Last Updated 27 Jul 2020

East Asian Economic Miracle

Category economics
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During 1960 to 1990, East Asia experienced a huge transformation in its economic development which is now widely referred to as the East Asian economic miracle. This was largely a result of the growth of eight economies known as the high-performing Asian economies, hereinafter HPAEs. These comprised Japan, Hong Kong, the Republic of Korea, Singapore and Taiwan, and the three newly industrialised economies (NIEs) which were Indonesia, Malaysia and Thailand.

Prior to the 1960s, tensions between the regional powers were relatively high, which was evidently the result of several major events including the Sino-Japanese war, the wars between Japan and Russia and Japan and Korea and the invasion and colonisation of certain regions. After 1960, however, a radical adjustment in the interactions between these regional powers developed, arguably as a result of the creation of organisations such as the Association of Southeast Asian Nations (ASEAN) in 1967. This illustrates a significant relaxation of tensions which effectively promoted economic, social and cultural co-operation between the member states. 1] Nevertheless, the extent to which such tensions have diminished is questionable, especially in light of the effects of both the Cold War and the Korean and Vietnamese wars. In order to develop a valuable analysis which documents the political implications of the East Asian economic miracle, it is first necessary to briefly outline the preceding tensions which existed in order to measure the extent to which tensions subsequently relaxed. Prior to 1960, relations between China and Japan were undoubtedly hostile.

In 1964, China fought Japan in the Sino-Japanese war over the control of Korea which resulted in the Japanese acquisition of Taiwan and the Liaodong province and the independence of Korea. In 1931 Japan had invaded Manchuria and was in occupation of this area by 1933. During this period atrocities such as the Nanking Massacre took place which exacerbated tensions between Japan and China. In 1905 Japan and Russia were at war, and in 1910 Japan had colonised Korea which significantly contributed to regional tensions in East Asia. Nevertheless, in the post-World War II era, most of the colonised egions in East Asia had become independent which arguably created the conditions for regional cooperation. However, when East Asia became engulfed in the Cold War, further tensions emerged between China and Japan. In addition, this also resulted in the creation of North and South Korea, and the Vietnamese civil war. Thus, these major events resulted in hostile tensions between the East Asian regional powers, which are arguably still visible today. During the 1940s, relations between Japan and other East Asian regions appeared to deteriorate, particularly as a result of the Japanese creation of the East Asia Co-Prosperity Sphere.

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Arguably, this seemed to enhance relations in East Asia by unifying the region and marking ‘the end of European control. ’[2] However, this was not a universally held opinion as many regarded this as political propaganda which served merely to disguise Japanese aggression and its underlying agenda for imperial domination[3]. It seems that it was not until the 1960s that relations between Japan and the South East Asian regions began to improve. Thus, the period between 1965 and 1975 ‘saw the maturing of Japan’s own economic position and the beginning of Japan’s large scale investment in the region. [4] Arguably, Japan realised the need for co-operation with the South-East Asian regions in order to take advantage of crucial raw materials such as rubber and oil. Consequently, Asia became the largest recipient of Japan’s manufacturing investment which resulted in large economic development in the South-East. Throughout this time of development, South-East Asia introduced many tariffs and inducements in order to encourage domestic industrialisation and enhance relations throughout Asia.

This large scale investment not only initiated rapid economic development, but it also highlighted the necessity of shared growth across the East Asian regions. As a result, east Asian leaders formally established the principle of shared growth, declaring that if the economy expanded all groups would benefit[5]. However, in light of the numerous stages involved in implementing such policies, serious coordination problems emerged. For example, it was first necessary for all the leaders to get initial support from economic elites and then to persuade them that it was necessary to share the benefits of his growth with the poor and middle classes. Secondly, it was essential to get the co-operation of the poor and middle classes by demonstrating how they would benefit from this growth. This was seen in Korea and Taiwan where comprehensive land reform was carried out, in Indonesia where rice and fertiliser price policies were used to raise rural incomes, in Malaysia where wealth sharing policies were introduced, and in Hong Kong and Singapore where huge public housing programs were implemented. [6]

Nevertheless, during this establishment of shared growth in East Asia the relations between the South-East regions continued to improve, and in 1967 the Association of Southeast Asian Nations (ASEAN) was created. Its founding members were Indonesia, Thailand, the Philippines, Singapore and Malaysia. After 1995, Vietnam, Laos, Myanmar and Cambodia also joined. ASEAN’s initial objectives can be summarised as follows: to ‘alleviate intra-ASEAN tensions, to reduce the regional influence of external actors, and to promote the socioeconomic development of its member states as a further hedge against Communist insurgency. [7] It is important to note that its creation had followed recent hostile relations between the South-East Asian powers, partly as a result of Indonesia’s confrontation with the new state of Malaysia, and the Philippines’ claim over the Malaysian state of Sabah. [8] Therefore it was an important step forward in the co-operation of these regional powers in which shared development could be promoted.

In 1976, ASEAN adopted the Treaty of Amity and Cooperation (TAC) which called for ‘signatories to commit to “non-interference in the internal affairs of one another”, a “renunciation of the threat or use of force” and the settlement of disputes by “peaceful means”. ’[9] The signing of the TAC was a major attempt in further uniting the South East Asian regions and establishing an effective agenda for the political development of the ASEAN countries. Thus, it effectively created additional foundations for the cooperation in the economical development of the ASEAN region.

In 1977, the Agreement on ASEAN Preferential Trading Arrangements (PTA) was signed in a bid to promote intra- ASEAN trading. Therefore, the PTA prescribed the use of a range of preferential tariffs, export credit support using preferential interest rates and long term quantity contracts. Nevertheless, the extent to which this agreement was effective is questionable. For example, it seems that some of the product groups that received preferential treatment often had little importance as imports. [10] As a result, it was agreed that the “ASEAN content requirement” should be reduced in order to allow preference margins to be increased.

Furthermore, it was thought this would encourage negotiation of the reduction of non-tariff measures between ASEAN countries. [11] This resulted in three agreements[12] in which the primary objective was to boost the industrial cooperation between ASEAN countries. Subsequently, the TAC and other intra-ASEAN trading initiatives seemed to reduce tensions between the South-East regions, although it should be noted that intra-ASEAN trading accounted for only a small percentage of total ASEAN trade as most countries relied heavily on the export of primary goods to Japan and the USA.

In addition, as trade became increasingly competitive it appears that trade relations also became more aggressive and hostile. However, it has been suggested that in the early development of the ASEAN, it ‘deliberately deemphasised the goals of political and military collaboration’[13] in order to avoid exacerbating opposition from communist led countries such as China. Consequently, many East Asia regions came to recognise that a market friendly strategy would be an effective way of enhancing the strength of their economies whereby governments would provide adequate investments in people.

Furthermore, this would result in a competitive climate for private enterprise, allow the economy to remain open for international trade and maintain a stable macroeconomy. [14] Many of these policies were implemented in east Asian regions in order to promote economic development at a successful rate, combined with selective intervention in order to guide private-sector resource allocation. This created a competitive environment with the benefits of co-operation between the government and private sector. 15] In 1992 ASEAN leaders endorsed the idea of an ASEAN free trade area (AFTA) which would gradually lift the tariffs for manufactured goods produced by these members in order to enhance ASEAN economic cooperation. The AFTA would remove barriers to trade and investment and therefore also present an incentive for foreign investment. However, the AFTA did not fully achieve its objectives due to pre-existing low tariffs, and therefore only very few intra-ASEAN traders took advantage of the reduced tariffs. [16] Consequently, it seems that there were only minor noticeable improvements in relations in the ASEAN.

However, in Northeast Asia, Japan, South Korea, Taiwan and the People’s Republic of China there was a massive economic development during the ‘East Asian Economic Miracle’ period. By the 1960s many regarded Japan as having a relatively mature industrialised economy in comparison with other East Asian countries. [17] During the 1950s and 1960s the idea emerged that Japan should use the flying geese model to support other Asian countries in their development. As a result, other regions would be able to replicate Japan’s developmental experience and adapt it to their own regions.

For example, manufacturing with lower skill rates were transferred from Japan and invested into lower performing economies. Thus, by utilising Japan’s economic development experiences, combined with the major Japanese investment in other East Asian regions, the basis for regional economic cooperation was created. Prior to the development experienced by South Korea and Taiwan, both countries had possessed high trade deficits. It was only with the combination of heavy investment from Japan and aid received from the U. S. that they were able to offset these trade deficits and sustain high levels of investment. 18] This was achieved partly as a result of the South Korean and Taiwanese governments engaging in import substitution, which meant that instead of relying on importing nondurable consumer goods, they manufactured these products domestically. This was a highly successful strategy, and in order to further develop their market economies they switched to an export orientated strategy following Japan’s example. This success has been shared with other export orientated economies which have achieved higher rates of growth in comparison to those countries that have pursued an import substitution strategy.

Thus, despite the fact that tensions may have initially increased as a result of competitive economic relationships between Japan, South Korea and Taiwan, arguably the result has been a significant relaxation of regional tensions. In addition, powerful government agencies have also been instrumental in determining the tone of regional relations, as is evident from an analysis of policies implemented by South Korea’s Economic Planning Board, Taiwan’s council for Economic Planning and Development, Taiwan’s and South Korea’s model agency and Japan’s Ministry of International Trade and Industry (MITI).

The MITI have many useful policy tools, including the power to screen foreign investment and regulate foreign exchange. Their main objective was to maintain national independence in industries such as energy, steel, computer and telecommunications, etc. whereby they attempted to guide firms towards what was termed ‘sunrise’ industries which included electronics and information systems. Thus, Japanese firms were encouraged to improve their technological capabilities and relocate industries where national competitiveness was declining, such as in Taiwan and South Korea.

These industries tended to have high labour intensity, therefore by transferring these industries Japan was able to avoid increasing labour costs. Throughout this period of development Japan also provided Taiwan and South Korea with some of the necessary machinery and components which was essential for their industrialisation. Consequently, South Korea was recognised as the most successful of the East Asian regions, and in 1996 South Korea was ranked as the twelfth largest economy in the world. 19] Taiwan has also experienced remarkable success in terms of the growth of its economy and has achieved a decrease in inequality of income. The ratio of incomes between the top twenty percent of households to those of the lowest twenty percent was estimated to be 20. 47 in 1953 which subsequently decreased to 5. 33 in 1964 where this figure has remained stable since, and has only risen slightly over time. [20] Both of these economies have experienced successful development in implementing the same growth strategies seen in Japan.

With the effective use of foreign investments, improved technologies, government policies and agencies, South Korea and Taiwan have advanced their economies and become major competitors in the global economy. Thus, as a result of the aid and guidance received from Japan, relations between these regions have undoubtedly improved. Throughout the ‘economic miracle’ many of the East Asian regions received foreign investment from the U. S. and Japan. Western investment was viewed y some as part of a wider effort to build opposition against the communist-led countries within East Asia, such as the People’s Republic of China (PRC). Therefore the PRC sought investment from other countries with similar political ideology, such as the Soviet Union who were able to provide loans, technology and advisors in order for the PRC to improve its communication infrastructure and heavy industrial foundation. [21] Nonetheless, by the late 1970s the PRC had not achieved its initial goals and its economy was unstable.

In the early 1980s the PRC government changed its strategy in order to achieve economic development by liberalising the economy. Therefore, the government began deemphasising the need for central planning and encouraging local initiatives, and later began to follow the models set by the East Asian regions that had already shown significant development. Consequently, the PRC opened its economy to foreign investment, technology and trade which ultimately strengthened its economic performance.

Before the 1980s, relations between the PRC and other East Asian nations had been hostile, particularly as a result of their conflicting political ideologies. It may be argued, however, that after this boost in its economical development, relations between the PRC and other East Asian regions began to relax as a result of the increase in the cooperation of these regions. Nevertheless, some commentators argue that the PRC increased tensions as a result of its economic growth which encouraged competitive relations.

Similarly, some security study texts indicate that the strengthening of the PRC resulted in moves to convert its economic power into political-military power. [22] Thus, it is questionable whether the development of the PRC’s economy merely exacerbated tensions with other East Asian regions in light of a perceived military threat. After the East Asian economic miracle, the introduction of ASEAN plus three (APT) has been recognised as significantly increasing regionalism within East Asia.

Although not an official organisation, it is a basic framework for East Asian cooperation which has enabled the integration of the East Asian regions whereby the policy of mutual dependence is prioritised. Furthermore, after the Asian financial crisis in 1997, it seems that there have been further calls for the enhancement of East Asian cooperation which subsequently led to recent suggestions for the establishment of an East Asian Free Trade Area (EAFTA).

However, it should be stressed that the creation of such an agreement will be difficult to achieve unless further policies can be implemented to support such a move, for example, an increase in sub regional agreements and bilateral FTAs. [23] However, it should also be noted that in 2001 it was announced that ASEAN and China would establish their own FTA before 2010 which suggests that the prospects of an EAFTA being established are not altogether slim. Thus, it is evident that there have been dramatic improvements in East Asian relations as a result of the increased economic cooperation.

Nevertheless, as the APT group consists of both advanced market economies and less developed economies many tensions continue to exist which is arguably compounded by the existence of the conflicting political ideologies in countries such as the PRC and Vietnam. Nevertheless, it is undeniable that the East Asian Economic Miracle has transformed East Asia’s economies whereby many East Asian countries have now confirmed their position as major contenders in the global market.

Throughout this period the HPAEs have grown at a faster rate than most other developing countries in the world. This has been a result of numerous factors, but in particular it seems that this success is largely attributable to the regionalism that has occurred across East Asia. It seems that relations between the East Asian regions have rapidly developed, especially as ‘those countries that have adopted a “trading strategy” have tended to outperform others that have given primacy to the ideas of military assertiveness and territorial control. [24] Thus, in order to compete in an increasingly global environment, it has proved to be essential to minimise military conflicts and establish trade relationships that will benefit the region as a whole. Many of the HPAEs have taken note of Japan’s developmental example, and accordingly, each have similar economic characteristics. Arguably, this has been instrumental in enabling organisations such as the ASEAN to emerge, as well as encouraging the implementation of many major policies which have enhanced intra trade relations.

Nonetheless, a deeper level of analysis reveals that major tensions continue to exist within East Asia, such as the North Korean threat, Japanese tensions with its neighbours and disputes between China and South Korea regarding historical legacies. Nevertheless, it seems that the cooperation and shared development which has resulted from the East Asian economic miracle has, at the very least, created the foundations for progressive trade relations in the future.

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