Approaches to Poverty Eradication and Economic Development III
The Truth & the Asian Miracle
In an article "From Miracle to Crash" in the 16 April 1998 edition of the 'London Review of Books', Professor Benedict Anderson writes: "Four basic conditions made the (East Asian) 'miracle' possible, and these existed only in the long strip of coastal capitalist states stretching from South Korea to the eastern edge of the Indian Ocean. "The first was the peculiar arc of the Cold War in the region. Nowhere else was it 'hotter' in the third quarter of the century, and perhaps nowhere else did it cool down more rapidly, thanks to the Peking-Washington rapprochement of the mid-Seventies.
"In every important country of South-East Asia, with the exception of Indonesia, there were major, sustained Communist insurrections, and Indonesia, in the early Sixties, had the largest legal Communist Party in the world outside the socialist bloc.
"The notorious domino theory was invented specifically for South-East Asia. To shore up the line of teetering dominoes, Washington made every effort to create loyal, capitalistically prosperous, authoritarian and anti-Communist regimes - typically, but not invariably, dominated by the military.Each disaster only encouraged Washington to put more muscle and money behind its remaining political allies. No world region received more 'aid'. "On the other hand, the Washington-Peking coalition against Moscow, consolidated after the 'fall' of Indochina, meant that from the late Seventies till the collapse of the Soviet Union those countries of South-East Asia who so wished could continue to profit from Washington's Cold War largesse without facing any severe internal or external constraints (the Philippines was a partial exception, as we shall see)."
To reach their "take off" levels of development, these countries depended on this "Washington's Cold War largesse". (Here we will refer only to Japan, South Korea and Taiwan). Here we also need to take note of Professor Anderson's remarks with regard to the other "Asian tigers". He says: "The second, accidental condition (for the emergence of these 'tigers') was the region's propinquity to Japan.Beginning with the acquisition of Taiwan in 1895, and the annexation of Korea in 1910, Japanese ruling Р№lites sought by economic, political and military means to create for their country, in East and South-East Asia, a zone of hegemony equivalent to that of the United States in the Western hemisphere. "In the period of postwar recovery, the old (Japanese) ambitions did not disappear, but took an essentially economic form. Assured of its political and military dominance over Japan, and eager to make the Japanese economy a cornerstone of capitalist strength in Asia, Washington put no real obstacles in Tokyo's way.
"In those early postwar years, however, Mao's China was closed to Japanese capital, and the South Koreans' bitter memories of Japanese colonialism made them scarcely more welcoming. South-East Asia was the only real possibility, not least because Europe had now lost its colonial fortresses there. "Beginning in the Fifties, thanks to a series of war reparations agreements whereby Japan provided substantial funds to South-East Asian countries for the purchase of its manufactures, Tokyo's economic presence rapidly increased: first in Thailand, which had been an ally in World War Two, later in other new nation-states which had had less pleasant experiences under Japanese military rule. By the early Seventies, Japan had become the single most important external investor in the region, both as extractor of natural resources (timber, oil and so on) and in industrial and infrastructural development. "All this meant that South-East Asia was the only region in the world in which the two most powerful capitalist economies were deeply and, on the whole co-operatively, committed for four decades. Later, when South Korea and Taiwan in their turn became major exporters of capital, they followed the leading goose, reinforcing the already huge inflows of capital and technology from America and Japan."
Not models of free trade
With regard to South Korea and Taiwan, here is what World Vision, New Zealand, had to say. "South Korea and Taiwan are often promoted as countries that have developed and reduced poverty substantially through free trade and investment, not aid. It is true that they have been spectacularly successful in reducing poverty, but otherwise this claim is wrong on all counts. "In fact, both countries received massive amounts of aid from the United States during the Cold War, because of their role as bulwarks against communism. They also received loans from the US on very generous terms. Very little of their capital came from FDI [foreign direct investment]. Between 1951 and 1967, FDI as a percentage of total long-term capital flows was only 1% in South Korea and 8% in Taiwan. Over the same period, foreign aid and loans made up 86% and 74% of such capital flows to South Korea and Taiwan respectively.
"Far from being models of free trade and investment, South Korea and Taiwan subsidised their industries heavily and protected them with tariffs and other barriers. They also carefully controlled investment. In addition, the US opened its market to their goods, without requiring them to open their markets to US goods in return. "More recently, South Korea and Taiwan have liberalised trade and investment. However, this happened after they had built up highly successful industries under conditions of protection. It was a case of development first, then liberalisation, rather than the model of development through liberalisation promoted by neo-liberal economists.
"South Korea and Taiwan industrialised under very specific conditions that cannot necessarily be repeated in other countries. Through much of their post-war development they were also ruled by authoritarian and repressive regimes, with little regard for human rights. For these and other reasons, they may not provide good models for other developing countries to follow. But if they are useful examples, it is certainly not as models of development through free trade rather than aid." Chakravarthi Raghavan made the same point in a 22 May 1996 article in 'Third World Network Features', entitled "East Asia proves World Bank theory wrong". He wrote: "Some of the most successful East Asian and South-East Asian economies, during the period 1971-1980 show a small ratio of FDI to total investment. It was only 0.1% for Japan, 5% for Hong Kong, 1.2% for the Republic of Korea, 1.3% for Taiwan, and 14% for Malaysia. China, which is less integrated into the world economy than Korea, had a 10.4% ratio of FDI to total investment."
In his article published by the Nautilus Institute, "Notes From Ground Zero: Power, Equity and Postwar Reconstruction in Two Eras", Mark Selden said the following about Japan: "The US articulated practices of postwar reconstruction in which the victor contributed to the rehabilitation of the vanquished as well as of its own allies. The result was to reverse the dominant logic of war reparations in which the defeated were customarily further bled by the victors. Nevertheless, postwar reconstruction of defeated industrialized nations became one pillar of a hegemonic strategy designed to accelerate restoration of international trade and investment while subordinating others militarily. "Postwar reconstruction after 1945 was attuned to American strategic priorities. The US aided in the relief, rehabilitation and reconstruction of defeated enemies, notably Germany and Japan, while providing assistance to selected European allies whose recovery was central to rebuilding the world economy in line with American interests.
"The bonanza of Korean War procurements that fueled Japan's economy from 1950 was critical to reconstruction. With the US assuring Japan's security, domestic investment could be concentrated on economic, infrastructure and social reconstruction. The occupation gave rise to a shared US-Japan vision of an economically robust and democratic Japan within the ambit of American power in a post-colonial Asia divided along Cold War lines. "Not all Japanese occupation programs proceeded smoothly, of course. Deadlock between different sections of the occupation, and at times between the occupation and the Japanese administration, meant that programs designed to dismantle the zaibatsu, the large economic-financial combines that dominated the prewar economy and that occupation authorities initially identified as the driving force behind Japanese militarism and colonialism, were stillborn. Likewise, the occupation's reverse course of 1947, driven by mounting Cold War concerns and the anticipation of a Third World War, led to an attack on labor and progressive forces generally.
"By contrast, programs that enjoyed strong popular support including the peace constitution, land reform, the vote for women, and numerous health and welfare measures, not only were fully implemented but were sustained following the formal end of the occupation in 1952, despite US pressures to scale back some of the most far-reaching reforms." Further to this, writing in 2002 about elements of the economic history of Japan, Toyoo Gyohten, President of the Institute for International Monetary Affairs, said: "In the 1950s and 1960s, Japan received a great deal of benefits from international organisations, both financially and institutionally. In particular, the World Bank provided financial assistance for the post-war reconstruction of Japan, starting with a loan to the Kansai Electric Power Project in 1953, when a stable supply of electricity was a top priority. During the next 13 years, Japan received financing from the World Bank, equalling US$863 million, for 31 reconstruction projects, including dams, highways, and bullet trains. "It should be noted that the World Bank provided not only the financial means, but also the expertise needed for the economic infrastructure, which greatly contributed to Japan's rapid economic recovery and development. Japan was able to graduate from World Bank borrowing in 1966, and finished repayment of all loans by 1990.
"Under the international monetary system of the Bretton-Woods regime, Japan benefited from the fixed rate of exchange where the yen was undervalued for a long time, at 360 yen to the dollar. This arrangement provided a foundation for the development of Japan's industries." In addition to all this, we must take into account that the US special programme instituted to procure as much of its defence requirements from Japan as possible, provided about 30% of Japan's foreign currency receipts in the early 1950s. Like the US initiated under-valuation of the yen and the opening of the US market to Japanese textiles, this constituted a deliberate intervention to accelerate the growth of the Japanese manufacturing sector.
In a 1996 paper "Capital Accumulation Key To East Asia Miracle", Chakravarthi Raghavan discusses the important issue of savings and investment. What we have said above shows the critical role of foreign savings in helping to bring about the Japanese and East Asian "economic miracle". It is however also true that, in time, domestic savings came to play the predominant role in terms of providing the necessary investment capital. In this regard, Raghavan says: "However important initially these (foreign capital) inflows, gross domestic savings rose to very high levels - in Japan from 24% in the early 1950s to 36% in the 1960s and 40% in the 1970s; in Singapore from 10% of GDP in 1965 to 30% in the 1970s and 42% in the 1980s. In Korea and Taiwan from about 4% and 9% during 1956-1960, it rose rapidly to an average of 32% by the 1970s in Taiwan and 22% in the 1970s and 32% in the 1980s in Korea."
However, he also makes some important observations about these savings, essentially pointing to the importance of corporate as opposed to household savings, including the role of the state in this regard. He writes: "In all these countries corporate savings accounted for a very large share of corporate investment and in East Asian NIEs (Newly Industrialised Economies), it was not household but corporate savings. "In most East Asian NIEs, other profit-related income also contributed to a rise in domestic savings. Personal savings and corporate profits in East Asia were linked to profits through the bonus system - tying a significant part of workers' pay to company profits. "Government policy played an important role in growth of corporate profits and savings. Fiscal instruments were used to supplement corporate profits and encourage retention to accelerate capital accumulation. Trade, financial and competition policies raised profits above levels that would have been attained under free market conditions, thus creating rents.
"Fiscal instruments included various tax breaks and special depreciation allowances to encourage enterprises to retain and invest profits. "But State created rents were important. These rents were created through a mix of selective protection, controls over interest rates and credit allocation, managed competition including encouragement of mergers, coordination of capacity expansion, restrictions on entry into specific industries, screening of technology acquisition and promotion of cartels for specific purposes such as product standardization, specialization and exports.
"Credit subsidies were essential for investment in new industries, as also credit rationing which could not merely be viewed as instrument for 'picking winners', but enabling rent creation and capital accumulation. "The rent creation through protection was linked to export performance. "Most of the fiscal instruments and rent-creations were focused in a deliberate concerted way on specific industries at particular moments in time - they did not just reallocate given resources across various sectors, but made a significant addition to the overall rate of accumulation. "This creation of rents.was central to the process of accelerating capital accumulation and growth and establishing new industries. It contradicted the theory of rent-seeking under inward-oriented-trade regimes developed in the 1970s and 1980s.
"The reciprocity between government support and private sector performance entailed a faster rate of capital accumulation and growth - not only because support was often provided in exchange for higher investment, but also because better export performance as a measure of quality of investment necessitated faster accumulation in order to raise competitiveness through adaptation of new technology, scale economies, learning and productivity growth."
The elements of monopoly
As we approach the conclusion of this section, we must draw attention to a particular form of corporate organisation in the three East Asian countries we are discussing. We have already quoted Selden as saying that the US occupation authorities in Japan failed to break the economic stranglehold of the "zaibatsu", the family owned monopoly conglomerates that dominated the pre-war Japanese economy. The 21 January 1999 'San Diego Daily Transcript' carried an article by John Patrick Ford entitled "Monopoly is not a game". He wrote: "American-style monopolies were personified by dynamic and ruthless entrepreneurs in the late 19th century. John D Rockefeller and Andrew Carnegie come to mind with their vast empires in oil and steel being financed by the likes of JP Morgan.These tycoons forged industrial empires that made America a world power.
"The same scheme worked for free-market Asian nations. All the elements of monopoly flourish today in South Korea with cliques called chaebols and in Taiwan with similar groups named guanxiqiyes. There certainly are differences from the American example or even from the Japanese (zaibatsu) root stock.Post-war reconstruction in the former (South Korean and Taiwan) colonies retained the same (zaibatsu and post-war Japanese) keiretsu system, but with some variations to suit the local culture. "A major change from the pre-war Japanese model was the leverage of American capitalism. With abundant US foreign aid to rebuild devastated industries, a blend of Asian monopoly with American free-trade emerged in South Korea and Taiwan. Larger Korean chaebols got their start after the country's liberation in 1945. Thoughtful entrepreneurs utilised the urgent needs of politicians to stay in power. Bribing the ranking bureaucrats gained them preferred access to government funds. "Real growth came after the corrupt Syngman Rhee regime was discarded in 1950. Succeeding military junta regimes needed strong business connections to stabilise their administrations. Any newcomers in the monopoly game depended on government subsidies. Even the largest chaebol can be humbled by politicians who were not on the payroll. "Validation of the chaebol structure came in 1983 as sales of the fifty top groups accounted for 94 percent of GNP. Only 10 ruling families control 30 of Korea's largest firms. "Taiwan is an island of only 14,000 square miles and half the population of South Korea. Yet this 'orphan' nation ranks 15th in world trade, boasts the third-largest foreign reserves, and is one of the lowest foreign debtors.
"Taiwanese monopolies, also cloned from the Japanese model, are called guanxiqiye. It's the Chinese-language equivalent to the same Korean and Japanese words.Taiwanese monopolies bear less imprint of state and more vitality of culture and market in their design.Typical is a cluster of enterprises owned and controlled by a group bound by an ancestral network. Such a clique is called an oligopoly to distinguish it from American-style monopoly. In the comments cited earlier, Chakravarthi Raghavan has explained the economic interaction between the East Asian monopolies, described by John Ford, and the ruling groups in these countries. In this context, we must also take particular note of the observation made by World Vision, that "through much of their post-war development, (South Korea and Taiwan) were also ruled by authoritarian and repressive regimes, with little regard for human rights." Obviously, this short presentation on the "Asian tigers" does not and cannot cover all the details that bear on the successful development model that turned these recently poor countries into the success stories they are. We must now, however, state some of the main conclusions drawn from this experience.
As was the case with Western Europe, the US intervention in the Asian Far East represented a conscious, purposeful and determined response by the then most powerful country in the world to what it considered an imminent Communist danger to its survival. To ward off this strategic danger, the US was ready to spend whatever was necessary and required. It understood that so big was the challenge it faced that it could not rely on "the market", the private sector, and especially foreign direct investment, to provide the resources to meet this challenge. In the end, this translated into aid and loans.
It was accordingly ready and willing to use public funds to provide the investment and other resources that would enable the Far East Asian economies to reach their "take off" point. It ensured that the World Bank played the development role from which it was largely excluded in Western Europe, adding multilateral resources to the investment funds available to the East Asian economies. It was also ready and willing to open its own market, and the markets of its allies, to guarantee the Asian economies a market for their products, as well as deliberately engineer the under-valuation of the Asian currencies to encourage Asian exports and discourage imports into the targeted Asian countries, thus opening the space for an import-substitution industrial strategy.
Rather than argue that governments had to minimise their role in the economy, it proceeded from the position that these governments had a central role to play in the achievement of the goals of the East Asian Development Programme.
It accepted the entrenchment and protection of monopolies and the formation of an interdependent political and business elite that would act as its partner in driving the Development Programme, regardless of the economic distortions that would result from this arrangement. It accepted that this elite should function in an authoritarian manner, with no respect both for democracy and human rights, to give it the possibility especially to suppress any revolt by the workers and the ordinary people, provoked by the blatantly and almost exclusively pro-business policies of the target countries. As in Western Europe, the US accepted that in the case of Japan, it had to allow for the development of a welfare state, to ensure the quiescence especially of the working people, without having to rely predominantly on repressive methods. Having ensured the economic recovery of Japan, the US was happy to assign to her the role of ensuring the economic development of the other "Asian tigers" in South East Asia, which coincided with Japan's own historic interest to be the dominant power in this region of the world. The dominant world power, the US, was pleased that the emerging Japanese economic powerhouse, already tied to the US, could take over the task of ensuring that this region was "saved from communism", while it attended to the same task in the rest of the world.
The Far East Asian intervention so succeeded in the context of the set development objectives of the post-war intervention by the US, that in 1993, the World Bank issued a report entitled "The East Asian Miracle: Economic Growth and Public Policy".
Contrary to what we have said about the East Asian "tigers", the August-October 1993 World Bank Policy Research Bulletin, gave a different account of "The making of the East Asia miracle". It wrote: "What caused East Asia's success? In large measure the HPAEs (High Performing Asian Economies) achieved high growth by getting the basics right. Private domestic investment and rapidly growing human capital were the principal engines of growth. High levels of domestic financial savings sustained the HPAEs' high investment levels. Agriculture, while declining in relative importance, experienced rapid growth and productivity improvement. Population growth rates declined more rapidly in the HPAEs than in other parts of the developing world. And some of these economies also got a head start because they had a better-educated labor force and a more effective system of public administration.
"Fundamentally sound development policy was a major ingredient in achieving rapid growth. Macroeconomic management was unusually good and macroeconomic performance unusually stable, providing the essential framework for private investment. Policies to increase the integrity of the banking system and to make it more accessible to non-traditional savers raised the levels of financial savings. Education policies that focused on primary and secondary schools generated rapid increases in labor force skills. Agricultural policies stressed productivity and did not tax the rural economy excessively." To the extent that any of this might be true, it describes a later stage of the Far East Asian development process, beyond the "take off" point achieved through the earlier post-war intervention of the US. To come down to earth, away from the heady "market friendly" heights idealised by this World Bank presentation of the East Asian "miracle", we will next undertake a brief examination of a contemporary development process, the European Union (EU) Regional Policy.
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