The Asian Model

I. Introduction

1. Development from a low initial level per capita income in a largely rural economy

2. Creation of capital and the drawing of labor out of agriculture.

3. Strong state is needed to raise the formation of capital, to allocate that capital and to draw labor from agriculture to industry

4. High rates of savings and investment and the distinctive organization of capital markets and corporate governance.

II. Origins1. Based on history and religion.2. Brief History:

– Tokugawa era (1603-1868)—military dictatorship brought peace, law, order, and isolation.

– The forced opening of Japan by Admiral Mathew Perry 1854– Meiji Restoration in 1868—Japanese economy was opened up to Western

technology. Japan opened the door to foreign trade, equality of classes, eliminated feudal guilds, divided agricultural estates among the peasants, instituted monetary taxes and established businesses and supported private industry through loans and subsidies. Growth continued until 1938 and WW II.

– World War II—destroyed 1/4 of buildings and 1/3 of industrial machinery. Japan was not surrounded by other countries with expanding markets; Recovery initially was slow.

– Korean War—increased demand for Japanese exports and caused the U.S. to see Japan as an important ally.

3. Influence of Confucianismencourages highest levels of social cooperation and equality of income (promoting

educational opportunity, emphasizing group over individual, virtuous government).

4. Principle of a strong state.

5. Relative Backwardness—a country’s gross underutilization of its potential

– Alexander Gerschenkron’s model—to explain how a poor country could rather quickly overcome underdevelopment

– Gerschenkron’s empirical prediction was that relatively backward countries would grow more rapidly than the industrialized countries once they decide upon a policy of industrialization.

6. Characteristic of Japan’s growth from 1953 to 1971 “econ miracle”: • High and persistent econ growth.• Sources of growth:

– Growth of capital stock—the largest contribution to growth, supported by saving rate.

– Technology—contribution of knowledge and technology to factor productivity. Facilitated by the adoption of foreign technology.

– Labor—growth in the quantity, working hours, and educational quality of labor. Low unemployment was promoted by the “permanent employment” system and flexible bonus income.

• Increasing equality in distribution• state-directed growth• high levels of investment • high domestic savings rates• export driven growthThe econ expansion for Japan’s rapid econ growth were a technology

gap, a high rate of capital formation and the availability of labor. After being a closed economy for centuries, Japan had a technology gap and could absorb western technology thru imports of capital, a high propensity to save and the state promotion of capital formation.

7. The Four Tigers-Hong Kong, Singapore, South Korea, Taiwan.a) characteristics

– High and persistent econ growth– Growth with increasing equality– Used foreign trade to promote industrialization.– have promoted exports of manufactured goods– State policy supported export promotion over import

substitution• Export promotion -consists of state policies to promote export• Import substitution -consists of policies that protect domestic

industries from foreign competition via tariffs or other barriers.

– Differ significantly in: population; per capita income; size as measured by land area.

– The GDP per capita is relatively equal to the U.S in Singapore, Hong Kong, Japan

b) Factors for rapid growth of the four tigers

• Openness to international trade

• Export-led growth

• high levels of human capital investment

• high levels of private investment

• high levels of savings

• stable state policies

• foreign direct investment

• rapid demographic transition

III. The Lewis Two-Sector Model

1. Used to explain the rapid growth of Asia

2. Transfer labor from agriculture to industry.

3. What will cause the agricultural surplus to be transferred to industry

Na→ Na’, Q a is produced, same wage

“surplus”= Qa – wages (in terms of agri goods) surplus→ industrial investment → raises MPL (demand for labor)Result: ↑ employment

↑ industrial output

4. Mechanisms that will cause agri surplus to be transferred from agri to industry:

•use the market to transfer the surplus •the state to impose taxes on agri population to force them to save•the state could “nationalize” agriculture to force transfer of savings from agri to industry

According to Arthur Lewis’s two-sector model, economic development in Japan and the Four Tigers is due to transfers of labor from agriculture to industry.

IV. Characteristics of the Asian Model1. Corporate Governance:

a) Industrial Organization:• Big Businesses:

– Zaibatsu—family-owned holding company controlled shares in a diversified group of industrial corporations, trading companies, and banks. After the war, American-written anti-trust legislation dissolved holding companies.

– Keiretsu—created after WWII, are conglomerates of horizontally or vertically integrated companies, owned by a single owner or a small group of owners, working close with government and banks. These groups usually involve cross holdings of stock

• Conglomerate Keiretsu Groups—are frequently grouped around a core company, which plays a leadership role in group management. Such a company may be trading company or bank.

– Zaibatsu origins—Mitsui, Mitsubishi, and Sumitomo– Bank-Centered Groups—Sanwa, DKB, Fuji, Tokai

• Vertical Groups—formed around a prime manufacturing company or production of a single product. Around the major company and its important affiliates, there are dozens and even hundreds of smaller suppliers and sales companies. Nippon steel, Nissan, Toyota, Hitachi.

• Small Businesses—99% of Japanese companies, employing 75% of work force, employ fewer than 100 workers.

• Subcontractors—2/3 of small firms in manufacturing. Large firms shift the cost of holding inventories to subcontractors, and maintain their "permanent commitment" employment by adjusting the use of subcontracting.

• Retail stores—Average store has only 4 employees.

b) corporations are closely held by wealthy families or small groups of individuals

c) extensive reciprocal (cross) shareholding by one company of other company;

d) 2 types of contracting:-Relational-Market-based

relational contracting is the primary form of contracting

e) relatively small role of widely held publicly traded corporationsf) the owners are the managersg) The rights of minority shareholders tend to be abused (cannot

influence management decisions)h) hostile takeovers are practically impossible

i) Publicly traded Asian countries are not required to be transparent

2. The Capital Market

• limited purchases of stock by minority buyers

• Asian companies finance themselves by borrowing not by selling new shares of stock.

• Asian corporations tend to obtain their financing from banks that are closely related to the enterprises themselves.

• Has lower levels of return on equity than the U.S.

4. Labor Markets• Combines the limited regulation of the Anglo-Saxon model with industrial

paternalism practices that protect employment during downturns• Lifetime employment policies:

– Coverage—about 25-30 percent of industrial labor force. During the 1990s, the proportion of long-tenure (10-year plus) workers was 43% in Japan, compared to 26% in the U.S.

– Advantages• Security and loyalty of workers who are covered.• May contribute to adoption of technology because workers have little

fear of technological unemployment and employers know their company will benefit from training.

– Disadvantages• Companies cannot fire workers during bad times; redundant,

incompetent, unmotivated workers retained.• For older employees and workers not included in system—greater job

uncertainty.– Lifetime employment system is in decline– Limits to the concepts of paternalism and lifetime employment:

• only 30% of industrial labor is covered by some form of guaranteed employment

• Japanese firms have ways to create flexibility in employment– temporary labor force and bonus system– subcontracting for industrial parts– small firms have flexible employment and wages

• Seniority wages—– wages are determined largely by the length of service of the employee.

System is in decline.

• Bonuses– account for 20% of pay in manufacturing. – Benefits—employee motivation; savings—if the bonuses are regarded as

transitory income, permanent income hypothesis suggests that a large portion of the bonus income will be saved.

• Labor unions are relatively week w/ exception of South Korea;

4. Income Distribution

• The Asian model has combined high growth with a relatively even distribution of income.

• Factors to combine growth with equity—Governments adopted policies to ensure that all groups benefited from econ growth. Growth and equality both supported by programs of public health and education, land reform, trade liberalization, and support for small business.

• Less inequality usually means greater political stability.

5. Industrial Policy (IP)• The active intervention of government to promote or change the

course of industrial development. Designates industries for priority development based on growth potential and contribution to growth of other sectors.

• Ministry of finance, the bank of Japan, Ministry of International Trade and Industry (MITI)

• State industrial policy directed investment to specific targets and develop industries that would be the core of the econ growth, industries that are competitive in the world markets-electronics, automobiles.

• Components of IP– Strategic—the goal of helping industries to be more competitive and therefore,

facilitate the national econ growth– Inherently discriminatory—IP is a macro econ policy b/c government must

decide which industries/sectors are important for econ growth– To facilitate adjustments to the constantly changing nature of production and

markets

• During the 1970s sustain growth.

• Dramatic decline in econ performance in the 1990’s:– reliance on large companies retarded the growth of smaller and more

innovative businesses– the relation b/w banks and large companies have caused banks to

make large unprofitable loans– the close relation b/w government and business has created a vast

system of corruption– the lifetime employment has prevented large concerns from

downsizing to become more efficient– Inefficiency

The sun also rises, Oct 6th 2005, The EconomistCrashing stock- and property markets, mountains of dud debt,

scores of corruption scandals, vast government deficits and stagnant economic growth in the 1990’s.

There has been a gradual process of reform in financial regulation, corporate law, in capital and labor markets.

Labor market:• most big companies chose to maintain their commitment, asking

workers to take pay cuts and waive bonuses rather than lose their jobs, but ceased to hire new graduates.

• changes to employment law, firms found flexibility by hiring part-timers and others on temporary contracts, both at far lower cost than for regular workers. Canon, for example, a successful electronics firm that still firmly maintains a lifetime commitment for its “core” workers, employs fully 70% of its Japanese factory staff on such “non-regular” terms,

• Since April 2005, the employment data have shown something new and more promising: full-time employment is growing faster than the part-time sort for the first time in a decade, and although some of that growth is still in full-time contract work, regular employment is rising too. Wages are also rising.

• 1993-2002, annual GDP growth 1.2% (compared to 2.9% average for industrial countries).

• Since 2002 recovery in Japan began that still continues today.

• 2003—econ growth 2.7%; 2005—2.8% (but unlike the previous expansions when growth rates were 5-10%).

• promotion of exports

6. Provision of Income Security

• the Asian model has largely rejected the European model of state provision of income and healthy security

• smaller welfare state.

– Japan’s public pension system and public health insurance was created in 1961

• Health care

– public spending on health is relatively low• Japan -8% of GDP on health, the private households spend 2%;

• EU-10% of GDP on health, where the state pays 7-8%;

• USA-15.2% of GDP on health.

• Education

http://www.kff.org/insurance/snapshot/chcm010307oth.cfm

Total Health Expenditures as a Share of GDP, U.S. and Selected Countries, 2003

US—National Health Expenditure, in billions of dollars. Hospital care spending in 2006 was about $648 billion dollars. Physician services is second. A distant third is prescription pharmaceuticals, which passed nursing home spending in 1999. Administration costs for private and public insurance is fourth-biggest, having passed nursing home care in 2003. Further down, some lines are so close together that one line shows and the other is hidden.  The end of the dark purple public health line is hiding behind Other Professional Care's line, for example.  The research portion of national health expenditure includes funded research such as universities, NIH. Research done by pharmaceutical companies is paid for by their sales of drugs, so it is included in the pharmaceutical spending category. http://hspm.sph.sc.edu/COURSES/Econ/Classes/nhe06/