Global Challenges and Local Responses

Jang-Sup Shin, Jang-Sup Shin

• Publisher: Routledge
• Year: 2007
• ISBN:
  9781134175178
• Edition: 1
• Topic: Commerce
• Subtopic: Commerce Général

East Asia has in many ways been the cockpit of the globalization process. If the phenomenon as it is generally defined is largely recognized as a relatively recent one, the countries that have experienced most change during this period have been in the region.

Rapid economic growth leading to the Tigers label was followed by financial crisis and partial recovery. Underlying this has been the remarkable success story of Japan since theSecond World War, followed by the current, seemingly inexorable progress of China towards centrality on the world stage.

Jang-Sup Shin has amassed an international team of contributors to shed light on how the various Asian countries have responded to the globalization process. These include James Crotty, Lu Ding and Ha-Joon Chang.

1 Global challenges and local responses
An introduction

Jang-Sup Shin¹

Globalization is a trend that has sparked off one of the most heated debates among academics and policy-makers during the last couple of decades. The pace of globalization has indeed accelerated during this period, posing great challenges to nations, regions, governments, and corporations.

According to the earlier orthodoxy, which is still prevalent in substantial segments of policy-making circles and the academia, globalization is a homogenizing force across economies and it is therefore imperative for local economies to adopt certain global norms. Global regulatory changes such as the replacement of the General Agreement on Tariffs and Trade (GATT) system with the World Trade Organization (WTO) system, the spread of the BIS (Bank of International Settlements) capital adequacy ratio, the introduction of OECD (Organization for Economic Cooperation and Development) guidelines on corporate governance were all based on the perception that globalization requires uniform standards across countries. Many countries, including East Asian economies, have also attempted to adjust their economies and institutions to embrace these presumed requirements during the period of accelerated globalization.

There are certainly some general forces behind globalization. For instance, we have witnessed the rapid progress of technologies, especially information and communication technologies (ICTs), which has enabled firms and other organizations to better coordinate their activities across the globe. This has helped them “shrink the space”, thus spreading global production networks (GPNs). Therefore, without understanding such general forces, we cannot understand globalization.

However, understanding the general forces is only a necessary condition, not a sufficient condition, to understanding globalization. Globalization is not simply shaped by general forces “out there” but also is a consequence of the complex interaction between external and internal factors. Globalization is realized in locality, characteristics of which are diverse across countries, regions and sectors. Even if there might be some general forces driving globalization, diverse local particularities condition their manifestations. Moreover, local actors seek to shape the presumed imperatives of globalization according to their own agenda. It is therefore necessary to take a step or several steps further to analyze various ways in which global challenges are perceived and met by local actors if we are to better understand the current unfolding of globalization. It is not realistic to attempt to draw the picture of globalization and policy implications simply on the basis of the perceived general trends. We need to see both commonalities and diversities of globalization at the same time. It is also often the case that diversity is more important than commonality in understanding the reality and especially drawing policy implications for individual countries.

The recent experiences of the East Asian countries clearly show that globalization needs to be understood as a result of the interaction between global and local forces. They were main beneficiaries of the increased globalization during the postwar period because they adopted export-oriented economic growth strategies and were able to capture the new market created by rapidly expanding imports of manufactured goods by the developed countries.² From the 1980s, these countries also accelerated the pace of opening up their economies and are currently more deeply integrated into the global economy. However, actual manifestations of globalization in these countries are quite diverse.

China began opening up its economy from the early 1980s and has strengthened its open-door policy, eventually acceding to the WTO. But it has done so while maintaining the backbone of the socialist market economy, in which the ownership of major firms is still held by the government and cross-border capital flows are tightly regulated. Japan, which had led the East Asian “miracle”, suddenly turned into a laggard of globalization during the 1990s with the decade-long economic stagnation. The country is however beginning to show signs of recovery without having abandoned its unique institutions. Korea hastened its pace of globalization in the 1990s and fell into a financial crisis in late 1997. It has since then introduced various global standard economic institutions more extensively than other East Asian countries, although the introduction of such institutions has not produced the expected results. Malaysia, though it accelerated the pace of globalization and fell into a financial crisis in the 1990s like Korea, defied calls for adopting global norms and revived its economy in its own way.

Understanding the processes of globalization

This volume contributes to the current debate on globalization by looking into related theoretical issues and historical evidence, and presenting a more complex picture of globalization. Its empirical focus lies in East Asian countries but it goes beyond them because a longer-term historical view and the understanding of broader processes on the global level are essential in putting the East Asian experience in perspective. This also serves us better in drawing policy implications from our collective investigations. Chapters 2–4 in this volume are geared to providing theoretical frameworks for understanding the process of globalization. Chapters 5–8 deal with case studies of individual countries, namely, South Korea (henceforth Korea), China, Japan and Malaysia. And the last two chapters (9–10) look into variations of responses at the sectoral and regional levels.

Ha-Joon Chang’s Chapter 2, “Globalization, global standards, and the future of East Asia”, provides a theoretical and historical evaluation of the myths surrounding the “global standard” institutions (GSIs), which have been frequently presented as necessary requirements for countries to survive challenges from globalization. It first asks whether there is a need for GSIs. By employing the concept of “transition cost” (Khan 1995; Shin and Chang 2003), Chang argues that the adoption of GSIs, which can be interpreted as an attempt at reducing transaction costs, may end up with increasing the overall costs of managing institutions by increasing transition costs. In the world where individual countries start from different institutional arrangements and would have to incur costs in making transitions from previous institutions to GSIs, this consideration of transition cost is critical. There is no a priori guarantee that the global adoption of GSIs would be beneficial to the world if we consider this aspect of transition cost on top of transaction cost.

Chang then questions the real contents of GSIs which are promoted as something universal. Based on historical and cross-country evidence, he points out that major pillars of the GSIs, i.e. (1) laissez-faire industrial policy with a welcoming attitude towards foreign investors, (2) small public-enterprise sector, (3) developed stock market with easy mergers and acquisitions (M&A), (4) a regime of financial regulation that encourages “prudence” and “stability”, (5) shareholder-oriented corporate governance system, and (6) flexible labour market, are in fact current-day Anglo-American institutions, and not even institutions common to all developed countries. Moreover, according to Chang, Anglo-American countries did not use many of those GSIs when they were developing countries themselves.

Viewed in this way, GSIs are most convenient institutions for the Anglo-American countries to promote their local interests globally. If we use a political geographers’ terminology (Chapter 4, Bae-Gyoon Park), it can be said that local interests of Anglo-American countries “jumped” the scale of discourse from the national level to the global level by presenting their institutions as global ones. Chang also argues that the GSIs are not really superior because, up to the 1990s, the Anglo-American economies had been laggards in terms of economic growth and even their “superior” performance since the 1990s owes more to the failures of other countries than their own successes. In other words, there is no need to adopt the GSIs even from the viewpoint of transaction cost without considering the aspect of transition cost.

If Chang’s chapter is geared to unraveling the myths surrounding the GSIs in general, Jang-Sup Shin’s Chapter 3, “Globalization and challenges to the developmental state: a comparison between South Korea and Singapore”, is directed at one particular myth of the GSIs, i.e. the one regarding the role of the state.

The view promulgated by the proponents of the GSIs is that the role of the state should be diminished with the progress of globalization. However, Shin points out one important ironic fact in the Age of Globalization: While globalization progresses with more and more assets becoming more mobile, and while attracting those mobile assets becomes more important for economic development, the role of less mobile assets rooted in particular localities also becomes more critical to national competitiveness because they are assets complementary to the mobile assets. Among those less mobile assets, the government is the least mobile but the most important, as it is responsible for providing many complementary immobile assets.

Moreover, the role of the state becomes more important with the progress of globalization, albeit in a defensive sense. Globalization has made countries financially more vulnerable as the incidence of financial crises doubled in developed countries and quintupled in developing countries during 1973–97 compared with the period of 1945–71. In this respect, Shin argues that the role of the state in guarding its economy from possible financial crises has become more important with the progress of globalization. It may be true that some roles of the state like mobilizing domestic financial resources have become less important but the other roles have become more important with globalization, and Shin therefore argues for a disaggregate approach to understanding the role of the state.

Shin points out that the role of the state in globalization is also different according to the differences in the ways in which individual states had previously intervened in their economies. To elaborate on this, he compares different challenges from globalization to two developmental states in East Asia, namely Korea, which employed a more “substituting” strategy for economic development, and Singapore, which adopted a more “complementing” strategy for economic development.³

We include a political geographer’s contribution in this volume because it provides an interesting framework to understand complex political processes behind policy discourses of globalization. These political economy considerations are often absent in economic analyses despite their critical importance in understanding globalization. Bae-Gyoon Park, in “Globalization and local political economy: the multi-scalar approach” (Chapter 4), presents the multi-scalar view of globalization developed by critical geographers. According to this view, major policy changes during the period of globalization including liberalization of product and services markets are not simply imposed from “above” by some mysterious global forces but are constituted from “below” by various national and sub-national forces. This is mainly because regulations have uneven spatial effects across nations and sub-national entities, and because actors situated in different scales all attempt to influence the course of regulatory changes for their own benefits.

Park presents this multi-scalar process of globalization with examples drawn from Korea’s recent policy discourses of liberalization. In his analysis of Korea’s “Big Deal” in the automobile industry, he shows how a program initially designed to solve problems of overcapacity on the national scale was resisted by local interests and eventually abandoned, incurring much larger adjustment costs to major companies involved and to the Korean government’s finances. This is an ironic result, considering the fact that the size of population constituting the local interest of the Busan area was quite small while firms involved in this project were the most powerful ones in Korea and while the Korean national government also held quite extensive regulatory power over its industries and regions. The Big Deal case shows that, in certain junctures of history, it is possible that even a small interest group can derail national or global projects if it can critically affect political outcomes in a country by creating “interscalar tensions”.

If the Big Deal case is about how local interest groups resist “global” imperatives, the case of “Jeju Free City Project” is about how particular local interest groups promote their own interests by presenting them as being compatible with the presumed imperatives of globalization. In appearance, the project is over-ambitious and unrealistic for the small tourist island with little industrial base. Park, however, points out that the project is an outcome of pro-development forces in the region who had previously seen their attempts fail due to conflicts of interests among various groups within the island. This group saw a new opportunity to revive their developmental projects when the Korean national government adopted broad liberalization policies that were supposed to obey the “imperatives of globalization”, and “jumped the politics of scale” by presenting its project as part of the country’s “globalizing” project.

The East Asian experience of globalization

James Crotty and Kang-Kook Lee’s “From East Asian ‘miracle’ to neoliberal ‘mediocrity’: the effects of liberalization and financial opening on the post-crisis Korean economy” (Chapter 5) is a comprehensive and detailed criticism of the introduction of the GSIs in Korea after the financial crisis. They sum up the results of the Korean restructuring after the crisis as “slow growth, high inequality, and the rise of foreign capital”, contrary to the conventional view that the Korean economy recovered successfully after instituting the GSIs comprehensively. To Crotty and Lee, the slow growth and the rise of foreign capital are closely related. They emphasize the sea change in the ownership of Korean firms and banks after the crisis. The foreign ownership share of the ten largest firms (in terms of market capitalization) has risen to an astounding 54 percent by the end of 2004, from less than 20 percent before the financial crisis in 1997. That of the eight large commercial banks grew from 12 percent in 1998 to 64 percent at the end of 2004, the highest level in Asia and even higher than those in almost all Latin American countries.

According to Crotty and Lee, a main strength of the previous Korean model lay in its ability to maintain high investment rates and high growth rates, though it restricted inward FDIs and was not really open to minority shareholder participation. However, the increased foreign ownership contributed critically to reducing the amount of investment funds. Firms had to pay more dividends and engage in share buybacks to acquiesce to shareholders’ demand to maintain high share prices. In fact, funds that Korean firms got from the stock market were smaller than they paid for dividends and share buybacks during 2001–04. Moreover, commercial banks shunned “risky” corporate loans and instead focused on increasing their share in consumer credits. Crotty and Lee conclude that the introduction of the global norms only benefited foreign investors, not the Korean economy.

Ding Lu’s Chapter 6, “The Chinese response to globalization: accession to the WTO and its challenges”, deals with challenges China is currently facing with its accession to the WTO and details the big country’s responses to those challenges. It is a bit too early to evaluate the China’s performance in terms of globalization because China joined the WTO only recently and has been slow in introducing the GSIs. Lu therefore focuses on current concerns and the Chinese government’s responses to alleviate them.

Lu points out that the earlier concern about the growing unemployment due to the increasing opening up of its domestic market has not been realized. This was mainly because of the booming export sector, which created enough new jobs to compensate for the loss of jobs in the import-competing industries. The large inflow of FDIs also helped China create new jobs.

However, Lu argues that the health of its banking sector is a major area of concern. The health of the sector appears to have improved substantially because the share of non-performing loans (NPLs) in total bank assets has been reduced from 25 percent in 2001 to below 15 percent in the mid...