Japan’s catch up, its model of Asian capitalism and its impact on the Asian and global economy.

1. Japan’s catch up, its model of Asian capitalism and its impact on the Asian and global economy.

2. Japanese capitalism • Social model: strong emphasis on paternalism and social solidarity. The industrial revolution in Japan was a top down process, on imitation of the West. In a short period the country made the transition from a semi-feudal to a modern capitalistic society. • Role of the State and State-business relationship. The State in Japan has an important role in the economy and it works in close contact with big Business. Business, politics and the high levels of bureaucracy are in close contact. • Organisational model: within the Japanese company there are strong loyalty ties. The permanent workforce enjoys privileges. There is a strong emphasis on team work and flexibility as well as customer care. Management keeps in close contact with the workforce on the shop floor.

3. Japanese capitalism: distinctive features. The zaibatsu, were large conglomerates, owned by important family business groups. They included industrial and financial interests. Companies belonging to a zaibatsu were financed from inside the group, by the zaibatsu banks. The aim of the zaibatsu was to keep the more modern sector of the Japanese economy firmly within their boundaries. The zaibatsu formed a powerful oligopoly, to which independent companies had to defer. Each zaibatsu was structured in a number of separate holdings, which were linked informally to each other, by personal and family ties. The 4 main zaibatsu – Mitsui, Mitsubishi, Sumitomo, Yasuda –controlled a dominant share of Japan’s banking and industrial system.75% of all loans to Japanese business came from the banks of the 4 zaibatsu.

4. Japan and the consequences of its WW2 defeat. • The US occupation of Japan affected the country’s political and economic structure. The US introduced reforms aimed at transforming what had been a militarist, autocratic and imperialist country into a Western style democracy. • The reforms had a mixed outcome. Japan’s political system was transformed into a democracy, but power rested in one main party, the Liberal Democratic Party, which garnered a large share of the vote. The opposition, which essentially comprised the Left wing parties, was farily weak. • Economically the zaibatsu were transformed into keiretsu, which were more informal groups, no longer openly oligopolistic and authoritarian but, in many ways very similar. The zaibatsu dynasties lost their former influence and were replaced by an elite of managers, bureaucrats and politicians.

5. Japan and the consequences of its WW2 defeat. • The State remained very important for the Japanese economy, mainly through “indicative planning” mechanisms carried out through important ministries such as MITI (Ministry for Industry and Technology). Industrial policies were aimed at encouraging strategic sectors. Trade policies were designed to boost exports, while the domestic market remained virtually closed to foreign products, through a panoply of protectionist devices (tariff and not tariff restrictions) only very gradually and partially affected by international open market commitments (see GATT).

6. Japan’s post-war growth • Japan experienced high and sustained levels of economic growth. • GDP grew by 9% between 1948 al 1960 and again between 1960 and 1973. • High rate of investment and a strong focus on making exporting companies efficient. • Very high family savings rate helps supply money to finance investment. Postal savings played a key role. The Japanese postal company became the largest financial institution in the world. And by law they were directed to finance the Japanese State, by servicing its debt.

7. Japan’s post-war growth • The engine of Japanese success were its exports. Japanese exports were particularly strong in consumer-electronics, automobiles. They were directed to the markets of industrialized countries and particularly to the US. • Imports into Japan were restricted by protectionist barriers.D • There were two kinds of companies: exporting companies were very efficient, whereas companies producing for the internal market were less efficient. Keiretsu were large conglomerates, each organized around a banking institutions. There was no central board, however members of the leading companies of the keiretsu came together periodically to determine strategies. There was a lot of cross-share holdings within each Keiretsu and among the keiretsu. • Central government offices steered banking institutions and worked to consolidate the system, by giving direction to the economy with planning decisions, incentives, informal cartels etc.

8. Japan post war economic model • Compared to Europe, Japan has kept social expenditure at a low level. Also much lower than both the US and Europe has been Japanese consumer spending. • Labour productivity, measured per-hour, has been inferior to the Us and Europe. However, in certain export oriented sectors productivity has been very hight, and in any case the gap is made up by a much higher number of hours worked per worker. • The system is highly hierarchical both among companies and withing companies. There is a strong sense of company loyalty, and this is also translated into loyalty incentives, company bonuses, reliance on in-house trade unions. Industrial relations are less adversarial than in the West. • Technological innovation receives a high priority. The number o engineers is very high. The school system is hightly competitive and geared to the requirements of the economy and of business. • Organizational innovations: lean production and just in time methods have resulted in running down inventories.

9. Japan’s GDP and productivity growth rates compared.

10. Japan and its Asian strategy • Up to around the mid 1980s Japan showed little interest for the Asian economy. Its main focus was on the US and European markets. This was mainly because there was scarcely a demand in Asia for Japanese export goods, such as automobiles, electronics, and other sophisticated industrial goods. From its neighbours Japan imported foodstuffs and raw materials. Japanese FDI in Asia went mainly into mining.

11. The revaluation of the yen in 1985 • US trade pressure on Japan provoked the revaluation of the yen by 30%. This hit Japan’s exports, raising production costs and wages and depressing company profits. Japan’s Finance minister reacted by expanding public expenditure to fight recession. The injection of new liquidity, however, encouraged financial and real estate speculation eventually leading to a serious financial crisis. Banks were overexposed in the real estate building and suffered when the bubble burst around 1990-1. • La revaluation of the yen brought with it two further consequences: the increase in financial capital available to Japanese investors abroad and the end of the previous export oriented model, with a change of directions towards Asian countries.

12. Japan in crisis: the 1990s • GDP growth slowed down dramatically between 1990 and 2004. Japan entered a phase of stagnation, punctuated by short recessions. • Banks emerged as the weak point of the system. They became over-exposed since the businesses they had financed had invested heavily in real estate. When the real estate boom burst banks were forced to call back their loans some of which had gone bad. • The government reacted by lowering interest rates, in order to give the economy a boost. The government started large public works and other expenditure programmes, borrowing heavily in the process. Banks were thus saddled with public sector rising debt, as well as private sector insolvencies. • The economy did not react as hoped to the generous fiscal policy enacted by the government. In fact the traditionally low consumption habits of the Japanese meant that they would not respond to low interest rates and would not use their spending power to buy more goods.

13. Japanese GDP growth

14. Japan’s stagnation and the changes to the Japanese model • Japan’s stagnation brought with it a rise in unemployment which, for the first time, reached 5%. Investment and consumption both fell. Exports on the other hand remained strong, but they increasingly went to other Asian markets. • The investment strategy of Japanese business changed. It started increasing FDI in other Asian economies. This encouraged the creation of an informal Asian regional economic bloc, with Japan at its center.

15. Japan’s Asian strategy. • The focus on Asia started in 1985. • Japan could have reacted to US pressures by internationalising its economy, in the way the US demanded. This would have meant opening up its domestic market to foreign imports of goods and services, liberalising its economy and accepting an inward flow of FDI, which it had always resisted. In fact Japan could have reaped the rewards of further exports and better foreign relations from such a strategy.

16. Japan’s Asian choice • Japan’s leadership made a different choice. It chose to use its massive capital base and its great technological and industrial potential to create an integrated South-East Asian economy. This also entailed the massive inflow of Japanese capital into China. And it had the further advantage of letting Japan off the hook of US commercial pressures.

17. Japanese companies and the Asian markets. • The big Japanese corporations started to delocalize some of theri production lines in Asian cheap labour economies. On the other hand the Japanese government increased its level of aid to the rest of asia. The first countries to be affected were Taiwan, South Korea and Hong-Kong. However the labour costs in these rapidly developing economies were rising and there currencies were strong. The second wave of Japanese FDI moved into South China.

18. Japanese companies in Asia • Japanese FDI was the preserve of the big business sector which consisted mainly of the keiretsu. In the 1990s Japan became the largest FDI source for Asia. By the end of the 1990s Japanese companies had invested 100 bn. $ in Asia and 4500 Japanese businesses, alone or through joint ventures, employed 1 million people. Naturally Japan was not the only country to invest in Asia. Corporations from the US, Taiwan, Hong Kong and South Korea also became large FDI providers. The Chinese expatriate communities were very active in channelling capital towards the coastal areas of mainland China, particularly through Taiwan e Hong Kong.

19. Network capitalism in Asia • The big Japanese corporations acquire a regional asian dimension. • They create vertically integrated supply chains (for example in automotive and electronic production). The head-companies located in Japan form the apex of the chain, supplying the high tech production. Down the chain come the subsidiaries in the more industrialized Asian economies, and at the bottom those in the low-wage economies. • Good are exchanged within these networks until the final product, which was exported to the West or reimported into Japan. • The Japanese claimed to be supplying the brains, while other Asian economies supplied the muscles.

20. Japanese’s overall overseas position

21. Japanese trade with US and with China/Hong Kong

22. Strategy or natural market development? • Gilpin claims that there was a strategy at work, consisting in an attempt to create a strong economic regional bloc. Japanese corporation do not improvise, they closely follow strategic guidelines imparted from the top. • Proof of this may be seen that 1985 marked a watershed. Not only after that date did the Japanese companies change their behaviour, but at the same time the Japanese government stepped up its foreign aid to Asian economies. • Japan, however, kept a two-track approach. It still was eager to export goods and capital to Western markets. However its new Asian connections allowed it to maintain its traditional economic export-oriented structure, and to rely less on mere market mechanisms. • Made in Japan is replaced by Made in Thailand or in Malaysia.

23. The rise of the Asian tigers. The four Asian tigers: Hong-Kong, Singapore, Taiwan and South Korea start their rise in the 1950/60s. The rise of Malaysia, Thailand and Indonesia starts in the 1970s. There have been sharp differences: Taiwan and and South Korea, former Japanese colonies, have many similarities with the Japanese model. In Malaysia and in Thailand the role of the State is more prominent and State-business links are closer. Common to all S. Asian economies has been the emphasis on exports and on integrating as far as possible into the world market. Asian economies have benefited from Japanese FDI and from Chinese informal community networks of trade and finance.

25. Per capita income growth rates in select Asian economies

26. GDP per Head. Rates of Growth

27. South Korea and Taiwan South Korea and Taiwan started developing in the middle 1950s, after their devastating civil wars. They first adopted import-substituting policies, but with little success. In the late 1960s both countries began to encourage their companies to produce industrial goods for foreign, especially American, consumers. They used many techniques to push exports: cheap loans and tax breaks to exporters; a very weak currency to make Korean and Taiwanese products artificially cheap.

28. South Korea and Taiwan Unlike most of Latin America and Africa, the two economies – like Hong Kong and Singapore – had few natural resources and had to take advantage of low wages to produce simple manufactures to sell abroad. The new development strategy of export-oriented industrialization (EOI) promoted and subsidized manufacturing for foreign markets.

29. South Korea and Taiwan By the late 1970s South Korea and Taiwan flooded world markets with toys, clothing, furniture, and other simple manufactures. Korean exports went from $385 million in 1970 to $15 billion in 1979, 90% of them manufactured goods. International banks and corporations found the East Asian exporters increasingly attractive. They were stable dictatorships backed by the United States, and their strong export performances promised a steady stream of dollars to pay back foreign lenders.

30. South Korea’s industrialization The two countries borrowed heavily, to build up their industrial base. S. Korea’s government pursued heavy industrial development by sponsoring modern steel mills, chemical factories, and a new auto industry. By the early 1980s the country had the world’s largest private shipyard and largest machinery factory. Unlike most developing countries, Korea decided to set up a car-making industry without multinationals. In the 1970s the government helped local auto firms borrow abroad and buy foreign technology and expertise. Soon cars made by Hyundai, Daewoo, and Kia were sold all over the world.

31. South Korea and Taiwan • Korean chaebols are very similar to Japanese zaibatsu. The 30 largest chaebol control 41% of South Korean industry and 16% of GDP. The Government influences and directs the economy through the banks by encouraging the most successful exporters. • Trade unions are very militant. • Taiwan is the result of a Chinese diaspora. Its economy is based on small industry. Despite bad bilateral ties with mainland China many Taiwanese companies (in textiles, electrical products and electronics) delocalize in China.

32. South Korea and Taiwan • After a couple of difficult years during the early 1980s ”Asian Tigers” resumed their rapid growth, shifting from simpler to more complex manufactured goods – from toys to computers, from clothing and footwear to bicycles and cars. • Just as Japan had gone from simple low-wage manufactures in the 1950s to more complex machinery and consumer appliances in the 1970s, so the two former Japanese colonies South Korea and Taiwan did much the same between the 1970s and 1990s.

33. South Korea and Taiwan • By 2000 South Korea produced nearly three million vehicles a year, about half for export. South Korea was also a world leader in ships, television sets, and consumer electronic equipment; • Taiwan became the world’s third-largest producer of computer products, after the United States and Japan. • During the 1990s thetwo countries democratized seeming to contradict the criticism that the East Asian model required dictatorial regimes that could repress the working class to keep labor cheap.

34. Hong-Kong and Singapore • Hong-Kong and Singapore are two city states, which became important financial centres. Both had been for a long time British colonies (Hong-Kong until 1997 and Singapore until1963). • Hong-Kongwas the gateway to China after 1949 and functioned as a conduit for investments into the Chinese mainland on the part of Chinese migrant communities scattered across South East Asia. Furthermore Chinese exports used Hong-Kong as a passageway. • After going back to China Hong-Kong is now an “autonomous region”. • Singapore also developed as an investment center and a location for international banks. It has become a hub for FDI towardes the rest of Asia.

35. The otherTigers Thailand, Malaysia, the Philippines, and Indonesia, four heavily agrarian countries, had failed to industrialize with import substitution. While their governments continued to protect national businesses, they soon abandoned ISI in favor of export-led industrial exporters. • They benefited from the successes of the four front-runners. As the first Tigers developed, their living standards and wages rose so quickly that they became unattractive to the most labor-intensive manufacturing. Industries priced out of Singapore and Taiwan and found cheap labor in Thailand, Malaysia and Indonesia.

36. The other Tigers • In Malaysia Thailand and Indonesia most of the economy is in the hands of Chinese immigrants. There are strong ties between the State, ruling elites and big banks. • Foreign capital flooded into the three Southeast Asian economies and eventually into the politically less stable Philippines, and soon manufactured exports flooded out. • Like the initial four East Asians, these four Southheast Asian countries were close American allies and feared Communist insurgencies. These strategic realities undoubtedly made it more attractive for them to integrate into the American-led world economy.

37. Answer Two of the following Three questions. • Outline the differences and similarities between three Asian “Tigers” of your choice. • How did Mao-Tse-Tung attempt to modernize China? • Why is FDI so important to the development of the Asian economies?