4 Crisis of US hegemony and the growth of regional economic integration in Pacific-Asia

 

Each time decentering occurs, a recentering takes place.

Fernand Braudel

By almost every conceivable yardstick, the 23 years from the beginning of the Korean War in 1950 was an exceptional period of material expansion – ‘the golden age of capitalism’ as Stephen Marglin and Juliet Schor (1991) among others have called it. The installation of state-centered strategies of development under the Bretton Woods system heralded a sustained burst of economic growth not only in the reconstructed economies of Western Europe and Japan, but also in the ‘people's democracies’ of Eastern Europe, in the USSR, in Latin America, and in the newly-independent states of Asia and Africa:

the quarter century following post-World War II reconstruction was a period of unprecedented prosperity and expansion of the world economy. Between 1950 and 1975 income per person in the developing countries increased on average by 3 per cent p.a., accelerating from 2 per cent in the 1950s to 3.4 per cent in the 1960s. This rate of growth was historically unprecedented for these countries and in excess of that achieved by the developed countries in their period of industrialization…. In the developed countries themselves … GDP and GDP per head grew almost twice as fast as in any previous period since 1820. Labour productivity grew twice as fast as ever before, and there was a massive acceleration in the rate of growth of the capital stock. The increase in capital stock represented an investment boom of historically unprecedented length and vigour.

(Glyn et al., 1991: 41–2)

The remarkable expansion of material production occasioned by the reconstitution of the world market under US tutelage led not only to the emergence of a mass market for consumer durables – most notably the automobile – in Western Europe, Japan, and Australasia, but also to the rapid industrialization of many former European colonies, and across the ideological divide, in the Soviet Union and other centrally-planned economies. The pursuit of multiple, parallel strategies of industrialization, however, eventually increased competitive pressures that led to a wholesale restructuring of the structural and institutional scaffolding of the world economy provided by the Bretton Woods agreements. In these conditions, attempts by Japanese corporations to relieve the adverse impact of growing competitive pressures, and limits imposed by narrow domestic markets in neighboring locations, led to greater regional integration along the Pacific coasts of Asia. This enabled these economies not only to withstand the collapse of most other low- and middle-income states during the debt crisis of the 1980s but also to post spectacularly high rates of economic growth, earning them the sobriquet of ‘Asian miracles.’

The reconstruction of high-income West European states in America's image by the mid-1960s and the rebuilding of Japan as a low-cost exporter, as the first section shows, increased competitive pressures in the world market and led to a decline in the US current account surplus. In smaller low- and middle-income states, import-substituting policies came up against the limitations of narrow domestic markets just as centrally-planned economies in Eastern Europe came up against the limitations of extensive models of economic growth. In short, constraints on capital accumulation appeared almost everywhere, in the core and in the periphery, in the West and in the ‘socialist’ bloc, though given socio-historical differences between states, there were considerable variations in the magnitude, nature, and timing of the impact of these constraints. These conditions led to a remapping of the geography of manufacturing. To counter increased wage pressures in their home bases, US and West European corporations recruited newer migrants. In the United States there was also a shift in manufacturing to the southern and western states. More importantly, since capital flows toward Europe represented the most substantial outflow of resources from the United States, the US government sought to curb these outflows. In contrast, since lower wages in East Asia could cheapen costs and hence lower welfare and military expenditures, successive US administrations encouraged capital outflows across the Pacific. As this coincided with an expansion of Japanese investments overseas due to rising labor costs, it heralded a new phase of regional integration along Asia's Pacific coasts. These shifts in patterns of cross-border corporate investments were lubricated by a vast increase in the liquidity of major financial institutions due to the emergence of a supranational money market created through the hoarding of the profits of TNCs in specially denominated bank accounts.

The relentless transnational expansion of US capital contributed to American deficits and the worsening US balance of payments led to a growing contradiction between the interests of the increasingly global US corporations and those of the US government. Unable to stem its persistent balance of payments deficit, the Nixon Administration revoked the US dollar's convertibility into gold and sought to shift competitive pressures onto enterprises in Western Europe and Japan, as demonstrated in the next section. The massive increase in global liquidity that followed loose US monetary policies led to a rapid expansion of public debt in many low- and middle-income states as they sought to construct multiple, parallel, state-centered industrial sectors. Far from heralding a ‘new international division of labor,’ this debt-led industrialization drive came undone when the United States government reversed its loose monetary policies as the ensuing world inflation threatened the role of the greenback as world money. It was now that the significance of regional economic integration along the Pacific coasts of Asia under the aegis of Japanese corporate networks became evident. Rather than constructing parallel and competing industrial structures, the creation of complementary industrial structures along capitalist Asia's Pacific coasts enabled these economies to withstand the debt crisis of the early 1980s.

The serial transfer of declining industries from Japan to neighboring locations in Asia – celebrated as the ‘flying geese’ model – provided a framework for regional economic integration and laid the foundations for rapid rates of growth not only in the ‘Four Dragons’ but also in Indonesia, Malaysia, and Thailand in the 1980s. The transfer of declining industries from Japan was especially smooth since Japanese corporations did not insist on majority equity participation, preferring to rely on non-equity forms of control. Along the Asian rimlands, inflows of foreign capital provided regional elites with the means to stabilize their rule. Even though they created agencies formally similar to pilot economic agencies in Japan, Singapore, South Korea, and Taiwan, these agencies never had the autonomy of the former as we shall see in the third section. Finally, we shall examine the implications of these developments for the next phase of industrial expansion and the changing dialectics of business–government relations in Pacific-Asia within the context of a world-wide process of capitalist restructuring in the 1980s and 1990s. Most notably, rapid structural transformation unraveled the domestic coalitions that had made the developmental state possible, an issue discussed at length in the following chapter.

The gathering storm

Though the reconstitution of the world market under US hegemony in the context of the bipolar rivalry between the United States and the Soviet Union led to a remarkable expansion of material production, it contained the seeds to constrain the possibilities for continued expansion and to unravel the bipolar partitioning of the world instituted by the Cold War, and eventually undermined the foundations of US hegemony itself. The soil in which these seeds germinated was fertilized by several elements: the growing incompatibility between the interests of increasingly global US corporate capital and the interests of the American government, an intensification in competitive pressures caused by the implementation of multiple state-centered strategies of economic growth and the increasing ‘workplace bargaining power of labor,’ the spatial relocation of manufacturing operations facilitated by constraints imposed by relatively narrow domestic markets in many low- and middle-income states, and the onset of structural limits to extensive economic growth in the centrally-planned economies.

Reintegration of the world market under US auspices had, as we saw in Chapter 1, led to the spread of multi-unit vertically-integrated enterprises to Western Europe. As reconstruction proceeded apace, European enterprises had begun to trespass on each others' market niches as well as those of US enterprises. While the resulting fall in US merchandise surpluses and the related growth of a supranational currency market hampered the geo-political strategies of the US government, it encouraged the flow of investments to East Asia to compensate for the decline in official aid to ‘friendly’ states. Meanwhile, increasing labor costs in Japan triggered a smaller outward expansion of Japanese production networks to select locations in East and Southeast Asia which was facilitated by internal developments in these locations. This new phase of regional integration in the Pacific-Asian region, as we shall see, was paralleled by shifts in the geography of manufacture in the United States and the greater recruitment of new migrants by American and West European industrial enterprises. Meanwhile, the limitations of extensive economic growth in Eastern Europe was also eroding the geopolitical partitioning of the globe between the United States and the Soviet Union that had enabled the reconstitution of the world market after the Second World War, as we also saw in Chapter 1.

In the first instance, the rebuilding of core states in Western Europe through massive flows of military assistance and the transnational expansion of US corporate capital transformed the world-wide liquidity shortage into a dollar glut by 1960. One indicator of the extent of American investments in Western Europe, especially after the formation of a Common Market and the restoration of currency convertibility in 1958, is provided by the fact that between 1957 and 1966, the number of American subsidiaries in Europe more than tripled to nearly 9,000 (Glyn et al., 1991: 99; calculated from Wilkins, 1974: 330).

The relentless transnational expansion of US corporate capital, particularly the high levels of FDI in manufacturing in Western Europe, enabled these economies to chip away at the impressive lead in industrial production that had been established by the United States during the Second World War, and the expansion of output produced abroad was also accompanied by a steep decline in US export earnings. By one reckoning, in the ten years after the creation of the European Common Market, a third of all US investments in transportation equipment, a quarter of all investments in chemicals, and a fifth in machinery were located abroad, mainly in Europe (Bluestone and Harrison, 1982: 42, 113; calculated from Wilkins, 1974: 331).¹ The US share of world-wide exports of manufactured goods, for instance, fell from 28.7 percent in 1957 to 23 percent in 1962 and to 16.1 percent in 1970, while the West German share rose from 16.7 to 19.5 percent and to 16.8 percent (van der Wee, 1986: 262–77; Itoh, 1990: 48). The presence of US transplants in Europe was so prominent that when Servan-Schreiber raised the prospect of an ‘American challenge’ in 1968, his main concern was that, ‘Fifteen years from now it is quite possible that the world's third great industrial power, just after the United States and Russia, will not be Europe but American industry in Europe’ (quoted in Chandler, 1990: 615)! As a consequence, from an average annual trade surplus of $5.41 billion between 1961 and 1965, the US trade account sharply declined to a deficit of $2.7 billion in 1971 (Glyn et al., 1991: 98; Parboni, 1981: 48; Itoh, 1990: 48; van der Wee, 1986: 450–3).

Since the US merchandise surplus had helped finance unilateral transfers of capital in the form of aid and military assistance to American allies and ‘friendly’ states, a decline in its current account surpluses increasingly hampered the power pursuits of the US government and weakened the complementarity of interests between it and the increasingly global US corporations. Additionally, the steady growth of dollar surpluses, and ipso facto foreign claims on income produced in the United States – which rose from nearly half the size of US gold reserves in 1959 to one and a half times larger than these reserves by 1967 (Glyn et al., 1991: 98) – undermined the ability of the US government to freely convert dollars to gold at $35 per ounce and its commitment to maintain free capital markets (Itoh, 1990: 48–9; van der Wee, 1986: 458). Simply put, the continually deteriorating balance of payments situation progressively eroded both the position of the dollar as world money and the national foundations of American power.

The growing fiscal crisis of the US government was compounded by the increased commitments to social welfare made by the Johnson administration. When government expenditure had grown by only $50 billion in the decade between 1955 and 1965, the ‘Great Society’ project led to an increase in budget expenditure of $75 billion between the fourth quarter of 1965 and the first quarter of 1969. Even more important than the magnitude of this increase was the inflexibility of new expenditures on welfare programs and public services – rising from 25.1 percent of total federal expenditures in 1965 to 46.5 percent in 1975, while the share of military expenditures fell from 40.8 percent in 1965 to 25.6 percent in 1975 (Aglietta, 1987: 239–40).

To counteract the aggravating fiscal crisis, the United States government adopted very different policies regarding capital flows to Western Europe and East Asia. As outflows to Western Europe represented the greatest drain on US resources, even before its merchandise trade registered a deficit, the Kennedy administration sought to extend its jurisdiction over foreign subsidiaries of US corporations by subjecting them to American trade laws and imposed controls on outflows of capital to the region (van der Wee, 1986: 470). However, as successive American administrations sought to monitor and restrict investments and lending abroad, US transplants with the connivance and collaboration of West European governments, began to develop a dynamic of their own that could not be controlled by the US government.

The creation of a supranational money market provided American transnational corporations (TNCs) with the means to evade US government controls. The unique status conferred on the dollar as the principal reserve currency and the medium for the settlement of international balances of payments by the Bretton Woods agreement enabled non-US banks to legally accumulate dollars. Though these funds were initially redeposited in US banks, European banks quickly recognized the advantages of holding funds in currencies outside the country of their issue. While the creation of Eurodollars – or, more broadly, supranational currencies – were initiated by dollar deposits of the USSR and its allies in specially denominated accounts in European banks to evade seizure by the US government, these were rapidly overshadowed by deposits of American-based TNCs seeking to evade US tax laws. As these deposits grew, American banks entered the market by establishing offshore branches and, by 1961, they controlled approximately 50 percent of the dollar deposits in Europe (Arrighi, 1994: 301–2). In the context of the growth of a supranational currency market, the Kennedy administration's attempt to stem the outflow of dollars by restricting foreign investments and lending merely shifted the center of financing dollar loans to London and hence outside the jurisdictional reach of US authorities. The emergence of a financial network parallel to, and outside the purview of, the Bretton Woods system initially buttressed the role of the dollar as world money and facilitated the further transnational expansion of US capital by enabling corporations to borrow in Europe. Thus, the growth of Eurodollars expanded exponentially after 1968 when the US trade account began a steady slide into deficit (Arrighi, 1994: 302–3; van der Wee, 1986: 469–72).

Meanwhile, the reconstruction of West European economies and the continuing flow of US investments had increased competitive pressures and constrained the further expansion of US capital in the region. Equally significantly, the growth in employment led to militant wage demands. While tight labor markets significantly diminished the threat of dismissals, workers evolved a series of strategies – lightning strikes, ‘go slows,’ rolling strikes, ‘confetti strikes’ (when different groups of workers struck for specified periods determined by the color or last digit of their registration cards) – to cause the greatest disruption with the least cost to themselves, and reaped rich rewards in the form of higher wages, reduction of wage differentials, greater shopfloor representation in bargaining, and increased workplace control (Armstrong et al., 1984: 236–46, 271–82; Silver, 1997).

In marked contrast to its attempts to curb capital outflows to Western Europe, the United States government encouraged an increase in US corporate investments to its allies and other ‘friendly’ states in Asia. This was done, in the first instance, to ensure the viability of a non-Communist model of development, especially in Taiwan, as American aid was being phased out. Transnational expansion to East and Southeast Asia also provided US corporations with a means to relieve increasing competitive measures as opportunities for further expansion in Europe declined. Additionally, relocation of manufacturing operations to East Asia enabled US-based TNCs – and less significantly, those based in Europe – to recapture market shares in their home bases which were being lost to cheap Japanese imports (Gold, 1988b: 195).

Unlike the case of India, Brazil, or other large low- and middle-income states, the smaller governments and businesses in several locations in East and Southeast Asia were more favorably inclined to foreign investments as limitations placed on the continued pursuit of ISI strategies by their narrow domestic markets and relatively poor resource endowments became evident by the mid-1960s. Thus, when the larger low- and middle-income states were beginning to impose restrictions on TNCs, Taiwan and South Korea were courting foreign investments by establishing the Kaohsiung Export Processing Zone (KEPZ) in 1965 and the Masan Export Processing Zone in 1970 respectively. Even earlier in Thailand, after Field Marshal Sarit Thanarat's take-over of power in 1958, the government had abandoned its dirigiste policy, privatized many state enterprises and, on the advice of a World Bank team, invited foreign investments. However, a symbiosis between bankers and industrialists frustrated demands by traders and consumers for a more liberal trading system until excess capacity in the domestic consumer goods sector became acute by the early 1970s when the government began to shift to an export-oriented industrialization strategy (Hewison, 1987: 56–8). In Indonesia, soon after his brutal overthrow of President Sukarno in 1965, General Suharto sought to regain the confidence of foreign investors as the old regime had largely nationalized foreign assets in 1957–58 (Winters, 1996: 50–76). And in Malaysia, the Malay-dominated state also began to be more receptive to overseas investors – permitting the establishment of free trade zones and severely curtailing the rights of labor – after the ethnic conflicts of 1969, as domestic industry was dominated by the Chinese minority (Rasiah, 1993; Jomo et al., 1997: 98).

Equally importantly, given the presence of large pools of cheap labor in East and Southeast Asia, the development of the region as a low-cost exporter to the United States enabled ‘the US government to cheapen supplies essential to its power pursuits, both at home and abroad’ (Arrighi, 1994: 341, emphasis in the original). Indeed, in the absence of the tremendous escalation of cheap imports from East and Southeast Asia – with US imports from Japan alone increasing more than three-fold, transforming an American trade surplus with Japan of $130 million in 1964 to a deficit of $1.4 billion in 1970 (Calleo and Rowland, 1973: 209) – the crisis of what James O'Connor (1973) calls the US ‘welfare-warfare state’ would have been far more acute than it already was by the end of the 1960s.

The constraints of narrow domestic markets on ISI strategies in East and Southeast Asia, the increasing substitution of corporate investments for US aid, and the development of several locations in the region as lowcost exporters to the United States in the mid-1960s led to a fundamental transformation in the patterns of US investments in Asia. Whereas these had been predominantly concentrated in India, Japan, and the Philippines until 1966, they became far more diversified with a quadrupling of US FDI in Asia (excluding Japan) between 1966 and 1977. Hong Kong and Indonesia accounted for two-fifths of the cumulative value of US investments in low- and middle-income Asian states by 1977, and Singapore, Malaysia, South Korea, Taiwan, and Thailand had also emerged as important new sites for American investments (Encarnation, 1992: 153, 158–9).

Though natural resources – especially petroleum in Indonesia – continued to attract the largest sectoral share of US investments, a considerable portion of new investments were directed toward offshore manufacturing, most notably in textiles and electronics. Unlike earlier US investments in manufacturing which had been oriented to supplying local markets in host countries, new investments were principally designed for export back to the United States.² Nevertheless, US investments in Asia remained relatively small – the book value of its FDI in manufacturing in Asia was only 4.7 percent of total US overseas investments in the sector in 1970, compared with 42.5 percent for the UK and the EEC, 31.2 percent for Canada, and 14.3 percent for Latin America (calculated from Wilkins, 1974: 331). Finally, deepening US military involvement in Indochina also fostered economic growth in neighboring countries. By locating strategic military bases in remote areas of Thailand and constructing highways, for instance, these areas were opened up for production for the world market and were central to the emergence of Thailand as an exporter of agricultural products (Phongpaichit and Baker, 1998: 22–3).

The surge in the expansion of US corporate capital to Asia was accompanied by a parallel, though smaller, outward expansion to the region by Japanese capital since the mid-1960s. The rapid expansion of industrial production in Japan during the preceding decade had led to a tightening of the labor market and raised wages by the early 1960s (Ozawa, 1979: 14, 78–80).³ The coincidence of labor shortages at home, and the opening of new opportunities abroad – with the conclusion of a peace treaty with South Korea in 1965, the establishment of the KEPZ in Taiwan, Singapore's expulsion from the Malaysian Federation and the ouster of the Sukarno government by Suharto's right-wing regime in Indonesia the same year – provided a favorable climate for the transborder expansion of Japanese capital. An additional impetus derived from the weakness of Japanese corporate and government structures and their greater dependence on American markets that made them far more susceptible to US pressure than enterprises and governments across the Atlantic. As domestic US manufacturers of relatively unskilled, laborintensive, low-technology products began to lobby against the large volume of cheap imports flooding the American market, beginning with a five-year agreement with Japan on cotton textiles in 1957, the US entered into a series of bilateral agreements with its trade partners in East Asia requiring them to ‘voluntarily’ limit their exports to the United States in specified categories, and until 1971 over 34 percent of Japan's exports to the United States were covered by these voluntary restrictions (Calleo and Rowland, 1973: 210). The imposition of quota restrictions inaugurated a process of regional integration along the Asian seaboard of the Pacific as Japanese producers – ‘quota refugees,’ as Rosalinda Ofreneo (1994) so aptly calls them – sought to circumvent quotas on exports to the US by setting up offshore manufacturing facilities. Tightening restrictions of the Multifibre Agreements subsequently led textile manufacturers based in Hong Kong, South Korea, and Taiwan also follow the Japanese lead in setting up off-shore production facilities in Pacific-Asia.

Consequently, while Japanese manufacturing investments in East and Southeast Asia had been limited to only nine cases before 1960 – four in Thailand, three in Taiwan, and one each in Hong Kong and Singapore – these numbers rose significantly after 1966, as indicated by Table 4.1. Despite this rise, overseas investments in manufacturing continued to be overshadowed by Japanese investments in resource extraction throughout the 1960s and the share of manufacturing in total Japanese FDI, measured in dollar terms, actually fell from 27.4 percent in 1960 to 20 percent in 1970 (Dicken, 1991: 19; Tokunaga, 1992). However, a more accurate indicator of the importance of Japanese overseas manufacturing investments is provided by the number of projects than by their value.

Unlike the transnational expansion of US capital which was spearheaded by large, vertically integrated TNCs, and directed toward the manufacture of relatively sophisticated products, small- and medium-scale firms specializing in labor-intensive, low-skilled, low-technology sectors were the primary agents for the transborder expansion of Japanese capital (Ozawa, 1979: 25–30; Ozawa, 1985: 166–7; Steven, 1990: 14). These small firms had neither the resources to construct large production facilities nor access to advanced technologies that would give them enough leverage with host governments to insist on retaining majority control over their

subsidiaries. Abiding resentments against the Japanese for their colonial occupation of Taiwan and South Korea and their wartime atrocities against peoples of Southeast Asia made it strategically prudent for Japanese investors not to insist on majority equity participation in their joint ventures. Thus, the average size of Japanese manufacturing investments in the region was far smaller than the average size of US or European investments. In Taiwan, for instance, Japanese investments in the electronics and electric machinery sectors averaged $339,000 at the end of 1970, and $417,575 in chemicals as opposed to average US investments of $3,975,676 and $2,344,478 respectively (Ozawa, 1979: 88; Denker, 1994: 55).

Small- and medium-scale firms were able to establish beachheads for Japanese capital on the Asian perimeters of the Pacific only because the sogo shosha could provide the infrastructural support necessary for foreign investments that none of them could have borne individually. Despite the panopoly of services provided by the sogo shosha – arranging finances, identifying local partners, providing market information and other consultancy services, organizing imports of components from Japan – the crux of their leverage over Japanese transplants lay in their control over local and global distribution networks (Yoshihara, 1978: 126; Steven, 1990: 70).

The transborder extension of hierarchically-linked Japanese subcontracting networks, and of the operations of TNCs more generally, to the ‘Four Dragons’ was eased by the absence of a landed aristocracy and the political subordination and structural dependence of their indigenous bourgeoisies on their respective state machineries. At the same time, repressive legislation and the lack of political representation for labor in dominant one-party or colonial regimes licensed managements to treat workers with impunity – ignoring protective legislation, dismissing activists, and even delaying payment of wages (Deyo, 1989; Bello and Rosenfeld, 1990; Koo, 1990; Koo, 1993). In the initial phase of export-oriented, light industrial production, the recruitment of large numbers of previously unwaged workers into factories, and the high levels of unemployment and underemployment further undermined the bargaining position of labor. Small- and medium-sized Japanese firms found Taiwan an especially hospitable environment because familiarity with Japanese business practices among the older Taiwanese eased small-time Japanese entrepreneurs' problems in ‘suddenly going global.’ Finally, high levels of job turnover and attempts by managements to atomize workers – the practice of some South Korean textile companies to frequently rotate shifts to prevent the development of social bonds, for example – created further obstacles to collective action (Deyo, 1989; Bello and Rosenfeld, 1990; Gold, 1988b: 196).

As low wages were a primary consideration in the transborder expansion of Japanese capital, they were concentrated in Taiwan and South Korea rather than in the two city-states where wages were much higher (see Tables 4.2a and b). In contrast, given the wide differences in wage

scales between the region and their home bases, US corporations were more concerned with tax incentives, government regulations (or lack thereof), and labor laws than with wage differentials within East and Southeast Asia. Consequently, American investments tended to be disproportionately sited in Hong Kong and Singapore. Finally, since Japanese overseas manufacturing investments were concentrated at the lower end of the technological scale, a far greater share of their sales was directed toward local markets in host countries and neighboring jurisdictions than was the case with US investments (Yoshihara, 1978: 30–46; Ozawa, 1979: 83–94; Gold, 1988b: 195–7; Steven, 1990: 70–1).

A third, and smaller, strand of transborder investments came from Overseas Chinese, who invested mainly in Taiwan until China began to solicit their investments in the early 1980s by creating Special Economic Zones and offering them other benefits. When there was considerable anti-Chinese animosity in Indonesia and Malaysia, many Sino-Indonesians and Sino-Malays invested in Taiwan, which offered them greater stability and a more skilled workforce. Though they constituted 50 percent of foreign investments in Taiwan by 1985, they accounted for only 23 percent of the capital invested. Most of these investments were small, averaging US$672,285 in 1985 and almost three-quarters of them were joint ventures. Thomas Gold (1988b: 197–8) reports that many of these Overseas Chinese were really ‘front men for local businessmen’ since Overseas Chinese received preferential treatment from officials, and these arrangements also provided Taiwanese businessmen with a convenient way to transfer capital to more secure locations abroad. Unlike small-scale Japanese businesses, since the Overseas Chinese came from places that were less technologically developed than Taiwan, these investments generally did not lead to technology transfers.

Notwithstanding differences between these strands of investments, they all promoted regional integration in East and Southeast Asia – the goal that had eluded American policy makers in the 1950s – and fostered the growth of economic linkages between the Pacific coasts of North America and Asia. Unlike the case in Western Europe though, where regional integration was a precondition to postwar reconstruction, it was the outcome of economic reconstruction in East Asia. Further, rather than attempting to reconstruct East and Southeast Asian economies in the American image, the purpose of these investments in the 1960s (and later) was to enable the US government to economize in its power pursuits at home and abroad while relieving the competitive pressures on Japanese and American enterprises caused by rising wages in their home bases.

In tandem with the flows of manufacturing investments to select low-and middle-income states, located mainly in East and Southeast Asia, major firms in the United States and Western Europe adopted two strategies to undermine the bargaining power of labor and to lower wages in their home bases: increased recruitment of previously unwaged workers and a further round of industrial decentralization. The recruitment of a fresh wave of migrants to the industrial labor force in the United States was facilitated by the elimination of immigration restrictions that had discriminated against migrants from Asia and Latin America, while core states in Europe encouraged migrations from their former colonies or, in the case of West Germany, from the outer fringes of Western Europe – Greece, Turkey, and Yugoslavia. Though these newly proletarianized migrants were less prone to militant wage bargaining, in the heightened conditions of labor militancy, the gains accruing to firms were not as significant as those resulting from industrial decentralization (van der Wee, 1986: 236–9).

With the growing capital-intensity of production that placed a greater premium on space, industrial relocation toward the suburbs and rural areas was a pronounced tendency during the 1960s in the United States and the core states of Europe. During the decade, the 15 largest conurbations in America lost almost a million jobs while the suburbs gained an additional three million and the percentage of the American population living in such locations rose from 25 percent in 1950 to nearly 40 percent in 1970 (Lash and Urry, 1987: 115–16). This spatial transformation of industrial production in the United States was heavily skewed toward the southern and western states of the ‘Sunbelt’ – which accounted for 86 percent of all new manufacturing jobs. During this period, metropolitan areas in the Northeast registered a net decline of 600,000 jobs in manufacturing (Davis, 1986: 130; Lash and Urry, 1987: 121–3; Kasarda, 1988: 218–19).

Moreover, though western states gained more jobs in the 1960s than the corroding industrial heartland, the southern states surpassed them in total employment gains during the decade (Kasarda, 1988: 218). Most impressively, by 1970 the thirteen southern states attracted almost half the annual inflow of foreign investments in manufacturing to the United States (Cobb, 1984: 58). This shift of manufacturing to the southern states is attributable to lower wages, taxes, energy costs, and land prices; improved accessibility to major markets through the construction of the interstate highway system and airport expansions; an abundance of local and state subsidies; a massive expansion in public schools systems and universities to offer a skilled laborforce; and perhaps most importantly, antiunion legislation. Along with spatial relocation, the size of manufacturing plants declined – while, for instance, the number of establishments in the United States with over one thousand employees remained stable between 1967 and 1977, the number of plants with less than 250 employees increased by more than 15 percent (calculated from Lash and Urry, 1987: 115). The magnitude of these changes in industrial structure within the United States partly accounts for the marked decline in the American share of total FDI between 1967 and 1974 (see Dunning, 1988: 91).

Finally, across the ideological divide in Eastern Europe and the Soviet Union, parallel tendencies were operating to irrevocably breach the hitherto impenetrable walls between the US- and Soviet-led blocs, though even a cursory examination of these trends falls outside the purview of the present analysis. Suffice it to note that the exceptionally high rates of material expansion registered in the region after the end of the Second World War – rates so remarkable that British Prime Minister Harold Macmillan could tell President John Kennedy in the early 1960s that the ‘buoyant economy [of the USSR] would soon outmatch capitalist society in the race for material wealth’ (quoted in Hobsbawm, 1994: 9) – were abruptly coming to an end by the late 1960s as additional inputs of labor and material resources yielded progressively diminishing returns (Brus, 1973: 34; Brus, 1975: 163–4; Sik, 1976: 54, 93–4). Simultaneously, the notorious inefficiency of its agriculture and the determination of the Brezhnev administration to increase animal proteins in Soviet diets increased pressures on the USSR to import feed grains for its growing herds of livestock (Morgan, 1980: 192–214). The final breach was sealed by the massive grain deal concluded between the United States and the Soviet Union in 1972, a deal that accounted for fully three-quarters of all commercially traded grain in the world market in the 1972–73 crop year (Friedmann, 1993: 40). Though grain sales to the USSR and the concomitant shift in US policy from food aid to commercial exports also provided the declining hegemonic power with a badly needed influx of foreign exchange, it was entirely inadequate to help redress its worsening balance of payments deficits.

Briefly put, by the mid to late 1960s, massive flows of US aid and the prodigious transnational expansion of US corporate capital along with an escalation of domestic social expenditures in the hegemonic power, and the creation and rapid growth of supranational currencies eroded the industrial and financial lead built by the United States before and during the Second World War over other core states. The exacerbating fiscal crisis confronting the US government led successive American administrations to encourage greater outflows of investments to East Asia to substitute for declining levels of US aid to ‘frontline’ states in the bipolar rivalry with the USSR and to economize in the means necessary for its power pursuits at home and abroad. This policy stood in sharp contrast to the unsuccessful attempts by the US government to curb capital outflows to Western Europe and signaled the beginnings of regional integration along the Asian perimeters of the Pacific as rising wages and the imposition of quotas on Japanese imports to the United States stimulated a corresponding, though smaller, outward expansion of Japanese investments to the region. The expansion of US and Japanese investments in manufacturing to Hong Kong, Singapore, South Korea, and Taiwan were facilitated by the appearance of the limitations of narrow domestic markets on the continued pursuit of ISI strategies in these territories, particularly in the two larger jurisdictions. Similarly, in a bid to lower production costs within the United States, there was a parallel shift of manufacturing from the industrial heartland of the northeastern and midwestern states to the western and, especially, to the southern states. While these processes laid the foundations for the emergence of a nexus of densely interconnected networks along the North American and East Asian coastlines of the Pacific, and across the ocean, these territories continued to be overshadowed by the concentration of industrial, commercial, and financial power in the eastern United States and in Western Europe throughout the 1960s and 1970s.

Nevertheless, as we will see in the next section, since these measures did not address the problem of ballooning US balance of payments deficits, it led the Nixon administration to revoke the dollar's convertibility to gold. This shifted competitive pressures onto enterprises in Western Europe and Japan. Combined with a rapid upsurge in world liquidity, this fueled a further and more intense transfer of manufacturing operations to low- and middle-income economies. While industrial upgrading in Japan and the transfer of both low-skilled and heavy industries from Japan was responsible for high rates of growth along the Asian coasts of the Pacific, as we shall also see, these rates were by no means exceptional. The recycling of increased revenues of members of the Organization of Petroleum Exporting Countries (OPEC) through European and American banks had led to the adoption of debt-led strategies of industrialization in several middle-income economies in Latin America and Eastern Europe which were more impressive. However, the transborder expansion of Japanese corporate networks further consolidated an emerging regional integration of production networks along Asia's Pacific shores.

Riding the dollar juggernaut

Despite attempts to alleviate the intensification of competitive pressures and the resulting overaccumulation crisis, none of the measures sketched above proved sufficient to the task and the persistence of the US balance of payments deficits compelled the Nixon administration to formally suspend the convertibility of the dollar to gold. Once the fixed dollar-gold standard was abandoned in 1971, as there was no viable alternative to the dollar as reserve currency and international medium of settlement, the US government was freed from the need to control its balance of payments deficits since

it was now possible to release unlimited quantities of non-convertible dollars into international circulation. Therefore, while continuing to depreciate the dollar in an attempt to recover competitivity in the production of goods, the United States was no longer saddled with the problem of generating a current account surplus with which to finance its capital account deficit…. In practical terms, the problem of the settlement of the American balance of payments simply disappeared.

(Parboni, 1981: 89–90; see also Itoh, 1990: 49–50)

Loose monetary policies, in fact, bestowed two substantive competitive advantages on US firms. First, by causing a steady depreciation of the dollar, it increased the competitiveness of US goods in foreign markets while simultaneously reducing American imports by making foreign goods more expensive. Second, after the sharp escalation of oil prices in 1972, the liberal release of dollars served to divert oil supplies to the United States. The imposition of a ceiling on the price of oil extracted from domestic wells in operation before 1972 also meant that oil prices in the US were approximately 40 percent below the world market price (Parboni, 1981: 34–5, 53–4; Arrighi, 1994: 309). Lower American energy costs served to further intensify competitive pressures on West European and Japanese enterprises. Additionally, the autocentric nature of the US economy and the role of the dollar as the international reserve currency and medium of exchange meant that the United States was relatively less constrained by balance of payments deficits than the more extroverted economies of Western Europe and Japan. Hence, the crisis of the 1970s was more properly a Euro-Japanese crisis, and the consequent narrowing of the gap in rates of growth between the United States and core states in Europe and Japan resulted in the US economy being stronger at the end of the 1970s than it had been at the beginning of the decade (Parboni, 1981: 99–113).

Though the impact of a liberal expansion of US money supply was less severe on Japanese enterprises than on those in the core states of Europe, the end of the regime of fixed exchange-rates led to a considerable appreciation of the yen – rising by almost 12 percent against the dollar in 1972 over the previous year, and by 40 percent between 1969 and 1979 (calculated from Parboni, 1981: 126). This rendered Japanese exports increasingly less competitive relative to exports from neighboring territories along Asia's Pacific perimeters which began pursuing aggressive export promotion policies at precisely the same time. Compounding the pressures on the Japanese economy were rising wage rates due to low levels of unemployment, and the country's abject dependence on imported raw materials and energy supplies when the composite index of raw materials prices increased by 300 percent between 1970 and 1973 (Parboni, 1981: 110). Caught between the twin pincers of rising import bills and declining exports – with net profit share of its domestic manufacturing sector falling by over 60 percent between 1970 and 1975 (Itoh, 1990: 165; Leyshon, 1994: 124) – Japanese manufacturers, under MITI's direction, developed a coordinated strategy for industrial restructuring which led to a consolidation of regional integration along Asia's Pacific perimeters.⁴ This hinged on upgrading domestic industrial structure by transferring both light and heavy industries to low-wage locations while retaining as much of the value-added segments of production processes within Japan as possible to enhance the export competitiveness of their products and reduce dependence on raw material imports. As the oil price hikes had demonstrated that unpredictable political events could hold the Japanese economy to ransom, the government even granted 100 percent tax remissions for offshore investments in resource extraction and processing in a bid to diversify and expand supplies of vital raw materials by (Eccleston, 1989: 245; Steven, 1990: 74–85).

In the first instance, led by the electronics and textile industries, the flight of manufacturing investments was so extensive in 1972 – when it topped the $2 billion mark for the first time, and represented a 172.5 percent increase over the previous year as shown in Figure 4.1 – that the Japanese often refer to the year as the gannen (the very first year) of overseas direct investment (Yoshihara, 1978: 112–66; Ozawa, 1979: 94–110; Encarnation, 1992: 169). As the lower end of production processes was dominated by small- and medium-sized companies, it accounted for about one-half of all Japanese overseas manufacturing investments in the 1970s, and 90 percent of these investments were in neighboring locations along Asia's Pacific seaboard (Eccleston, 1989: 245–6; Ozawa, 1979: 94–103; Yoshihara, 1978; Steven, 1990: 136–44).

Source: Adapted from Steven (1990: 67).

The transfer of labor-intensive, low-skilled production processes also represented an attempt by Japanese manufacturers to preserve their established market shares in East and Southeast Asia as many governments erected protective tarrifs on these sectors while offering inducements to foreign investors. In Indonesia, increasing popular discontent with foreign investments highlighted by the Malari riots of 1974 had led to a change of course. To counteract this discontent, and its coffers flush with the quadrupling of oil prices in 1972, the Suharto government revised foreign investment laws in 1974, mandating a transfer of majority ownership to Indonesians within ten years, requiring that all investments be joint ventures, and favoring the pribumi (‘indigenous’ Indonesians) – changes that were prompted by the displacement of domestic Indonesian industries by Japanese transplants.⁵ To maintain their share of the large Indonesian domestic markets, and to circumvent quotas imposed by the Multifibre Agreements, Japanese investments in the textile industry expanded dramatically after 1967. By 1974 only South Korea had more Japanese investments than Indonesia in the sector (Steven, 1990: 210–13; Yoshihara, 1978: 65–7; Morris-Suzuki, 1991: 139).

Though the average size of Japanese investments in the original member-states of the Association of Southeast Asian Nations (ASEAN) – Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand – involved fewer than 200 employees in 1980, and 37.5 percent of the 2,406 Japanese manufacturing projects in the trading bloc had a paid-up capital of less than $5,000 (Saravanamuttu, 1988: 144), there were significant differences in their sectoral composition, structural characteristics, and locational patterns in the 1970s when compared with the earlier wave of outward expansion. Thus, while the number of overseas investments in textiles increased from 207 between 1951 and 1971 to 321 between 1972 and 1979, and of electronics from 175 to 557, as a proportion of total Japanese overseas manufacturing investments in Asia, the sectoral share of these sectors declined from 18.6 percent to 11.2 percent and 14.4 percent to 12.0 percent respectively, as indicated by Table 4.3. Moreover, while the average annual flows of investments in textiles and electronics between 1972 and 1979 were $35.7 million and $45.4 million respectively, these were overshadowed by investments in iron and non-ferrous metals and chemicals that averaged $76.9 million and $55 million respectively over the same years. Largely due to the large investments in resource extraction, Indonesia accounted for 70 percent of the cumulative value of Japanese investments to ASEAN states between 1951 and 1971, though only 8.8 percent of the total number of Japanese companies operating in the region were located in Indonesia. However, 69.4 percent of these ventures had a paid-up capital higher than $1 million. At the opposite end of the scale, though the Philippines accounted for the largest number of Japanese companies among the ASEAN states (30.7 percent of the total), 56.2 percent of these had a paid-up capital of less than $5,000 in 1980.

The small-scale and low skill- and capital-intensities of Japanese joint ventures in manufacturing did not undermine the salience of industrial policies in the several jurisdictions as the governments of Thailand, Malaysia, and Indonesia had also adopted some of the institutional accou-terments of a ‘developmental state’ as they began to encourage foreign investments. However, their economic bureaucracies never achieved the autonomy and proficiency of their counterparts in Japan and the ‘dragons’ (Henderson, 1999). In Thailand, despite the creation of pilot agencies such as the National Economic and Social Development Board and Board of Investment in the 1960s, concern for macro-economic stability took precedence over industrialization because economic policy was dominated by the Bank of Thailand and the Ministry of Finance. Consequently, though the Sarit government had abandoned dirigisme in 1957, the chief beneficiaries tended to be capitalists closely associated with the military. The appointment of senior military figures to head state enterprises further constrained the powers of the economic agencies. Moreover, there was little coordination between economic agencies – in the 1970s, for instance, the Board of Investment, the Fiscal Policy Office (an inter-ministerial committee to deal with individual petitions for protection), the Ministry of Commerce, and the Ministry of Industry all had authority to impose tariffs and often made mutually conflicting decisions (Hewison, 1987: 54–6; Phongpaichit and Baker, 1998: 20–2; Dixon, 1999: 103).

In Malaysia, while the adoption of the ‘New Economic Policy’ in 1971 involved the creation of ministries and economic agencies modeled on those in Japan and the ‘dragons’ – the Ministry of Trade and Industry, the Malaysian Industrial Development Authority, the Economic Planning Unit, and state-holding companies – these were dominated not by a technocratic elite but by a political elite seeking to further their personal interests, both political and economic. The government's policy of ensuring bumiputera (‘indigenous’ Malay) ownership of 30 percent of the corporate sector led to the selective allocation of concessions, industrial licenses, low-interest loans and monopolies to companies owned or controlled by politicians, retired bureaucrats, and politically connected entrepreneurs – to ‘crony capitalists’ (Yoshihara, 1988: 3–4, 71; Gomez and Jomo, 1997: 25). Since the main beneficiaries of the New Economic Policy were those linked to the ruling party, bumiputeras came to view involvement in politics as a quick route to obtain profitable business opportunities and the creation of patronage networks as well as the establishment of a large number of public enterprises – growing from 23 in 1957 to 1,149 by 1992 – in virtually every economic sector as sinecures undermined the disciplinary functions of the economic bureaucracy. At the same time, the split between domestic capital dominated by the ethnic Chinese minority and foreign capital ensured that linkages between these fractions of capital remained weak and the economy did not benefit from synergies and spin-offs.⁶

Finally, in Indonesia, President Suharto also instituted an economic bureaucracy – creating a plethora of agencies such as the National Economic Planning Board, the Investment Coordinating Board, the State Logistics Boards, and the Technology Research and Development Board – under his direct control. If these organizations played key roles in the development and expansion of state-funded industrial projects, it was more in the interests of appropriating the benefits for the Sino-Indonesian and pribumi conglomerates and for the companies owned by the President's family and friends. Unlike the case in Malaysia, the lack of equity capital meant that pribumi investors were a much smaller component of Indonesia's domestic bourgeoisie and that even as late as the early 1990s, only four pribumi-owned conglomerates figured among the top twenty and two of these belonged to President Suharto's sons (Hill, 2000: 111–12; Berger, 1997; Robison, 1993: 48–9, 56; Wolf, 1992: 36). Crucially, the pervasive clientalism that characterized developmental strategies in Malaysia, Thailand, and Indonesia meant that economic bureaucracies did not have the autonomy to subject businesses to performance criteria or to deflect counter-productive investment flows (Henderson, 1999: 14–19).

With the greater diversification in the range of overseas investments, there was a corresponding increase in the importance of large manufacturing corporations in Japanese FDI. This is indicated by the fact that the average size of investments in the heavy and chemical industries – almost exclusively undertaken by large corporations such as Kawasaki Steel, Mitsubishi, Mitsui, Nippon Steel, and Sumitomo – were much larger than in the case of textile and electronics industries. Even in the electronics industry, where only Sony among the major manufacturing corporations had figured among the top ten overseas investors as late as 1974, other large manufacturers became increasingly prominent in offshore production as it became a vital element in their global strategies due to the appreciation of the yen and the imposition of quotas on exports from Japan by core states in Western Europe and North America. Similarly, the increased transfer of synthetic textile production to East and Southeast Asian locations can be calibrated by the growing prominence of large textile firms such as Kanebo, Teijin, Toray, Toyobo, and Unitika in Indonesia, the Philippines, Thailand, Malaysia, Hong Kong, and less significantly in South Korea, Taiwan, and Singapore (Yoshihara, 1978: 102–38; Steven, 1990: 71–3).

The greater importance of heavy and chemical industries in overseas investments also reflected a fundamental restructuring of Japanese domestic industries. By the mid-1970s, increasing concern over the social and environmental costs of an industrialization drive based on heavy and chemical industries, and the rising costs of commodity prices, led to the progressive transfer of primary, ‘pollution-prone,’ and ‘resource-consuming’ stages of processing raw materials to offshore locations. Taiwan and, more importantly, South Korea, where the average wage level was only one-seventh of the Japanese level between 1972 and 1974, were the major destinations for the transfer of Japanese heavy industries (Amsden, 1989: 296; Fujiwara, 1989: 189; Ozawa, 1979: 18–19; Steven, 1990: 77–8).

In keeping with their internal structures, Taiwan and South Korea accommodated declining Japanese heavy and chemical industries differently. Its security concerns heightened by the US rapprochement toward China, the Taiwanese government encouraged foreign investments, and by the late 1970s foreign investors accounted for 54.7 percent of production in the electronics sector, 35.5 percent in machinery and 17.9 percent in chemicals. At the same time, the state sector also grew absolutely in size, as favorable current account balances in the 1970s enabled the government to create new enterprises in the intermediate and capital goods sectors to upgrade Taiwan's industrial structure. After the oil price hikes compelled the government to scrap its Sixth Four-Year Plan, generous tax incentives were provided for local research and development to attract high-technology industries to Taiwan, and state enterprises formed joint ventures with foreign firms in selected sectors (Cheng, 1990: 162–70; Haggard, 1990: 141–2; Bello and Rosenfeld, 1990: 244–5).

The disproportionate share of investments in heavy and chemical industries flowing to South Korea was due to the determination of the Park government to upgrade the industrial structure in the country with the initiation of the Heavy and Chemical Industries Drive (HCI) by presidential decree in the early 1970s. The larger size of the chaebol enabled them to undertake expensive, large-scale projects albeit with ample assistance from the government (Amsden, 1989; Bello and Rosenfeld, 1990: 57–60). Resorting to low-interest loans as the chief instrument of industrial restructuring, the new strategy favored larger firms – and aimed to create ‘national champions’ in different sectors. South Korea's overseas debt grew from US$1.7 billion between 1966 and 1970 to $4.5 billion between 1971 and 1975 and $11.7 billion between 1976 and 1980. In the latter part of the 1970s, Hagen Koo and Eun Mee Kim (1992: 136) estimate that between 53 and 63 percent of all domestic loans in South Korea were distributed to the chaebol by the government as ‘policy loans’ at heavily discounted rates. Additionally, some 70 percent of all bank loans in the 1980s were channeled to the chaebol – the top five receiving 20.3 percent in 1980 – these highly leveraged conglomerates were able to capture market shares by initially absorbing huge losses (Bello and Rosenfeld, 1990: 66–7; Haggard, 1990: 131–2; Cheng, 1990: 162–8; Koo and Kim, 1992: 135, table 5.2).

In 1975, the government also created General Trading Companies modeled on the sogo shosha and 13 chaebol were given GTC licenses. This led to an even higher degree of centralization and concentration of capital.⁷ While the chaebol had diversified into unrelated sectors like the Japanese keiretsu, they had not nurtured the vertical, inter-firm organization of the latter. One survey of 81 ancillary firms in the South Korean automobile sector in the mid-1970s indicated that 70 percent did not receive any form of assistance from the primary firm and that only a quarter of them received technical assistance. Typically, the chaebol not only did not provide financing or loan guarantees or arrange for the supply of raw materials but also maintained a competitive cost pricing relationship with their suppliers. Ancillary firms therefore had little incentive not to cut corners and a study conducted by the Korean Automobile Association in 1976 indicated that only 10 percent of 1,200 products met international standards, and 60 percent were significantly below par. To upgrade product quality necessary to be competitive in overseas markets, the state encouraged joint ventures and mergers by designating specific firms for low interest loans and tax incentives, and assisted with their acquisition of technical know-how, thus creating an autonomous supplier base (Chuk Kyo Kim and Chul Heui Lee, 1983: 314; Morales, 1994: 138–9).

Accompanying the transfer of heavy industries overseas, and in accordance with the MITI-directed strategy of retaining as much of the higher value-added segments of production processes within Japan as possible, there was a spectacular expansion of Japanese investments in resource extraction in the 1970s. The rise of commodity prices had underlined the dependence of the Japanese economy on imports of raw materials and shifted the relative balance of power to elites in resource-rich low- and middle-income states. Consequently, unlike the large, integrated US-based resource extracting and processing corporations which had insisted on majority ownership – and were thus vulnerable to the nationalization of their operations by peripheral states frustrated by the failure of foreign investments in the extractive sector to relieve chronic levels of unemployment and to transfer technology – Japanese investors sought access to resources through joint ventures with host governments. The most prominent destination for these investments in resource extraction was Indonesia, which by 1981 accounted for 15.1 percent of the cumulative value of Japanese FDI and emerged as the second largest locus of all Japanese investments after the United States (Saravanamuttu, 1988: 140; Shibusawa et al., 1992: 20).

The massive level of these investments gave the Japanese government and businesses considerable leverage to insist that loans be tied to purchases of machinery and equipment from Japan and hence benefitted a wide range of Japanese enterprises including those not directly involved in resource extraction. This was most clearly evident in the increased activities of Japanese construction companies throughout Southeast Asia and further afield (Steven, 1990: 75; Edgington, 1991).

Rob Steven (1990: 78–81) has argued that a central reason for Japanese corporations to invest heavily in resource extraction and processing facilities in low- and middle-income countries in Asia and elsewhere was because governments in these countries had a typically cavalier disregard for the highly toxic and polluting effects of these projects on their peoples and the land. While this observation contains an important element of truth, for the purposes of this discussion the main significance of industrial restructuring in Japan through the transfer of light and heavy industries to neighboring locations along the Pacific perimeters of Asia was that it denoted a new phase of regional integration. The scale of outflows of capital from Japan to East and Southeast Asia was so extensive that by 1977 the cumulative value of Japanese FDI equaled the historically larger US investments in the region and by the end of the 1970s Japan was the largest foreign investor in Indonesia, Thailand, and South Korea, the second largest in the Philippines, Taiwan, Malaysia, and Hong Kong, and the fourth largest in Singapore (Encarnation, 1992: 154–64; Steven, 1996: 83; Shibusawa et al., 1992).

The ordinal ranking of Japanese investments in East and Southeast Asia actually understate the extent of Japanese expansion in the region. As already indicated, the transborder expansion of Japanese capital took the form of joint ventures with low levels of equity participation by Japanese investors. In the ASEAN states, for instance, almost half (47.1 percent) of all Japanese manufacturing investments involved an equity participation of less than 10 percent in 1980 (Saravanamuttu, 1988: 156). As small- and medium-sized Japanese firms rarely controlled all aspects of the production process, rather than exporting finished products back to their home market, wherever practicable the trading companies imported Japanese components to East and Southeast Asian sites for processing and then exported them back to Japan for finishing – the intent being to retain as much of the value-added in Japan as possible and going overseas only to cut wages at particular stages of manufacture (Gold, 1988b: 195–7).

In contrast, the average size of US investments was considerably larger. Until 1985, for instance, though the number of US investments in Taiwan represented 14.5 percent of the total number of foreign investments, they accounted for 33 percent of foreign capital invested in the island and the average size of American investment was $3.39 million.⁸ In the bulk of these cases, US corporations set up wholly-owned subsidiaries rather than joint ventures with local entrepreneurs. Moreover, until 1980, with only a few exceptions (producers of chemical products used for agriculture, the plastics industry, and intermediate components for other American subsidiaries on the island), most of the US plants exported finished products back to the United States rather than develop a market within Taiwan or elsewhere.

Apart from the transborder expansion of Japanese subcontracting networks, in response to rising wages in their home bases and to accommodate the declining industries being transferred from Japan, South Korean-and Taiwan-based capital began to extend its own subcontracting networks to Hong Kong, the Philippines, Indonesia, Malaysia, and Thailand through a transfer of labor-intensive, light industrial production (Eccleston, 1989: 245). Though many small- and medium-sized enterprises from Taiwan also began to invest in Southeast Asia, since they were not tied to keiretsu-like networks, they largely relied on kinship ties. A typical characteristic of this type of investment tended to be their clustering together to reduce transaction costs and to facilitate networking. However, these networks tended to be more fluid and open-ended than in the keiretsu structures. Conversely, South Korean investments were generally led by the chaebol (Jomo et al., 1997: 49–51).

Despite the Hong Kong government's ideological commitment to laissez faire, as the political energies of the Cultural Revolution echoed across the colony in the 1960s and raised real apprehensions about its political future, the colonial administration was compelled to respond to changing conditions. The shift to export-oriented industrialization in neighboring jurisdictions had increased competitive pressures on Hong Kong's electronics and plastics industries while the Multifibre Agreements limiting the exports of textiles had a disproportionate impact on the colony. Though an Industrial Development Board was set up, it was headed by the Finance Secretary and was more involved in courting foreign investments and promoting closer institutional relations with large domestic firms than in providing low-interest loans and other incentives (Castells et al., 1990: 59; Haggard and Cheng, 1987: 119–21).

Far more important in Hong Kong's emergence as a leading exporter in the 1970s and 1980s – rising from the 27th largest exporter in 1960 to the 10th largest by 1988 (Yeung, 2000: 128) – was a rapid expansion in government expenditure. In real terms, government expenditure rose by 26 times between 1949 and 1980 when real GDP grew only by 13 times (Sung, 1982: 48–9; Jao, 1993: 160). Even more tellingly, government expenditure on social services (education, health, social welfare, and housing) increased by 72 times during the same period, while public expenditure on transportation, land reclamation, and water services increased by 37 times, and the Royal Hong Kong Police Force grew to become larger than the New York City Police Department. ‘In fact, Hong Kong has the highest proportion of social expenditures over government expenditures of any Asian country, including Japan’ (Castells et al., 1990: 88).

In the absence of high taxes, the Hong Kong administration financed the rapid expansion of public expenditures at a rate faster than the rate of growth of the colony's GDP without causing high rates of inflation by increasing its nontax revenues – the income from licences, fees, fines, public enterprises including the Mass Transit Railway system in the 1980s, and most importantly from the sale and lease of land – which consistently accounted for over one-third of all government receipts, and rose to 46 percent of total revenues by the late 1970s. However, because domestic research and development was weak and the colony lacked upstream industries, small contractors were vulnerable to pressure from foreign firms. This led to a reversal in the trend toward income inequality – the Gini coefficient that had declined from 0.487 in 1966 to 0.435 in 1976 rose to 0.481 by 1981. Additionally, rapid industrialization entailed longer working hours in conditions where health and safety regulations were poorly implemented (Castells et al., 1990; Haggard, 1990: 152–3).

Conversely, in Singapore though the oil price hikes and the recession of the 1970s had forced a roll back of the high wage policy designed to promote higher value-added production, the government sought to assist small domestic entrepreneurs to upgrade their technologies so that there could be greater integration with international firms, especially in electronics. Thus, while the government had adopted a high-wage policy in 1973, the recession led to a loss of some 20,000 jobs between July 1974 and December 1975 with about two-thirds of the retrenchments coming from the electronics and electronic industry sectors. This was matched by a 61 percent drop in foreign investment commitments in 1975 as full employment had pushed labor costs in Singapore above prevalent levels in Hong Kong, Taiwan, and South Korea. As we have seen above, this compelled the government to revise wage levels downwards and introduce measures to assist small domestic entrepreneurs (Haggard, 1990: 146–7; Rodan, 1989: 113–28). The development of a large base on ancillary industries was a vital element in insulating Singapore from the more adverse effects of the economic crisis of 1997–98 as we shall see. Similarly, to foster OEM arrangements, for instance, the Taiwanese government not only provided tax incentives for exporters but as gatekeeper for the national economy it insisted that foreign investors not compete with local enterprises in the domestic market and included stringent domestic content requirements in approvals for foreign investments.

Meanwhile, reflecting the greater concentration of heavy industries in South Korea, investments by corporations based in that country in overseas resource extraction surged during the 1970s and early 1980s, with foreign investments in the mining sector – mainly in Indonesia, the Philippines, and Thailand – accounting for $172.7 million or 36.3 percent of South Korean FDI between 1968 and 1985 compared with $91.8 million in the manufacturing sector. In contrast, Taiwanese overseas investments in the manufacturing sector during the same period accounted for $183.2 million – more than twice the South Korean aggregate – or 85.3 percent of its FDI (calculated from Muraoka, 1991: 157).

The installation of manufacturing complexes in low- and middle-income states along the Pacific perimeters of Asia was also facilitated by the large-scale commercialization of agriculture. The globalization of the US agro-industrial complex through an expansion of contract farming and the implementation of new on-farm technologies and labor processes transformed family farms from being primarily concerned with local markets and household consumption to out-growers for large consolidated agro-marketing corporations, and converted growers into a ‘self-employed proletariat’ in low- and middle-income states. The expansion of contract farming in low- and middle-income states, which represented both a partial decomposition of plantation and estate agriculture and the integration of independent peasants and/or pioneer growers into corporate circuits of capital, resulted in widening disparities within rural areas, often culminating in the eviction of poor and highly indebted peasants, and in the conversion of acreage under food crops to export agriculture (see Watts, 1992; McMichael, 1993).

While the expropriation of subsistence farmers contributed to a massive emigration from rural areas, leading to historically unprecedented rates of urbanization, the mobilization of displaced farmers as an urban reserve army of labor was paralleled by an equally unprecedented recruitment of previously unwaged women in low-skilled, labor-intensive assembly processes as the impetus toward the installation of manufacturing complexes in low- and middle-incomes states by the TNCs stemmed from their search for a low-wage, submissive industrial workforce (Sassen, 1988: 18–19, 107–16). Hence, the expansion of manufacturing was accompanied by a major transformation in the sex composition of rural-to-urban migrations, and the overwhelming majority of such migrants were now women (Sassen, 1988: 110). At the same time, the cultural distancing of women employed in export-processing zones from their rural families, amidst increasing male unemployment, ruptured existing patternings of gender relations, and exacerbated social tensions (Ong, 1990; Wolf, 1992).

This massive expansion of multilateral subcontracting networks, which served to more tightly link low-waged peripheral producers in East and Southeast Asia to high-income consumers in the core through the mediation of corporations in Japan, South Korea, and Taiwan, was responsible for the high rates of industrialization registered by several states along the Asian perimeters of the Pacific. There was, however, nothing exceptional about these levels of industrialization. The unprecedented increase in global liquidity by the early 1970s through the creation of a large, supranational money market and the consequent availability of cheap credit spurred a wave of industrialization in several low- and middle-income states – most notably in Argentina, Brazil, and Mexico in the Americas, in Poland and other centrally planned economies in Eastern Europe, Italy and Spain in Southern Europe, and in Iran and some other oil-exporting states. The expansion of liquidity due to the loose monetary policies pursued by the US government and, more importantly, to the explosive growth of supranational currencies was so extensive that real long-term interest rates were negative between 1974 and 1979 – minus 1 percent in Western Europe, minus 0.2 percent in the United States, and minus 0.4 percent for the ‘Group of Seven’ (Canada, France, Italy, Japan, the US, the UK, and West Germany) as a whole (Itoh, 1990: 43).

The ample availability of cheap credit appeared to present a painless way to achieve economic growth, especially to leaders of one-party regimes and military dicatatorships. Since low-interest loans could finance the construction of industrial plants without resorting to higher taxation or other unpopular measures, it was thought that the incremental export earnings from higher industrial production could repay the loans. Thus, for instance, in Latin America, the share of private institutions in the net inflow of capital rose from 39.8 percent of a total capital inflow of $1.6 billion between 1961 and 1965 to 92.7 percent of a total annual inflow of $21.8 billion by 1978, while the share of public agencies fell from 60.2 percent to 7.3 percent. During this period, the share of FDI by the TNCs and their subsidiaries which had accounted for 25.2 percent of all capital inflows between 1961 and 1965, declined to 16 percent in 1978, while the share of private banks rose from 2.1 percent to 56.6 percent (Roddick, 1988: 26–8). Similarly, the magnitude of the flows of cheap credit to the People's Democracies of Eastern Europe is indicated by the rise in Poland's cumulative external debt from $1.2 billion in 1970 to $20.5 billion in 1979 (Nuti, 1981: 107; Damus, 1981: 105).

Viewed in the light of the vast expansion of industrial production in several low- and middle-income states in the 1970s, the rapid industrialization of what were to be subsequently called the ‘Four Dragons’ was hardly exceptional. The rates of industrialization registered by several Latin American states – particularly Brazil, which accounted for a population almost three times that of Hong Kong, Singapore, South Korea and Taiwan combined – appeared far more impressive to most contemporary observers, and it is often forgotten that it was Brazil and not any of the ‘dragons’ that was hailed as an economic ‘miracle’ in the 1970s. However, as illustrated by Table 4.4, despite rapid industrialization, differentials in GNPs per capita between these states and the organic core continued to widen in the 1970s – except for Brazil, which collapsed slightly later in the early 1980s. Though different national accounting procedures complicate similar comparisons with East European states, there is considerable evidence to suggest that their trajectories resembled those of the Latin American ‘miracles’ of the 1970s (Nuti, 1981; Marer, 1985). The only exception to this generalization were Italy and Spain, the two Southern European states integrated into the EEC.

Rather than heralding a phase of regional industrial expansion unprecedented elsewhere in the world, the real significance of the transborder expansion of production networks based in Japan – and less significantly in South Korea and Taiwan – under the pressure of currency appreciation, rising wages in their home bases, and raw materials con-straints in the 1970s was that it denoted the consolidation of regional economic integration along the Asian perimeters of the Pacific. Although it was the unfavorable bargaining position of Japanese corporations and government in the context of rising energy and commodity prices and the growth of ‘resource nationalism’ in low- and middle-income states that led them into joint ventures with host governments, by the early 1980s it became apparent that minority participation in joint ventures better served their needs. This was because participation in such projects enabled Japanese investors to greatly diversify their sources of supply by shifting a sizable share of project development costs onto host governments rather than sinking their own capital into projects with long gestation periods. Loose monetary policies pursued by the US government and the recycling of petrodollars and the resultant expansion of world liquidity enabled several resource-rich low- and middle-income states to exploit their resource endowments through external borrowing and technological assistance from TNCs, especially those based in Japan. The pursuit of multiple, parallel paths of state-led resource extraction projects, however, significantly impaired the capacity of producers to affect prices by rapidly expanding supplies without corresponding increases in demand. In these conditions, the increased exposure of host governments to risk and external debt reduced their ability to regulate overseas investors (Bunker and O'Hearn, 1993: 93–100).

Simply put, just as revoking the convertibility of the US dollar to gold had freed the US government to issue unlimited dollars and depreciate its value, the recycling of petrodollars through European banks removed restrictions on spending for other governments as they could easily borrow from supranational currency markets. Along with high rates of

inflation in the US, the unchecked growth of world liquidity not only threatened the dollar's role as world money but also raised the possibility of a severe global financial crisis. In these conditions, as the US Federal Reserve tried to curb inflation by raising domestic interest rates above the world average, it led to a dramatic shift in capital flows – with the US emerging as a debtor nation in quick succession. Correspondingly, as the flow of cheap credit to the ‘newly industrializing economies’ of Latin America and Eastern Europe was abruptly choked off, their industrialization programs came to a grinding stop and the debt crisis that followed virtually erased all the gains they had registered over the preceding thirty years or more. In contrast, since the transborder expansion of Japanese production networks, rather than debt-led strategies of autarkic national economy-making, underpinned industrialization along Asia's Pacific seaboard, there was no similar meltdown in these economies. However, if this gave cause for celebration, the benefits of industrial growth as we will see in the next section were very unevenly distributed.

Making the ‘miracle’ economies of the Pacific Rim

The exceptional nature of industrialization along Asia's Pacific seaboard became evident only in the late 1970s and the early 1980s, when most other low- and middle-income states posting high rates of growth slumped as rapidly as they had risen. The proximate causes for the collapse of these states were two-fold. First, the pursuit of multiple, parallel paths of industrialization had worsened the conditions for all by rapidly increasing supplies precisely when most high-income states, reeling under the effects of recession and growing rates of unemployment, were implementing protectionist measures to shield their domestic industries from further ravages. The rise of protectionism undermined a fundamental premise on which industrialization financed through borrowing from international private capital markets was based – that the loans could be repaid through incremental export earnings – especially when there was also a reduction in real wages in the core. Second, the reversal of loose monetary policies by the United States government and its aggressive competition for footloose capital from 1979 choked off the ample supplies of cheap credit that low- and middle-income states had enjoyed during much of the decade. This not only imperiled their industrialization strategies but also posed further complications as these states did not have the pecuniary or other resources to hedge against currency fluctuations created by floating exchange-rates.

Though loose monetary policies had enabled the United States government to shift competitive pressures to enterprises and governments in Western Europe and Japan, it proved to be only a temporary palliative for the US economy. The volatility of flexible exchange-rates had stimulated a further wave of transnationalization of US capital as corporations sought to hedge against variations in their cash-flows, sales, profits, and assets caused by currency fluctuations. These outflows were facilitated by the elimination of controls on capital outflows from the United States in 1974 – with the accumulated value of US FDI rising from $78 billion in 1970 to $168 billion in 1978 – which reversed the sharp decline in US overseas investments between 1969 and 1974 (Dunning, 1988: 91; Kirby, 1983: 40). While holdings in diverse currencies provided a long-term hedge against currency fluctuations, these provided no insurance at all against short-term variations. Consequently, major US and non-US enterprises engaged in short-term speculations in financial markets and thereby added to their volatility. Finally, the oil shock of 1972, which quadrupled the price of crude oil and the resultant problem of recycling petrodollars, led to a spectacular growth in international liquidity. As members of the Organization of Petroleum Exporting Countries (OPEC) channeled a major share of their earnings through European banks, the assets of these banks increased by 95 percent between 1976 and 1980 (Daly, 1987; Sassen, 1991: 66).

The consequent explosive growth of liquidity became the fount of a major destabilizing inflationary wave:

Formerly, countries other than the United States had to keep their balance of payments in some sort of equilibrium. They had to ‘earn’ the money they wished to spend abroad. Now they could borrow it. With liquidity apparently capable of infinite expansion, countries deemed credit-worthy no longer had any external check on foreign spending…. Under such circumstances, a balance-of-payments deficit no longer provided, in itself, an automatic check to domestic inflation. Countries in deficit could borrow indefinitely from the magic liquidity machine. Many countries … thus joined the United States in avoiding any real adjustment to higher oil prices. Not surprisingly, world inflation continued accelerating throughout the decade, and fears of collapse in the private banking system grew increasingly vivid. More and more debts were ‘rescheduled,’ and a number of poor countries grew flagrantly insolvent.

(Calleo, 1982: 137–8)

The uncontrolled creation of world liquidity and the equally unregulated competition between banks to recycle the growing volumes of supranational currencies – especially in the context of a dramatic growth in offshore banking made possible by advances in telecommunications, and the plethora of financial innovations – made the world financial system increasingly resemble a proverbial house of cards teetering on the brink of collapse. The collapse of the world market, and with it the US dollar as world money, in a catastrophic financial crisis was even more threatening to the smaller and more extroverted economies of Europe and Japan. Transnational corporations and the offshore banks that had vastly expanded their scale of operations were perhaps even more vulnerable to the threat of an imminent collapse. Consequently, starting with the appointment of Paul Volcker as Chairman of the US Federal Reserve in 1979, the United States government aimed to tighten its control over world liquidity by raising its interest rates above the rate of inflation. In lockstep with interest rate hikes, the US government also deregulated its banking and financial system, thereby offering banks all the advantages they could get in offshore locations plus the additional advantage that none of these offshore locations could offer – proximity to the most important center of world power (Arrighi, 1994: 309–18). These policies led to a sharp reduction in American and European FDI to low- and middle-income states. Thus, while peripheral and semiperipheral states had been the leading recipients of FDI in the 1970s, the deregulation of financial markets in the core led to a situation where intra-core flows have constituted the bulk of FDI since the 1980s.

The resulting recentralization of financial power in the United States and the drying up of the streams of cheap credit to low- and middle-income states led to a precipitous fall in commodity prices, the composite index of which declined by nearly 40 percent between 1980 and 1988 and of oil by 50 percent (United Nations, 1990). The rise in the London Interbank Offering Rate (LIBOR) from 11 percent in mid-1977 to over 20 percent in early 1981 caused by the interest rate hikes in the United States was particularly catastrophic for the Latin American economic ‘miracles’ of the 1970s as their debt service payments soared from less than a third of their export revenues in 1977 to almost two-thirds in 1982 (Frieden, 1987: 142–3; Arrighi, 1994: 323). Beginning with Poland in 1981, a debt crisis spread across the low- and middle-income states that had implemented debt-led strategies of industrialization in the 1970s. Between the Mexican debt crisis of 1982 and 1990, the restructuring of highly indebted low- and middle-income economies under joint World Bank and IMF supervision led to the debtor states collectively owing 61 percent more at the end of the period than they did at the beginning. While total resource flows – all bilateral and multilateral aid, grants by private charities, direct private investments, trade credits, and bank loans – to ‘developing countries’ amounted to $927 billion, these highly-indebted low- and middle-income states remitted $1,345 billion in debt service alone to the high-income states. To put this in perspective, if US Marshall Plan aid to Europe amounted to about $70 billion in 1991 dollars, in the eight years from 1982, the poorer countries have financed six Marshall Plans for the richer ones through debt service alone (George, 1992: xv–xvi)!

In this context, the ability of states along the Pacific perimeters of Asia, with the exception of the Philippines, to consistently post high rates of growth in the midst of this general collapse of peripheral and semiperipheral states was rooted in the unabated extension of subcontracting networks based in Japan, South Korea, Taiwan, and Hong Kong (see Douglass, 1991: 16, table 1; Arrighi et al., 1993; Palat, 1996; Palat, 1999). As export-oriented industrialization in much of East and Southeast Asia was based on the transfer to these jurisdictions of declining Japanese industries – and attempts by firms based in Japan and the ‘Four Dragons’ to circumvent quota restrictions – they were not predicated on large capital inflows. After all, the exports of textiles, toys, plastics, and small consumer electronics like transistor radios did not have the same capital requirements as the production of the fighter aircraft, automobiles, and large iron and steel plants that were the industrial flagships of the more illustrious Latin American ‘miracles.’ In fact of the five states – Mexico, Brazil, Venezuela, South Korea, and Algeria – which received the lion's share of the flows of cheap credit, about one-half of all publicly announced bank loans in Euro-dollars in the 1970s, only one was in East Asia (Frieden, 1987). South Korea was able to weather the debt-crisis because its industrialization strategy was coordinated within a broader regional strategy.

Conversely, Thailand was unable to withstand the collapse of low- and middle-income economies in the early 1980s precisely because it was less integrated within the evolving regional production network and domestic firms still dominated its economy (Anek Laothamatas, 1994: 203). US withdrawal from Vietnam and increased military procurements due to security concerns had led to a steep escalation in overseas borrowings, and debt servicing accounted for 20.5 percent of the GDP. Combined with the oil price hike of 1978, this contributed to a rising incidence of domestic bankruptcies: growing by 15 percent between 1978 and 1979, by 47 percent rise in 1980, and by 35 percent the following year. Even though rapid inflows of foreign investments had meant that the share of manufactured goods in Thai exports had increased from 15.4 percent in the early 1970s to 26.8 percent in 1980, the government had to approach international financial institutions for structural adjustment loans in 1982 and 1983. The conditions attached to these loans – reduction of government expenditures, elimination of subsidies, abolition of export restrictions and taxes, removal of protections for domestic industries, adoption of deflationary fiscal and monetary policies – virtually erased the success of the poverty alleviation measures of the previous ten years (Hewison, 1987: 60, 65–8; Phongpaichit and Baker, 1998: 75–7; Dixon, 1999: 114–16).

The serial transfer of low-skilled, labor-intensive Japanese industries also entailed the creation of a matrix of core–periphery relations, a new regional divisioning of labor, rather than the construction of parallel and competing national industrial structures as was the case with the contemporaneous patterns of debt-led industrialization in Latin America, Eastern Europe, and elsewhere. Hence, though industrialization in low-income states in East and Southeast Asia may have appeared to be more pedestrian than in the ‘newly industrializing countries’ of Latin America, the former were not competing with each other for export markets in high-income states but occupied distinct market niches. Better coordination of manufacturing investments, orchestrated by MITI, ensured the installation of complementary industrial structures in much of Pacific-Asia and these economies began to consistently register favorable trade balances with high-income economies in Western Europe and North America, though not with Japan.

Elite bureaucracies in both South Korea and Taiwan formulated national industrial policies to ensure that partnerships with Japanese and other foreign enterprises would generate optimal synergies through backward and forward linkages. The Chinese government's decision to undertake market-oriented reforms was especially fortuitous for Hong Kong as it restored its old entrepôt function to the colony precisely as lower-waged areas like Thailand, Malaysia, and Indonesia were being enmeshed within the technostructures of Japanese corporations. To counteract the more extensive incorporation of reservoirs of low-waged labor in these jurisdictions, Singapore's Economic Development Board (EDB) attempted to transform the island state into a base for higher value-added production by launching its ‘Second Industrial Revolution’ program in 1979.

Following Akamatsu Kaname's imagery of the ‘flying geese,’ economic development along Asia's Pacific coasts has been widely conceptualized as a regional phenomenon in which declining Japanese industries are transferred to less industrialized countries – first to the ‘Four Dragons’ and subsequently to Malaysia, Thailand, Indonesia, China, Vietnam, and other locations. In this conceptualization, the developmental experience of less industrialized states replicated those of the more advanced economies. At the level of industrial sectors this is analogous to Raymond Vernon's conception of product cycles formulated to explain the behavior of individual firms. He suggested that while product innovation occurs in high-income countries and innovative firms reap the benefits of oligopositic competion, as production processes become standardized and competition grows, costs of production gain greater salience and manufacturing operations are transferred to low-wage locations (Cumings, 1987; Kojima Kiyoshi, 1977).

While the regionally-integrated character of industrialization along Pacific-Asia is evident from our discussion above, as Mitchell Bernard and John Ravenhill (1995) suggest there are several reasons to be skeptical about this benign imagery of the Japanese goose leading the lesser geese toward development. In the first instance, the ‘flying geese’ model is based on the presumption that technological maturity will result in ‘stable-state’ technologies that less developed states can use, perhaps with the kind of shop-floor focus that Alice Amsden (1989; 2001) suggested was a characteristic of ‘late-late industrializers.’ However, the microelectronics revolution has not only speeded up technological change in every aspect of the production process but also raised the barriers to entry and made companies reluctant to transfer technology because production processes have become interrelated. Additionally, by facilitating an increasing fragmentation of production processes, the progressive automation, computerization, and robotization of production, the lowering of freight costs through containerization, and the development of satellite communication systems, has made the installation of backward and forward linkages with domestic industries far more tenuous (Palat, 1996; Palat, 1998). When computerization makes production processes more interrelated, Bernard and Ravenhill (1995: 207) note, ‘abandoning production of certain mature products carries the risk of losing know-how in manufacturing techniques or component manufacturing that might have been critical to seemingly nonrelated future production.’ Thus, the transborder expansion of Japanese production networks have not been accompanied by the elimination of domestic production in Japan as predicted by the ‘flying geese’ model.

Rather, it has led to a regional hierarchy of production structures and, contrary to expectations that Japanese companies would serially exit from the production of consumer goods of lower technological sophistication, new innovations have led to the concentration of core technologies in product design and innovation in Japan. While small Taiwanese entrepreneurs initially welcomed collaboration with small Japanese firms, they soon found that they were bound in an intricate web of contractual agreements that even precluded them from handling their own procurement and marketing arrangements (Gold, 1988b: 190). In a typical instance, Jinbao Electronics – a Taiwanese firm that makes low-end calculators on an original equipment manufacturer (OEM) basis for Japanese firms such as Casio, Canon, and Sharp – set up a factory in Thailand in 1990 when rising Taiwanese wages made production in the island unprofitable. Nevertheless, all critical components in the Thai factory were imported from Japan while the Taipei office oversaw its administration and controlled all procurements; the labor alone was Thai (Bernard and Ravenhill, 1995: 186–7; see also Simon, 1988b: 210).

Due to the regionally integrated character of production networks and continuing product innovation at home, domestic production of consumer goods in Japan did not suffer the catastrophic declines that occurred in the United States in the 1980s. However, unlike the Japanese case, Taiwanese investments in electronics assembly in Southeast Asia led to precipitous declines in Taiwanese domestic output precisely because manufacturers had not institutionalized product innovation. The continuing deficits that Taiwan and South Korea register in their trade with Japan indeed underline their continued technological dependence on Japan especially since the greater deployment of microelectronics has made reverse engineering far more difficult if not impossible (Bernard and Ravenhill, 1995: 187–91). In Pacific-Asia, then, the transborder expansion of Japanese subcontracting networks ‘produced a new regional division of labor that is based not on national economies but on regionalized networks of production’ (Bernard and Ravenhill, 1995: 206). Hence, rather than signifying a progressive transfer of technology as suggested by the ‘flying geese’ analogy, the widespread dispersal of production operations led to a concentration of control in Japan.

Strangely enough, while proponents of the ‘flying geese’ model have underscored parallels between their conceptualization for whole economies with Vernon's ‘product cycles’ at the level of individual firms, they appear to gloss over the fact that the rewards at each stage are less than those reaped at earlier stages of the ‘product cycle.’ This is demonstrated, to take just one instance among many, by the Malaysian government's attempt in the early 1980s to mimic the South Korean shift to heavy and chemical industries which was not nearly as successful. Under the aegis of a new public sector enterprise – the Heavy Industries Corporation of Malaysia set up in 1980 – the government entered into joint ventures with foreign firms in automobiles, cement, iron and steel, and small internal combustion engines. However, sluggish demand in the world economy and the foreign debts incurred by the government in its heavy industry drive – total outstanding public debt including loans guaranteed by the federal government rose from M$11.9 billion to M$26.5 billion in 1980 and to M$57.8 billion in 1983 – led to a contraction of its economy and the Malay GDP fell by 1 percent in 1985 (Bowie, 1994: 175–8; Jomo, 1987: 125–30; Jomo et al., 1997: 101–3). Moreover, as Beverly Silver argues, the monopolistic windfall profits that accrued to early innovators allowed them ‘to finance a more generous and stable laborcapital accord’ while

lower profit levels associated with the intense competitive pressures towards the end of the life cycle (and the relative national poverty of the favored new sites of production) make such social contracts increasingly difficult to sustain economically.

(Silver, 2003: 79)

This contrast creates additional pressures for economies accommodating declining industries at the mature stage of a product cycle, especially in heavy industries, since the installation of factory complexes also brings into being large well-organized labor forces. An increasingly mature industrial proletariat, concentrated in considerable numbers, can and would challenge the social coalitions that exclude them as we shall see in the next chapter.

Whereas a combination of substantial US military procurements, favorable trade balances, high rates of domestic savings, and large infusions of US aid financed industrial restructuring and growth in Japan, South Korea, and Taiwan, other economies in the region had to depend on inflows of foreign investments or loans. By reducing the scope of control that pilot economic agencies can exercise, reliance on foreign investments can produce mixed results, as indicated by the experience of Singapore's ‘Second Industrial Revolution.’ To transform the island into a base for higher value-added production, this strategy hinged on an over 40 percent increase in wage-rates, with a higher rate of increase at the lower wage scales, and a phase-out of migrant labor (Rodan, 1989: 145). Simultaneously, the government offered investors substantially increased incentives for research and development, and government funding of public research and development institutions rose from S$10 million in 1981 to S$50 million in 1982. Several other measures were also announced to help domestic firms upgrade their technologies and skills. While this led to the closure of many low-wage operations and to a fall in new investment commitments especially from Japanese enterprises, it was successful in attracting higher value-added production to the island, particularly computer disk drive manufacturers (Rodan, 1989: 174–80). However, despite increased incentives and greater government outlays, research and development continued to lag behind South Korea and Taiwan. Contrary to the goals of the ‘Second Industrial Revolution’ strategy, the manufacturing sector failed to become the motor force of economic expansion and its share of GDP (at 1968 prices) fell from 23.7 percent in 1979 to 20.6 percent in 1984. Instead of large-scale industrial upgrading, Singapore was progressively being transformed into a service sector as large TNCs began to locate their regional headquarters and service centers there to take advantage of its excellent communications and transport infrastructure and English-speaking workforce. Finally, for an extroverted economy, the combination of declining investment commitments and sluggish world demand led to a fall in GDP by almost 2 percent in 1985. This economic downturn prompted the imposition of a wage-freeze in 1986 and 1987 and the emphasis of government policy shifted from higher value-added production to hard labor (Rodan, 1989: 142–88; Bello and Rosenfeld, 1990: 297–300; Haggard, 1990: 146–7; Castells et al., 1990: 195–6).

Reliance on overseas investments also made economies vulnerable to the vagaries of financial markets. Buoyed by increased oil revenues after the oil price hike of 1979, state corporations in Indonesia had embarked on major projects even as inflows of foreign investments were disappointing – between 1968 and 1985 only 45 percent of approved foreign investments were realized (Winters, 1996: 114).⁹ This provided an engine for private sector projects in automobiles, beverages and foodstuffs, cement, engineering, metal fabrication, and tires. A sudden decline in oil prices in 1982, however, compelled the government to increase its borrowings and by 1983 it was forced to devalue the rupiah by 27.6 percent to boost nonoil exports – estimated to be the highest real effective devaluation among ‘developing’ countries by the Morgan Guaranty Bank (Robison, 1987: 18–19, 28–31; Winters, 1996: 107–32; Jomo et al., 1997: 130–1; Berger, 1997: 343; Hill, 2000: 70–1, 158–9).

Overshadowed by the rapid debt-led industrialization of Argentina, Brazil, and Mexico in the 1970s, the exceptional nature of industrial transformation in several jurisdictions along Asia's Pacific coasts only became evident once the United States reversed its loose monetary policies. When the United States' Federal Reserve raised interest rates above the rate of inflation in tandem with the government deregulating the banking and financial systems, it pulled the carpet from under the more illustrious of the ‘newly industrializing countries’ as capital flows were channeled toward the United States. Precisely because industrialization in East and Southeast Asia was – with the exception of South Korea – based on less capital-intensive production processes, and integrated within the corporate technostructures of Japanese TNCs, they were not vulnerable to this quick about-turn of financial flows. Rather than creating parallel and competing industrial structures, the transfer of declining Japanese industries to neighboring locations led to the construction of complementary patterns of industrialization and to a greater regional economic integration. It was this increasingly densely-knit manufacturing network that led to spectacular growth rates in the 1980s and early 1990s.

Reprise and preview

The emergence of Hyundai Heavy Industries as the world's largest shipbuilder in 1984, just eleven years after it built its first ship, and amidst the collapse of large Latin American ‘newly industrializing countries,’ symbolized the rise of several small economies along Asia's Pacific coasts as major growth poles of the world economy in the 1980s and early 1990s. The rapid structural transformation of muddied paddy fields in Southeast and East Asia to grimy factory complexes and dark workhouses, we argue here, can be traced to US attempts to resurrect the Japanese economy by ensuring access to markets and raw materials for its light industries, and to attempts by major US and West European corporations to gain greater wage flexibility and control over job specifications by relocating their manufacturing plants to ‘greenfield’ sites within their own jurisdictions, as well as to off-shore locations. Imports embodying low-wage labor from East Asia by cheapening the cost of essential supplies revealed a complementarity of interests between the US government and firms and state structures in the region. Conversely, mounting US balance of payments deficits in the 1960s revealed the growing incompatibility between the interests of successive American adminstrations and US corporate transplants in Western Europe.

The coincidence of an increase in competitive pressures in the core with the exhaustion of ISI strategies in many small low- and middle-income states in the late 1960s stimulated a massive expansion of manufacturing operations by TNCs in search of low-wage, docile labor forces both within their home countries and in other states. Several small East and Southeast Asian states – most notably the ‘Four Dragons’ – were particularly well-sited to reap disproportionate benefits during this phase of the transborder expansion of low-skilled, labor-intensive production processes. After General Suharto's coup in Indonesia and the anti-Chinese riots in Malaysia, inflows of foreign investments were welcomed for domestic reasons. Though the Sarit Administration in Thailand had reversed the kingdom's dirigiste policies, it remained less open to foreign investments in the 1960s and early 1970s than its neighbors due to a powerful alliance established by its domestic bankers and industrialists. While large, vertically-integrated TNCs based in the US and Europe had the resources to disperse their manufacturing operations over a wide arena, the relative weakness and multilayered structure of major Japanese corporations restricted the transfer of the lower end of their production processes to neighboring locations on the Pacific seaboard of Asia. Additionally, the greater relative autonomy of the state in the ‘Four Dragons’ minimized local oppositions, while their repressive apparatuses ensured labor peace.

A second wave of transnational expansion of capital was triggered by the Nixon Administration's decision to rescind the convertibility of the US dollar to gold and by the oil price hikes of 1972. The resulting depreciation of the dollar increased competitive pressures on Japanese and West European enterprises. Confronted with rising import bills and falling exports, MITI adopted a strategy to transfer both light and heavy industries to neighboring locations while retaining as much of the value-added segments of manufacturing operations as possible within Japan. This led to a massive outward expansion of Japanese capital, primarily to small East and Southeast Asian economies, and by the end of the 1970s, Japan had surpassed the historically larger US investments in the region. As the rise in commodity prices underlined both Japan's dependence on imports of raw materials and a shift in the balance of power toward elites in resource-rich low- and middle-income states, Japanese investors sought access to these resources through joint venture projects. This strategy enabled Japanese investors to diversify their sources of supply while simultaneously impairing the capacity of peripheral producers to affect prices by rapidly expanding supplies without corresponding increases in demand. Thus, unlike in 1972, the oil price hike of 1978 was not accompanied by a general rise in commodity prices.

Despite all this, economic growth in Pacific-Asia was not exceptional and was dwarfed by the achievements of some much larger middle-income states in Eastern Europe, Latin America and elsewhere which pursued a strategy of debt-led industrialization in the 1970s. However, when the US responded by raising its domestic interest rates above the rate of inflation and by deregulating its banks and the financial sector, it reversed the flow of cheap credit to low- and middle-income states and undermined debt-led industrialization strategies. It was only then that the exceptionalism of economic growth in Pacific-Asia became evident. As the growth of manufacturing was based on a spatial extension of hierarchically-linked Japanese subcontracting networks, and was less capital-intensive than in Latin America and Eastern Europe, they were less vulnerable to the credit squeeze that so adversely affected other peripheral and semiperipheral states. Celebrations of the ‘flying geese’ model – replication of Japanese patterns of industrialization in neighboring locations on the Asian mainland – were however both premature and essentially unfounded.

Just as the transnational expansion of US enterprises led to a contradiction between their interests and the power pursuits of the US government, the transborder expansion of Japanese corporate technostructures undermined the coherence of regulatory mechanisms in Japan. The economic ascendance of Japanese corporations meant that they were no longer restricted to investments within the Pacific-Asian region. Moreover, their greater credit-worthiness meant that they were less reliant on the government for loans at preferential rates. If deregulation of financial markets and the appreciation of the yen triggered a further wave of Japanese overseas investments, they simultaneously began to hollow out industry in the Japanese home islands. Meanwhile, the wholesale structural transformation of low- and middle-income economies in East and Southeast Asia undermined the social coalitions on which the developmentalist states were based as an increasingly mature proletariat began to challenge the terms of their exclusion. Finally, greater deregulation of international financial markets encouraged adoption of debt-led strategies which, in the face of a progressive erosion of regulatory frameworks, led to overproduction and the financial meltdown of 1997–98, as we shall see in the next chapter.