Quick – name a booming Asian economy with an undervalued currency racking up huge forex reserves through aggressive exports of increasingly sophisticated manufactured goods.
China, right? Well yes. But turn back the clock 40 years and you would have answered Japan; and back in the mid-1980s, one of the Asian Tigers – probably South Korea or Taiwan – would leap to mind.
China today, the Tigers 20 years back, and Japan of the 1960s all seem at first blush to fit what, before the Asian Economic Crisis of 1997, was called the Asian Developmental Model. Like China, Japan and the East Asian NICs (newly industrialized countries) were disciplined, relatively homogenous societies with a culturally-ingrained work ethic and exceptionally high savings rates, governed by soft-authoritarian, technocratic regimes happy to take up available policy tools to ensure favorable balance of payments and to guide investments into strategic industries.
Japan's real GDP growth through the 1960s averaged 10% a year, South Korea's annual GDP increased at close to 9% throughout the '80s, and Taiwan's grew at a respectable 8% yearly across the same period – all comparable to China's present annual GDP growth.
It's tempting, then, to want to see China's future in the recent past of Japan, South Korea and Taiwan. To be sure, China has from time to time taken a page from the experiences of neighboring states further along on the development curve: the QFII (qualified foreign institutional investor) policy, which allows select foreign funds to buy shares on Chinese bourses where individual investors are not welcome, was cribbed, for example, directly from Taipei and Seoul. And when Chinese leaders defend the yuan peg by citing the battering the Japanese and South Korean economies took for knuckling under Washington's pressure and revaluing their currencies, they tacitly acknowledge a kinship of circumstances.
Beijing has also felt a certain ideological affinity to the political approach associated with the Asian Developmental Model ? single-party or oligarchic or strong-man rule that could preserve social stability, by force if need be, and wouldn't shy away from acts of economic interventionism. In the 1980s, even the more liberal Chinese think tanks embraced this concept, which came to be called "Neo- Authoritarianism" – an ideology inspired if not overtly espoused by Singapore's Lee Kwan Yew and reflected in Chun Doo Hwa's South Japan, Korea and the Tigers provide useful clues about how China's development will go, but the path is not exactly parallel. Kaiser Kuo reports Korea and Chiang Ching-kuo's Taiwan.
But is China following essentially the same "Asian Miracle" trajectory, only doing so in a compressed timeframe and with the advantage of clearly flagged hazards? Not really. China's departures from the Asian Developmental Model – deliberate or otherwise – are enough to sap comparisons of any real significance.
"I don't think there's anyone sitting down and saying, 'this is how Japan did it," one Shanghai-based western economist told CER. "This country is governed by a Mandarinate that studies everything, and adopts what works. They're pragmatists, and I'm not sure the same could be said for [the leadership of] Japan or Korea. The Chinese don't mind systems competing. They know there's not one panacea for everything."
What then are the points of departure? Perhaps most conspicuously, China has from the outset of reforms been far friendlier to foreign investment than either Japan or the leading Tigers. Beginning in the 1960s, Japan promoted cross-shareholding among Japanese companies to discourage inward FDI and thwart potential takeovers by foreign interests.
Even during the "FDI boom" that has followed deregulation of key industries since 1997, Japan's inward FDI to GDP ratio remained at very low levels today compared to other OECD countries, and stands now at only 9% that of US, less than 5% that of Germany, and less than 4% that of the UK. The ratio is considerably lower than that of China and even South Korea, which also discouraged foreign investment until the late 1980s, relying instead on heavy foreign borrowing. Seoul racked up debts totaling $46.8 billion in 1985, making it fourth largest Third World debtor of the day. Taiwan, like South Korea, tended to spurn FDI, and its ratio of inward FDI to GDP FDI to GDP never passed
3%.never passed 3%.
By contrast, China – now the world's top destination for FDI, passing the US last year at a level of US$53 billion – has so embraced foreign capital that some prominent observers of the Chinese economy see trouble. Chief among these is Yasheng Huang of Harvard Business School, who sees all that FDI as evidence of China's inability to put its 30- 40% domestic savings rate to optimal use.
For better or for worse, even discounting "round-trip" money – earned in China but booked in Hong Kong, and returning to the mainland as foreign investment – the FDI numbers are staggering, topping a cumulative $500 billion since reform began 25 years ago. Currently more than half the goods China exports are made by firms with foreign investment.
Compared to its NIC neighbors and Japan, China's markets have been relatively open as well. Testifying before the House Committee on International Relations, economist Nicholas Lardy of the Institute for International Economics called China "one of the most open [and] perhaps the most open of all emerging market economies."
He cites as evidence China's import ratio (the ratio of imports to GDP), which has risen from 15% in 1990 to reach 25% in 2003 and is expected to hit 30% this year – nearly four times that of Japan (8%) and twice that of the US (14%). Average import tariffs are 11.5%, compared to India's 32%, Indonesia's 37%. In the analogous periods of ELG (export-led growth) in Japan, Taiwan and South Korea, key industries were zealously protected through prohibitive tariffs, rigid quotas and outright exclusion; Korea's nominal tariff rates were above 20% even toward the late 1980s.
Even before accession to the WTO, the relative penness of Chinese economy both to FDI and imports exposed all but a few key industries – telecoms, for example – to direct international competition. This stands in marked contrast to the approach taken by Japan, Korea and Taiwan, which nurtured their own in a protected environment until they were judged strong enough to enjoy an advantage internationally.
Most significantly – and given Beijing's Marxist command-economy legacy, somewhat ironically – China lacks a governmental body on par with Japan's MITI, the Economic Planning Board (EPB) of Chun Doo Hwan's Korea, or Taiwan's Council for Economic Planning and Development (CEPD). At critical junctures, and to the consternation of their major trading partner, the US, these bodies identified and actively supported internationally competitive industries, steered investment toward hand-picked enterprises and, in some cases, provided them with preferential loans and technological assistance. The EPB ran the South Korean economy in alliance with the chaebol virtually unfettered by competing bureaucracies, interest groups or local governments through most of the 1980s.
The closest thing China has is the State Council's NDRC (National Development and Reform Commission), which pales in terms of its actual capacity for interventionism. Size, too, matters: China is a continental economy with an enormous and burgeoning domestic market. "China is a large, domestically- driven economy. Dynamic export is really just the icing on the cake," said the Shanghai-based economist. "China may have kick-started growth through the export sector but with China, even generously, the percentage of total investment that is FDI is only about 20%, where in Singapore or Malaysia it's close to 100%. It's nice to have export markets, but the interesting thing about China today is that it's generating its own growth."
Not everyone is so sanguine. "The economic crisis in '97-'98 highlighted the exhaustion of the Asian Developmental Model," said Martin Hart-Landsberg, Professor of Economics at Lewis and Clark College in Oregon. "What worked for Japan historically, and for South Korea and Taiwan for a period, failed when it was extended to Malaysia, Thailand and Indonesia."
The trouble is, warned Hart-Landsberg, China hasn't quite absorbed all the lessons. "A large part of the crisis was regional overproduction," he said. "You had all the ASEAN states trying to produce increasingly similar goods for export to the US. They're more export-oriented than before, but now the destination of their exports is China. Most of East Asia has decreased exports to the US, and increased exports to China. The whole thing is being recreated on an even greater scale, with all of these countries pulled increasingly into China's orbit."
To Hart-Landsberg, the irreducible point of resemblance between the China of today, the Japan of the 1960s and the Tigers of the 1980s is their addiction to exports, and that's what troubles him most. "75% of China's growth last year was from exports, it's important to recognize that export-led growth driven by foreign investment isn't the same as development," he said. "Real development is nationally integrated, with innovation and technological impulses that respond to domestic activity. Is China seeing that kind of development? I don't think so."
But others see exactly that kind of development. Private property rights have now been enshrined, home ownership is becoming commonplace, and big-ticket items like automobiles are being bought on long-term credit – a major transition for this formerly cash-based economy.
The fact is China has not been simply retracing either the Japanese road paved in the 1960s or the parallel path that Korea and Taiwan took two decades later. China's sheer size and inertia are a counterweight to the kind of dislocations that rocked smaller, more export-dependent economies of the ASEAN states in 1997. The foreign-invested export sector may have begun as an appendage grafted onto the corpus of the domestic Chinese economy, but integration proceeds apace, spreading deep into the hinterland.
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