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| Introduction + | Introduction This document will suggest that the methods that have been the basis of 'economic miracles' in East Asia since the 1960s may be unsustainable in the international economic environment that follows the global financial crisis (GFC). Several years ago it was speculated that China's / East Asia's growth might be decoupling from US growth. The GFC initially suggested that this assumption was premature. Though some of the region was then able to recover rapidly, because of a lack of direct exposure to financial losses, this seemed likely to be temporary because dependence on the strength of others' (mainly US) financial systems remained. Moreover in the medium term East Asian societies may face severe difficulties in creating the more macroeconomically balanced economic regimes that will be needed in the post-GFC environment. In brief this document, after outlining the origin in the 1980s of the present writer's efforts to understand the intellectual basis of East Asian economic models, suggests that:
However, attempts to develop alternative strategies (eg mainly domestically driven growth in a China-centred economic 'world' within the world) will be anything but assured. . |
| Background | Background The present writer was involved in detailed study of global debates about economic development strategy for much of the 1980s on behalf of an Australian state government. At that time Japan's industry policy methods were seen as very significant because of the perceived 'miracle' of its rapid growth and development to the point where it was viewed as the major economic rival to the United States. As a result of earlier involvement in, and study of, organisational development using 'strategic management' methods, theories about a systems approach to economic development were developed and these were found to help in understanding the methods that Japan used as the basis of its economic 'miracle'.
These involvements led in turn in the late 1980s to concept development for the Queensland Government's response to a proposal for a centre for technological and cultural exchange put forward by Japan's Ministry for International Trade and Industry (MITI). As a result of research undertaken for that project, a substantial document ('Towards an Understanding with Japan', unpublished) was produced. This gave an account of the intellectual basis of Japanese society and economic methods in ways that the writer had not seen from any other source. Japanese connections took this to a 'philosopher' in Japan who (without contradicting it) elaborated it with hundreds of detailed notes. Similar work was described by Chalmer's Johnson (author of MITI and the Japanese Miracle) as dealing with matters on the leading edge of the social sciences. |
| Understanding East Asia's Economic Models | Understanding East Asia's Economic
Models
The intellectual basis of the economic model that Japan originated, and encouraged other East Asian ethnic communities to adapt in the 1960s and 1970s, seems radically different to that which has been the basis of Western economic methods. An account of both the different ways of using information and the practical consequences in terms of the nature of power, governance, strategy and economic goals was outlined in East Asia (in Competing Civilizations, 2001).
Of particular significance is that the East Asian economic models rely on neo-Confucian social relationships amongst elites (called 'guanxi' in China) and the obligations of subordinates to superiors, and give little attention to financial (ie symbolic) outcomes in coordinating economic production (see Structural Incompatibility Puts Global Growth at Risk, 2003). While this arrangement can be very effective in creating production capabilities, savings tend to be used wastefully and financial institutions tend to have poor balance sheets. The latter can only be protected from financial failure by:
Following decades of 'miracles' by accelerating development of its production systems, Japan ran into severe difficulties in the 1980s because of its structural focus on production capabilities and lack of concern for financial outcomes. Huge quantities of credit were created on the basis of inflated land values, and invested in excess industrial capacity and acquiring assets world-wide with little regard to price. The apparent incompatibility of East Asia's economic models and the global financial systems based on Western principles has led to increasing problems since the 1980s - though this was probably not obvious to average Western observers who had no way to understand the underlying cultural issues (see An Invisible Clash of Financial Systems).
Following the Asia financial crisis of 1997, East Asian societies were urged (especially by the IMF) to reform their financial systems to make them more transparent. What was not apparently recognised was why this was culturally impossible (see Understanding the Cultural Revolution, 1998). The latter referred (for example) to: fundamental differences in way information is used; the need to change economic goals from economic 'power' to financial returns; the inseparability of economic issues from questions of social / political power; and the lack of appropriate legal systems. In practice, all that happened was that (with IMF encouragement) strategies were adopted to suppress demand and so accumulate large foreign exchange reserves (mainly $US) as the best method to reduce the risk of financial crises. After all Japan and China had done this with apparent success. In late 2009, the 'mystery' of why Chinese companies maintained high savings rates was examined by the IMF [1]. Some observers: (a) noted that this made their growth dependent on debt-fuelled consumption elsewhere (mainly in the US) - which would no longer be sustainable) and (b) suggested that the explanation of their high savings rate was that those companies were state owned and had no no one to pay dividends to [1]. Such explanations, which do not take account of cultural factors and the similar situation in Japan, are only part of the story. |
| Impacting the Global Economy | Impacting the Global Economy The necessity to boost production and suppress consumption in East Asian societies that adopted variations on the Japanese economic model led to structural demand deficits (and so-called 'savings gluts') within those economies. This was compounded by one of Japan's solutions to the challenges it faced in the 1990s because of its economic model (ie creating credit at virtually zero interest rates which was exported through 'carry trades' to boost demand elsewhere). Large domestic demand deficits were macroeconomically unsustainable within affected economies. In the 1930s Keynes identified the risk that demand deficits (ie unspent savings) posed to economic growth, and advocated counter-cyclical public spending as the remedy. Moreover these large demand deficits made global economic growth unstainable (see Structural Incompatibility Puts Global Growth at Risk, 2003), though the problem took many years to manifest itself. In recent decades innovations in macroeconomic management and economic globalization provided a temporary means for compensating for demand deficits, by allowing them to be countered by excess demand elsewhere (mainly in the US).
It may be that US authorities (presumably as a by-product of Cold War strategies to promote world development on a democratic-capitalist basis and with Japan's encouragement as a US 'ally') sought to exploit those innovations to maintain global growth in the face of East Asia's demand deficits, in the expectation that market forces would eventually force real financial reforms in Asia (see An Invisible Clash of Financial Systems?). However the US's ability to take on the role of 'consumer of last resort', which had made export-driven growth a feasible economic tactic, could not be a permanent solution as the resulting financial imbalances led to problems (eg a large and persistent US current account deficit and accumulated debts). The financial instabilities that emerged in the US in 2007 (related initially to losses on very complex structured financial assets - ie sub-prime mortgages) and were transformed in 2008 into an unprecedented global financial crisis had many causes (eg see Financial Market Instability: A Many Sided Story (2007) and Global Financial Crisis: The Second Test of Globalization?). However global financial imbalances (which, as noted above, also had many causes) were key components of the problem. Despite their importance most GFC analysts (because of the lack of information about the East Asian economic models that necessitated such imbalances) have focused simply on arrangements within Western financial systems and economies. Moreover the G20 Summit in April 2009 essentially ignored the imbalance issue, and was thus unable to create any solid basis for sustainable economic growth (see Announcing 'Peace for our Time'?). By September 2009, however, the US and Europe had recognised the necessity for systematic efforts to reduce imbalances (and raised this in the context of a G20 meeting) - a focus to which China objected [1]. |
Unsustainable Economic Models? +
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Unsustainable Economic Models? Large international financial imbalances involving the US can not continue, both because of their role in the GFC (as above) and because, in the post-GFC environment, the US's financial system will no longer be strong enough to compensate for large demand deficits in East Asia (or elsewhere).
However without radical change, East Asia's growth would continue to depend on now-unreliable US demand [1]. New Economic Strategies Must Be Found Thus a shift in the basis of East Asia's economic growth and development would be needed away from the export-oriented industrialization strategies that Japan (primarily) had spread through the region (with World-Bank and US endorsement) [1, 2].
To sustain growth within a Western-style market economy would require more macroeconomically-balanced economic systems (ie those without a large demand deficit and savings surplus). This requirement would bring the incompatibility between the prevailing Western-style global financial regime and East Asia's economic models into sharper focus, because it is likely that any shift towards sustainability within Western-style financial traditions would require a large (and probably culturally-unachievable) change in social, political and economic practices. The only practical alternative may be seeking to create a new international economic (and perhaps political) system based on practices and institutions that have little relationship with Western precedents to meet challenges arising in the post-GFC environment in 'Asian' ways (see below).The Need to Avoid Exposing Financial Institutions The most obvious difficulty under Western-style international arrangements (mentioned above) is that because economic production is coordinated through 'Confucian' social relationships (amongst elites and the obligations of subordinates to superiors) rather than by serious concern for return on capital, losses have tended to accumulate in financial institutions. In the past these could be ignored by suppressed consumption and thus generating large current account surpluses so that sufficient cash flow was available to make it unnecessary for banks to borrow in international markets. In future, without support from a strong external economy (to provide excess demand and productively invest surplus savings) or major changes to business and financial practices, financial crises like that in 1997 would be likely. Though financial systems in Asia seemed reasonably secure against external financial shocks in early 2009 [1], they would need to be radically transformed were growth to be driven by domestic demand in the medium to long term. Growth would inevitably have to be funded by borrowing in international markets rather than from cash flows derived from trade surpluses. While sound balance sheets might be fabricated if there is no outside scrutiny, this would not be feasible if external investment had to be sought. There are precedents for radical transformations as part of East Asia's economic strategies (eg Japan's initial challenge to Western economies in the 1950s and 1960s came unexpectedly through moving into the highest productivity and most demanding segment of developed economies - which at the time involved capital intensive manufacturing). While similar tactics, ie moving into what had been the high ground of Western economies - financial services, might be seen as an option, in practice this seems unlikely. Developing financial systems under which economic outcomes were driven by a search for the profitable use of capital rather than social relationships would probably be impossible because of cultural aversion to abstracts (see An Invisible Clash of Financial Systems?). Moreover in responding to the impact of the GFC, China (for example) made no obvious move towards Western-style changes to its financial system (see China: After the Bubble) any more than Japan did in the 1990s. The possibility that alternative ways of making state-supported companies and banks 'profitable' (by rigging markets through communitarian networks) is suggested below. Japan's Predicament Presumably Japan recognised in about 1990 the profound difficulties that the financial principles built into the prevailing international financial regime (ie the emphasis on return on capital and sound balance sheets) created for its economic model, and adjusted its strategy on that basis. Japan chose not to, and perhaps was unable to, adjust its system of socio-political-economy to conform to the requirements of the Western-style international financial regime. 'An Invisible Clash of Financial Systems' is the present writer's speculative view of international events in terms of a 'clash of civilizations' that may have been obvious to Japan though it was invisible to rational Western mindsets who had no way to understand the predicament of those who adopted variations of Japan's economic model. Japan's international relationships since 1990 need close attention from this viewpoint - by both East Asian nations and especially by the US, as the latter may have been subjected to the greatest con game in history by Japan's 'good cop' routine. In October 2009 it was indicated that 'Japan wants its culture back' - in reference apparently to claims that it had become 'Americanised' and wanted business to operate in a traditional communitarian style rather than concerning themselves over-much with profitability (see Which Identity Does Japan want Back?) China's Predicament As a result of creativity, effort and the adoption of a variation of the Japanese economic model, China achieved spectacular progress from the 1980s in the face of immense difficulties to be seen as a potential economic super-power. There was even an expectation some years ago that Asia's economic growth (led by China) would decouple from the growth of the US economy (see Decoupling: A New Urgency?). The need for decoupling has been amplified by the GFC and the consequent inadequacy of export-led industrialization strategies. In June 2009 it was suggested that emerging economies might have been less adversely affected by the GFC and be able to maintain strong growth without dependence on demand from the US and Europe. However, without radical changes, this seemed likely to be only a temporary respite. China: After the GFC speculates about China's position - basically suggesting that China's response has involved both: (a) high levels of government spending; and (b) some efforts to transform its society and economy which may long have been planned to overcome the constraints implicit in the economic model it copied from Japan (ie its dependence on the strength of the US financial system). Creating a New 'Confucian' Economic World? [Preliminary] Various observers have suggested that China has been challenging the US dollar - but China may not be seeking to replace the $US with the Yuan. Rather China (and presumably Japan) may be seeking (and possibly have been seeking for some years) to reduce the role which any currency (ie money) plays in influencing economic affairs, and replace it with neo-Confucian social relationships within a substantial part of the global economy. In simplest possible terms the goal could be to reduce the constraints on the rule by traditional social elites that arise where financial considerations determine economic activities and where law is the basis of government - because it is presumed that the interests of ethnic communities (as determined by integrative-intuitive consensus amongst social elites and their subordinates) should dominate over the interests of rational individuals (as electors, politicians, consumers or entrepreneurs). That such a development (which would make econometricians and many political scientists redundant) might be considered and might be consistent with emerging events, is considered below. The constraint on the economic models Japan promoted throughout East Asia lies on the demand side (ie on its dependence on export demand - especially from the US, and on the ability that the US had had to productively absorb surplus savings) and no amount of additional supply capacity is going to solve that difficulty. In the absence of strong external demand, under Western global economic principles growth driven by domestic demand would merely run down foreign exchange reserves and eventually lead to a financial crisis because of the lack of traditional capitalistic attention to profitability that characterises those models (see above). A solution might be seen to lie in creating an updated version of the China-centred economic 'world' that existed prior to prior to the expansion of Western influences - which interestingly would also give effect to Japan's WWII goal of creating an 'Asian Co-prosperity Sphere'.
Features of such an international Confucian 'world' might be expected to involve:
The apparently incompatibility of East Asian economic models and the prevailing international financial regime have led to indications that alternative regional arrangements were being considered for decades to consolidate the long-established role that China's Diaspora have played as a China-focused economic 'empire' especially through SE Asia.
The possibility that socially-coordinated cartels (rather than reliance on conventional market transactions) may be being put into place to promote the 'profitability' of state-favoured enterprises and banks is suggested by:
China's 2009 responses to the GFC may be consistent with a desire to create a new China-centred trade / tribute empire as speculated above - though this is by no means certain. Steps taken have had the effect of::
China's efforts in late 2009 to subvert United Nations talks intended to negotiate an international agreement on responding to climate change may indicate the start of an attempt to limit the effectiveness of global institutions which operate (as the UN has sought to do) on Western-style political principles and perhaps establish alternative 'Asian-style' machinery.
Though massive and difficult adjustments would be required in East Asia to adapt to the dominant global order (ie involving a rule of law and a capitalistic search for profit), there are reasons to suspect that the alternative outcome (despite its benefits) would involve short-term risk, would be not in the interests of ordinary Chinese people and would ultimately be ineffective. In the short term the hypothesised plan would involve a race against time. It would be vital to create alternative 'tame' markets within a China-centred trade / tribute regime before foreign exchange reserves became depleted - in an environment in which recovery by major past export markets was not assured, and the latter's ability / willingness to sustain large current account deficits would be limited. From the point of view of China's ordinary people such an arrangement may have been best assessed by a former premier of China who was critical of the path that China's leaders took at the time of the Tiananmen Square massacres because of: (a) the lack of political stability where only a few rule; (b) the commercial focus of those with political power; (c) rampant corruption; (d) social inequality; (e) pervasive inefficiencies; (f) the lack of benefit to ordinary people of their hard work
It can be noted also that China controls the flow of information to its own citizens who may thus be unaware of the fact that under such an arrangement their hard work would remain largely unrewarded so that China's elites could control a new trade / tribute empire. From the point of view of the rest of the world, a Chinese trade / tribute empire that was more-or-less self contained in terms of net supply and demand would be less macroeconomically risky than has been the case for export-led industrialization in the past. However:
However in the medium to long term, quite severe problems could well arise internally within such a trade / tribute 'empire'. China's future aspirations are limited by diverse environmental, demographic and political challenges which constrain its ability to create the sort of 'world' speculated above.
While there may be ways in which an economic system could be organised primarily on the basis of social relationships and with limited reliance on money as a means of exchange, store of value and indicator of the need for economic change, such a system would probably eventually prove unworkably complex and inefficient. A Fundamental Problem: Balancing Supply and Demand [Preliminary] The major challenge to the creation of 'Confucian economic world' (no matter how effective it could be in organising production and rigging markets to provide some with an appearance of 'profitability') would be the lack of practical means to balance supply and demand - which are critical to sustainable economic growth. Mercantilist economic models prevailed in Europe in the 18th century where the goal was to use state power to boost economic production - so as to accumulate a stock of treasure (eg gold). Adam Smith's Wealth of Nations critiqued those mercantilist economic models. He suggested that wealth would best be achieved by a free market. A key characteristic of the latter is the ability it provides to balance supply and demand - through an effective price mechanism and sensitivity by producers to profits. These have not been features of East Asian economic models so that no matter how effective the latter are in strengthening the production side of an economy and arranging markets so that favoured enterprises are 'profitable', unless a way can be found for (say) 'Confucian' obligation to balance supply and demand internally, they are not likely to prove any more sustainable than: (a) the European mercantilist systems that Adam Smith criticised; (b) the Soviet Union, whose command economy was seen to achieve sensational growth in the 1950s by producing goods that no one wanted; and (c) Japan in the 1980s. In the past balancing supply and demand has not been an issue that East Asian economies have had to worry about - because this tended to be achieved by expansion of (mainly) US demand through easing monetary policy to compensate for demand deficits in East Asia. In addressing export markets, the strategies of 'East Asian' producers can (over-simplistically) be said to have involved maximizing market share in export markets (through low cost quality goods) rather than maximizing profits. Though some claim that seeking market share laid the foundation for long term profits, low cost quality goods were achieved (amongst other things) through modest wages and a high savings rate to provide capital for investment which did not have to be used particularly profitably. However for domestically driven growth within a 'Confucian economic world', household incomes (from wages and investments) would have to increase - or else domestic demand would be unable to more closely balance supply. Thus there could be no high savings to provide ready access to capital for investment. Moreover capital would need to be used efficiently - in ways that minimize costs (rather than merely relying on modest wages, and fabricated 'profits'). This requires that firms be genuinely profit sensitive, which seems incompatible with organising production and markets primarily on the basis of social relationships. |