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Class4.pptEast Asia
East Asia
Development, Crisis and Asian Values
East Asia
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Introduction
- Diversity in performance
- Participation in the regional production network
- Policy as key to economic success
- Authoritarian developmentalism as a dynamic and temporary regime
- The exit problem
- Democratic developmentalism?
Development, Crisis and Asian Values
Introduction (East Asia’s Uniqueness)
- The region is like a big factory where member economies compete
- Growth starts by participating in this regional dynamism
- The sandwich effect—pressure from above and below to work harder
- FDI as relocater of industries
- Clear but shifting order and structure (flying geese)
Development, Crisis and Asian Values
Introduction
- Development
- Crisis
- Values
Development, Crisis and Asian Values
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Development in East Asia
The aim of this module is to understand the rise of the East Asian region through analysing the interconnections between development and geopolitics.
The module adopts an historical approach beginning with an examination of the legacies of European and Japanese imperialism and the subsequent role of post-war US hegemony and Cold War politics in shaping development across the region.
It also examines the nature of the post-Cold War era for East Asia.
The module thereby provides a unique means with which to examine contemporary shifts in the distribution of global power.
Development, Crisis and Asian Values
Development in East Asia
- Japan’s economy took off in 1960s
- NIE’s (newly industrialized economies)
- Hong Kong, Taiwan and Korea
- “very high” growth in the 1960-1975 period
- “outstanding” growth in the 1975-1990 period
Development, Crisis and Asian Values
Development in East Asia
- NIE’s accumulated capital and increased labor participation at a much faster rate than other economies
- The increase in these two factors far from fully explains their exceptional growth rates
- productivity growth also accounts for a significant fraction
- Productivity growth
- Higher than that of United States
- Proportion of growth of GDP per person that is explained by productivity growth was not systematically different from those of Japan and the United States
Development, Crisis and Asian Values
Development in East Asia
- Growth of capital
- Hong Kong: “high”
- Taiwan: “very high”
- Korea: “outstanding”
- Public investment/GDP similar to other developing economies
- Private investment/GDP much higher
Development, Crisis and Asian Values
Development in East Asia
- Productivity growth
- Higher than that of United States
- Proportion of growth of GDP per person that is explained by productivity growth was not systematically different from those of Japan and the United States
Development, Crisis and Asian Values
Development in East Asia
- Interlocking cooperation
- free enterprise
- government financial intervention
- guidance-minded technocratic bureaucracy
Development, Crisis and Asian Values
- Chinese Development
- China Under Communism
- “Great Leap Forward” resulted in the death of 20 million
- Cultural Revolution of the 1960s – expulsion of many to “re-education” camps
- Toward a Post-communist Economy
- China seeks closer connections with the world economy
- Experimenting with capitalism
- Industrial Reform
- China opened Special Economic Zones (SEZs) in which foreign investment was welcomed and state involvement is minimal
- Economic growth is around 6-7%
Development, Crisis and Asian Values
- Chinese Development
- Social and Regional Differentiation
- Chinese economic reforms resulted in social and regional differentiation (when certain groups and portions of a country prosper while others fail)
- The Booming Coastal Region
- Most of China’s economic benefits have flowed to the coastal region and Beijing
- Interior and Northern China
- China’s interior and northern portions have seen little economic expansion; Manchuria is a “rust belt
Development, Crisis and Asian Values
Development and Aid Strategy
There is a clear gap in developmental thinking between Eastern practitioners and Western aid community.
Development, Crisis and Asian Values
| East Asia’s Way | Western Donors | |
| Goal | Economic prosperity and national pride | Poverty reduction (MDGs) |
| Policies | Industry, investment, trade, technology | Health, education, governance |
| Key actors | Central government and businesses | Local communities and people |
Growth policies—vision, strategy, technology, HRD, infrastructure, SMEs, FDI, trade, finance, logistics, etc.
Supplementary policies—inequality, pollution, urbanization, congestion, labor migration, corruption, drugs, HIV/AIDS, etc.
- Rapid growth always creates new problems, which destabilize society.
- Unless both policies are implemented, development will fail (Murakami).
- Success depends on these policies, rather than diligence or Confucianism
Development, Crisis and Asian Values
Development, Crisis and Asian Values
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Introduction
- East Asian Miracle
- Types of Crisis
- Beginning of Crisis
- The role of financial panic as an essential element of the Asian crisis.
- Impact of Crisis
- Role of IMF
Development, Crisis and Asian Values
Four Asian (Tigers East Asian Miracle)
- The Four Asian Tigers or Asian Dragons are the highly developed economies of Hong Kong, Singapore, South Korea and Taiwan
- These regions were the first newly industrialized countries, noted for maintaining exceptionally high growth rates and rapid industrialization between the early 1960s and 1990s.
- All four Asian Tigers have a highly educated and skilled workforce and have specialized in areas where they had a competitive advantage
Development, Crisis and Asian Values
East Asia Miracle
- Many factors have been identified as the cause of East Asia's relative success - outward orientation, high saving and investment rates, macroeconomic discipline, and other good public policies
- Each focused on exports to rich industrialized nations.
- Each of the Asian Tigers had high tariffs on imports and undervalued currencies.
- They had high interest rates attractive to foreign investors looking for high rate of return.
Development, Crisis and Asian Values
Financial crisis is a situation in which some financial institutions or assets suddenly lose a large part of their value.
It is a testament to the shortcomings of the international capital markets and their vulnerability to sudden reversals of market confidence.
East Asia Crisis
Development, Crisis and Asian Values
Diagnosing Financial Crises
Five Type of Crisis
Macroeconomic policy-induced crisis:
- Balance of payment crisis
- currency depreciation;
- loss of foreign exchange reserves;
Financial panic:
- case of multiple equilibria in the financial markets
- short-term creditors suddenly withdraw their loans from a solvent borrower
Development, Crisis and Asian Values
3. Bubble collapse:
- occurs when speculators purchase a financial asset at a price above its fundamental value
- In each period, the bubble may continue to grow, or may collapse
4. Moral-hazard crisis:
- arises because banks are able to borrow funds on the basis of implicit or explicit public guarantees of bank liabilities.
- undercapitalized or under-regulated banks may use these funds in overly risky or even criminal ventures
Development, Crisis and Asian Values
Diagnosing Financial Crises
Disorderly workout:
- occurs when an illiquid or insolvent borrower provokes a creditor grab race
- a forced liquidation even though the borrower is worth more as an ongoing enterprise.
Development, Crisis and Asian Values
Diagnosing Financial Crises
- Received large inflow of money
- High growth rate (8-12%GDP)
- Dramatic run up in asset prices
- Increase capital investment
- High per Capita Income
- Thailand, Indonesia and South Korea had large private current account deficit
- It led to excessive exposure to foreign exchange risk in both the financial and corporate sectors.
Development, Crisis and Asian Values
Before Crises
- The rapid reversal of private capital inflows into Asia.
- Net private inflows dropped from $93 billion to
-$12.1 billion.
- The sudden drop in bank lending followed a sustained period of large increases in cross border bank loans.
- At the end of 1996, the proportion of loans with maturity of one year or less was 62% for Indonesia, 68% for South Korea, 50% for the Philippines, 65% for Thailand, and 84% for Taiwan.
Development, Crisis and Asian Values
Beginning of Crises
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Per Capita GDP
Source : The onset of East Asia Crisis
- The Asian financial crisis had substantial elements of panic and disorderly workout.
- The crisis was largely unanticipated.
- The crisis involved considerable lending to debtors that were not protected by state guarantees
- The sudden withdrawal of investor funds to the region, rather than simply a deflation of asset values
Development, Crisis and Asian Values
Element of Panic
South Korea:
- Drastic devaluation of the won: from 1,000 to 1,700 per us$
- National debt to GDP ratio more than doubled.
- Major setback in automobile industry.
Japan:
- 40% of Japan’s export go to Asia, so it was affected even if the economy was strong
- GDP real growth rate slowed from 5% to 1.6% .
- Some companies went bankrupt
- The Japanese yen fell to 147
- Japan was the world's largest holder of currency reserves at the time, so it was easily defended, and quickly bounced back.
Development, Crisis and Asian Values
Effects on Countries
China:
- The Chinese currency, the renminbi (RMB), had been pegged to the US dollar at a ratio of 8.3 RMB to the dollar, in 1994.
- Heavy speculation that China would soon be forced to devalue its currency to protect the competitiveness of its exports.
- RMB's non-convertibility protected its value from currency speculators, and the decision was made to maintain the peg of the currency, thereby improving the country's standing within Asia.
- China was unaffected by the crisis compared to Southeast Asia and South Korea.
Development, Crisis and Asian Values
Effects on Countries
Non-convertibility can generally be defined with reference to transaction for which foreign exchange cannot be legally purchased (e.g. import of consumer goods etc), or transactions which are controlled and approved on a case by case basis (like regulated imports etc). A move towards free convertibility implies a reduction in the number / volume of the above types of transaction.
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Outside Mainland
Hong Kong :
- Hong Kong dollar came under attack in November as a result of currency depreciations.
- Hong Kong banks faced steeply rising interest rates on liabilities
Taiwan:
- New Taiwan dollar also came under pressure and fell sharply, despite Taiwan's huge stock of reserves.
Development, Crisis and Asian Values
Effects on Countries
- Provided $120 billion as bailout package. Imposed restrictive condition
- IMF programs up till the end of 1997 apparently added to the panic.
- The IMF programs generally called for six key actions:
immediate bank closures;
quick restoration of minimum capital adequacy standards;
tight domestic credit;
high interest rates on central bank discount facilities;
fiscal contraction;
non-financial sector structural changes.
- Domestic bank lending stopped abruptly in countries with Fund programs.
Development, Crisis and Asian Values
IMF Role
- The de-capitalized banks restricted their lending in order to move towards capital-adequacy ratios required by bank supervisors and by the IMF.
- Currency depreciation and stock market collapse continued long after the programs were signed
- More bankruptcies
- Local called the financial crisis “the IMF crisis” due to its controversial role.
Development, Crisis and Asian Values
IMF Role
- Three weaknesses in the Asian economies’ structures became apparent with the 1997 financial crisis:
- Productivity
- Rapid growth of production inputs but little increase in the output per unit of input
- Banking regulation
- Poor state of banking regulation
- Legal framework
- Lack of a good legal framework for dealing with companies in trouble
Weaknesses
Development, Crisis and Asian Values
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Development, Crisis and Asian Values
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Development, Crisis and Asian Values
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Development, Crisis and Asian Values
Asian Values
Introduction
Asian values was a political ideology of the 1990s, which defined elements of society, culture and history common to the nations of Southeast and East Asia.
It aimed to use commonalities – for example, the principle of collectivism – to unify people for their economic and social good and to create a pan-Asian identity.
This contrasted with perceived European ideals of the universal rights of man.
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Development, Crisis and Asian Values
Asian Values
Introduction
The concept was advocated by Mahathir Mohamad (Prime Minister of Malaysia during 1981–2003) and by Lee Kuan Yew (Prime Minister of Singapore, 1959–1990).
The popularity of the concept waned after the 1997 Asian financial crisis, when it became evident that Asia lacked any coherent regional institutional mechanism to deal with the crisis.
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The ‘Asian values’ argument
- Mahathir bin Mohamad and Lee Kuan Yew were particularly vocal advocates of Asian values.
- The main claims of the Asian values argument are as follows:
- A set of values is shared by people of many different nationalities and ethnicities living in East Asia. ('Asian values' are today usually associated solely with East and Southeast Asia).
- These values include:
- a stress on the community rather than the individual
- the privileging of order and harmony over personal freedom
Development, Crisis and Asian Values
- refusal to compartmentalize religion away from other spheres of life
- a belief that government and business need not necessarily be natural adversaries
- a particular emphasis on saving and thriftiness
- an insistence on hard work
- a respect for political leadership
- an emphasis on family loyalty
The ‘Asian values’ argument
Development, Crisis and Asian Values
- In seeking to understand the economic success of certain Asian societies, credit must be given to the role of these 'Asian values'.
- It is not appropriate to analyze Asian economic success in culture-free economic terms.
- It is not appropriate to characterize Asian economic success as a result of the adoption of specifically Western values.
Asian values and Asian Economy
Development, Crisis and Asian Values
- Modern political systems in Asian societies should be grounded in the specific Asian cultures in which they are to be situated.
- It is not acceptable to reform or criticize Asian societies solely on the basis of liberal-democratic forms developed in Western societies.
Asian values and Asian Politics
Development, Crisis and Asian Values
- Proponents of Asian values believe that a major international shift is underway, involving the rise of 'the East' and the fall of 'the West'.
- Samuel Huntington also offers this argument in ‘The Clash of Civilizations’.
- Proponents of Asian values are critical of certain Western values and behavior patterns.
The West: In Decline and In Decay
Development, Crisis and Asian Values
- Western values place too much emphasis on the individual rather than the community.
- Western societies lack social discipline, and there is too much tolerance of eccentricity and abnormality in social behavior.
- The suggestion is sometimes made that Western countries would do well to learn from 'Asian values‘, rather than the other way around.
The West: In Decline and In Decay
Development, Crisis and Asian Values
- Proponents of Asian values have argued that the West is experiencing social decay. Evidence of this decay includes:
Increases in antisocial behavior, such as crime, drug use, and general violence in society.
The breakdown of family life, including increased divorce rates, increased illegitimacy, a rise in the number of teenage pregnancies, and a growth in the number of single-parent families.
Social Decay in the West
Development, Crisis and Asian Values
Criticisms of the Asian values argument
- The Asian values argument is premised on the economic success of Asian countries.
- The economies of a number of Southeast Asian and East Asian countries collapsed in the 1990s.
- This gave a significant boost to the 'anti-Asian values' case.
- Proponents of Asian values suggest that a set of 'Asian values' operate throughout the Asian region.
- Critics argue that there are long-standing religious (Islamic, Buddhist, Confucian), political and other divisions in the region.
- Huntington, for example, argues that Asia contains five different civilizations.
Development, Crisis and Asian Values
Asian Values
- commitment to hard work
- sense of thriftiness
- emphasis on education
- well-defined family structure
- respect for political authority
- society above self
Development, Crisis and Asian Values
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Non-convertibility can generally be defined with reference to transaction for which foreign exchange cannot be legally purchased (e.g. import of consumer goods etc), or transactions which are controlled and approved on a case by case basis (like regulated imports etc). A move towards free convertibility implies a reduction in the number / volume of the above types of transaction.
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