technology can overthrow product markets by advancing more rapidly than new technologies can be applied into new products. When market leaders focus on constant upgrading of existing products, there is room for cheap innovation that seems less profitable, but once established can create new markets and destroy existing ones. This is the strategy that Japan thus followed.
We've seen overthrowing technology can create potential new markets. The United States and Europe have in the past proven successful in repeating a cycle of continuous development of new technologies; this has kept their economies moving. A sound legal framework and flexible capital markets aid this phenomenon. When looking at the period, before, during and after WW II, The US and Europe and their large multinational companies, were the dominant actors in the field of the world economy. As Japan began to challenge this status hierarchy in the world economy, however, things began to look a bit different.
3.3 Status of Japan in the field of the world economy
Especially in the 1970's and 1980's, the continues success of the Japanese economy worried the incumbent economies of the US and Europe. Japan was not perceived as a fellow incumbent, but rather as an invader in the field. Frequent trade disputes about violation of trade agreements by Japan show that Japan did not necessarily feel that it had to comply with the existing rules. "Dumping", the selling of products at a price below cost in export countries while charging consumers in the import-protecting home country a steep price, was a very important issue in the aforementioned decades.
The method of dumping may have been new, but the Japanese goal of maximizing exports and minimizing imports cannot be argued to be radically different from the mercantilist policies of existing incumbents. However, the collective reactions by the incumbents to protect their markets against Japanese imports show that they were very reluctant in treating Japan as an incumbent. In fact, worries about Japan taking over world economic leadership did not end until its prolonged recession in the 1990's. Not surprisingly, with its role as challenger having moved to the background, it became easier for western countries to accept Japan as an incumbent.
3.4 Flying geese approach to the East-Asian miracle
In the period after WW II, 'economic miracles' happened in Japan, the newly industrialised economies of Asia (South Korea, Taiwan, Hong Kong and Singapore), and the ASEAN-3 countries (Indonesia, Malaysia, and Thailand). These countries were admired for overcoming the so-called 'barriers to late industrialisation' and were used as models for other developing countries. The theories as to how this region's economic success could be so large and widespread differed greatly and therefore, there was large disagreement on the underlying causes for the subsequent crisis as well. One of the theories that try to explain rising Asian Tigers and rising Japan is the flying geese approach. The flying geese approach can be visualised as a troop of geese, with one flying at head-position and the others following its lead. The flying geese approach argues that Japanese companies indeed started a series of successful product and process innovations and spread these innovations from developed East Asian countries to less developed East Asian countries. Hereby they supported an advance in welfare for the whole region.
Three decades of economic growth of about 5.5% a year followed and induced praise for their economic strategies, because they seemingly contributed to the longest period of sustained growth ever. The conjecture rose that there was an 'Asian century' ahead, and that East Asia's economies would overthrow the world economic leadership of the United States and other incumbents in the field of the world economy like Europe. Prospects for gaining a position in the world economic ranking at least next to the main players seemed plausible.
According to advocates of the free market economy, the economic success of Japan and other East-Asian countries is due to the fact that governments have allowed domestic firms to capitalise on their comparative advantage of low unit labour costs. Japanese and many other Asian countries engaged in labour-intensive, export-oriented production. Their economic growth was thus mainly export biased. In order to compete on world markets they even engaged in 'dumping' practices and tried to ban imports from other countries into their economy by imposing high tariffs and other trade barriers. There has also been a lot of protectionism of their own successful industries, mostly in the form of subsidies or cheap credits by government-controlled banks.
The following figures show the increasing importance of HPAEs in the world economy. One can see that the East-Asian economies have managed to increase their share in world GDP from 11% in 1960 to 21% in 2000. Japan, which is now treated as an incumbent, increased it share from 10 to 16%, with the remaining HPAEs going from 1 to 5%. Although large when taken together, the latter cannot yet be seen as true incumbents because they are lacking in combined negotiating power. This will be explained more detailed in the following sections. Finally, it seems that the richest Asian economies are also quite small in size.
Figures 1 & 2. Source: World Bank (2002). World Development Indicators.
Figure 3. Source: World Bank (2002). World Development Indicators.
Figure 4. Source: The Economist (1997).
4. The Asian crisis and after
4.1 Asian crisis
At present, leaving behind three decades of growth and prosperity, the East Asian economies, except China and Japan, were growing on average only 1% per year over the past 5 years, fairly slower than the established rich industrial economies. Indonesia, South Korea and Thailand have suffered recessions, because high interest rates have blocked investment and consumption and in general, East Asian banking systems as of yet do not function properly.
Among the many explanations that came up for the sudden fall in economic progress were: globalisation forces, faulty economic policies, rigid political systems and pursuit of growth at the expense of the working poor and the environment. The western world seemed kind of relieved, when it turned out that the new and profound 'Asian economic model' had died. Some subsequently claimed that the Asian miracle had always been kind of a counterfeit. According to critics, the rapid growth of Asian economies depended on governments giving cheap credit to certain protected industries. It is said that there exists a 'special relationship' between government, banks and firms in certain of these countries. (The Economist, 1997).
4.2 Impact of the Asian crisis on world economic relations
The crisis that struck the HPAEs in 1997 and 1998 had several consequences for their role in the field of world economic relations. First of all, it became clear that their macroeconomic stability depended greatly on worldwide capital flows. The enormous outflow of capital during the crisis made it necessary for most of the HPAEs to ask the International Monetary Fund for support. Their dependency on world financial institutions increased. They were prepared to aid the troubled HPAEs; however, certain conditions had to be met. These included liberalisation of the banking sector and capital markets in general. The once lauded government involvement in these markets was now perceived as crony capitalism, presumably stimulating bad loans to non-competitive companies. (The Economist, 1997). Restructuring the bank sector according to the neo-liberal economic model championed by the IMF was considered necessary; it can be argued that the HPAEs, by committing themselves to adopting this model, started to imitate even more than before the political-cultural structures of the incumbents in the field of international economic relations.
Second, the competitive devaluations that occurred during the crisis showed more than before that economic cooperation between the HPAEs was largely absent. Until the crisis, most of the HPAEs followed a policy of pegging their exchange rates to the dollar, with Japan as an exception. The sharp depreciation of the yen against the dollar since 1995 caused a decreasing competitiveness of the other countries' export industries. With the forced devaluation of the Thai baht, early 1997, a series of forced and competitive devaluations among the HPAEs started. Obviously this type of actions can be classified as beggar-thy-neighbour policies. (The Economist, 1997). Moreover, a free trade area, like NAFTA or the EU common market, does not exist in Asia. The East-Asian economies consequently do not speak with one voice on the field of global economic relations. (Thunder Lake Management, 2002)
It cannot be said that there was a complete lack of economic cooperation: there exist several organisations in which emerging Asian economies have united themselves. The main bodies are ASEAN (Association of East-Asian Nations) and APEC (Asia-Pacific Economic Cooperation), the latter including the United States. However, ASEAN does not include countries like South Korea and China. APEC is more focused towards maintaining economic relations with the US than towards far-reaching economic integration.
4.3 After the crisis: more cooperation
The HPAEs, hurt by the crisis of 1997, seem to have realised that more intensive cooperation was necessary to prevent the lack of cohesion to endure. ASEAN aims at creating a free-trade area, similar to NAFTA and the EU. The original goal was to implement the necessary measures in 2008, but the date has been brought forward, to 2003. More radical plans exist, for example the creation of a North-East Asian Free Trade Area, or NEAFTA in the future (2010). This would include in first instance countries like China, Japan, South Korea and later possibly also ASEAN.
These measures could not only establish enduring stability within the field of Asian economic relations, but also could help the HPAEs and China to present themselves as one player on the field of world economic relations. It remains to be seen how successful the attempts of unified acting on the world stage will be. If successful, the smaller HPAEs may have found a way to install themselves as incumbents in the field of the world economy.
4.4 China and the future
China, while not grouped under the HPAEs, may well prove to fulfil a vital role in the near future. In the next 20 years, China could surpass Japan as the world's second largest trading nation, and between 2020 and 2030 the People's Republic of China could emerge as the world's biggest economy. To do so, however, China must continue to liberalize its economy, establish a modern financial system with a sound currency, and conform to international norms for protecting property rights. One might say that China is adapting to the existing field of the world economy. It is thought that successful economic development can only occur when accepting the terms already applied by the incumbents in the world economy. An important step in this respect was China's entry into the WTO, at the end of 2001. China is currently still not comparable to economies like Japan or the US. But if it succeeds to enter the world economy, its massive population and sheer size will enable it to become an incumbent within a relatively short time span.
Japan and other High-Performance East-Asian economies have become, by their unsurpassed development since the Second World War, important players in the field of world economic relations. Japan has been able to install itself as an incumbent, while other smaller Asian economies continued to act as relatively isolated challengers until the Asian crisis of 1997. After this crisis, two important developments occurred. Firstly, the damaged Asian economies were reformed to reflect even better the rules of exchange preferred by incumbents in the world economy. Secondly, political support for far-reaching plans of economic integration have found increasing support within and among these countries.
These developments both have and will have an important effect on the way East-Asian economies act on the world stage. The approach towards the culture in the field of the world economy will make these smaller HPAEs more acceptable to existing incumbents. They will be regarded more easily as companions than as competitors. By combining their economic power, they will be able to play a role as incumbent if the current attempts of cooperation are successful. The creation of a free trade area may well prove to be of decisive importance in this respect.
Moreover, the development of China in the near future is extremely important. The question remains whether China, confronted with its own increased economic power, will continue to act together with the HPAEs on the field of the world economy. It might well be able, like Japan, to present itself as an incumbent on its own. If this happens, the smaller HPAEs depend on China's willingness to maintain a high degree of economic integration with them. They will be able to see themselves as incumbents if this willingness is prolonged. Like small EU member states (e.g. The Netherlands or Belgium), they will then profit from their position by being able to maintain political autonomy combined with a share in the economic power that accrues to incumbents.
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