Japan

1
Japans 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
  Japans 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 countrys
  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. Japans
  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
Japans 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
Japans 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.
• 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 high, 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 within 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 of engineers is very high.
  The school system is highly 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
Japans GDP and productivity growth rates
compared.
10
Japan and Asia up to 1985

• 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 Japans
  exports, raising production costs and wages and
  depressing company profits. Japans 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
Japans stagnation and the changes to the
Japanese model

• Japans 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 centre.

15
Japans 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
Japans Asian choice

• Japans 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 their 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
Japaneses 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.

24
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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 Koreas industrialization

• The two countries borrowed heavily, to build up
  their industrial base.
• S. Koreas 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 worlds
  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 worlds third-largest producer
  of computer products, after the United States and
  Japan.
• During the 1990s the two 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 centers. Both
  had been for a long time British colonies
  (Hong-Kong until 1997 and Singapore until1963).
• Hong-Kong was 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 towards the rest of Asia.

35
The other Tigers

• 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 growth.
• 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
  Southeast 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?