Introduction

Dragons, tigers, and other myths of our time

Nothing illustrates the pervasiveness of a de-historicized economic rationality more than the debate over the causes of, and solutions to, the precipitous drop in East and Southeast Asian currency values in 1997 and the ensuing meltdown of some of the fastest growing economies in history. Led by Japan, economies along Asia's Pacific coasts had posted such spectacular growth rates that even the World Bank had been compelled to acknowledge the significance of macroeconomic planning and the centrality of industrial policy in the economic success of the ‘East Asian model of growth’ (World Bank, 1993: 5–6, 8–10, 83–4).¹ Just as the rapid growth of economies on Asia's Pacific perimeters had led to hagiographic evaluations of their performance, their headlong descent in 1997–98 prompted an equally sharp turnabout in assessments of their patterns of growth. Their overnight transformation from nimble tigers to debt-laden, lumbering elephants was attributed to ‘crony capitalism’: code for cozy arrangements between governments and entrepreneurs that led to ready infusions of cash to those with the right political connections while insulating them from shareholder scrutiny, the need to disclose embarrassing financial information, or exposure to serious foreign competition in their domestic markets.

The well-publicized venality of former Indonesian President Suharto's children and associates and the large, illegal payoffs made to former South Korean presidents Chun Doo Hwan and Roh Tae Woo by large industrial conglomerates gave this diagnosis an aura of plausibility and attracted support from prominent dissidents in each of the ailing economies. However, it ignored that close coordination between political and economic elites and the violation of Western practices of prudential lending were precisely the wellsprings for the remarkable performance of Japanese and South Korean enterprises over the previous quarter century. If they had merely relied on retained corporate earnings and equity markets for investment funds, it is hardly conceivable that they could have emerged as formidable competitors in the most exacting markets in so short a time (Wade and Veneroso, 1998a). From this perspective, the remarkable growth of small, resource-poor economies in East and Southeast Asia had been due precisely to their violation of the market principles now being thrust on them by the International Monetary Fund (IMF) as a condition for emergency cash infusions and loan guarantees.

By focusing on the immediate triggers of the meltdown of 1997–98, this debate about the ‘Asian model’ of growth ignores the underlying causes of the economic collapse. While mainstream orthodoxy conveniently ignored the importance of national economic planning and close coordination between government and business elites for rapid economic growth in the East and Southeast Asian ‘miracles,’ theorists of the developmental state conveniently ignored that national economic planning had been rendered anachronistic by high-speed growth that had transformed production and procurement networks and social topographies all along Asia's Pacific coasts. After all, the crisis spread like bush-fire from Thailand across the region in large part because of the integrated character of regional production. By emphasizing the particular attributes of discrete states, the more empirically-grounded studies of national economymaking not only tend to routinely underplay the similarities shared by states located at comparable coordinates in the global hierarchy of wealth but also obscure the impact of wider global processes of change on individual states. By routinely extrapolating their findings on one economy to neighboring economies, they also tend to homogenize different constellations of class accommodations, patterns of resistance, and historical legacies.

Though economies in the region were marked by different patterns of socio-political relations and occupied different coordinates in the world hierarchy of wealth, the practice of treating each economy as a selfcontained isolate had two further adverse consequences. First, the tendency to prescribe the same policies for each economy, as the IMF did in 1997–98 without regard to their internal constitutions, could have very different consequences, as we see in Chapter 6. Second, the fragmentation of production processes and their widespread dispersal across the region resulted in the adverse impacts of business failures in some locations cascading onto businesses in other locations. Trans-border integration of production operations implied that economies could not be easily insulated from the impact of policies implemented in neighboring economies: closure of insolvent enterprises in one economy led to shortages of key inputs in other economies.

Taking our cue from Bruce Cumings (1987: 46) who argued that ‘a country-by-country approach’ misses ‘through a fallacy of disaggregation the fundamental unity and integrity of the regional effort,’ we shall analyze economic growth along the Pacific coasts of Asia as a singular process rather than as multiple, parallel processes. Complementing Cumings’ analysis of product cycles and power relations in the structuring of a regional economic formation, Giovanni Arrighi, Satoshi Ikeda, and Alex Irwan (1993) had highlighted the spatial expansion of Japanese production and procurement networks. The integration of select Southeast and East Asian economies into Japan-centered hierarchical subcontracting systems and the transfer of manufacturing operations to neighboring jurisdictions on the Pacific coasts of Asia had led to the formation of a regional economic structure. This enabled them not only to withstand the debt crisis of the early 1980s unlike most other low and middle-income economies, but also to register rates of growth that were the envy of the world. Building on these insights, we will argue that if the close coordination of the transborder expansion of corporate networks by elite economic agencies led to regional economic integration, it also simultaneously undermined the national foundations of accumulation and eroded the social coalitions of the developmental state. The subsequent unbridled expansion of production led to the meltdown of these ‘miracle’ economies in 1997. Paradoxically, even though the crisis gave Western governments and the IMF the leverage to weaken active state intervention, corporate bankruptcies and massive layoffs strengthened states in the region by weakening capital and organized labor. In this context, while the reintegration of China into the world market undermined patterns of intra-regional linkages by exerting a downward push on wages, Chinese participation in regional institutional arrangements provided a counterweight to Japan. Resentful of the draconian prescriptions imposed by the IMF, and with Chinese involvement in regional arrangements assuaging deep-seated suspicions about the ‘land of the rising sun,’ governments began to negotiate regional arrangements whereas previously economic integration had been largely driven by the transborder expansion of corporate networks. The coincidence of the emergence of an institutional framework for regional integration with the collapse of the US stock market bubble and the creation of the euro as a potential alternative to the dollar as world money offers the prospect of greater intra-regional flows of goods and investments, freeing economies in the region from their dependence on the United States. In short, if the transborder expansion of Japanese corporate networks was responsible for structuring a regional economy, it is the reintegration of China that will consolidate it.

We begin by tracing the origins of the extraordinary dynamism of several economies along Asia's Pacific seaboard to the reconfiguration of geopolitical alignments after the end of the Second World War. The reconstitution of the world market under US auspices, based on statecentered systems of regulation, revolved around military Keynesianism and the transnational expansion of vertically-integrated American enterprises, impacted differently on Western Europe and East Asia as we shall see in Chapter 1. While the United States pursued policies designed to foster regional integration in Western Europe, it established bilateral relations with its client states in East Asia and opened its markets to their products without requiring reciprocal access for US products to their domestic markets. Under the compulsions of the wars in Korea and Vietnam, the US also channeled large doses of military and economic aid to its client states in Asia.

The strategic political and military arrangements of US hegemony also conditioned postwar rehabilitation and reconstruction of its client states along Asia's ‘Pacific Rim.’ Japanese defeat in the Second World War had fundamentally ruptured patterns of state–society relations all across the region. While the emerging geopolitical equations of the Cold War conferred considerable autonomy on the state apparatuses, as we see in Chapter 2, the new regimes were under immense pressure to transform the basis of their rule from coercion to consent. Massive US military procurements and large infusions of American aid led state machineries in Japan, South Korea, and Taiwan to decisively shape the direction of industrial production through the allocation of subsidized capital, credit guarantees, and favorable – even negative – interest rates to targeted firms and industries.

Though governing elites in Singapore and Hong Kong did not have access to large dollops of US aid, the loss of their hinterlands and the compulsion to transform their economies from entrepôts to off-shore manufacturing platforms also placed their governments under pressure to foster economic growth. Hence, Chapter 3 traces patterns of state intervention and structures of industrial organization in Japan and the Four Dragons (Hong Kong, Singapore, South Korea, and Taiwan) as their regimes sought to legitimize their rule by pursuing state-directed strategies of industrialization based on cheap labor and relatively unfettered access to high-income markets in the core. Despite differences in industrial structures in the several states, what is significant for the purposes of the present discussion is that their industrial structures were relatively independent of one another and their bilateral ties to the United States easily overshadowed all other linkages. Equally importantly, while these states were relatively autonomous from domestic constellations of power and privilege, different configurations of class alliances and resource endowments shaped the development of their industrial structures and modes of labor control. These differences, in turn, were to condition the differential impact of the crisis of 1997–98 on each of these economies.

Precisely because these trajectories – internal configurations of class and power relations, patterns of state intervention and forms of industrial organization, methods of labor control in each of these jurisdictions, and their location within larger political and socio-economic networks – were dynamic processes each of these chapters builds upon and augments the others. Constitutively, since our focus is on the local processing of larger systemic forces within the region, each of these chapters depict integral moments in the formation of an integrated nexus of production, trade, and investment along Asia's Pacific seaboard rather than the narrative of national economy-making in individual countries. Since economies located in this cartographic space did not equally participate in the evolving networks of regional integration, we begin by focusing on Japan and the Four Dragons and then expand our field of vision to other economies as they become integrated within this regional divisioning of labor.²

State-centered strategies of industrialization were not displaced even when narrow domestic markets, not only in South Korea and Taiwan but eventually also in other economies along Asia's Pacific coasts, began to constrain possibilities of import-substituting industrialization (ISI). As the saturation of domestic markets in light consumer goods in these locations coincided with rising wages in Japan, it led to their accommodation of declining Japanese labor-intensive light industries, producing largely for markets in the United States and other high-income economies as we shall see in Chapter 4. At the same time, internal political developments in Indonesia and Malaysia – respectively General Suharto's coup in 1965 and the 1969 riots against the Chinese ethnic minority in Malaysia – inclined their governments to facilitate foreign investments just as high rates of growth were pushing up labor costs in Japan and the dragon economies. After the US withdrawal from Vietnam and the consequent loss of revenue from its role as a rest and recreation center for American troops, just as oil price hikes and heightened security concerns led to increased government expenditures, the Thai government also began to court foreign investors.

The transborder expansion of Japanese corporate networks shielded economies along Asia's Pacific coasts from the debt crisis of the 1980s as we see in Chapter 4. While these chapters integrate material rehearsed elsewhere, they provide the backdrop to the central claims of this book: that the financial crisis was merely the surface manifestation of an underlying social crisis and that the expansion of production and procurement networks to China not only unraveled the regional divisioning of labor but also provides an opportunity to reconstruct it on an entirely new basis. In the first instance, high-speed growth rendered national economic planning anachronistic by transforming production and procurement networks and social topographies all along Asia's Pacific coasts. The progressive transnational expansion of Japanese, South Korean, and Taiwanese corporate networks eroded the national foundations of accumulation. The deregulation of capital flows and financial markets in high-income states and the resultant explosive increase in world liquidity emancipated large conglomerates in Northeast Asia from their dependence on state bureaucracies for access to capital at preferential rates. Without the administrative guidance provided by elite economic bureaucracies, the continued emphasis on capturing market share through debtled patterns of industrial expansion led to rampant overproduction, often at the expense of technological innovation.

Equally significantly, the transborder expansion of corporate technostructures undermined the social coalitions underpinning the developmental states, as we shall see in Chapter 5. As political changes were gradually being instituted to accommodate these new social forces, a realignment of the yen–dollar exchange-rates negotiated in 1985 at the Plaza Hotel in New York at the insistence of the United States government stimulated a new wave of transborder expansion of corporate networks that was significantly different. On the one hand, it signified the progressive erosion of national foundations of accumulation and on the other hand, the availability of large pools of low-wage labor in China implied that ‘runaway’ shops were accompanied by a hollowing out of industrial sectors not only in the high-income states but also in the ‘Four Dragons.’ As manufacturing profits plummeted and capital flowed into financial expansion, it aggravated the problem of overproduction and brought social conflicts in the open. Put differently, as geopolitical equations have changed over the last half-century, and especially after China's shift to market-oriented reforms and the end of the Cold War, economic recovery can only occur after the political order has been reshaped on a world scale. In the Asia-Pacific theater, this can be achieved most plausibly be reconstituting regional linkages and emancipating enterprises from their dependence on US markets – by forging closer intra-regional integration and by increasing consumption in the region. Such a move would divert capital flows away from the United States, which is chronically dependent on such inflows to compensate for its persistent balance of payments deficits. As we see in the Epilogue, resentment against the United States for the harsh measures it imposed on the ailing economies in 1997–98 has gone a long way to transcending regional obstacles toward closer integration and it has led to capital inflows to the United States in 2002 being only one-tenth their level two years earlier.