GISPRI No. 13, 1995

"An Essay for Studying the Asian Development Model"

Akira Kojima
Deputy Chief Editorial Writer,
Nihon Keizai Shimbun, Inc.

Asia is now in the midst of major changes. The region's economy is expanding, both driven by and driving Japanese economic development. Awareness of the rapid, fundamental changes occurring in the Japanese economy because of this development is quickly increasing interest in Asia.

This has led to a debate over whether there is an "Asian model" that can be garnered from this development. Singapore's Lee Kuan Yew says that there is not. Nonetheless, while there is no unique pattern of Asian development, the overall region is developing in a manner than differs slightly from "European-style" development. While there may be no "Asian model," there are Asian characteristics that may be more significant than commonly believed.

1. The Post-Cold War World

An inquiry into the overall position of Asia leads first to the question, What is the significance of the end of the Cold War? Extensive debate on the post-Cold War new economic order and new world order has proved inconclusive -- resulting instead in the theory of "new world disorder." The so-called "peace dividend" has also failed to materialize: the Cold War's end and the coming of peace were quickly followed by outbreak of the Gulf War, internal strife in Yugoslavia, and the appearance of a new form of turmoil and instability in other regions as well. At the same time, OECD members and other industrialized nations have nearly all plunged into a prolonged recession against which Japan is still struggling. It is amid such circumstances that the Asian region has ascended so rapidly and begun showing signs of future economic predominance.

Terms like "the peace dividend" and "the end of history" were tossed about at the end of the Cold War, but have yet to be actualized. The argument about the "end of history" even turned out to be a prank. Today there are conflicts that are completely immune to the nuclear restraint that worked during the years of power politics, with no new ideologies or international mechanisms with which to respond to them. Europe, meanwhile, is no longer as confident as it was when European union was being debated in the early 1990s. Relations with Russia have been particularly disappointing, as Russia, betraying initial expectations that it might soften its stance and embrace the Western European model, continues to show a reluctance to do so while at the same time doing nothing to allay fears of nuclear proliferation.

One of the most well-known debates on the direction of the post-Cold War world is that between Kissinger and Brzezinski. Kissinger maintained an optimistic and active point of view throughout the Cold War, while Brzezinski has viewed the post-Cold War world with considerable pessimism. Comparing their predictions with the way things are today, it would seem that Brzezinski's is closer to becoming reality. This is apparent also from the current debate over post-Cold War Europe's new type of poverty and strife, and it is from this point of view that I wish to examine Asia.

In Asia, conflicts involving actual shooting are becoming fewer and fewer, while such conflicts persist in Eastern Europe and Africa remains unstable. Amid such international circumstances, however, Asia's Indochinese Peninsula, once the heart of conflict, is now moving toward peace, and even the Korean Peninsula would seem capable of assimilating in the long run. The first aspect of Asia that I wish to focus on is how a new economic dynamism is driving political stability and stable diplomatic relations.

The primary reason for Brzezinski's pessimism is poverty. Any examination into the causes of conflict runs into the issue of poverty. Poverty breeds despair, and despair leads to policies designed to turn public attention outward. Even if this does not happen, an inflow of political refugees can create political instability. Even if democracy has taken root, poverty creates economic refugees. A regional conflict caused by poverty is not amenable to containment by deployment of a few nuclear weapons. This makes the question of how to eliminate poverty one of the most important issues facing the post-Cold War world.

2. Factors Behind Asia's Growth and Development

There is now considerable interest in the reasons for post-Cold War Asia's rapid development. Is it because of certain factors common to all Asian nations? How do these factors differ from those in an EU-like region?

The World Bank's "Report on the Asian Miracle" had a significant impact on world opinion, prompting greater interest in the Asian reason. Recent debate on this matter includes Paul Krugman's article in "Foreign Affairs" titled "The Myth of Asia's Miracle." Mr. Krugman's own characteristic views on Asian development suggest a deliberate attempt to arouse debate on the issue. Chalmers Johnson's contribution to the February issue of Japanese journal SEKAI (The World) asserts that a stronger Asia will lead to create new problems in the world.

Growth in East Asia cannot be explained merely as the result of intensive investments of capital and labor, contrary to Mr. Krugman's claims, but instead requires an examination of the region's productivity and technology, whose importance Mr. Krugman has denied. With the Cold War's end, the nations of Asia began to undergo an economic transformation, offering various incentives to attract foreign capital, and today continue to compete against one another with such incentives. Although this alone is not enough to attract capital, there was also a major post-Plaza Accord currency adjustment among the industrialized nations that coincided with the Cold War's conclusion. Although the Plaza Accord was originally intended as a means of compensating for certain principal nation's relative competitive strength in other nations' markets, the extent of this adjustment and the coincidence of rapid policy changes in Asia combined to stimulate production in a way that made use of a work force that was inexpensive and relatively leveled throughout the region. It was foreign direct investment that bridged these two developments.

Direct investment in Asia is considerably different from the EC's style of direct investment. The EC has striven for expansion through a mode of investment whereby similar countries (i.e., countries with similar cultural backgrounds and in similar stages of economic development) invest mainly in each other in order to strengthen their interdependence and pursue economies of scale with a horizontal division of labor. Asia, in contrast, was from the beginning a heterogeneous, diverse region with definite disparities. In fact, development, resulting from the coincidence of an Asian policy change and changes in conditions in industrialized nations, would seem to be driven by these disparities. In other words, it was these disparities that made direct investment possible, and Asia has expanded despite a lack of an EC-like economy of scale because of its successful use of its disparities, as in the division of labor within the production process or among separate products. The term "ganko development" ("ganko" meaning a side-by-side formation and describing the roughly equal pace at which the nations of Asian have developed) also refers to this same utilization of disparities in which low wages become one strategy in the division of labor among production processes. In Asia there is now a multilayer mechanism in which one country, once its wages rise, expands its capital to preserve its competitiveness while at the same time making use of disparities between nations. This is what differs from EU-style union. Also, the end of the Cold War brought a realization that the Russian model was a failure, stirring the Asian nations into action with an economic model closer to the West's. This was one factor responsible for the development that is happening in Asia today.

Despite Asia's religious differences, differences in abundance of resources, and differences in per capita national income, the nations of this region are moving forward in unity, each striving for coexistence. This economic development has initiated a positive cycle in which the incomes of different groups are pushed upwards, driving further economic development. On these foundations is developing a forward-looking, future-oriented climate.

In Asia there has never been the kind of ideological conflict that pits one large nation against another. Instead, Asian countries have tended to emphasis pragmatism over ideology. For instance, after the collapse of the Soviet Union, Vietnam looked at the development of the ASEAN member states around it and made the practical decision to engage these nations constructively rather than oppose them. I believe that Asia's rapid ascension after the Cold War is essentially because of the concurrence of changes in the times and economic changes both in Asia and in investing G7 nations. Vague references to an "Asian model" are, I think, allusions to the mutual trust that Asia is creating (debates about the future notwithstanding) and to the sense of military and security-related stability that has resulted from this mutual trust -- which contrasts with not-always-stable bilateral relations in post-Cold War Europe, Africa and the Middle East. A prime example of this stability is the ASEAN Regional Forum (ARF).

"Foreign Affairs" recently ran an article, titled "The Pacific Way," written by a Singapore diplomat named Mabubani. In this article he, too, suggests a vague Asian model. His theory is that a process has begun whereby Asian cultures linked by the Pacific Ocean will fuse in the sense that the Asian socioeconomic model will coexist with other models. The term "fusion" does not mean that these models will be integrated, but that they will coexist without conflict. Asia, unlike the EC, is not a union of closely related nations whose purpose is to eliminate external elements of instability, and similarly the ARF is not a response to an external threat, but rather represents an emphasis on mutual trust among its members. Thus, it differs from NATO and the EC's economic approach, and is uniquely Asian in that it is intrinsically open and has the potential for considerable expansion.

This is only natural in light of the fact that Asia has always opened itself to other regions in the sense of attracting capital and technology. This openness is the source of Asia's dynamism, and it would be self-defeating, with respect to self-development, to shut out other nations. More-over, in view of the fact that the region's current development has been driven by this openness, there is no need for pessimism based on claims of protectionism or exclusionist policies. Instead, this openness is an extremely Asian element.

When the Cold War ended, it was said that the world in the future would switch to a market economy, the theory being that those countries that successfully introduced private capital would develop. However, this is the private capital, so it avoids the regions which often occur regional conflicts through the theory of market mechanism. Ironically, the politically unstable regions were also those that required private capital and investment the most, and these regions have not benefited from the private-sector vitality that has been the most important feature of the post-Cold War world economic dynamism. Herein lies one dilemma.

There have also been rapid cutbacks in the support that Russia and the West had provided to poor nations during the Cold War years as a "carrot" to entice them into their respective ideological alliances, in the belief that whichever side had the most nations on its side would win. Absolute amounts of ODA have also decreased overall, with the slight increase in aid from Japan an exception to the rule. Allies of the former Soviet Union were left to fend for themselves after Russia became unable to provide them with aid. The same thing happened in Africa. With the end of the Cold War thus ironically resulting in some countries' sudden rise to prominence and other countries' being deserted, conflicts are expected to worsen in areas where poverty is severe.

In contrast, economic development in Asia has led to domestic stability and more amicable relations between neighboring nations. In light of post-Cold War instability, this process of Asian stabilization holds great significance for world stability.

3. Issues in Future Asian Development

Of course there are also those who claim that Asia is actually unstable. This view, based on economic conflicts of interest, is prevalent in the West. In rebuttal, the above-mentioned diplomate from Singapore states with confidence: "The Europeans, seeing Asia gradually catching up, have begun worrying that they may be overtaken, and their argument is merely an attempt to deny reality. The Asian model, however, is not just about following Europe's lead. Europeans may believe that since conflict has broken out in some parts of post-Cold War Europe, Asia, too, will one day face the same kind of problems, but Asia will proceed in its own way."

In recent years, Asia's commentators, emboldened by recent prosperity, have tended to be more confident in their writings about Asia. The potential danger of this confidence is that such commentators may have forgotten that there are also unstable areas in Asia, and that friendly relations with the U.S. will remain essential. How Asia should position relations with the West (particularly the U.S.) will continue to be an important question in Asia.

The second question -- now that the nations of Asia are shifting away from import-substitute production and turning to export-led production, with considerable combined export capacity -- is, Which countries will absorb Asia's products? Although economic development and rising individual incomes are enabling Asian nations to absorb some of each other's products, a majority of trade is still with non-Asian regions, and it would be impossible for Asia to absorb all its own exports. The largest absorber of Asian products is, of course, the United States. While Japan is the second largest, it runs a net trade surplus with the rest of Asia, making it a minus factor as an export recipient. In other words, Japan does not function as an absorber of Asian products.

While standards of living are rising throughout Asia on an overall basis, making everyone happy now, I believe that at some point there will be backlash from outside the region as Europe and the U.S. become unable to absorb any addition Asian products and begin applying pressure. This has already begun in the area of exchange rate adjustment, as is evident from demands, made shortly after the Plaza Accord, that the NIEs revalue their currencies upward. Similar demands are likely to be made on ASEAN members, along with insistent calls for market opening. America's persistent calls for market opening in Korea, for instance, seem to have generated considerable anti-U.S. sentiment in that nation. Nonetheless, under current circumstances, Asia will continue to need large absorbers like America, and so determining how to position the U.S. and the role of Japan within the scheme of things is an increasingly serious issue in Asia.

There are periods of adjustment in any economic system. Japan's economic growth after the end of World War II, for instance, has been a cycle of expansion followed by recession, and the principal nations of Asia may at some point enter such a period of adjustment. If Japan still has a huge trade surplus with the rest of Asia when this happens, relations between Japan and her Asian trading partners will not remain as congenial as they are now. While Asia is still firmly convinced of the importance of friendly relations with Japan, Japan, for her part, must acquire the wisdom needed to look toward the future and strive for balanced relations with the rest of Asia.

4. The Possibility of a Yen Block in Asia

Regarding relations with Japan and recent exchange trends (particularly the high yen), let us now consider the possibility of a "yen block" in Asia. Singapore's Lee Kuan Yew had always claimed that Asia has no need for a yen block, but what do current developments suggest? Japanese corporations are investing heavily in Asia, and the yen is being bought as dollars are sold. While this is partly due to the dollar's drop in value, another factor is Asia's need to pay back its yen loans, which now total roughly 3 trillion yen. Despite Asia's need for yen to make these large payments, Japan's annual trade surpluses quickly absorb yen as soon as they leave Japan, leaving an insufficient supply of yen for the Asian countries that need it. Therefore, without a certain degree of yen liquidity -- both quantitative and qualitative -- there can be no yen block in Asia.

A yen block will become a possibility only when Japan begins functioning as an absorber of the goods produced by Asia's export-led economies. For now, however, Asia is part of the dollar block. In terms of the relationship between the dollar and the yen, it is the Japanese yen that faces a dilemma: Japan cannot create a yen block because of a lack of yen.

There was a time, about 15 years after the end of World War II, when the U.S. faced a similar dilemma regarding the dollar's fluidity. At the time, the U.S. was the world's overwhelming export leader, and the dollar was praised like a god. However, America's trade surplus absorbed the world's supply of dollars, leaving it in short supply. In order to increase the world's supply of dollars, it created the Marshall Plan to divert roughly 1.8% of its annual GNP to the rest of the world. Then, as an absorber, it opened its borders to other countries' products -- even when those counties adopted protectionist policies -- and purchased huge amounts of foreign goods. This policy was too successful, however, and created structural trade deficits in the U.S. Even with the dollar now too fluid, and the dollar block in the process of correcting itself, supplies of yen, marks and other currencies are too low to take the place of the dollar. Thus, the yen cannot become an international currency, and Asia cannot become a yen block. The precondition for a yen block is Japan's functioning as a net absorber. If it fails to do so, a "Japan problem" may occur in Asia as well. Some in the U.S. claim that Japan's economic might is moving into the U.S. via Asia in the form of Asian imports. If current conditions continue, this view will gain favor in the U.S., and a tough stance toward Asia by the U.S. would drag Asia into the U.S.-Japan trade issue. This is my impression upon contemplating current trends in Asia.

5. The Form of Asian Development

A look at development in Asia reveals no clear Asian model of development. For instance, the trade and investment patterns of many developing Asian nations are completely different from those of Japan during its period of development. Japan was determined to make whatever it needed itself, and so excluded foreign currency, allowing in only technology and borrowing capital from the World Bank and similar institutions. Regarding trade, Japan's approach was to use quantity adjustment to keep foreign products out, no matter how inexpensive. Thus, Japan's postwar development model centered around quantity adjustment, with no price adjustment necessary because of fixed exchange rates. The Japanese government was extremely selective about which foreign firms, no matter how competent, would be allowed to establish wholly-owned subsidiaries. This policy lasted until about 1970. Korea is the closest to this model, and Japan and Korea share a similar problem, namely, their current difficulty in attracting foreign firms now that they need foreign capital.

The rest of Asia, in contrast, is allowing large amounts of foreign capital in. China has been doing so somewhat selectively, but is still much less selective than Japan was in its developmental stage. The most important between the Japanese and Chinese models is that China's stance is to allow inexpensive products in, and has from the beginning incorporated price adjustment into its policy toward foreign capital.

A major difference between the European model and the Asian model is the latter's departure from the tradition theory of developmental stages, which holds that each country begins with agriculture and becomes gradually more and more advanced, working its way up to the processing of farm products, then light industry, heavy industry, high-tech and finally services. In Asia, however, labor, capital, factories and even brainpower moves across borders, and once the development process is set in motion, a variety of industries previously associated with the developmental stage begin advancing all at once. This is the reason for the rapid pace of recent Asian development. For example, an automobile industry suddenly appears where none existed. Before, it took 50 years for a country to go from textiles to automobiles, but a characteristic of today's Asia is that there are already automobiles and computers. There are some who call this the "accelerated" model of development -- that is, going directly from the agricultural stage to the industrial stage -- and I believe that what characterizes Asian development is the presence of both the accelerated development process and the process whereby industries representing different stages all develop simultaneously. Rather than calling this the Asian model of development, a better term would be the "1980s-and-1990s" model.

Note: This article is an abstract of the report presented by the author at the first meeting of GISPRI's "Study Group for Considering the Development of Developing Countries in the 21st Century.