Rethinking the East Asian Development Model in the midst of the Global Recession

The experience of earlier East Asian economic miracles like Japan and Korea has drawn world attention. Japan is the world’s second largest economy, and Korea is the fourth largest economy in Asia. China is the world’s second largest exporter. They have been regarded as the examples of one of the most successful developmental states.

Their economic miracles seem to ground to a halt in the face of the worst global recession after Depression. Their exports have contracted by double-digit number this quarter, as bubble-generated Western demand is decreasing. Is their development model still sustainable?

Characteristics of their development model

In the process of rapid economic development, their exports have been the main driving force of the economy. They started to export what’s left of the economic food chain in the scale-intensive industries. As they accumulated technological competence, they climbed up the economic ladder with higher value-added products. This strategy has worked out beautifully until the recent global debacle. Their exports have outweighed their relatively small domestic markets.

Aside from export-dependent economic model, these three countries share similar economic features: state-led development drive, big business-centered industrial structure, technology-driven growth strategy, and dissonance between weak financial infrastructure and strong manufacturing base.

Korea adopted the Japanese model which made the rapid economic recovery from the defeat of WWII and followed their growth path in rebuilding its economy from the devastated loss of Korean War. China has followed suit, although they have been run by the communist regime, embracing capitalism.

Not surprisingly, these characteristics of their development model are all intertwined. For example, their governments purposefully promoted big businesses in the technology-intensive fields and controlled the banking system. Their dubious collusion between the state and big businesses led to mismanagement of the financial sector.

There are differences in their pattern of development trajectories, and their economies are at the different stage of industrialization. Although they all started with scale-intensive business, exploiting their cheap labor, Japan has reached the advanced level of industrialization, while Korea has yet to move beyond the fast follower position. China’s case is quite intriguing since it has established the unique relationship with the U.S. through import/export and lending/borrowing, although both Japan and Korea has purchased the U.S. treasuries as well. Their growth strategy is interesting in the sense that they have managed to accelerate their economic growth by utilizing FDI, building manufacturing foundation through MNCs, and enhancing its own technology capacity at a faster pace than Korea, where as Korea limited FDI in the early decades in an attempt to build its own independent technological base.

Both Japan and Korea have gone through the economic crisis before –Japan’s Lost Decade, Korea’s financial crisis, and yet not like contractions of this magnitude. Amid a sharp fall in exports which comprises most of their GDP, there is a serious concern as to the sustainability of their economic model that has brought hard currencies they need. What would be the path they may need to take, as they are facing the painful impact of the global recession?

Two paths

One path may be to continuously pursue the export-led economy if the Western fire economy is restored. Even if the Western economic recovery kicks in, as I doubt it to in any reasonable time frame, they are well aware that they need to continuously move up the economic food chain. In this era of global economy in which perpetual global wage arbitrage continues, even China may not be able to compete on low-priced labor for long. This is why the Chinese government has been seriously interested in technology transfer from the advanced nations and has done it in smart ways.

The other path may involve moving from an export-oriented model to a more domestic consumption-based model. Boosting domestic consumption seems to require a significant political imperative since it should be based on income, not credit, breaking ties between the government and businesses. Income should be generated through job growth. Domestic jobs can be created through further innovation and production, which may require fundamental industrial restructuring and financial sector reform. This may also call for the needs for policy interventions aiming at the well-being of a large public, resulting in the expansion of the middle class and decreased disparity between the haves and have-nots. All this transformation may even require the abandonment of the state-led economic orientation which has been the backbone of the East Asian economy. Even if they try to accommodate the transition, their domestic economy may be too small to make up for the dwindling Western demand for the foreseeable future.

Challenges ahead

Regardless of the road they would take, their economic growth and prosperity seem to be affected by compounding factors. Internal factors may include employing proper policy mechanisms to boost the domestic economy and weather external economic conditions, further enhancing indigenous innovation capacity at the corporate level, revamping their infrastructure encompassing higher education system and financial institution, fostering social capital, and so on. Ironically, the success factors which had led them to rapid economic growth in the past became liabilities in recent times.

Further, there are demographics issues across East Asia and generational change. In the case of Korea, the younger generation have more access to easy credit such as student loans, and the older generation worry that hardworking Confucian work ethics is waning among the youngsters.

External factors may include geopolitical concerns (Both Japan and Korea have a U.S. military presence), global financial linkage, aggressive global corporatism, and conflicting national interests such as trade dispute and protectionism.

Some other factors may include a growing tension between technonationalist orientation and global force. For instance, many Korean chaebols have globalized their business operations. As their manufacturing or R&D offshoring expands, the global operations may result in conflicting with nationalist aims or the host country’s objectives.

These factors would pose daunting challenges as well as opportunities for the East Asian economies. Those who would take up the challenge and exploit the opportunity would emerge as a formidable contender with stronger fundamentals than before in post-global recession years.

In the midst of global bailouts, stimulus and reflationary measures, the speed of the decline in their exports is alarming. However, don’t count them out just yet. They have a history of turning disadvantages of latecomers into advantages.

I’ll discuss how the East Asian economies has coupled or decoupled (or would decouple) from the Western economies and how both economies-the East and the West- have faced similar patterns of predicaments, failures, challenges and opportunities in the next posts.