New East Asian Economic Development: The Interaction of Capitalism and Socialism

The Interaction of Capitalism and Socialism

Lily Xiao Hong Lee

• Publisher: Routledge
• Year: 2016
• eBook ISBN: 9781315484877
• Topic: Business
• Subtopic: Business General
• Index: Business

This text documents the economic development of East Asian countries in order to highlight the beneficial techniques used to increase growth. Socialist and capitalist structures are discussed, complete with an analysis of the future extent of interaction between East Asian countries.

Chapter 1

Introduction

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East Asia is the most dynamic economic region in the world, home to the fastest growing economies. Only in this region have we seen countries that have already joined, or are in the process of joining, the group of advanced industrialized economies, and thus graduating from the category of developing economies. If the growth decades of the 1960s and 1970s were led by East Asian variants of capitalist economies, that is, Japan, South Korea, and Taiwan, then the 1980s and 1990s have seen the increasing participation in East Asian economic development of the East Asian socialist economies of China, North Korea, Mongolia, and the Russian Far East. Furthermore, East Asian socialist regimes are expected to survive for the foreseeable future, despite the collapse of socialism in Eastern Europe, although they are also undergoing substantial political and economic changes.

The greater participation of socialist economies began with China’s open-door policy and economic reforms since 1978, and then gained a second wind from the so-called end of the cold war in 1990. Postwar economic history in East Asia and radical political economic change since the 1980s in this region and the surrounding world have raised two important questions that form the themes of this book.

First, what can East Asian economies learn from one another’s growth experiences? In other words, what can Taiwan and South Korea learn from Japan? What can China learn from its capitalist neighbors? What can more conservative North Korea learn from more liberal China in terms of reform strategies? And why has China shown better economic performance, compared with the former Soviet Union, despite its apparently conservative political leadership?

Second, if the current and coming decades are expected to see more economic interaction among East Asian capitalist and socialist economies, what will be the emerging or desirable mode of interdependence and international division of labor among these economies? We have already seen greater economic interaction between China and Japan, followed by emerging economic interaction among China, South Korea, and Taiwan in the last decade. In the 1990s, greater economic transactions are predicted among North Korea, South Korea, and Taiwan, and among the Russian Far East, South Korea, and Taiwan.

The mutual lessons for development and reform and the emerging mode of international division of labor in East Asia—these are the two main issues addressed by the chapters in Part 1 and Part 2, respectively, of this volume.

Chapter 2 sets the background for subsequent chapters in Part 1, focusing on strategies for economic development and reform, by providing a somewhat historical analysis of the development experiences in the region, comparing those of capitalist Japan, South Korea, and Taiwan with socialist China and North Korea. The central question addressed is how the different mechanisms of state activism in these economies led to different economic outcomes, in spite of the common initial conditions of the “hard” Confucian state in East Asia. Chapter 2 tries to characterize the unique capitalistic developmental economic systems in East Asia, where we have seen varying mixes of plans and markets. Such an effort is particularly interesting since reform-oriented China and the formerly centrally planned socialist economies of Russia and Eastern Europe are looking at the East Asian mixed capitalist economies in their search for an optimal mix of plans and markets in their economies.

Chapter 3 addresses the question of what the South Korean economy should do to sustain its development until it joins the ranks of the world’s advanced industrialized countries. As a result of the rapid economic growth it has achieved in the past three decades, South Korea is now called a new giant in Asia and has become the envy of and a model for other developing countries in the world. There are now some doubts, however, about South Korea’s ability to maintain sustained economic growth and eventually catch up with the industrialized countries, given its slow growth during the early 1990s.

Because Japan’s development strategies have served as a model for Korean policymakers and because Japan has succeeded in achieving sustainable economic growth, this chapter compares the Japanese and South Korean economies in order to find useful lessons for the latter. The comparison focuses on the following four aspects of the two economies: state–enterprise relations, the structure of enterprise ownership and owner–manager relations, time horizon and productivity, and management and labor relations. The industrial system that supported rapid growth in the past decades in South Korea is characterized by having closed or concentrated ownership, a unified owner–manager structure, forced cooperation or confrontation between management and workers, and a conflicting time horizon between the long-term–oriented owner–manager and short-run–oriented workers. It will be argued that what South Korea needs now is a change in its industrial system such that it will become more like the Japanese system, which has open and dispersed ownership, professional management, and long-term–oriented, cooperative shareholder–management–labor relations.

Chapter 4 tries to solve the “puzzle” of contrasting postreform economic performance in China and the former Soviet Union. Why did China achieve at least mixed success, compared with the economic crisis in the former Soviet Union? This puzzle is even more interesting, considering that the Chinese leadership used to be even more conservative than the Gorbachev leadership, and seems to be more constrained by socialist ideology. Even before the aborted August 1991 coup to oust Mikhail Gorbachev from power, he was seriously losing popularity among his own population, including the intelligentsia, which once vigorously supported him, because of domestic economic crisis. For the first time in the postwar period, official Soviet sources reported negative economic growth in 1990 and 1991. In contrast, China has maintained an average 9.6 percent real growth during the reform decade from 1978 to 1988.

This chapter argues that Chinese leaders were more cautious but radical than the Soviet leaders, and that the initial conditions for success of reform were more favorable for China. Despite the failure of state-sector reform in both countries, China alone has succeeded in creating many new nonstate economic entities as the “engine” of growth whereas the former Soviet Union failed to do so.

Chapter 5 evaluates the effectiveness of recent North Korean reform measures through comparison with the Chinese reform experience. It first describes the North Korean economic system and identifies recent reform efforts, which were motivated by the increasing seriousness of the problems typical of centrally planned socialist economies. The comparative analysis focuses on the following four aspects of the industrial systems in North Korea and China: state–enterprise relations and the soft budget constraint problem; the decision-making structure in enterprises; intraenterprise income distribution and the problem of incentives; and changes in the planning system and the associated enterprises.

It will be shown that there is nothing innovative about North Korean reform measures, most of which were tried in other socialist economies, in particular, China. Thus it is expected that the impact of state-sector reform will be quite limited. It will be easier for North Koreans to try to allow nonstate sector and foreign joint ventures to grow than to try radical reform of the state sector. Only in such areas will reform be successful, as the Chinese experience suggests.

As the first chapter of Part 2 on the international division of labor and interdependence in East Asia, Chapter 6 provides an overview of China’s open-door policy, which signaled the beginning of a new era in the Asian-Pacific economy, moving toward more interaction among diverse economies based on different economic systems and ideologies.

The overview first describes the country composition of China’s foreign trade, investment, and borrowing in the Asian-Pacific region. Next, it addresses the issue of international economic complementarity and competition among China, Japan, the newly industrializing economies (NIEs), and the members of the Association of Southeast Asian Nations (ASEAN). The rise of South Korea and Taiwan as China’s major trading and investment partners will be discussed, as well as less complementarity between China and the ASEAN–4 (Indonesia, Thailand, Malaysia, and the Philippines) than between China and the four NIEs (South Korea, Taiwan, Hong Kong, and Singapore).

It will be argued, in view of China’s very low debt-service ratio, that Chinese policymakers have too conservative a perception of the appropriate level of foreign debt, and that China can and should borrow more for rapid modernization, which would also ease domestic capital shortages. Aggressive foreign borrowing will be important since the competition for labor-intensive direct foreign investment will be stiff between China and the ASEAN–4, whereas the NIEs will attract skill- or technology-oriented investment.

If Chapter 6 is a macroeconomic overview of China’s open-door policy, Chapter 7 provides a microeconomic assessment of it, with statistical analysis of survey data of foreign ventures in the Tianjin area. This chapter first explains briefly the three major forms of direct foreign investment in China and the situation in the Special Economic Zones (SEZs). Then it uses the survey data to investigate the problems and profitability of direct foreign investment in China and to draw some policy implications.

The empirical analysis finds that there are several systemic constraints on the profitability of foreign investment in China, such as input and foreign exchange shortages, rigid labor policies, conflicts between business partners, and uneasy relations with state authorities. The derived policy implication is that unless the investment environment is further improved, China will not succeed in competing with other developing countries to attract enough foreign capital for its modernization.

Although South Korea’s so-called Northern Economic Policy coincided with China’s open-door policy, it has been on the top of the South Korean government’s policy agenda since the 1980s. The Northern Economic Policy aimed to expand South Korea’s economic interaction with the economies of China, the former Soviet Union, Mongolia, Vietnam, and the East European economies. Among those (currently or formerly) socialist economies, China is still the biggest economic partner for South Korea. In particular, South Korean economic transactions with China tend to be heavier with China’s northeast provinces and the Bohai region (Beijing and Tianjin and Hebei, Shandong, and Liaoning provinces). Chapter 8 investigates the current state and future prospects of trade between South Korea and China and Bohai.

First, the chapter compares the basic economic profiles, including trade patterns, of China, Bohai, and South Korea. Then it explores the trade prospects between these economies using one index of export similarity and another of trade complementarity. Also examined are the trade creation and diversion effects of the trade opening between South Korea and China and Bohai during the last decade, and alternative future trade projections are presented.

Another important economic change happening in East Asia is the industrial restructuring and economic transition in two NIEs, South Korea and Taiwan. These two countries are facing one of the most critical stages in their economic development, which will determine whether they can smoothly join the group of the advanced industrialized economies or remain semi-industrialized economies.

In South Korea and Taiwan, substantial increases in domestic wage rates and previous accumulation of capital have raised the issue of transition into more skilled labor- or technology-intensive industries and restructuring or foreign reallocation of old labor-intensive industries in accordance with changing comparative advantage. Taiwan and South Korea have emerged as important sources of outward direct foreign investment (DFI) flows since the mid-1980s. The last two chapters in this volume take up these issues from an international perspective, focusing on DFI flows.

Chapter 9 provides a simple theoretical framework and an empirical analysis of the relationship among competitive advantages, inward and outward DFI, and domestic capital accumulation, applied to the case of South Korea. Outward DFI in Korea is found to originate largely in those sectors where Korea has proved its competitive advantages in world markets and Korea has received a large amount of inward DFI. In other words, inward DFI flows seem to have contributed to enhancing the competitive advantages of Korean manufacturing in certain sectors, although it does not seem to have led to a more rapid domestic capital accumulation of the recipient sector, which is determined largely by profit rates. The analysis in this chapter also identifies the three types of outward DFI in Korea: outward DFI seeking cheap labor in foreign countries to maintain competitiveness or profitability of production; outward DFI defending market shares, mostly in markets of members of the Organization for Economic Cooperation and Development (OECD), given the increasing protectionistic trade barriers; and outward DFI seeking advanced technology in developed countries.

Chapter 10 investigates structural changes in Taiwan’s economy and related outward DFI flows into China and other Asian countries. It addresses the issue of what roles outward DFI can play in Taiwan’s industrial restructuring and transition. Regarding investment relations with China, the following questions will be addressed: What motivates Taiwanese businessmen to invest in China? What difficulties do they face? And what are the responses and policies by state authorities in Taiwan and China? These questions are asked to determine the typical and most suitable model of Taiwanese investment in China. Information from case studies of several Taiwanese companies in China will be used to address this issue.

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of Tables
• Acknowledgments
• 1. Introduction
• Part I. Strategies for Economic Development and Reform
• Part II. International Division of Labor and Interdependence
• Bibliography
• Index
• About