As goods pile up in wharves from Bangkok to Shanghai, and workers are laid off
in record numbers, people in East Asia are beginning to realize they aren't
only experiencing an economic downturn but living through the end of an era.
For over 40 years, the cutting edge of the region's economy has been
export-oriented industrialization (EOI). Taiwan and South Korea first adopted
this strategy of growth in the mid-1960s, with Korean dictator Park Chung-Hee
coaxing his country's
entrepreneurs to export. He did this by, among other measures, cutting off
electricity to their factories if they refused to comply.
The success of Korea and Taiwan convinced the World Bank that EOI was the wave
of the future. In the mid-1970s, then-Bank president Robert McNamara enshrined
it as doctrine, preaching that "special efforts must be made in many countries
to turn their manufacturing enterprises away from the relatively small markets
associated with import substitution toward the much larger opportunities
flowing from export promotion."
EOI became one of the key points of consensus between the World Bank and
Southeast Asia's governments. Both realized import substitution
industrialization could continue only if domestic purchasing power were
increased via significant redistribution of income and wealth, and this was
simply out of the question for the region's elites. Export markets, especially
the relatively open US market, appeared to be a painless substitute.
Japanese capital creates an export platform
The World Bank endorsed the establishment of export processing zones, where
foreign capital could be married to cheap (usually female) labor. It also
supported the establishment of tax incentives for exporters and, less
successfully, promoted trade liberalization. Not until the mid-1980s, however,
did the economies of Southeast Asia take off, and this wasn't so much because
of the World Bank but because of aggressive US trade policy.
In 1985, in what became known as the Plaza Accord, the United States forced the
drastic revaluation of the Japanese yen relative to the dollar and other major
currencies. By making Japanese imports more expensive to American consumers,
Washington hoped to reduce its trade deficit with Tokyo. Production in Japan
became prohibitive in terms of labor costs, forcing the Japanese to move the
more labor-intensive parts of their manufacturing operations to low-wage areas,
in particular to China and Southeast Asia. At least US$15 billion worth of
Japanese direct investment flowed into Southeast Asia between 1985 and 1990.
The inflow of Japanese capital allowed the Southeast Asian "newly
industrializing countries" to escape the credit squeeze of the early 1980s
brought on by the Third World debt crisis, surmount the global recession of the
mid-1980s, and move onto a path of high-speed growth. The centrality of the endaka,
or currency revaluation, was reflected in the ratio of foreign direct
investment inflows to gross capital formation, which leaped spectacularly in
the late 1980s and 1990s in Indonesia, Malaysia, and Thailand.
The dynamics of foreign-investment-driven growth was best illustrated in
Thailand, which received $24 billion worth of investment from capital-rich
Japan, Korea, and Taiwan in just five years, between 1987 and 1991. Whatever
might have been the Thai government's economic policy preferences -
protectionist, mercantilist, or pro-market - this vast amount of East Asian
capital coming into Thailand could not but trigger rapid growth. The same was
true in the two other favored nations of northeast Asian capital, Malaysia and
Indonesia.
It wasn't just the scale of Japanese investment over a five-year period that
mattered, however; it was the process. The Japanese government and keiretsu,
or conglomerates, planned and cooperated closely in the transfer of corporate
industrial facilities to Southeast Asia. One key dimension of this plan was to
relocate not just big corporations such as Toyota or Matsushita, but also small
and medium enterprises that provided their inputs and components. Another was
to integrate complementary manufacturing operations that were spread across the
region in different countries.
The aim was to create an Asia-Pacific platform for re-export to Japan and
export to third-country markets. This was industrial policy and planning on a
grand scale, managed jointly by the Japanese government and corporations and
driven by the need to adjust to the post-Plaza Accord world. As one Japanese
diplomat put it rather candidly, "Japan is creating an exclusive Japanese
market in which Asia Pacific nations are incorporated into the so-called keiretsu
[financial-industrial bloc] system."
China masters the model
If Taiwan and Korea pioneered the model and Southeast Asia successfully
followed in their wake, China perfected the strategy of export-oriented
industrialization. With its unmatchable reserve army of cheap labor, China
became the workshop of the world, drawing in $50 billion in foreign investment
annually by the first half of this decade. To survive, transnational firms had
no choice but to transfer their labor-intensive operations to China to take
advantage of what came to be known as the "China price", provoking in the
process a tremendous crisis in the labor forces of advanced capitalist
countries.
This process depended on the US market. As long as US consumers splurged, the
export economies of East Asia could continue in high gear. The low US savings
rate was no barrier since credit was available on a grand scale. China and
other Asian countries snapped up US Treasury bills and loaned massively to US
financial institutions, which in turn loaned to consumers and homebuyers.
But now the US credit economy has imploded, and the US market is unlikely to
serve as the same dynamic source of demand for a long time to come. As a
result, Asia's export economies have been marooned.
The illusion of decoupling
For several years China has seemed to be a dynamic alternative to the US market
for Japan and East Asia's smaller economies. Chinese demand, after all, had
pulled the Asian economies, including South Korea and Japan, from the depths of
stagnation and the morass of the Asian financial crisis in the first half of
this decade. In 2003, for instance, Japan broke a decade-long stagnation by
meeting China's thirst for capital and technology-intensive goods. Japanese
exports shot up to record levels.
Indeed, China had become by the middle of the decade, the overwhelming driver
of export growth in Taiwan and the Philippines, and the majority buyer of
products from Japan, South Korea, Malaysia, and Australia.
Even though China appeared to be a new driver of export-led growth, some
analysts still considered the notion of Asia decoupling from the US locomotive
to be a pipe dream. For instance, research by economists C P Chandrasekhar and
Jayati Ghosh, underlined that China was indeed importing intermediate goods and
parts from Japan, Korea, and member countries of the Association of Southeast
Asian Nations, but only to put them together mainly for export as finished
goods to the United States and Europe, not for its domestic market.
Thus, "if demand for Chinese exports from the United States and the EU slow
down, as will be likely with a US recession", they asserted, "this will not
only affect Chinese manufacturing production, but also Chinese demand for
imports from these Asian developing countries".
The collapse of Asia's key market has banished all talk of decoupling. The
image of decoupled locomotives - one coming to a halt, the other chugging along
on a separate track - no longer applies, if it ever had. Rather, US-East Asia
economic relations today resemble a chain-gang linking not only China and the
United States but a host of other satellite economies. They are all linked to
debt-financed, middle-class spending in the United States, which has collapsed.
China's growth in 2008 fell to 9%, from 11% a year earlier. Japan is now in
deep recession, its mighty export-oriented consumer goods industries reeling
from plummeting sales. South Korea, the hardest hit of Asia's economies so far,
has seen its currency collapse by some 30% relative to the US dollar. Southeast
Asia's growth in 2009 will likely be half that of 2008.
The coming fury
The sudden end of the export era is going to have some ugly consequences. In
the past three decades, rapid growth reduced the number of people living below
the poverty line in many countries. In practically all countries, however,
income and wealth inequality increased. But the expansion of consumer
purchasing power took much of the edge off social conflicts. Now, with the era
of growth coming to an end, increasing poverty amid great inequalities will be
a combustible combination.
In China, about 20 million workers have lost their jobs in the last few months,
many of them heading back to the countryside, where they will find little work.
The authorities are rightly worried that what they label "mass group
incidents", which have been increasing in the last decade, might spin out of
control.
With the safety valve of foreign demand for Indonesian and Filipino workers
shut off, hundreds of thousands of workers are returning home to few jobs and
dying farms. Suffering is likely to be accompanied by rising protests, as it
already has in Vietnam, where strikes are spreading like wildfire. South Korea,
with its tradition of militant labor and peasant protest, is a ticking time
bomb.
Indeed, East Asia may be entering a period of radical protest and social
revolution that went out of style when export-oriented industrialization became
the fashion three decades ago.
Walden Bello is a Foreign Policy In Focus columnist, a senior analyst at
the Bangkok-based Focus on the Global South, president of the Freedom from Debt
Coalition, and a professor of sociology at the University of the Philippines.
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