CHAPTER 4:

The previous chapter explained the legacy of authoritarian political leadership in the Asia Pacific. The chapter proposed that Economic Nationalism is the dominant political paradigm in the region. The main concern of politicians is of course the economy. In the present chapter we explain the strong role of Asian governments in their economies, in terms of strategic trade and industrial policies to enhance national competitiveness.

THE POLITICAL ECONOMY OF TRADE

Previously we defined political economy as the role of politics in economic systems and processes. The objective in the present chapter is to describe the political economy of trade, i.e., the way world political considerations impact the international economy, specifically the trading system. The discussion is divided into two major parts. The first part examines the evolution of the global trading system, and covers various instruments and rationales for government intervention in free trade. The second part addresses the East Asian approach within the global framework.

HISTORY OF THE FREE TRADE MOVEMENT

The ‘free trade movement’ is at least two centuries old, with its intellectual underpinnings in Adam Smith’s The Wealth of Nations and other writings representing the new liberalism of the time. Scholars generally argue that the tendency toward making international commerce more free has been the prevailing trend and continued to gain force down through the years, despite setbacks for example by the protectionist policies associated with the Great Depression of the early 1930s. The original champion of the ‘free trade movement’ had been Britain; the United States adopted an avid free-trade policy in 1933, and at the end of World War II grasped the baton to orchestrate a rapid liberalization of the world economy.

The United States used its dominant position in the international economy to bring about the creation of three major institutions to provide the framework for postwar prosperity in the so-called ‘free world’ (non-communist countries): the World Bank, the International Monetary Fund, and the General Agreement on Tariffs and Trade (GATT). GATT represented a compromise with the American Congress which did not welcome interference in its domestic policy from a proposed permanent International Trade Organization (ITO). GATT was formed as a temporary organization for multilateral trade negotiations between the United States and its major trading partners (then primarily Western Europe).

GATT was replaced on January 1, 1995 by a permanent World Trade Organization (WTO), which has a stronger mandate to settle trade disputes and bring about further liberalization in the modern, much more complex international business environment. GATT’s replacement followed its last session which ended with an agreement signed in Morocco in April 1994 (Uruguay Round --to be discussed later).

GATT’s purpose was thus to provide a forum to achieve free trade. Tariffs, or taxes on imports, were the simplest barrier to address, and GATT was successful in significantly reducing tariff levels on manufactured imports into the industrialized countries (for example, average US tariffs were reduced from over 40% of import value to around 4% by the year 2000). The means has been by multilateral negotiations through a series of eight "rounds" or meetings of GATT member countries --from the first Geneva Round in 1947 to the last Uruguay Round from 1986-94. A ninth Doha Round commenced in November 2001 to address the unfinished business of the Uruguay Round. (Exhibit 4.1 shows the history of the GATT rounds.)

So-called non-tariff barriers (NTBs) have only been on the agenda since the Tokyo Round, and these barriers present the most difficulties to identify and eliminate. NTBs, as a category for "everything else", can include an infinite variety of barriers that might obstruct trade. CWL Hill lists six main categories of instruments of trade policy by governments:

tariffs (already defined)

subsidies --defined as government provision of funding for a domestic producer, such as tax breaks, cash grants, low-interest credit

quotas --quantity restrictions on imports

Quotas are normally enforced by issuing import licenses for prescribed goods. A special type of quota is the voluntary export restraint (VER), where the exporter "voluntarily" controls the quota. The classic case of VERs was the restraint of Japanese auto firms exporting to the United States, resulting from an agreement between the US and Japanese governments in 1981. These VERs were renewed regularly and lasted until the early 1990s. The Japanese agreed to the VERs to avoid the likelihood of protectionist legislation by the United States.

local content requirements --requiring local inputs into a domestic production process, typically in terms of labor, supplies, or capital

administrative policies --a wide range of informal barriers including customs procedures, product standards, etc

"Some would argue that the Japanese are the masters of this kind of trade barrier." (Hill 2004:178) CWL Hill cites examples of Japanese customs inspectors cutting Dutch tulip imports down the middle, or delaying Federal Express mail packages to check for pornography.

The main operating principle of the global negotiating framework is nondiscrimination, as expressed in GATT’s "most-favored nation" (MFN) clause. This principle requires member countries who offer a trade concession to another member to offer the same concession on a nondiscriminatory, or MFN basis, i.e., to all GATT (now WTO) members. Today, with 148 member nations (acceded in 2004), the MFN acronym has been replaced simply by the term “normal” trading status.

The principle of nondiscrimination eschews a bilateral or regional approach whereby the wider WTO membership is excluded. The United States bilateral negotiations to resolve its trade complaints with Japan since the 1980s was in contravention with this principle because it took the trade liberalization process outside the global framework. US President Reagan and all subsequent administrations have seen the global framework as insufficient to deal with the complex issues of what was perceived as Japanese protectionism, and especially to correct the immense trade deficit that the US has with Japan. The problem, of course, is that bilateralism has tended to become "aggressive unilateralism", where the United States insisted that Japan do business more like Americans do. Instead of universal rules, it tends to pose American business culture as the exemplar of competitive practices. (American "shareholder capitalism" is indeed today seen as the model of superior efficiency and dynamism. This concept is juxtaposed against, for example, Japanese "stakeholder capitalism" which was credited for the seeming invincibility of Japanese firms in the GATT era --until the economic decline in Japan starting in the 1990s.)

The United States has resorted in recent years to bilateral free trade agreements, in 2003 including Singapore and Chile and others under negotiation. By May 2003, over 265 regional or bilateral arrangements had been notified to the WTO (and its predecessor, GATT). The total number of regional trade agreements in force is accelerating and is projected to reach 300 by 2005.

Such negotiations offer dynamic liberalization at many levels not possible on a larger scale. However, this approach excludes the rest of the world and therefore is a potential cause of trade diversion from more competitive producers that still must overcome the WTO “normal” trade barriers.

Regional blocs are also discriminatory in principle and had to be allowed only as an exception to the GATT framework. Of course, the precursors of the European Union were emerging at around the same time as GATT itself so the contradiction had to be acknowledged. It is still a major concern that both regionalism and bilateralism divert attention from global progress on trade liberalization. Some argue that both Europe and the United States are forsaking the global liberalization process for their own particular agenda. Yet regionalism and bilateralism are today actively pursued simply because trade liberalism on a global front (i.e., WTO negotiations) is fraught with difficulties. The current Doha Round has encountered many obstacles, including American domestic resistance and a multitude of differences among the numerous countries that would be involved (148 countries in 2004). For example, agricultural reform is resisted not only by the Europeans but also by Japan, South Korea and China at least; and trade-related labor and environmental standards are rejected as part of the negotiating agenda by nearly every developing country. Negotiation among smaller groups seems the easiest approach.

RECENT EVOLUTION OF THE FREE TRADE REGIME

The Uruguay Round of GATT for the first time negotiated a complex international business package of tariff and NTB concessions, much of which now constitutes unfinished business and therefore the agenda of the WTO in the Doha Round. This complexity was an outcome of the attempt to address ‘free trade’ as constituting more than simple trade in manufactured goods among industrialized countries. Negotiating groups were formed for new areas including services, agriculture, foreign investment, textiles and clothing, tropical products, and others.

Increasingly, modern trade includes a wide range of services such as banking, construction, transportation, telecommunications, etc. The United States, which has a comparative trade advantage in many services, has been pushing for services to be liberalized. Barriers to trade in services represent NTBs, e.g., limiting movement of people and capital to provide the services, or limiting foreign competition in retailing, insurance, broadcasting, etc. One way GATT/WTO addressed the complexity of different national regimes governing services was to advocate "transparency", i.e., publication and explanation of national rules and regulations.

The agricultural and textile industries, and tropical products, had been ignored in the first forty years of GATT negotiations. These were concerns of less-developed countries (LDCs), which had until recently not participated significantly in the negotiations. Agriculture in Europe, the United States, and even Japan (rice) was heavily protected, and there was strong domestic resistance to opening up to international competition. The Uruguay Round resulted in an initial reduction of subsidies for agriculture, and the Doha Round has put agriculture center stage.

Thus, the WTO inherits the unfinished agenda of the Uruguay Round, including addressing specific services –telecommunications and financial services were addressed in separate negotiations after the conclusion of the round. The Doha Round now is focusing on more significant liberalization of agriculture, further reduction of tariffs especially including goods exported by the LDCs (e.g., textiles, shoes), and the so-called “Singapore issues” put on the table at a meeting in that city in 1996. These include the following four areas: (which may not result in much immediate progress, depending on the outcome of ongoing debates)

– foreign investment (national treatment)

– transparency in government purchasing

– trade facilitation (efficient customs clearance)

– competition policies (monopoly; price fixing)

Foreign investment is subject to government intervention just as trade is; for example, local content requirements are certainly protectionist. This issue –government measures sometimes to control FDI or not give it equal “national treatment” as domestic enterprises-- was proposed for the Uruguay Round negotiations (but without any resulting agreement). It was again tabled by the Europeans for the Doha Round but again was jettisoned at a meeting in Cancun in September 2003. The prospect of expanding the WTO remit to new areas worries poor countries with less technical ability to negotiate, and even institute any resulting new rules. If investment regimes were to be dictated by the WTO, poor countries might have less control over multinational corporations from the advanced countries.

Competition policy has almost infinite variety on a nation-by-nation basis. This refers to domestic policy as to local monopolies and allowance for foreign participation. In a larger sense, it can include rules and regulations affecting each business, and business practice generally. For example, each country’s banking law may define what businesses banks can undertake, capital controls, reserve requirements, and many other aspects of the business. The concern for international commerce is harmonization, so that particular national practices do not present effective ‘non-tariff barriers’ to international businesses entering their market. There is a need for a "level playing field", i.e., that foreign business is given national treatment and that national regimes conform to some international norm. Defining the ‘rules of the game’ will be extremely complex; this is the real challenge to the WTO.

Another issue is protection of intellectual property (ideas). Intellectual property includes patents, copyrights, and trademarks.¹

The Uruguay Round of GATT for the first time negotiated a complex international business package of tariff and NTB concessions, much of which now constitutes unfinished business and therefore the agenda of the WTO in the Doha Round. This complexity was an outcome of the attempt to address ‘free trade’ as constituting more than simple trade in manufactured goods among industrialized countries. Negotiating groups were formed for new areas besides tariffs and NTBs, including services, agriculture, foreign investment, textiles and clothing, tropical products, and others.

– foreign investment (national treatment)

– transparency in government purchasing

– trade facilitation (efficient customs clearance)

– competition policies (monopoly; price fixing)

Another issue is protection of intellectual property (ideas). Intellectual property includes patents, copyrights, and trademarks.¹ The intent is to protect originators of a new invention, book, song, design, etc, to allow them the fruits of their efforts. Many East Asian nations have weak legal protection of intellectual property rights.

This complexity is amplified by other global priorities that might be added to the agenda now or in later rounds, such as environmentalism, labor standards, and even e-commerce.

Certainly environmentalism is a global issue that impacts trade. Ecology can change comparative advantage by rewarding polluters who save the cost of "cleaning up" their own pollution --many East Asian countries have given scant regard to implementing strict environmental regulations or imposing higher taxes on polluters. Similarly, labor standards in many Asian countries have been criticized, mostly by the West which has achieved higher work standards (such as health and safety standards, rights to form unions, or minimum wages) through many past decades of union negotiations and political pressure. For example, China has been criticized for using prison labor, and Pakistan for using child labor, in export industries. Western attempts to use trade restrictions as a means to impose their own standards for pollution or labor abuses have been disallowed by GATT and the WTO --it is unilateralism. However, trade provisions have been successfully written into international conventions; for example, no WTO member has objected to worldwide bans on ivory trade or controls in the trade of hazardous substances.

Thus, the future challenges to the free trade regime are daunting. The WTO, and advocates of free trade such as the United States and, arguably, East Asia, must also face rising protectionist pressures within their own societies. CWL Hill identifies a trend since the 1970s for the advanced countries to revert to protectionism in the face of new competition. The trend was exacerbated by a huge Japanese trade surplus since the 1970s with most of its competitors. The trade imbalance caused economic dislocations, especially in the United States and Europe, where domestic producers of autos, steel, semiconductors, and even Scotch whiskey steadily lost market share to the Japanese. This problem is amplified by perceived unfair trade practices by Japan, and the American deficit often seemed to run in tandem with the Japanese surplus. This "Japanese invasion" was met with protectionist measures outside the GATT framework, such as VERs. In 1990 the US and Japan jointly entered into a "Structural Impediments Initiative" to identify and correct mutual problems causing trade tensions. For example, the Japanese distribution system was considered a trade barrier, whereby many middlemen between producers and final point of sale made foreign entry into the multi-layered and tightly controlled retail market too complex and tended to favor exclusive, inside arrangements. Progress has been made; for example, Japanese retail laws, designed to protect the multitude of small retailers against giant supermarkets, were changed to allow in American-style discounters like Toys-R-Us. Entering the Japanese market in December 1991, Toys-R-Us has been very successful. Japanese distribution systems also hurt the Japanese consumer by more price markups to compensate each middleman --often making the final price quite exorbitant by international standards; but it could be argued that Japanese business culture and lifestyle are being sacrificed under pressure to conform to American practices.

The US trade deficit has been generally on the rise since the 1970s, reached a dangerously high level in the late 1980s, and persists into the new millennium –with China replacing Japan as the country with the biggest trade surplus with the United States. The widening of the current account deficit continues to provoke allegations in the United States that some foreign producers are engaging in "unfair" trading practices. Today the deficit seems quite perilous. According to Bergsten (2003)², to finance the net outflows of dollars in recent decades, foreign investors (largely the Japanese and Chinese central banks) provide $1 trillion of foreign capital annually. Bergsten notes: “The situation is clearly unsustainable.”

PROS AND CONS OF GOVERNMENT INTERVENTION

Traditional arguments for and against protectionism are well documented, with a clear bias in favor of free trade. Arguments include:

Protecting jobs and industries --by attempting to save jobs and protect inefficient producers from foreign competition, governments hurt their own consumers and industries because intervention raises prices.

National security --by attempting self-reliance in a nation’s own industries, in defense for example, nations often end up making their defense requirements more expensive and below world quality standards.

Infant industry --by protecting developing industries until they can achieve international standards, governments attempt to create comparative advantage; this argument has a new legitimacy based on the logic of Strategic Trade Theory --see below. However, in the general case we find the industry cannot break away from its dependence on government protection and becomes a burden on the national treasury.

Bargaining tool --by intervening or threatening to, governments may want to force other governments to behave better; but the results are no more predictable than anything in world politics. In the past the United States has attempted to deny China MFN trade status, or to slap extra tariffs on specified Chinese products, to force China to behave in certain ways, such as improve their protection of intellectual property rights. China sometimes retaliated, however, by canceling business with American firms.

Other arguments could be mentioned such as to trade measures to further foreign policy objectives, such as to impose a trade embargo or economic sanctions against a nation’s perceived enemies. However, we will instead concentrate on the need for nations to adopt national development strategies that impinge on their trade relations. This is the subject of the following section.

Intellectual justification for industrial policy

Since at least the publication of Adam Smith’s The Wealth of Nations in 1776, free trade has been embraced by increasing numbers of countries such that today almost no nation (disregarding exceptions such as North Korea) rejects the notion that free trade is the best policy for global prosperity. Nevertheless, there is no doubt that strong undercurrents of protectionism persist. The challenge was to overcome the persuasive arguments for protection (see previous section), but also to see if trade relations among countries was somehow not fair. The lack of “free trade” began to be recognized in the 1970s as first Japan and then other Asian countries were seen to use highly successful export promotion strategies. In a pure sense, such trade and industrial policies represent government intervention so are unfair. Yet in a practical sense it seemed only natural for governments to adopt effective economic development policies to compete with the advanced countries. The theory of free trade was to catch up with the realities by the 1980s and 1990s in what was called New Trade Theory. A number of economists (famously including Paul Krugman) argued that in many modern industries the world market would not support new entrants because the industry was dominated by those firms already there, having gained “first-mover advantage”. These firms had achieved the necessary economies of scale and learning curve advantages. Free trade policies did not allow latecomer countries to participate because their emerging enterprises could not overcome such “barriers to entry”! This rationale is explained in the Window, avoiding the terminology and rigorous arguments of economists for a more general understanding.

See Window: Strategic Trade Policy

Note the conclusion: Free trade rationale still prevails. Nevertheless, industrial policies in Asia have been an important tool for trade and development, and they will be discussed now.

THE POLITICAL ECONOMY OF ASIAN TRADE

THE POLITICAL ECONOMY OF JAPANESE TRADE

The Japanese have put together the political and economic institutions of capitalism in ways that differ from the Anglo-American model and this Japanese configuration has many different tradeoffs, not all of which have as yet become fully manifest to either the Japanese or Japan's competitors. The most obvious tradeoff is that in return for lesser levels of political participation than those prevailing in the United States, Japan has obtained a comparatively more effective and more efficient public economic policy. (Johnson, 1985:65)

What had been "efficient public economic policy", however, by the 1990s has turned into "an amorphous swamp of bureaucracy and ruling party" (The Economist, 18-4-2002). In this section we look at how Japanese capitalism worked so well for so long, and then became bogged down in a quagmire from which it appears unable to extricate itself.

The political economy of Japanese trade has been emulated to a greater or lesser extent by many countries in Asia. Japanese trade practices have been the object of much controversy, however, largely because of the protectionist tendencies of any model that institutionalizes government intervention to such an extent. Perhaps another reason the Japanese approach has been so vilified is due to its very success --Japanese success in the 1960-80s went hand-in-hand with economic difficulties among its trade partners, notably the USA and Western Europe. The low-growth world economy of the 1980s made international trade effectively a zero-sum game.

Deliberate government programs and guidance in trade relations, and other activities to achieve national competitiveness, is called trade policy; or, to cover international business more broadly, industrial policy. Modern industrial policy is an adjunct to and complements a government's monetary and fiscal policies. Such government activities go well beyond the more traditional macroeconomic policies. It implies the infusion of goal-oriented, strategic thinking into public economic policy.

All governments in the world engage in industrial policy, and it has become increasingly sophisticated, especially since the notorious success of Japanese industrial policy. The issue, therefore, is not whether industrial policy exists in a country (though the USA, for one, has been ideologically opposed to any government role in business, at least until the Clinton administration). The issue is whether industrial policy is ad hoc, incoherent, and pushed by pressure groups into ill-conceived policy priorities; or whether it is long term, systematic, and in the whole national interest.

Areas of industrial policy concern labor relations, productivity programs, pay policy, training and education, etc. Besides these macro-policy areas, industrial policy can include micro --targeting of desired new industries, state investment in enterprise, and related policies. Policy tools commonly include administrative guidance, tax incentives, subsidies, tariffs and a wide variety of other so-called non-tariff barriers. Some measures are considered more protectionist than others. The criteria as to whether government intervention is protectionist is not easily defined, but generally government intervention which promotes rather than inhibits competition is seen as more 'positive', i.e., less protectionist.

The Role of MITI ³

The essence of Japanese industrial policy is that the Japanese model of state intervention in the market contributed to the active definition and realization of comparative advantage. This constituted the first serious challenge in the post-war era to traditional advocates of free trade on the basis of comparative advantage, and resulted in the conceptualization by Paul Krugman and others of the New Trade Theory.

The Meiji Restoration commencing in 1868 marked the beginning of Japan's drive to industrialize, led by strong government initiatives. The arrival of the American navy in 1853 had forced Japan to open up to foreign trade after 250 years of self-imposed isolation, and a series of unequal commercial treaties forced Japan to accept a flood of imports. Japan's leaders had to face the reality that they might soon become another Western colony unless they modernized. Lacking capital, commercial skills, modern technology and infrastructure, all these shortcomings created a clear imperative for rapid, government-led industrialization.

The government initiated the process by establishing their own state-owned enterprises in strategic sectors such as shipbuilding, then transferring them to favored individuals. (Occurring in the late 19th century, this represents perhaps the world's first privatization program.) This process resulted in the formation of the large industrial and financial combines called zaibatsu, which were the pre-war predecessors to today's keiretsu. The first zaibatsu, Mitsubishi, was formed in 1893. Mitsui and Sumitomo were formed in 1909 and 1921 respectively. Many more had their origins in the first two decades of the 20th century. The focus of the new industries was outward-looking, to match Western development and deal with the West on equal terms. This meant in practice to develop export industries that could compete in the world market.

The institution with primary responsibility for post-war industrial policy in Japan has been the Ministry of International Trade & Industry, famously known as MITI. Johnson identified four activities MITI undertakes to promote competitiveness in Japanese industry.

1. indicative planning, or 'visions'

2. coordination of lending policies

3. targeting new industries for the future

4. phasing out old industries

The term 'indicative planning', also sometimes called 'incentive planning', can be easily differentiated from the planning mechanism of the 'command economies', i.e., the former Communist countries. Typically in the latter case, a Five Year Plan promulgated by the Economic Planning Commission of China, for example, laid out in detail what every government department and economic enterprise would do to meet production targets; thus, supply and demand were set by government edict rather than by the market. (China today is much less a 'command economy' than during the days of Mao Zedong.) Indicative planning in Japan, in contrast to the command economies, involves medium-term econometric forecasting of industrial performance and working out any needed changes and developments. It entails, for example, comparisons between Japan and major competitors on cost structure.

To conform with the plan for industrial development, MITI arranged allocation of capital to preferred sectors through commercial bank lending policies which were guided by the Bank of Japan and the Ministry of Finance. Financial support also implied an indirect coordinating role (not control) of the industry by MITI.

Through 'targeting', industries judged as the future engines of the economy are identified, and necessary policy measures to promote their creation and development implemented. The criteria for an industrial sector to be targeted were two: technological possibilities for rapid productivity growth and/or high income elasticity of demand.

Until about the 1980s, the policy orientation was to protect targeted infant industries from foreign competition. This was achieved through various market controls, including foreign exchange control (until 1964) and imposing technology licensing requirements on foreign investors (until the end of the 1970s). Contemporary measures have been more positive, or pro-competition, such as tax incentives, other financial assistance, and research cartels. Until after the 1979 conclusion of the Tokyo Round of trade negotiations, Japan's tariff rates were higher and quota system more comprehensive than most other industrialized countries; still today hidden (non-tariff) barriers to trade make Japan famously impenetrable.

Targeting allows the concentration of scarce resources such as financing and R&D, to focus competitive efforts more effectively. The USA, with its larger and more varied industrial base, never saw the need to limit its competitive scope so specifically. To an extent, this difference in approach may explain why Japanese exports are dominated by relatively few product areas --such as automobiles, electronics, precision machinery, and steel (Itami, 1994:32), making their impact so devastating to international competitors in those industries.

Phasing out old industries no longer in the scheme of things and shifting to the newly targeted areas of competition is termed 'industrial restructuring'. Getting rid of the so-called 'smokestack' industries in Europe and the USA --industries that had marked their greatness-- caused bitter strikes and political turmoil. Japan saw the need for a coordinated strategy, to overcome resistance by labor unions, industrialists, and others with a vested interest in the status quo. Through special legislation written by MITI and passed in 1978 (amended in 1983), MITI was authorized to draw up divestment plans that allowed for some cost sharing by government. Japan was able to efficiently phase out shipbuilding, textiles, and other labor-intensive industries being taken over by Korea, Taiwan, and other Newly-Industrialized Countries.

This approach led to the rise of Japan to become the second largest economy in the world. The same formula today, however, seems to be leading to an irreversible decline: "During its heyday, MITI was a master of picking and backing winners. But that was when things were going well. When things go badly, the ministries neither propel forward any individual to take charge nor do they provide the institutional impetus needed for corrective action. ...In short, the status quo is a recipe for failure." (The Economist, 18-4-2002)

The Government-Business Relationship

Liberal theorists would argue that Japanese industrial policy cannot work in the long run because businesses rather than bureaucrats should be better at all the things done by MITI and other ministries. Despite the theory, industrial policy worked exceedingly well at least until recently, because of the particular political economy of Japan --less political interference by special-interest pressure groups, yet more interference by economically rational government agencies in the overall national interest.

The means by which the government-business relationship operates is through a triangular, mutual support system among three parties:

1) the bureaucracy,

2) the politicians (specifically, the ruling Liberal Democratic Party), and

3) big business.

First, an elite, meritocratic bureaucracy formulated virtually all industrial policy to direct business along the desired path. "Japan's economic bureaucracy is probably the most powerful of that in any contemporary capitalist democracy, but it is also the smallest, cheapest, and imposes the lightest tax burden of any capitalist democracy." (Johnson p 61) Bureaucratic power in Japan operates through competition among the various ministries to provide administrative guidance to industry. A job in a key ministry was the most prestigious in the country so bureaucrats were recruited from the top universities, particularly Tokyo University. Through the practice of amakudari, or descending from heaven, bureaucrats often retired early to top positions in big business, industry associations, or to run for parliament. This cross-fertilization, and common school ties, created old-boy networks among the top ranks of business and government.

Thus today's elite bureaucrats are like descendants of the samurai, the warrior administrators of feudal Japan; and now they are in charge of an industrial economy and seemingly trying to keep it functioning to the pleasure of old loyalties. Instead of monitoring the industrialists and forcing restructuring, they collude together for subsidies in a mutual "tradition of obfuscation of responsibility". (The Economist, 18-4-02).

Second, the elected parliament (Diet) rubber-stamped policies written by the bureaucracy. The Japanese Diet is weaker politically than the parliaments in most Western democracies, though not when political pressures become more intense as during elections. Although the politicians have to make bureaucratic policy conform to popular expectations, in general politicians have not imposed their political agenda on the bureaucracy. "In postwar Japan, an informal relationship between the Diet and the economic bureaucracy has developed in which the Diet reigns but the bureaucracy actually rules." (Johnson, p60) The political overlords could be voted out of office, but the bureaucrats remained to keep the system on course.

Today's elected politicians thus do not engage in forming policy, rather they act as mediators between the bureaucrats and the voters, with their main interest to deliver favors to their districts. So while this helped the bureaucrats direct the economy successfully for so long, today it has become an opaque one-party political system, manipulated behind the scenes by corrupt, conservative old-guard politicians attempting to garner more goodies for their constituencies, with no prime minister able to wrest real power from the various factions and exert political leadership.

Third, big business kept the Liberal Democratic Party in power almost uninterrupted since 1948, through a patrimonial system whereby enormous financial support is provided for the election campaigns of conservative politicians. Zaikai, which translates as "business world", is represented by a number of associations. The biggest and most powerful business federation, the keidanren, brings together leaders of over 100 industry-wide associations and around 800 keiretsu, its large corporations. Since the mid-1950s it was a major influence in Japan's industrial policy, both as a discussion forum and as a source of political donations. The banking sector is brought in through the keiretsu's in-house bank, which in turn is influenced by the Bank of Japan. There are also presidents' clubs, chambers of commerce, and other policy clubs and advisory councils.

A fourth point made by Johnson allows, in a sense, the three linked constituents in the triangle to coordinate policy together with minimal challenge. This 4th point is the less-developed and less-utilized legal system. Unlike America, Japanese administrators have more discretion to make and implement policy. "If a Japanese thinks that the executive branch has exceeded its mandate or is interpreting a law in an undesirable manner, he will not easily obtain relief by turning to the courts, which are also notoriously slow." (Johnson p61) Still today, Japan's "supine judiciary" (The Economist, 18-4-02) is loath to challenge centers of power.

The triangular relationship in Japan represents a partnership of equals, unlike in many other Asian countries where the government itself is more dominant. Mutual interdependence is evident: the bureaucracy needs the approval of the Diet for its policies and must maintain close ties with the LDP which dominates the Diet. The zaikai supports the LDP with financing, in return for business privileges devised by the bureaucracy. A conspiratorial network is easily perceived, founded on patronage, which Chen(1995:159) called "a triangle of corruption, breeding one scandal after another."

Conceptualizing the Japanese Model

Johnson identified four rather miscellaneous points as "other things one needs to know" (p62) to understand Japanese competitiveness.

1. The basic outlook of the Japanese is quite nationalistic. This attitude has been characterized by other writers as a 'siege mentality'. Japan as an isolated, island state, with few natural resources, and historically surrounded by hostile neighbors, has always felt vulnerable to the outside world and perceived a need for national solidarity and constant vigilance against threats such as foreign competition. Many other Asian nations share this psychology, including South Korea, Taiwan and Singapore, at least.

2. The behavior of the peculiarly Japanese business institution, the keiretsu, is a topic for later study.

3. Emphasis on bank lending rather than share market financing, and the cooperative bank-government approach to protect industries they have invested in, created a different form of capitalism. This also is the object of later study.

4. A stable labor market since the 1950s was an important competitive advantage. Orderly labor-management relations, which especially contrasted with European trade-union militancy at least until the mid-1980s, and the lifetime employment system, discussed later, were instrumental.

The Economist⁴ (which advocates the liberal perspective on issues of political economy) offers three theories of Japanese success:

Liberal

Industrial Policy

Enterprise Culture (or, Japan is Different).

Liberal theorists favor explanations for Japan's economic success based on efficient capital accumulation, and the free operation of markets to allocate these resources most profitably. In this view, the Japan is Different and (especially) Industrial Policy schools of thought are off the mark. To extreme liberals, Japan must have achieved its success despite government intervention in the economy. Furthermore, Japan's different business culture could only have played an incidental role in the country's economic success.

The Liberal school credits the efficient capital formation to some extent on the government getting its policies right, by encouraging savings and nurturing small enterprise. Gross national savings amounted to 30-40% of GDP since the 1950s, among the highest in the world. Consumption constitutes just over 50% of GDP, smaller even than Germany. With inflation and interest rates consistently very low, capital was available for investment at a low cost. Thus, stable macroeconomic policies were the main contributing factor.

The policy to nurture small enterprises promoted entrepreneurial spirit and competition. Japan is unusually dependent on small enterprises --"the self-employed and their unpaid family workers account for nearly a third of the labor force, compared with less than 10% in Britain and America." (p12) Although much of this workforce exists because of protection of farmers, manufacturing depends heavily on small contractors and suppliers. The constant exit and entry of numerous small and medium-sized businesses keep the economy dynamic and adjustable. Inter-firm rivalry is fierce, and only the strong survive.

Fortuitous circumstances also contributed, since Japan as a late developer could imitate rather than innovate and compete with the advanced western countries on a cost basis. The timing of Japan's rise coincided with the post-war trend toward trade liberalization, as well as rapid growth of the international economy that occurred during the 1950s and 1960s.

The second theory, Industrial Policy, was the object of prior analysis here. Johnson and others described the national plans, with measures to achieve the plan. A key aspect of planning that contrasted with Communist countries was that the many 'visions' obliged nobody to do anything --being incentive-based, not command-based plans. So industrial policy could blend in with the macroeconomic policy more acceptable to liberals. Among the most constructive Japanese government programs included R&D projects supported by MITI, and the redirection of funds released by declining industries to be spent on training and relocation. Ill-advised policies were also pursued, such as massive support and protection for agriculture and restrictions on land use. One spectacular failure was the Fifth Generation computer project during the 1980s to put Japan at the forefront of artificial intelligence, which created hardware and software incompatible with the global standard set by America's unregulated industry.

A key aspect of Industrial Policy was the pro-business (and by implication, anti-consumer) bias of the government. Again, it nurtured savings, helped enterprises --notably small firms-- rather than pursuing welfare-oriented policies, protection of citizens from capitalist exploitation, or other classic mistakes of Western government intervention.

The third theory shares the same key aspect just mentioned, that is, a pro-business bias. (Lester Thurow famously depicted Japan's "producer economics" as their key source of success.) The idea is that Japan has a more competitive 'enterprise culture', developing the kinds of enterprises, management style, and other systemic features that have special advantages. Various institutionalized values, processes or structures may be mentioned, including their cooperative labor relations; strong group orientation and sense of loyalty; networks of enterprises (the keiretsu); reliance on bank financing rather than (arguably) the more short-term oriented shareholder capitalization of firms; lifetime employment practices; and others.

Take the keiretsu, for example. Toyota was Japan's biggest industrial company by sales in the late 1980s, producing 4.5 million cars per year with 65,000 workers. General Motors produced 8 million with 750,000 workers. So Toyota's output per worker was 6.5 times better. One reason given for this evident efficiency is that Toyota depends far more than GM on a huge network of independent suppliers and subcontractors (47,308 in the early 1980s!). Cross-shareholdings among Toyota and its affiliates cement a strong business relationship, but Toyota's suppliers do not work exclusively for Toyota nor does Toyota buy all its parts from one supplier; thus internal rivalry keeps the network of enterprises competitive. In contrast, GM in the 1980s had much of its car-production operation under one roof through wholly-owned subsidiaries or even the same management hierarchy --affiliates are thus captive markets.

Another implication of this is that Toyota may minimize internal 'transaction costs' by operating through trust and long-term relationships among its affiliates rather than through contractual or ownership obligations as at GM.

The keiretsu networks also promote other distinctive features of Japanese enterprise culture. Lifetime employment is largely confined to the main firms, with lower-level affiliates having a more flexible workforce. Their labor market flexibility combines with employment stability at the centre which allows heavy investment in training.

But keiretsu networks are accused of being protectionist by excluding outsiders from the network's business, making it harder for foreign firms to enter the Japanese market. In the longstanding US-Japan row over auto parts, for example, the Americans argue that strong ties between Japanese car makers and their suppliers have shut out foreign component manufacturers. Thus, as to whether the Japanese system is more open, or more closed --than General Motors for example-- the answer depends on the degree of competition allowed in practice.

Japan's golden era went unchallenged through the mid-1970s when the government controlled extensive means for subsidy, access to capital, licensing, and tariff protection. Gradually pressures to liberalize capital markets, internationalize Japan's economy, protect the environment, lessen the heavy hand of government in business, and eliminate protectionism, all have led to a lesser role by the ministries, greater politicization of policy making, and other gradual adjustments to the post-war model.

THE JAPANESE ECONOMY TODAY^4(Ibid)

From 1950-1990, real income per head in Japan grew on the average at 7.7% per year, a growth rate "unsurpassed in the history of the world" (p1). In the 1990s, however, Japan's economy plunged into a deep recession. What went wrong; and will things get back on the right track again? These are the questions we will address here.

The Bubble and How it Burst

By the end of the 1980s the long prosperity and low cost of capital had allowed an almost uninterrupted bull market in the stock and property markets. But credit from banks involved a certain misallocation of investment capital. As with many industrialized countries at the time, "finance was generally segmented (particular institutions were expected to carry out only a narrow range of functions); controlled (the authorities put quantitative limits on lending, many interest rates were either set or heavily influenced by the government, and so on); and protected (foreigners, as well as domestic competitors from other segments of the industry, were kept out)." (p5) During the 1980s banks were deregulated; also equity markets, less-utilized in earlier eras, became a new means of raising capital and for investing. Legislation in the 1980s (not unlike what was happening in other industrialized economies) allowed banks to compete with securities houses and vice versa; new laws also permitted new instruments, and freed interest rates. This process of financial liberalization promoted innovation in banking and changed the pattern of capital flows.

The banks' traditional function was to channel savings from households to firms. Japan had favored a particularly intimate form of 'relationship banking' whereby keiretsu-affiliated firms were clustered around one group bank. The bank, in turn, owns shares in the companies and fosters their long-term development. The banks lent heavily to manufacturing in the high growth years, but with reform, banks began lending more to new customers, not only their own keiretsu members.

New financial instruments and markets developed. Firms began issuing equity-related securities instead of relying on bank loans. Banks still expanded their lending, since monetary policy was loose, but now much more to households and service firms (notably property firms) instead of their old manufacturing clients. As financial and property market prices rose precipitously, even manufacturing firms used some of their debt and equity capital to buy financial assets! The process fueled itself with rising asset prices serving as added collateral for more borrowing and higher expectations. The high yen and easy credit also financed Japanese FDI overseas.

Numerous borrowers took advantage of the low interest rates and appreciating asset values and invested in property and financial assets. Banks sometimes offered excessively high returns on deposits or cheap loans, to compete for business. Property values skyrocketed so high that in 1990 the Imperial Palace grounds were worth more than all the land in California!

Then, the inevitable tightening of credit began in 1989. The Bank of Japan gently tightened money supply to control inflation, but market psychology shifted dramatically. Asset values plummeted. Banks ended up with land collateral of much lesser value than the loans on their books. The fall in share and land prices represented a huge contraction of household and corporate wealth. Growth in the money supply slowed and then turned negative. Demand fell. Many companies (especially those that had gambled on property) were unable to service the debts they had recently taken on. After 1990, the number of bankruptcies increased sharply. In 1996, the Japanese government engineered a $6.3 billion rescue package for seven failed mortgage companies, and taxpayers were not happy to accept the burden. Today the financial system still wears a huge lump of bad debts, estimated at 170 trillion yen by The Economist in 2002, property prices are down by 84% since 1991 in the biggest cities, unemployment reached a postwar high of 5.6% recently, and a succession of 11 prime ministers (including Junichiro Koizumi) since 1989 have all failed to accomplish significant reform.

Demise of the Japanese Miracle

Perhaps the nature of the problems Japan must solve cannot be addressed with the old formulae. Industrial Policy could succeed easier while Japan was a follower society --with its proven skills in acquiring and adapting foreign technology, Japan thrived on simply being quicker than most free economies to exploit a good idea that may surface in the USA or elsewhere. However, innovation, not conformance, seems more appropriate of a society at the advanced frontiers of development.

New problems are becoming apparent with Japan's maturity. The biggest single threat to Japan's prospects may be that the social consensus on which Japan has built its success is breaking down. Japan managed to preserve into the late 20th century a kind of society that largely vanished in less successful traditional countries. The native religion, Shinto, and the Confucianism imported from China, put family loyalty as a supreme value; and the family extends today to the captain of industry and his assiduous workforce.

The society is changing, becoming more politicized and disenchanted with the spate of political scandals. Political reform is long overdue but was put off as long as incomes were rising. The extraordinary rise in land prices widened the distance between rich and poor. Workers and consumers who had sacrificed in the past now are less willing to simply do what the government, the company, or the family tells them --Japanese are becoming more liberal, in other words.

Capital accumulation must inevitably decline as Japan's aging population spends their savings. In anticipation of old age, savings increases, but it decreases when old age is reached; thus the savings rate is less predictable. By the year 2025, Japan's percent of population aged 65 and over is projected to be higher than any other country in the world; a time bomb is planted in the state's pension, health, and insurance systems. Japan is thought to have the least sustainable pension system among all the industrialized countries.

The low cost of capital is less sustainable in the long term if Japan's capital and foreign exchange markets are open to the world. Network insiders have less access to cheap rates from relationship banking. Banks, trying to resolve the financial mess of the collapse, make harsher credit appraisal for loans and charge higher costs.

The keiretsu is under pressure as the sharply reduced domestic demand tests the conventions of loyalty that bind the networks together. The system of cross-shareholdings that cements the bond among member firms is finally going into reverse as the shares they hold lose value. Also, now that interest rates are deregulated (hence, competition prevails among banks), bankers cannot secure member firms' custom simply by owning shares in them; so they are more willing to sell their stakes. Furthermore, the keiretsu's bank cannot save the struggling parts of the network; lifetime employment is no longer sustainable as the well-established tradition of job rotation --moving workers around in the system-- cannot be done because different parts of the system can no longer absorb workers from others in a worse position. In fact, employment was already over-inflated during the expansion of the bubble.

However, adjustments are being forced on Japan by adverse economic conditions. Declining cross-shareholdings might improve corporate governance, with more ownership by outsiders that have an impersonal stake in the firm's performance. And, such a change could help ease trade tensions.

As Japan debates its future, a multitude of ideas are being aired. (See endnote ⁵.)

The 1993 survey in The Economist (6/3/93:18) ended on a note of optimism. "The crucial sources of Japan's strength are in the methods and institutions ... likely to endure." Thus, the magazine seems to be relying finally on the Japan is Different argument. The uncertainty is how long they can remain different --indeed, do they even want to?

A more recent appraisal is just as ambivalent as the earlier survey. The Economist in 2002 predicts that "Japan will muddle through in its own consensual way. Inexorable economic and social forces will gradually impose their alternatives, and the bureaucracy and political system will adapt." This is not a happy ending, for Japan seems destined for relative stagnation for years to come; but the country still remains prosperous, with efficient public services and low crime, and a cooperative, frugal culture.

INDUSTRIAL POLICY IN OTHER ASIAN COUNTRIES ⁶

An appropriate name for the Japanese model was provided by Chalmers Johnson (1985:62). He characterized Japan as a "developmental state"; this label has subsequently been adopted to apply to many other emerging Asian economies who have followed, with varying degrees of conformance, the Japanese economic model. The issue of politics in a developmental state is to promote national competitiveness; politics should serve the economy rather than having political liberalism as the end purpose. Thus, the issue of government intervention is viewed pragmatically, not ideologically.

The countries quickest to follow in Japan's footsteps to industrialize relied upon a great deal of government intervention, including South Korea, Taiwan and Singapore. Hong Kong was the exception, adopting laissez faire policies in keeping with the approach of the British administrators. Among the second generation of successful Asian economies, Indonesia and Malaysia were slightly less interventionist, largely due to a poor experience with early government import-substitution strategies (read endnote ⁶),

whereby industrial development emphasized self reliance, to make products that would otherwise be imported rather than promoting exports. Thailand and coastal China have tried to minimize government intervention, relying on multinational investment to spearhead development.

Governments can inhibit national development through excessive bureaucracy, politicization and corruption of the business class, ill-conceived plans, and creating uncertainty and instability in the investment environment; or, as in the case of Japan, bureaucracies can facilitate reform and be agents of development. "Contrary to the currently fashionable views worldwide, one of the key ingredients in East Asia's success was active government. But it was not more government which had a positive effect --it was better government." (p6) In Korea, Taiwan and Singapore key ministries were instrumental. "At the core of development success in East Asia has been pragmatic policymaking --meaning, most importantly, the relative absence of ideology and the willingness to repudiate failed policies." (p4) Japan's experience, especially in contrast with failed quasi-socialist approaches in much of the Third World during the first three post-war decades, probably also confirmed the importance of getting the policies right --particularly policies for investment in human resources, outward orientation, providing a competitive climate, and macroeconomic stability. Macroeconomic stability required fiscal discipline and adequate incentives for saving and investment.

Industrial policy approaches in selective countries are briefly described below.

South Korea

Korea's industrial policy was most pronounced under Park Chung Hee who came to power in 1961. The approach differed from the import-substitution policies of India and others (that were destined to failure), in that export performance was emphasized. The basic strategy was to pursue Korea's comparative advantage in labor-intensive industries. Under the capital-intensive Heavy and Chemical Industry (HCI) campaign commencing in 1971, the government designated six specific industries for special incentives and protection: steel, shipbuilding, machinery, electronics, petrochemicals, and metals. The goal was international competitiveness in these industries within the decade. To this end, the authoritarian government controlled bank financing and capital investment more stringently than perhaps any other non-Communist East Asian country.

Although Korea's economic miracle generally is credited to this policy era, the merits of the policies were controversial. A critique of East Asian economic success by Paul Krugman and others concerned whether 'total factor productivity' improved, or whether they simply achieved profits as a result of accumulating more investment and labor and competing as a low-wage country. Also, long-term costs may be understated, in terms of environmental pollution, wage repression, and underdevelopment of the financial sector due to government-directed credit and government risk-bearing.

Korea abandoned the HCI drive at the end of the 1970s, faced with rising costs resulting from the second oil shock. Since that time, and coinciding with the assassination of Park in 1979, the government grip on industry and the financial system loosened somewhat. National planning was still central to development, moving for example to technology-intensive strategies in the 1980s and to liberalization of the domestic banking and financial regime in the 1990s. By the advent of the 1997-8 Asian Financial Crisis, the Korean government was gradually stepping back from its long-implicit guarantee of banks and the giant chaebol corporations. The crisis afterwards led to reforms that required the government to reduce its role further.

Singapore

The Singapore government has been able to take advantage of the small size of the administrative unit to implement very effective industrial policy, and the hands-on approach continues today with ongoing success. Lacking a sufficient local base for capital, entrepreneurs, and technology, the economy has relied on multinationals; the government thus saw a necessity to create a very open, free-trade regime to be more acceptable to foreign investors. Singapore has been called a corporate state because government operates rather like the board of directors of an investment holding company. Government-linked companies spearhead domestic investment. Heavy investment in infrastructure and in education, macroeconomic stability, and incentives for desired industry have effectively attracted FDI.

The Singapore government charts its course to the future with evident creativity and precision. (See Appendix A.)

The First Five Year Plan was founded on labor policy. Legislation of the late 1960s to attract MNCs delineated employment regulations, labor relations and worker benefits. A National Wage Council set up in 1972 was a tripartite forum (business-government-labor) to make wage increases conform to productivity gains and cost of living. To balance the government's interventions in the labor market to keep wages competitive, social policies were designed to improve housing and living standards.

To promote high-tech investment, the government dropped the cheap labor policy at the end of the 1970s and promulgated a high-wage policy. When Singapore subsequently experienced its first severe recession in 1985, the government reversed course, decreasing labor costs by 12% through a large reduction in employer contributions to the national pension fund. The wage cut demonstrated the benefits of the strict controls over labor relations earlier institutionalized. The entire exercise also demonstrated the flexibility of the government to change course effectively.

Indonesia

Indonesia, impoverished in the 1960s, an oil economy in the 1970s, and investing in inefficient state enterprises in the early 1980s, by the 1990s had become another East Asian dynamo. Indonesia's import-substitution policy until the mid-1980s constituted strict controls over entry into industry, local-content requirements, and other requirements for foreign investors, as well as high trade barriers. Local industry, mostly state-owned enterprises, attempted to move into 'upstream activities' and produce more 'value-added' to escape from the low returns of commodity-based extractive industries. These industries typically suffered from adverse 'terms of trade' compared to the sophisticated technological-based industries of the advanced countries. The state's foray into steel, plastics and petrochemicals was a failure.

In the late 1980s Indonesia changed course, to lower the protective barriers against imports, facilitate foreign investment, reduce the public sector, and decrease industrial concentration in only selective industries.

Indonesia's attempts to nurture new industries in aerospace and cars were abandoned after the presidential election that removed President Habibie from office. These industrial policies, mostly associated with Habibie when he was technology minister, were directed at building up advanced industries with massive government support. The idea was to leapfrog ahead in the development process by preparing a high-technology industrial base through government initiative. Most orthodox economists are skeptical of such policies, and the involvement of President Suharto’s son Hutomo (Tommy) made the economics more doubtful still. In February 1996, Timor Putra Nasional, controlled by Tommy, was awarded exclusive import tariff exemption for a "national car" project; in June 1997 the government announced the Timor car would be the official government transport.

In the post-Suharto era, the less secure political successors have not succeeded in achieving much effective strategic trade policy.

Malaysia

Malaysia instituted a "Look East Policy" in 1981, to learn from Japan. A fundamental strategic shift was made in the early 1980s to ensure the private sector would be the primary engine of growth. However, its Fourth Five Year Plan (1981-5) had vestiges of its earlier import-substitution policy. Malaysia employed Korean advisors to target winners, and created a holding company, Heavy Industries Corporation of Malaysia (HICOM), to carry a core of critical heavy industries. The symbol of this policy was the national car, Proton Saga, heavily subsidized and protected from import competition. Mounting deficits caused a policy reversal in the last half of the decade, including more privatizations. Behind high tariff walls, the Proton at least was a success; so much so that a new automobile project was introduced.

The Malaysian government's current concept for development is called "Vision 2020", to become a fully industrialized country with state-of-the-art infrastructure by the year 2020. Plans incorporated into the '20-20 vision' included a 750 square kilometer "multi-media super-corridor", a new airport to surpass even Singapore's Changi Airport in grandeur, a new administrative capital, and the world's tallest building. As a result of the economic crisis in 1997-8, some of the plans were deferred such as a hydro-electric dam (which also faced challenges from environmentalists).

Taiwan

Taiwan benefited from an infrastructure built during Japanese occupation, then inflow of entrepreneurs from China and generous US aid after the Kuomintang expulsion from China in 1949. But domestic policies are credited for its very rapid industrialization. Taiwan's success is highlighted by effective land reform in the early years and an export drive during 1958-72 which resulted in average growth of 12% during 1963-72. There was an import substitution phase during 1953-57, and then again the 1970s witnessed large infrastructure investment and emphasis on self reliance in a world increasingly aligning with mainland China. State-owned enterprises played a role, and many were unprofitable. The more favorable political climate of the 1980s allowed a switch back to liberal, open policies, resulting in massive payments surpluses and internationalization of domestic enterprises.

Thailand

Thailand's economy has grown consistently since the 1950s, with policies favoring foreign investment (with heavy participation by the Japanese) and private sector development, export orientation, and macroeconomic stability. Thailand has lacked the state apparatus of many other Asian countries and so has avoided both more effective intervention and costly industrial adventures.

Hong Kong

Hong Kong began a famous export drive a decade earlier than the other early Asian NIEs, in the early 1950s. For most of the four decades leading to the 1997 handover to China, Hong Kong had one of the highest growth rates in the region, but the industrial policy under British colonial rule had been one of "positive nonintervention". It's fortunes relied on migrant industrialists, largely from Shanghai, and local merchants, and since the 1980s their prosperity has been closely tied with the opening of China. The growth of the adjoining province of Guangdong is credited to the role of private investors and entrepreneurs from Hong Kong, rather than state intervention.

Other emerging Asian Economies

The Economist⁷ identified three ways in which Southeast Asian capitalism differed from the earlier Japanese and Korean models: more openness to foreign investment, less reliance on industrial policy, and being quicker to allow financial markets to develop.

In their determination to build national industrial champions, the Japanese and Koreans established careful restraints over the activities of foreign investors.

The Economist concedes, "The distinction between Northeast and Southeast Asia is more blurred when it comes to industrial policy." The distinction might be an earlier respect for market forces in Southeast Asia, ensuring government followed market forces instead of trying to govern the market.

Concerning financial markets, in the early stages of South Korean and Japanese industrialization, business finance was confined to bank lending which in turn was confined by government policy. In contrast, Thai, Malaysian, and Indonesian stockmarkets were important early in the path to economic development. Foreign flotations have also been allowed.

China and India, Asia's two underdeveloped giants, seem to follow the Southeast Asian model. Both countries court foreign investment (India only since 1991), and both encourage foreign investors to raise capital through their local stockmarkets. Both China and India may be reacting to the failure of their import-substitution, directed-lending and industrial planning of the 1950s-1970s.

The Economist closes with a point also made by Chalmers Johnson, Lucian Pye and others. Early developers in Asia benefited from the Cold War policy of the United States to allow its allies to develop through closed markets; but this policy waned in the 1980s and went out the window in the 1990s. Furthermore, today it seems wise to take advantage of sophisticated international capital markets and investors.

APPENDIX A: PLANNING IN SINGAPORE

Singapore has attempted perhaps the most comprehensive social and economic planning of any modern nation. Yet, Singapore does not resort to centralized direction of economic and business activities. The modus operandi is instead exemplified by the relatively loose 'indicative' planning, such as practiced by France, rather than the planning of Communist countries which often relied on state guidance for the achievement of each goal. The national economic planning is based upon an interlocked political-executive pattern of policy making, coordination, and resource allocation.

In September 1989, all national planning activities were consolidated under the Urban Redevelopment Authority. URA also coordinated other inputs such as a National Information Technology Plan devised by Singapore Telecommunications and other authorities, contributions from the private sector and professional institutions, and public dialogue. The Concept Plan released in 1991 guided the preparation of Development Guide Plans for 55 planning areas which collectively formed a Master Plan targeted for completion by 1998.

Peter Chen described the planning process in the early days, identifying a cooperative approach in the inner circles of government:

"There is no formal centralized planning body in Singapore. Planning and implementation are carried out by the various ministries and statutory boards in accordance with development priorities set by the government... Although each statutory board is responsible for solving a defined set of problems and for achieving certain goals, ... coordination among the various government ministries is fairly strong, largely because of the relatively small number of people in policy-making positions and their frequent interactions, and the planning mechanism is flexible enough to respond to changing conditions." (Chen,1983:20-21)

The early Jurong Town Corporation industrial plans and decentralized 'new town' concepts illustrate a deliberate, idealistic quality to Singapore's socioeconomic development all along. Just prior to the 1984 election the government announced (to the usual derision of the Western press) a master plan for national development projected to be achieved by 1999, known as "Vision 99". The 1991 Concept Plan, which was an update of this, adopted the slogan, Towards a Tropical City of Excellence, promising waterfront housing, 'green trails' linking a network of parks, 'technology corridors' for modern business complexes, a new seaside Downtown, enhanced public transport and 'regional centers' to reduce congestion --much of this development was achieved or is well underway.

Singapore is a society where planning is consummate, from the sublime to the ridiculous. There was even an official goal of becoming "a culturally vibrant society", which prompted a satirical remark from the Far Eastern Economic Review that "setting a target date of sometime in the 1990s is unnecessary and a bit strange". (24 July 1986)

In March 1996 Prime Minister Goh Chok Tong declared: "It is time to get a new vision for Singapore, and for the Government. What we hope to do is to make Singapore the best home... We can make Singapore the most attractive place to live, study, work, play and bring up our families... the best home to fulfill yourself." (Straits Times, 10 & 11 March 1996:1)

REFERENCES

1. Bergsten, C Fred (2003) “The Correction of the Dollar and Foreign Intervention in the Currency Markets,” Testimony before the US House of Representatives, June 25

2. Chen, Peter (1983)

3. Hill, Charles WL (2004) Global Business Today, New York: McGraw-Hill/Irwin, (3^rd edition)

4. Hill, Charles WL (2002) International Business, McGraw-Hill (2^nd edition)

5. Johnson, Chalmers (1985) "The Institutional Foundations of Japanese Industrial Policy," California Management Review, XXVII(4), Summer

6. Chen Min (1995) Asian Management Systems: Chinese, Japanese, and Korean Styles of Business, London: New York: Routledge

endnotes:
^{1. Patents grant exclusive rights

to manufacture, use, or sell a product or process. Copyrights grant exclusive rights to

reproduce, publish, or sell recorded or artistic work, such as literature, music, or

computer software. Trademarks are exclusive rights to designs, symbols, or other devices

which distinguish a particular product or service in the market.

². C Fred Bergsten (2003) argued
that every one percent decline in the dollar will produce $10 billion reduction
in the overall external deficit. However, dollar depreciation was hampered by
Asian countries fixing their currencies to the dollar to maintain export
competitiveness –especially China and Japan were singled out. In accordance with
the “theory of the second best”, Bergsten advocated offsetting Asian currency
manipulations with US government distortions in the other direction, i.e., by
selling dollars when Asian governments buy –answering government interventions
in kind!

^{2. Discussion

draws on the classic treatise by Chalmers Johnson, (1985:59-69); and

Chen Min (1995:151-160), "Government-Business Relations in Japan and Korea".

³.

Discussion draws primarily on "A Survey of the Japanese Economy", The

Economist, 6 March 1993, 14pp; also refer to
“What ails Japan,”
Survey Japan The Economist April 18^th 2002; "Survey: Asian
Finance” The Economist February 6^th 2003; “A Survey of
Business in Japan,” The Economist November 27^th 1999; "Survey Japan", The

Economist, 9 July 1994, 14pp; "A Survey of Tomorrow's Japan", The

Economist, 13 July 1996, 14 pp; "Japan's Debt-ridden Future", The

Economist, 3 August 1996, 25-26; "Japan Inc Frays at the Edges", The

Economist, 3 June 1995, 65-66; "Demythologizing Japanese Success", The

Asian Manager, April-May-June 1992, 69-71.

⁴.

Discussion draws on Danny M Leipziger and Vinod Thomas, The Lessons of East Asia:

An Overview of Country Experience, Washington: The World Bank, 1993.

⁵. Some of

the ideas being mooted in Tokyo include: a. budget reform, b. education reform,

c.

basic research, and d. deregulation.

a. To compensate for dwindling investment that results from the

declining savings rate, corporate tax was lowered from 50% to a more competitive rate to

attract foreign investors. As direct taxes fall, indirect taxes such as consumption tax

have to go up.

b. The present school system produced excellent engineers for the needs

of the old industries, but the new info-tech world needs a school system better at

encouraging individual talent and innovativeness. More independence from the Ministry of

Education for primary and secondary schools is being promoted.

c. Though Japan spends proportionally more than the USA on R&D, and

more of what it spends is privately financed, it does mostly applied research rather than

the basic research that is supposed to be the best stimulant for productivity.

d. Targets for deregulation are quite complex and poorly understood by

outsiders. Competition in the financial system is one area that is still too

compartmentalized, not to mention the multitude of protectionist measures against foreign

competition or just to protect businesses in one prefecture from competition across town.

"It is the piling up of thousands of such petty, price-raising rules that makes the

Japanese that tenth poorer than they ought to be." (p16)

source: "A Survey of Tomorrow's Japan", The Economist,

13 July 1996, 10-16

⁶.

Import-substitution as a development strategy was popular among left-leaning

economists from the 1950s-1970s and practiced by many of the larger developing countries

--almost inevitably with disastrous results because the resulting products and production

processes were not competitive. Related policy notions included heavy state investment in

and protection of national industry, and some hostility to foreign multinational

companies.

⁷. Discussion

draws on "Asia's Competing Capitalisms", The Economist, 24 June 1995,

p13.

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