Econ model project
saizo0816
TheAsianModelFall18.pptxThe Asian Model
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Ideological/Intellectual Origins
Developed primarily in Japan and China in isolation from West.
Characterized by
Rapid economic growth from capital formation
“Japanese Economic Miracle”
Rapid growth for three decades following WWII.
Confucianism
Notion of a virtuous government
Accept powerful leader
Loyalty & Nationalism
Solidarity and Collectivism
Bravery and Benevolence
Four Tigers (post 1960s)
Hong Kong, Singapore, South Korea, Taiwan
Extremely rapid growth with high rates of capital formation.
Policies
Free markets, low taxes, minimal welfare state
Export promotion (rejects import substitution)
Rapid demographic transition
Universal education
Japan’s Historical Context
Japan isolated from west until the forced opening to west by U.S. in 1854.
Meiji Restoration in 1868 replaced a military regime with progressive government officials that embarked on large-scale modernization.
Japan advanced toward imperialist rule from 1868-1945
Occupied and spread ideals to Korea 1910-1945
Economic relationships help spread ideals to southeast Asia in 1960s and 1970s (Asian Tigers)
Today Japan is more economically Anglo, but formed the foundation for Korea and other East Asian countries that today represent the Asian Model.
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Mini Dragons: Malaysia, Thailand, Philippines, & Indonesia
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Asian Corporate Governance
Stakeholder over Shareholder interests
Zaibatsu
Vertical or horizontal conglomerates dominating Japan pre-WWII
Strong interlocking directorates, bank relationships, and family ties.
Dissolved after WWII by occupational forces
Kieretsu
Replaced Zaibatsu organizations.
Vertical or horizontal conglomerates with large banks at the center.
Emphasize growth of conglomerate over profit maximization.
Emulated in other Asian countries (Gruppos) and Korea (Chaebols).
State supports through guaranteed lines of credit to main bank which ultimately supplies credit to industrial groups.
Mitigates corporate takeovers, promotes longer-term decision-making, growth orientation, and insulates business from market fluctuations.
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Asian Corporate Governance
Family Ownership
Families own the largest businesses in interconnected cross-ownership networks.
Confucian ideology
Company is “head of family” and workers are “children”.
Management unified with ownership
Family members typically manage the firms.
Mitigates the principal-agent problem.
Compromises minority shareholder rights and desire to invest.
Contracting
Propping
Financial support given to more unprofitable units of a conglomerate.
Tunneling
Awarding of contracts to firms, individuals, or insiders to the conglomerate.
Relational Contracting
Based on informal personal relationships and trust.
Emerges in models where courts are often unreliable or corrupt.
Contrasts with Market Contracting: formal, arms-length, and based on rule of law.
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Asian Corporate Governance
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Asian Corporate Governance
Transparency
Low standard for publically traded companies.
No disclosure requirement for related party transactions.
Accounting statements not commonly vetted by impartial outsiders.
P/E ratios typically lower in Asian Model.
Rapid growth should increase P/E ratios relative to Anglo and European Models but this is not the case.
Price discount is likely due to:
Stakeholder vs. Shareholder rights.
Emphasis on familial inheritance of company.
Poorly run companies are almost impossible to raid and replace management.
High risk for minority shareholders.
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Asian Capital Markets
Most Asian countries are funded by families and cross holdings.
Minimal capital supply from minority investors.
Heavy reliance on debt over equity funding.
Generates greater volatility in fund access.
Limits foreign investment since U.S. is the safe haven for debt investment.
High savings rates
Flows to banks rather than equity markets.
Increases bank influence in government and markets.
Highly Leveraged Companies
Heavy debt to equity ratios require interest and principal servicing at regular intervals.
Problematic during periods when revenue falls but debt service costs do not.
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Asian Labor Markets
Elements of both Anglo and European Models
Hire and fire system but regulated to provide basic rights to workers.
Highly paternalistic
Low unionization levels and unions are typically enterprise specific.
Share Economy
Employee shares company risk through bonuses as a large percent of their pay.
Adds flexibility to labor costs and may attenuate business cycle.
Lower historic unemployment rates in Japan support this idea.
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Asian Labor Markets
Two-Tiered System
Full-time, older workers, with full protection and part-time younger workers with little protections.
Singapore’s “liberal” labor laws
44 hour workweek
1.5 times pay for overtime.
One week annual leave with 1 added day per year up to a total of 14 days/yr.
Dismissed with one day’s notice (<26 weeks of service) and 4 weeks notice (> 5yrs.)
Implicit Lifetime Labor Contract
Understanding that employees will retain their job over their working lifetime.
Approximately 20-30 percent of Japan’s labor force.
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Asian Labor Markets
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Asian Welfare
Demographics are younger in Asian countries.
Small share of GDP allocated to social security and welfare.
Confucianism places greater role on family, over government, support.
Lack of public pension system increases savings rates.
Singapore’s Central Provident Retirement Fund
Employees pay 25% and employers pay 15%
At age 55 can withdraw setting aside minimum retirement amount.
Funds are invested in Singapore government securities and an approved list of stocks.
Can use funds to buy property or pay educational expenses.
Medisave fund is used for exceptional medical expenses.
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Asian Income Distribution
High growth absent large increases in income inequality.
Policies to promote equality
Universal education
Public housing
Fertilizer and agriculture price controls.
Rural land reforms post WWII and Korean wars eliminated elite property ownership.
Benefits
Greater political stability and resulting lower costs of capital.
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Japan 1965-69 1970-74 1975-79 1980-83
Gross Investment 33.8% 37.5% 31.5% 30.5%
Net Investment 20.2% 23.8% 18.5% 16.5%
Household Saving 10.6% 13.5% 15.6% 13.6%
Corporate Saving 5.0% 4.7% 1.2% 0.9%
Government Saving 5.4% 6.5% 0.9% 2.7%
UNEMPLOYMENT I NFLATION (CPI)
YEAR JAPAN U.S.A. JAPAN U.S.A.
1965 1.2% 4.5% 6.4% 1.6%
1966 1.4 3.8 5.4 2.9
1967 1.3 3.8 3.5 3.1
1968 1.2 3.6 5.6 4.2
1969 1.1 3.5 5.3 5.5
1970 1.2 4.9 7.5 5.7
1971 1.3 5.9 6.2 4.4
1972 1.4 5.6 4.9 3.2
1973 1.3 4.9 11.7 6.2
1974 1.4 5.6 23.2 11.0
1975 1.9 8.5 11.9 9.1
1976 2.0 7.7 9.2 5.8
1977 2.0 7.1 8.2 6.5
1978 2.3 6.1 4.2 7.6
1979 2.1 5.8 3.7 11.3
1980 2.0 7.1 7.8 13.5
1981 2.2 7.6 5.0 10.3
1982 2.4 9.7 2.7 6.2
1983 2.7 9.6 1.8 3.2
1984 2.8 7.5 2.3 4.3
1985 2.6 7.2 2.1 3.6
1986 2.8 7.0 .6 1.9
1987 2.9 6.2 3.6
