[Ppnews] Asia: The Coming Fury

[Political Prisoner News]

Asia: The Coming Fury

February 11, 2009 By Walden Bello
Source: <http://www.fpif.org/fpiftxt/5855>FPF

As goods 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 
<http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2008/03/19/000334955_20080319051924/Rendered/INDEX/420330WP0Box0321445B01PUBLIC1.txt>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 substitute.

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 
<http://www.thehindubusinessline.com/2008/01/29/stories/2008012950970900.htm>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.

Walden Bello is a <http://www.fpif.org/>Foreign 
Policy In Focus columnist, a senior analyst at 
the Bangkok-based Focus on the Global South, 
president of the Freedom from Debt Coalition, and 
a professor of sociology at the University of the Philippines.


Sources

Hisahiko Okasaki, "New Strategies toward 
Super-Asian Bloc," This Is (Tokyo), August 1992. 
Reproduced in Foreign Broadcast Information 
Service Daily Report: East Asia Supplement, Oct. 7, 1992.

"China: the Locomotive," The Straits Times, February 23, 2004.




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