Since the U.S. subprime mortgage crisis broke out, it has affected the economy on a global scale in the synchronized fashion. Reflecting upon the root cause of the economic recession worldwide and intricacy of global economy, one gets startled by the similar patterns of predicaments and failures as well as challenges and opportunities emerged through each nation’s crisis and their dealing with it, regardless of the East and the West. One of the reasons behind it may be that the world economy is increasingly interwoven in terms of trade and financial linkage. Another reason may be that this crisis boils down to the moral and value issue beyond the obvious financial troubles.
In the case of the U.S., over-indebted consumers have plagued the U.S. economy. Their financial crisis started with loans given to people who are not qualified, then compounded by the securitization of those loans. This problem was further compounded by derivatives.
Although the major banks of East Asian countries do not have the mortgage problem with far smaller losses than their Western counterparts, they are facing the impact of the global financial debacle. In the cases of Japan and Korea, corporate borrowing was the main cause of their financial difficulties. Japan’s financial problem was derived from bad loans mainly caused by corporate borrowing skyrocketed in the 1980s. As in Japan’s case, the main cause of financial crisis in Korea stemmed from corporate borrowing, mainly heavily indebted chaebols. The financial liberalization of the 1980s had allowed the chaebols to indulge in the risky investments. Their excessive reliance on debt financing burst in 1997. China’s economy has been propelled by the Western consumption-based economy financed through credit which was in large part underwritten by China through treasury purchases. In a way, China’s wealth is built upon foreign debt.
All these countries share commonalities in their financial crisis. The credit crunch caused by excessive borrowing has generated debt-laden economic structure.
In the case of China, the biggest Chinese banks are state-owned, and their biggest enterprises are SOEs. Accordingly, China can force their banks to lend and their SOEs to borrow. Nowadays, China’s leading boom (16% of GDP) is startling.
Japan has experienced 19 years lasting deflation. Japan’s stock market has lost three-quarters of its values and their real estate prices have fell for 15 consecutive years. Although Japan employed policy initiatives such as ultra-low interest rates, monetization of its own debt, and quantitative easing, they haven’t got out of the deflationary mode. Japan has the world’s largest domestic debt for an industrialized country. Ironically, in spite of the Japanese government’s policy failure, these measures have been emulated by the U.S. and other countries in this global crisis.
Most Korean banks went technically bankrupt during the 1997 Asian crisis. In an attempt to revive the Korean banks, massive public money was injected, which made the government the largest shareholder in many commercial banks. Although the Korean economy soon recovered due to reduction in costs and their robust exports, the success of the economic reform effort focusing on financial and corporate sector restructuring was limited.
Both Japan and Korea share structural weaknesses such as cross-shareholding arrangements and bad loans. In sum, it is easy for both governments to manipulate its lending and borrowing practices. The cases of Japan and Korea show how hard it is to overhaul the financial sector and break the tie between the state and big businesses. Japan and Korea seem to be caught in the middle between a statist economy and a market-oriented one.
Both Japan and Korea have experienced difficulties of opening their economy to the full force of global capitalism, especially American-styled capitalism. Both cases have also demonstrated the difficulties of transferring from a statist economy to a market-centered one. Furthermore, both cases have shown that economic growth and development has been closely linked with broader socio-political processes.
Interestingly enough, with the implementation of TARP, quantitative easing, and so on, the U.S. seems to demonstrate many signs of transferring from a market-friendly economy to a state-led one. They should know its ramifications in the light of the two countries’ experiences.
All these economies have shown variations of crony capitalism. For starters, public-private partnership seems to permeate the markets of both worlds, the East and the West. The close-knit relationship between the state and big businesses has hindered market discipline from operating properly in the financial markets. This tight relationship has been bolstered through financial oligarchy. A former IMF economist and MIT professor, Simon Johnson urges to overcome this similar pattern of oligarchy destroying the currency and economy in pursuit of greed in both the developed and developing countries. This relationship has allowed the financial market to be easily manipulated, causing the undesirable consequences in both markets.
Previously, too big to fail mentality ruled in many aspects of Korean economy. One of the reasons why the Korean banking sector lags behind the manufacturing sector stemmed from this mentality. Their major customers were chaebols, which were never allowed to fail. Under this arrangement, the Korean banks did not have to learn advanced banking practices. Given the economic concentration of the chaebols, the state guaranteed the debts of the chaebols during the pre-crisis period. This directly led to the mounting NPLs. During the Asian financial crisis, some conglomerates such as Daewoo went under, but in most cases too big to fail mentality persisted.
This situation has been quite similar to bailouts for financials and automakers in the U.S. since the subprime mortgage crisis broke out. Their bailouts seem to operate along the similar logic: their failures would shake the foundation of their economy
The U.S. has been the world’s super power in terms of economic and military status. The U.S. consumption still drives the export-led economies of East Asia. East Asian countries have accepted U.S. treasuries as part of their bargain. The U.S.’s credit bubble deflation/implosion has put the world economy in a recession. The unwinding of the financial leverage has been ongoing. With the amount of global financial linkages in place, no country seems to be entirely free from the global recession.
It is true that the U.S. officials and diplomats have demanded other nations to open their markets up to American-styled capitalism and the benefits of free trade while they have exercised neither genuine capitalism nor free market principles. The States has pressured the exporter countries to buy their treasuries and depended on the financial-services industry too much.
Therein lies the problem of moral issue as William Black put it eloquently, “our financial problem is at the heart a moral problem.” In my view, this is not purely an economic crisis. We have abandoned the values of morality, integrity, and accountability in favor of greed and excess. This moral decline seems to be a huge component of our debacle. Unless the moral issue is resolved at the top level, a true recovery may be a long way off.
One has to take a close look at the system through which we govern in each country and the values and ideas that work for the proper operation of the system. A system that governs us should be underpinned by a basic morality. Growth at all costs mentality should be abandoned.
A state should be governed by the rule of law. Some level of regulation based on moral principles needs to be enforced to serve the interests of the majority of the population, not those of the selected few. One has to pay close attention to whose interests are most represented in the system. For instance, declining middle income households are problems in all countries. We need to have checks and balances put in the system. Toward this, the critical mass may need to be educated about how the economy works structurally and understand the macro effects of the economy.
Employment is a fundamental stitch in each country’s social fabric. Businesses are the major sources of job creation which can bring income. They can grow and prosper through innovation and production. Consequently, a sound recovery should occur through innovation and production, not through financial reengineering. It is interesting that the U.S., Japan, Korea, and China all have emphasized technology-driven economic growth although their technological capacity is at the different stage. The U.S. still holds the leading position in the basic proprietary technology area. Yet financial engineering got in the way of advancing their economy based on innovation and has become a large portion of it. It trumped the technological innovation side of economy mainly due to greed and corruption. We have to find ways to nurture innovation and boost production in the fair and balanced fashion since they are the real drive of the economy.
Monday, May 25, 2009
Thursday, May 21, 2009
Is East Asia Decoupling or Can It Decouple?
There have been a lot of talks as to whether the East Asian economies have decoupled from the Western economies since their stock markets have rallied significantly this year despite downward trend of their exports. Has their decoupling happened or would it happen?
The East Asian economies are closely interwoven with the Western larger economies, especially the U.S. economy. China has jumped into the global economic scene by exporting its goods to the U.S. and pegging the yuan to the dollar. The U.S. dollar hegemony and its status as importer country have made it possible for the States to sell its treasuries to the East Asian countries. All three countries, Japan, Korea, and China, seem to be fully aware that if they stop buying dollars, their export economies might be ruined due to their currency appreciation, although they have attempted to reduce their holding of U.S. treasuries.
We are in a global economy. Many consumer electronics goods made in China to export to the U.S. are assembled in China with chips produced in Japan and Korea. A lot of manufacturing jobs not only in the U.S. but in Japan and Korea have been outsourced to China. Corporatism would perpetually move for cheaper labor around the globe. Technology transfer from the advanced countries to the developing ones has occurred through various modes such as reverse brain drain, acquisition, and strategic alliance. Capital has also been flown across the border.
The East Asia’s economic contraction is in large part derived from faltering demand from their trading partners in the Western economies. Given several indicators such as a sharp fall in their exports and the unemployment, the East Asian economies are falling, not decoupled from the Western economies. We may be entering a new phase of demand-constrained economies due to various factors such as structural unemployment and aging demographics. How can the East Asia economies decouple from the Western economies and pull out of this crisis first? Again, resetting the system for decoupling would involve the confluence of many factors.
The East Asian countries have had the very low domestic consumption levels. Given the small size of their domestic market, their overcapacity problem won’t go away soon. This brings the need for boosting their domestic demand for their goods, as discussed in the previous post. In order to boost domestic consumption, income should be leveled up through increased corporate earnings or job growth.
Businesses are central to a sound recovery. The East Asian countries may have to replace the imported goods with locally-produced goods by raising the ratio of domestic components and capital goods. So as not to heavily depend on Western demand for their goods, the East Asian companies may need to expand their geographically diverse product portfolio, which some Korean firms have successfully done. In Korea’s case, foreign shareholders who own the shares of the Korean corporations have been the major movers of Korean stock market uptick and can easily shake the Korean economy. Hence, their economic performance – especially chaebols’ -, which is heavily dependent on exports, would be one of the key indicators of decoupling scenario.
This global recession may provide some rare opportunities for the East Asian companies to leap if they are able to foresee the future outlook and prepare themselves for it. It is interesting to point out that Korean chaebols were able to enter the high tech businesses such as semiconductor and flat panel by utilizing the global recession wisely as explained in the previous posts.
Some pivotal issues around economic fundamentals remain unresolved. As in the West, the banking sector holds the lion’s share of financial assets in East Asia. Nurturing the healthy financial sector may be an imminent issue for the East Asian countries. The collusion between the government and big businesses has been fueled by the state’s control of the financial system. The financial markets of Japan and Korea have been liberalized. And yet they have learned that the easing of regulations and the liberalization of markets for free trade and capital influx can cause the adverse consequences such as a widening gap between classes. Since the East Asian countries can’t compete with the foreign financial institutions on a level playing field, they may have to be cautious about further opening their markets up to global capitalism until they have proper infrastructure put into the system. Their recent policies such as low interest rates, fiscal stimulus, and bailouts are worrisome, as Japan’s case demonstrates that it didn’t do a whole a lot to revive the ailing economy.
How the various policy approaches in East Asia pan out would be paramount to true decoupling. Policy initiatives need to be crafted in a way that prepares for the global economy and protects its people, considering the dynamic patterns of the macro-economic effects. Although it would not be easy to conjecture how each country would decouple, the one who takes a hard look at the real fabric of the economy and prepare for the next economic upturn in a global economy would get out of the mess first in which we are mired today.
The East Asian countries have histories of excessive or mismanaged government interventions including interfering in financial markets, policing mergers, and creating conglomerates. Although big businesses (in China’s case, SOEs) in the East Asia have been the locomotive for their economic development, their excessive reliance on them has hindered the proper functioning of market economies. The government’s criteria used to determine the bailouts has been dubious on many occasions. In order to move up the economic food chain, ventures should be nurtured in accordance with market mechanism since they can grow jobs in emerging industries. Monopolistic and anti-competitive practices by big businesses should be banned through proper regulations. A level playing field should be guaranteed to small businesses.
More robust infrastructure critical to further enhance indigenous innovation capacity such as higher education and national innovation system should be built. For example, the U.S. still has the best engineering schools in the world, and many engineers who were sent to attend those schools from Korean chaebols hardly return to Korea due to the better educational system and working conditions. Resources including financial and human capital should be better reallocated throughout the economy accordingly. Whichever country with this infrastructure being in place would have much more recovery potential.
True decoupling may require something deeper than mere economic transformation. It may entail social transformation and political will since economic factors are compounded by its internal social and political concerns. Decoupling may require a fundamental reset of an economy that will operate in the interests of the society.
In addition, to make matters more complicated, geopolitical dynamics can be a defining factor in determining if the East can actually decouple from the U.S. There are also geo-political issues among the East Asian countries themselves. For instance, China has a lot of geopolitical upside in East Asia.
All these factors would play a part in decoupling. Reshaping the society and retooling the economy is a painful process. They know it from their prior experience during a financial crisis. Japan has been in deflation even when global bubble economy was booming. How they can decouple from the Western economic contraction seems to be a matter of survival, not an option they can take, given the speed and degree of downward trend of their exports.
We may see there would be some actual East Asian decoupling from the West if the East Asian economies still show strong sign of recovery after being hit by the initial ripple effect of faltering Western economies. If they don’t, they may risk a Japan-style lost decade of growth.
The East Asian economies are closely interwoven with the Western larger economies, especially the U.S. economy. China has jumped into the global economic scene by exporting its goods to the U.S. and pegging the yuan to the dollar. The U.S. dollar hegemony and its status as importer country have made it possible for the States to sell its treasuries to the East Asian countries. All three countries, Japan, Korea, and China, seem to be fully aware that if they stop buying dollars, their export economies might be ruined due to their currency appreciation, although they have attempted to reduce their holding of U.S. treasuries.
We are in a global economy. Many consumer electronics goods made in China to export to the U.S. are assembled in China with chips produced in Japan and Korea. A lot of manufacturing jobs not only in the U.S. but in Japan and Korea have been outsourced to China. Corporatism would perpetually move for cheaper labor around the globe. Technology transfer from the advanced countries to the developing ones has occurred through various modes such as reverse brain drain, acquisition, and strategic alliance. Capital has also been flown across the border.
The East Asia’s economic contraction is in large part derived from faltering demand from their trading partners in the Western economies. Given several indicators such as a sharp fall in their exports and the unemployment, the East Asian economies are falling, not decoupled from the Western economies. We may be entering a new phase of demand-constrained economies due to various factors such as structural unemployment and aging demographics. How can the East Asia economies decouple from the Western economies and pull out of this crisis first? Again, resetting the system for decoupling would involve the confluence of many factors.
The East Asian countries have had the very low domestic consumption levels. Given the small size of their domestic market, their overcapacity problem won’t go away soon. This brings the need for boosting their domestic demand for their goods, as discussed in the previous post. In order to boost domestic consumption, income should be leveled up through increased corporate earnings or job growth.
Businesses are central to a sound recovery. The East Asian countries may have to replace the imported goods with locally-produced goods by raising the ratio of domestic components and capital goods. So as not to heavily depend on Western demand for their goods, the East Asian companies may need to expand their geographically diverse product portfolio, which some Korean firms have successfully done. In Korea’s case, foreign shareholders who own the shares of the Korean corporations have been the major movers of Korean stock market uptick and can easily shake the Korean economy. Hence, their economic performance – especially chaebols’ -, which is heavily dependent on exports, would be one of the key indicators of decoupling scenario.
This global recession may provide some rare opportunities for the East Asian companies to leap if they are able to foresee the future outlook and prepare themselves for it. It is interesting to point out that Korean chaebols were able to enter the high tech businesses such as semiconductor and flat panel by utilizing the global recession wisely as explained in the previous posts.
Some pivotal issues around economic fundamentals remain unresolved. As in the West, the banking sector holds the lion’s share of financial assets in East Asia. Nurturing the healthy financial sector may be an imminent issue for the East Asian countries. The collusion between the government and big businesses has been fueled by the state’s control of the financial system. The financial markets of Japan and Korea have been liberalized. And yet they have learned that the easing of regulations and the liberalization of markets for free trade and capital influx can cause the adverse consequences such as a widening gap between classes. Since the East Asian countries can’t compete with the foreign financial institutions on a level playing field, they may have to be cautious about further opening their markets up to global capitalism until they have proper infrastructure put into the system. Their recent policies such as low interest rates, fiscal stimulus, and bailouts are worrisome, as Japan’s case demonstrates that it didn’t do a whole a lot to revive the ailing economy.
How the various policy approaches in East Asia pan out would be paramount to true decoupling. Policy initiatives need to be crafted in a way that prepares for the global economy and protects its people, considering the dynamic patterns of the macro-economic effects. Although it would not be easy to conjecture how each country would decouple, the one who takes a hard look at the real fabric of the economy and prepare for the next economic upturn in a global economy would get out of the mess first in which we are mired today.
The East Asian countries have histories of excessive or mismanaged government interventions including interfering in financial markets, policing mergers, and creating conglomerates. Although big businesses (in China’s case, SOEs) in the East Asia have been the locomotive for their economic development, their excessive reliance on them has hindered the proper functioning of market economies. The government’s criteria used to determine the bailouts has been dubious on many occasions. In order to move up the economic food chain, ventures should be nurtured in accordance with market mechanism since they can grow jobs in emerging industries. Monopolistic and anti-competitive practices by big businesses should be banned through proper regulations. A level playing field should be guaranteed to small businesses.
More robust infrastructure critical to further enhance indigenous innovation capacity such as higher education and national innovation system should be built. For example, the U.S. still has the best engineering schools in the world, and many engineers who were sent to attend those schools from Korean chaebols hardly return to Korea due to the better educational system and working conditions. Resources including financial and human capital should be better reallocated throughout the economy accordingly. Whichever country with this infrastructure being in place would have much more recovery potential.
True decoupling may require something deeper than mere economic transformation. It may entail social transformation and political will since economic factors are compounded by its internal social and political concerns. Decoupling may require a fundamental reset of an economy that will operate in the interests of the society.
In addition, to make matters more complicated, geopolitical dynamics can be a defining factor in determining if the East can actually decouple from the U.S. There are also geo-political issues among the East Asian countries themselves. For instance, China has a lot of geopolitical upside in East Asia.
All these factors would play a part in decoupling. Reshaping the society and retooling the economy is a painful process. They know it from their prior experience during a financial crisis. Japan has been in deflation even when global bubble economy was booming. How they can decouple from the Western economic contraction seems to be a matter of survival, not an option they can take, given the speed and degree of downward trend of their exports.
We may see there would be some actual East Asian decoupling from the West if the East Asian economies still show strong sign of recovery after being hit by the initial ripple effect of faltering Western economies. If they don’t, they may risk a Japan-style lost decade of growth.
Sunday, May 17, 2009
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.
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.
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