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