Epilogue
A future imperfect: Remaking a regional economy
It is better to be vaguely right than precisely wrong.
Wildon Carr1
Obituaries to the ‘Asian economic miracle’ published in the wake of the financial crisis, and self-congratulatory proclamations of the ‘triumph of Western capitalism,’ obscure a fundamental restructuring of economic and political relationships in East and Southeast Asia since 1997–98. Most notably, widespread perceptions that the IMF had acted as a ‘creditor cartel, not an institution sensitive to its members' needs’ (Dieter and Higgot, 2000) reversed long-standing apprehensions regarding closer regional economic integration among governing elites.
Abiding animosities against the Japanese for their colonial occupation of Korea and Taiwan and for the atrocities their forces committed against the Chinese and most peoples of Southeast Asia during the Second World War, and more than a quarter-century of American aggression in the Korean peninsula and Indochina, had hitherto conditioned processes of regional integration along the Pacific coasts of Asia. Acknowledging these sensitivities, as Japanese leaders sought recognition as an emerging regional powerhouse by proposing the creation of an Asian Development Bank (ADB) to promote subsidized loans to low-income states, they included a provision giving the United States an equal equity position with Japan (Lincoln, 2002: 206–7). Since the ADB itself was too large to promote regional integration,2 Japanese government and business elites launched several initiatives to institute formal mechanisms for greater regional integration. Though none of them led to fruition, they were nevertheless important means to socialize policy makers in the region. Later, when a major initiative launched in Canberra in November 1989, the Asia Pacific Economic Cooperation (APEC), it even eschewed a noun to describe its institutional form. Stretching from the eastern borders of Poland to the Atlantic coasts of New England, APEC was of course more of a transregional forum and conceptions of ‘open regionalism’ associated with it meant little more than unilateral liberalism rather than a government-directed process to construct a free trade region (Ravenhill, 2002a). Instead, as we have seen, economic integration along Asia's Pacific perimeters was achieved primarily by the transborder expansion of corporate networks.
If regional integration had been stymied by animosities against Japan and intra-regional tensions stemming from the Soviet-American rivalry and unresolved conflicts – most notably in the Korean peninsula and across the Taiwan Straits – as well as the imbrication of the United States in regional security and economic arrangements, the financial crisis of 1997–98 sharply changed perceptions concerning closer regional integration among governing elites. Echoing a widespread sentiment in the region, Walden Bello (1998c) observed that never before has the IMF's ‘connection to its principle “stockholder” been displayed as prominently as it is today when the words of wisdom coming from US Treasury Secretary Robert Rubin and IMF Managing Director Michael Camdessus have become virtually indistinguishable.’
After the United States thwarted a Japanese-led regional resolution to the financial crisis – the AMF – the fact that Japan was the largest donor of financial assistance, committing $42 billion in the multilateral packages put together by the IMF, received scant attention. It was all the more egregious that though the US contributed only $8 billion – less than a fifth as much as Japan – it determined the conditions attached to the IMF loans and loan guarantees and as Christopher Hughes (2000) noted, ‘the currency crises have looked to be a repeat of the Gulf crisis of 1990–91, when, despite talk of global partnership, the USA dictated policy and Japan was expected to pay for it.’
In these circumstances, the Japanese leadership welcomed greater receptiveness to an institutional framework for regional economic integration also because the absence of such a mechanism had meant that they had been at a disadvantage in negotiations over multilateral trade agreements since they had no experience in negotiating regional trade agreements, unlike the US and the European Union who could draw on ‘reams of legal text’ (Bowles, 2002: 247). Precisely because regional economic integration along Asia's Pacific coasts had been initiated and largely sustained by the transborder expansion of Japanese corporate networks, no regionally-accepted accounting standards or protocols for the legal treatment of financial activity had evolved and Japanese governing elites complained that international standards were nothing but American ones that would wreck Japan's unique systems of regulation.3
If Japanese business and government leaders had incentives to revive their initiatives for a regional institutional armature, the Chinese leadership too came to regret its role in blocking the creation of an AMF. Beijing had opposed it not only because of worries about a ‘yen hegemony’ but also because it was seeking to play by the rules of the reigning international financial order to ease its membership to the World Trade Organization (Bowles, 2002: 241). However, when no such concessions were made in this regard despite China maintaining its exchange-rate and not succumbing to pressures to devalue the renminbi (RMB), and despite injecting a measure of stability by launching a massive infrastructural development program, Chinese leaders felt slighted. Relations between Beijing and Washington worsened when US airplanes bombed the Chinese Embassy in Belgrade during the NATO assault on Yugoslavia in 1998, and the Chinese refused to accept the ‘wrong map’ explanation proffered by the Clinton administration. They were further enraged when the US House of Representatives' Cox Report in 1999 accused China of stealing US nuclear weapons technology and of penetrating US nuclear weapons laboratories. The continued ‘demonization’ of China, Paul Bowles (2002: 242–3) plausibly suggests, convinced its leadership to look more favorably toward emerging forms of regional integration that excluded the United States.
If smaller economies in the region were disappointed by China's opposition to the creation of an AMF, the Chinese leadership's refusal to devalue the RMB and its willingness to accept the adverse impact on the competitiveness of Chinese exports when regional currencies were plummeting had also won China much political goodwill in the region (Wang, 2000: 154–6). Japanese proposals to stabilize regional currencies by creating a regional financing facility also tempered deep-seated suspicions of Japanese motives among smaller economies in the region. Finally, the emergence of China as a regional counterweight to Japan has led to a greater willingness to enter into bilateral and plurilateral trade agreements among government and business elites in smaller East and Southeast Asian economies. Closer regional trade and financial arrangements even diminished interstate political tensions along Asia's Pacific perimeters.
Precisely because the crisis did not throw up new social forces, as we saw in Chapter 6, governing elites in the region sought to reconsolidate their power by reviving their export engines while trying to insulate their currencies from raids by currency speculators. This strategy was predicated on the assumption that the crisis stemmed not from structural problems as alleged by the IMF and Western governments but from temporary liquidity problems generated by declining export growth (Hughes, 2000: 242). For government and business elites, a regional solution to the crisis confronting them primarily entailed an insulation from speculative raids on their currencies and promoting intra-regional trade and consumption. Prefiguring this strategy, in September 1997, Joseph Yam, the Chief Executive of the Hong Kong Monetary Authority, had forcefully questioned the wisdom of repatriating regional surpluses to the United States through the purchase of US Treasury instruments:
[M]ore than 80% of total Asian foreign exchange reserves amounting to US$600 billion are invested largely in North America and Europe…. It can be argued therefore that Asia is financing much of the budget deficit of developed countries, particularly the United States, but has to try hard to attract money back into the region through foreign instruments. And the volatility of foreign portfolio investments has been a major cause of disruptions to the monetary and financial systems of the Asian economies. Some have even gone so far as to say that the Asian economies are providing the funding to hedge funds in non-Asian countries to play havoc with their currencies and financial markets.
(quoted in Nordhaug, 2002: 525)
As regional governing elites turned away from the United States and began to create an institutional framework for closer regional integration, it implied a reversal of the repatriation of trade surpluses earned by East and Southeast Asian states to the United States to fund US federal deficits and to maintain its high levels of consumption with low levels of domestic savings.
In the first instance, after its AMF initiative had been thwarted, the Japanese government announced a new initiative offering $30 billion in aid denominated in yen to the five economies most adversely affected by the financial crisis – Thailand, Indonesia, the Philippines, South Korea, and Malaysia – without the stringent conditions attached to typical IMF bail outs. In addition, the New Miyazawa initiative, as this proposal has come to be known, also pledged an additional $20 billion to Vietnam to support economic reforms (Amyx, 2000: 148–9; Nordhaug, 2002: 529). In November 1998, the Japanese government also provided $22.5 billion through the Export-Import Bank of Japan to foster private sector trade in the region. As its budgetary problems forced a cutback in its overseas development aid, the Japanese government shifted its emphasis from big-ticket projects to human resource development, promising some $32 million toward human resource development in ASEAN states and stationing finance ministry officials in Thailand and Vietnam to provide assistance in the use of yen loans and overseas debt management (Bowles, 2002: 240; Hughes, 2000: 244–5).
This was followed by an inaugural meeting of East Asian Finance Ministers representing the ten ASEAN member-states as well as China, Japan, and South Korea on May 13, 2000 when they agreed to create a network of currency swaps. By agreeing to work toward the creation of a regional liquidity fund, they envisaged a system whereby member-states can cushion the impact of currency fluctuations by having access to some of their partners' foreign exchange reserves. Central banks of the ASEAN members, plus China, Japan, and South Korea were estimated to have reserves of more than $800 billion in March 2000. Even if only a fraction of this were to be available, it could easily overcome liquidity crises without having to resort to the IMF or to US or European banks. Chinese membership in the currency swap network also provided a counter-balance to Japanese influence as the Chinese central bank together with the Hong Kong monetary authority controlled over $250 billion in reserves while being insulated against volatile exchange-rate fluctuations by comprehensive controls over capital flows. Moreover, as monetary arrangements are not discriminatory toward other states, they do not attract sanctions from the WTO (Montagnon, 2000; Dieter and Higgot, 2000; Bergsten, 2000). Crucially then, whereas corporate networks were the main mechanisms for regional integration before the crisis of 1997–98, intra-governmental negotiations are proving to be the main driving force for the new phase of regional integration in East and Southeast Asia.
These beginnings suggested a significant turn away from the hitherto accepted practice in East and Southeast Asia – with the exception of ASEAN which remained the only free-trade agreement in the region – to pursue unilateral liberalization measures rather than discriminatory, preferential bilateral trade agreements. Japan, in particular, had feared that because of its extremely diverse range of export markets, negotiating bilateral or plurilateral trade agreements might make it vulnerable to discriminatory regional trade agreements. However, in a 1999 White Paper, the Ministry of International Trade and Industry explicitly endorsed the creation of a free trade agreement in Northeast Asia, noting that such agreements had led to an expansion of trade and investment flows in other cases, such as that of the European Union (EU) and the North American Free Trade Agreement (NAFTA); that the reduction of tariff and commercial barriers helped prepare participating economies become more competitive in a global economy; and that regional agreements were the building blocks of multilateral trade agreements (Ravenhill, 2002b: 179–80).
Accompanying government-directed efforts toward regional integration was a recovery of intra-Asian trade after it had collapsed in 1998. Between 1990 and 2000, intra-Asian merchandise exports grew at an annual rate of 10 percent, even after accounting for a 17 percent drop in 1998, and accounted for 48.9 percent of merchandise exports of Asian economies. North America, in contrast, accounted for only 25.6 percent of merchandise exports from Asia (World Trade Organization, 2001: table III.72). Central to the growth of this intra-Asian trade was the re-emergence of China as the ‘workshop of the world.’ Low wages, a virtually limitless supply of docile labor, and political stability led to a relentless inflow of FDI to China, which emerged in 2002 as the largest recipient of FDI, overtaking the United States. Conversely, inflows of FDI to South Korea fell by 63.7 percent in the last quarter of 2002 compared with the last quarter of the previous year, while Indonesia suffered an annual decline of 35 percent in 2002 (Rhoads, 2003; Roberts and Kynge, 2003).
China now makes 50 percent of cameras sold worldwide, 30 percent of air-conditioners, 25 percent of washing machines, and 20 percent of refrigerators (Legget, 2002). In comparative terms, while Chinese exports have doubled in just the last five years, it took 12 years after 1838 for British exports to double, ten years for Germany to double its exports in the 1960s, and seven years for Japan in the 1970s (Roberts and Kynge, 2003). Though large inflows of foreign investment to China have led to a loss of jobs in East and Southeast Asia in some sectors,4 rapid economic growth in China also served to boost imports – in 2001 Chinese imports from Asia amounted to $42 billion or about 53 percent of Japanese imports from the region (Richardson, 2002). As Jim Walker, chief economist for CLSA Emerging Markets notes, ‘People simplistically believe there will be a giant sucking sound as China absorbs Asian economies. The reality is that for every dollar of exports, China imports 92 cents’ (quoted in Crampton, 2003). China has committed itself to creating a free trade region with ASEAN by 2010 (Eckholm and Kahn, 2002).
On another estimate, China's gross industrial output grew from 2.4 percent of global industrial production in 1993 to 4.7 percent in 2002. Chinese purchases of industrial products, however, also rose to 4.6 percent of world industrial production in 2002. This implies that the net increase in China's manufacturing exports amounted to only 0.18 percent of world manufacturing production (Andersen, 2003). Moreover, Chinese firms, mainly state-owned enterprises, have also begun expanding overseas. According to the World Investment Report, 2002, the top 12 Chinese TNCs controlled more that $30 billion in foreign assets and employed more than 20,000 employees in their overseas operations, which generated $30 billion in sales (Iyengar, 2003).
Rapid growth in manufacturing in China has seen urban incomes increase by an annual average of 17 percent since 1998 and rural incomes by 6 percent (Crampton, 2003). This rise in incomes has created a lower middle-income – defined as people with an annual average household income of $1,200 – market of 470 million, larger than in any country other than India. Thus the Chinese now buy more cellphones than consumers anywhere else, more film than the Japanese, more vehicles than the Germans. As a result, foreign companies that once used China as an export base now sell most of their China-based production in the country itself (Kahn, 2003). Relatedly, in South Korea, after the close relations between banks and politically-connected enterprises were severed by the economic meltdown, the restructured banks have pursued consumer banking. The collapse of the asset bubble in the US economy since mid-2000 shifted investment strategies and contributed to a greater density in intra-regional capital flows. In 2001, the region's largest credit card issuer, Visa International, increased the numbers of cards issued by 25 percent to 310 million and the volume of sales and cash withdrawals in Asia using Visa cards grew by 44 percent to $310 billion. Increased consumer expenditure in South Korea was reflected in a more than 11 percent increase in retail sales in 2001 as household lending overtook corporate lending for the first time. The following year, South Korea's 18 commercial banks posted profits of $5 billion, an 11.4 percent increase over 2001 (Thornhill, 2002; Ward, 2002b; Kirk, 2003). Similarly, the World Bank estimates that private consumption increased at an average annual rate of 8.8 percent in China between 1990 and 2000 and though the corresponding rate in Malaysia was only 3.8, in 2000 personal consumption grew at a galloping rate of 10.7 percent. If successful, this could finally free economies along Asia's Pacific coasts from their dependence on the United States as a market of last resort.
To counteract the flight of manufacturing to China, the Japanese government sought to reorient its domestic industry to new growth sectors. In 1999, while Japanese imports of software totaled ¥720 billion, its exports were a meager ¥9.l3 billion. Again, between 1991 and 2000, while Japanese companies registered 707 patents, the corresponding figure for US companies was 5,430. Recognizing the importance of rectifying this ‘technology deficit,’ the Ministry of Economy, Trade, and Industry – the new nomenclature for MITI after it was reorganized in 2001 – proposes to spend ¥24,000 billion over the next five years on information technology, environment, biotechnology, and nanotechnology. However, questions remain whether a rigid bureaucratic structure can be flexible enough to create high value-added products through science and technology. An apt illustration of the rigidity of the organizational structure of Japanese research is provided by the case of Yoshiahi Ito, who had done pioneering work on the genetic causes of leukemia and cancer. He was forced to move from Kyoto to Singapore with his entire research team in 2002 as he had reached the mandatory retirement age and the Japanese research establishment was not prepared to let him work any longer (Nakamoto and Pilling, 2002; see also Markoff, 2002)!
As governmental negotiations have begun to undergrid regional economic integration, political tensions in the region have begun to thaw as well and this has led to South Korea and Japan distancing themselves from US foreign policy positions in the region, notably with regard to North Korea. Elected on a pro-engagement platform, South Korean President Kim Dae-Jung made a historic trip to Pyongyang in June 2000. His ‘Sunshine Policy’ offered a beleaguered North Korean regime desperately needed economic assistance and a whole range of economic, cultural, and sporting exchanges were inaugurated. These included work toward reopening the Seoul-Pyongyang railway line, now nearing completion, which would connect South Korea to Europe, construction of a Special Economic Zone north of the demilitarized zone by Hyundai, and a joint tourist development project at Mount Kumgang. Despite Washington castigating the North Korean President Kim Jong Il as a charter member of an ‘axis of evil,’ between 60 and 70 percent of South Koreans do not see North Korea as a threat. Both Kim Dae-Jung and his successor, Roh Moo-Hyun, have rejected the Bush administration's confrontational approach toward Pyongyang. In September 2002, the Japanese Prime Minister Koizumi Junichiro also visited Pyongyang, despite opposition from Washington. In 2001, North Korea adopted sweeping economic reforms – coining Kaegon as the Korean equivalent of Perestroika, and according to Chinese authorities the North Korean leadership has determined that without security guarantees from the United States and access to economic assistance, the Democratic People's Republic of Korea will face economic collapse and social chaos. It is precisely the fear that such a collapse will trigger a flood of refugees south and pose an unbearable strain on its fragile economy that has led Seoul to publicly distance itself from Washington's increasingly belligerent posture toward Pyongyang. Rather than escalating tensions O. Wonchol, the architect of South Korea's industrial transformation under President Park Chung-Hee, has proposed a peninsula-wide divison of labor and resources to more optimally utilize North Korea's relative abundance of mineral resources and reserves of high-quality low-wage labor (McCormack, 2002; McCormack, 2003).
On another axis of regional tension, in November 2002, China reached agreement with ASEAN to prevent clashes in the South China Sea – concerning the Spratly Islands and other territorial disputes (Eckholm and Kahn, 2002). Finally, if the election of an opposition candidate, Chen Shui-bian, for the first time in the history of Taiwan has led to calls for a formal declaration of independence and raised tensions with China, the rapid growth of Taiwanese investments in China has also prompted leading businessmen to urge Taipei to rescind the ban on their joining the National People's Congress – China's parliament – and the Chinese People's Political Consultative Conference for them to have a formal voice in mainland politics (Lague, 2001).
Greater regional integration along Asia's Pacific coasts not only lessened the dependence of these economies on the United States as a market of last resort but also posed problems for the latter as it is in increasing need of foreign capital to compensate for its low rates of domestic savings and high rates of investment. In the context of the first foreign incursions on the US mainland since 1812 – the attacks on the World Trade Center and the Pentagon on September 11, 2001 – the Bush administration successfully pushed for an additional $48 billion for defense and the US military budget for 2002–3 equaled the combined defense outlays of the next 15 biggest military powers (Achcar, 2002: 75–6). Along with a prior $1.4 trillion tax cut, this transformed a projected cumulative $5.6 trillion federal budget surplus over 10 years when Bush took office to expectations in March 2002 of a $1.8 trillion deficit over the same period (Maddrick, 2003). To finance its current account deficit – estimated at $500 billion in 2002 and growing at an annual rate of 10 percent – the US requires capital inflows of some $1.9 billion every working day (Clairmont, 2003)! However, as the US equities bubble burst capital inflows have diminished – falling from $307.7 billion in 2000 to $130.8 billion in 2001 and to just $30.1 billion in 2002 (Organization for Economic Cooperation and Development, 2003). This accounts in large part for the 9.7 percent fall in the value of the dollar between January 2002 and May 2003 against other major currencies. Moreover, higher federal deficits, unless counter-balanced by large capital inflows, would lead to higher interest rates and further dampen economic activity, especially when the euro and possibly the yen could emerge as alternatives to the US dollar as international reserve currencies. In short, while US governing elites proclaim their military invincibility, the material base of the US economy is far more vulnerable than they appear to realize.
Paradoxically, if the geopolitical ecology of the Cold War provided for the reconstruction of economies along Asia's Pacific seaboard, the dampening of lingering tensions stemming from those times now provides for the reconstruction of regional linkages on entirely new foundations. As we saw in Chapter 1, the relative impoverishment of US client states in East Asia – Japan, South Korea, and Taiwan – meant that rather than seeking to integrate them to foster the transnational expansion of US enterprises after the Second World War, postwar reconstruction was financed by massive injections of US aid and on export promotion. Large infusions of American aid and procurements funneled through the bureaucracies of its client states enabled them to pursue developmental goals through the implementation of national industrial policies determined by elite economic agencies. These policies were determined by the specific configurations of class forces in each jurisdiction as well as by its prior legacies of industrialization as we saw in Chapter 2and 3. Meanwhile, though Hong Kong and Singapore had lost their entrepôt functions due to the Chinese Revolution and the failure of federation with Malaya respectively, as British colonies they were not recipients of US aid. If the flight of capital from China was crucial in Hong Kong's transformation into a manufacturing platform, Singapore relied on foreign investors by providing excellent infrastructural facilities and by brutally cauterizing a militant labor movement.
Fortuitously for Taiwan and South Korea, as the limits imposed by their narrow domestic markets on import-substituting policies were being reached in the mid-1960s, an increase in competitive pressures faced by Japan and other high-income economies led enterprises based in those jurisdictions to seek out low-waged labor overseas. When the pursuit of multiple, parallel patterns of industrialization serially eroded the advantages accruing to each of the low- and middle-income states that had pursed a strategy of import-substituting industrialization, a transborder expansion of Japanese production networks to East and Southeast Asian economies enabled them to withstand the collapse of low- and middle-income economies elsewhere in the early 1980s. Sustained rates of growth, however, radically transformed social topographies all across the region and rendered the coalitional logic of the developmental state anachronistic. Ruling coalitions in these jurisdictions were able to largely accommodate these pressures from below by easing controls over capital flows and – except in Japan, Taiwan, Hong Kong, and Singapore – by adopting debt-led strategies of industrialization. However, this undermined national industrial policies since it conferred priority on inflation control and the resulting bout of overproduction led to the financial crisis of 1997–98. Ironically, if the IMF and Western governments blamed ‘crony capitalism’ for the meltdown of some of the fastest growing economies in history, and forced their governments to liberalize their economies, curb public spending, nationalize private corporate debt, dissolve bankrupt enterprises, break up heavily indebted conglomerates, and permit greater foreign ownership of assets, these very measures shifted the balance of power between states and local capital back to states.
Governing elites in the region, resentful of Western pressures during the crisis, have now begun to reintegrate their economies on an entirely different institutional basis as they seek to reduce their reliance on the United States as the market of last resort. Closer regional integration and an increase in consumption has begun to redirect capital flows away from the United States. Thus, contrary to the triumphalist rhetoric of US political and business leaders, the material foundations of the American economy are steadily eroding as capital continues to accumulate in great goblets along Asia's Pacific coasts.