Forty years ago, Asia w as largely perceived as an underdeveloped area of the world, with little likelihood to take an important position in world economy. in the early 1990s, there was heated discussion of the "asian economic miracle"--of east and southeast asian countries' miraculous economic takeoff in the previous decade: besides the earlier economic takeoff of Japan, now korea, taiwan, hong kong, singapore, thailand, malaysia, and indonesia, all experienced rapid economic development, often around 10 per cent of growth per year. because of their ties to chinese culture or to the large number of chinese immigrants, taiwan, hong kong, singapore, and korea were called the "four little dragons," as dragon was a chinese symbol of power. they were sometimes also called the little tigers, as the latter was a korean symbol of power. their economic takeoff all had something to do with state intervention in the economy. the last to take off was communist china, which started an economic reform program in the 1980s.

export-driven economic development

All these Asian countries' economies have been characterized by an export-driven economy. As they embark on the path of economic development, these Asian countries need to buy the technology know-how, machinery, management skills (by hiring Western managerial personnel), and very often energy resources from the West or the other parts of the world. To do so, the state would take over economic regulation and channel the limited resources of the country to maximum use--the production of goods for export, in exchange for money to industrialize. In 1997-1998, however, this state-regulated economy came under challenge in what is called the Asian economic flu--the collapse or near collapse of many Asian economies from Thailand to South Korea, Hong Kong, Indonesia, Malaysia, and Singapore. Japan came under economic recession in 1991, and has been struggling to get out of it ever since.

Japan:

In the years from 1950 on, Japanese leaders in the bureaucracy and ruling political party, working in tandem with corporate executives, actively sought to manage and develop the economy. Over the 23 years from 1950 to 1973, Japan's gross national product (GNP; the total value of goods and services produced in a year) expanded by an average annual rate of more than 10 per cent with only a few minor downturns.  There was also a high rate of investment in technology. Japan developed an export-oriented economy: much of what it manufactured would be sold abroad and the foreign currency they made would be invested in the purchase of technology, management, raw materials and energy sources for its further industrial development.  Japan is a country with few raw materials for industrial development and non known oil reserves except for recent limited offshore discoveries.  Today over 70 percent of manufactured goods from Japan are exported abroad.  When this export driven economy first started in the 1950s, Japan had a favorable international environment: The United States led in negotiating a more open trading system through treaties such as the General Agreement on Trade and Tariffs (GATT, predecessor to today's WTO, World Trade Organization).  Cheap and reliable energy supplies in the form of oil from the Middle East and elsewhere fueled industrial expansion at relatively low costs.  Relatively affordable licensing agreements also gave Japanese companies open access to a host of new technologies from transistors to steel furnaces. 

A. Government regulation in the form of loans:

Private banks, as well as public institutions such as the  Industrial Development Bank, drew on individual savings to channel capital to businesses.  In the early years of Japanese economic development from the 1950s to 1960s,  1/3 of the bank loans came from private savings.  The average household saved under 10 per cent of its income in the early 1950s, but savings rate soared steadily as the economy grew and reached 15 percent by 1960 and topped 20 percent by 1970.  Households have continued to save in excess of 20 percent since then.  These funds, deposited in savings accounts of commercial banks or in the government run postal savings system, made up a vast pool of capital available for investment in industry. There has been such extensive government regulation of Japanese industry that Japanese capitalism is sometimes called "brokered capitalism" to refer to the extensive role the state plays in it.  Of all government ministries, perhaps MITI has been the most instrumental.  MITI and the Ministry of Finance encouraged the rationalization of firms and industries and guided the structural transformation of the economy.  MITI stimulated the movement of capital and labor out of declining industries such as coal and textiles and into promising new industries with high growth potential--first into electronics, steel, petrochemicals, and automobiles, and later into computers, semiconductors, and biotechnology.

B. Steps to avoid competition: monopolies (zaibatsu) and the Keiretsu

During the American occupation, one of the decisions MacArthur made to liberalize Japan was to abolish the monopolies (zaibatsu).  Because of the onset of the Cold War and the Korean War, the anti-monopoly stance was not upheld by the Americans to give the Japanese businesses a chance to compete more aggressively internationally.  This opportunity was seized upon by the Japanese government.  On Sept.1, 1953, the Diet amended the Anti-Monopoly Law so as to relax the Occupation-imposed restrictions on cartels, interlocking directorates, and mergers.  To maximize the efficient use of resources, MITI preferred to have competition limited to a small number of very large corporations.  The Fair Trade Commission's authority to prevent restraint of trade was constantly under attack from MITI.  In one of the better documented cases of collusive behavior that resulted from the changed rules, six Japanese firms manufacturing televisions joined forces, forming a market stabilization group in 1956 to control the domestic price of televisions. They maintained a high price level in the domestic market while government tariff policy kept the market closed to foreign producers.  With high profit margins and an ensured market at home, the industry turned to exports, especially to the US market.  Through below-cost exports to the US market, the Japanese firms were able to drive most of their US competitors out of business.  The Japanese government spurred and shaped the development of the television industry through preferential credit allocation via large banks, lax antitrust enforcement, condoning of de facto recession cartels, MITI guided investment coordination, and various forms of non-tariff barriers.

C Burst of the economic bubble

For years, an inefficient economy dragged on.  This stopped in 1991 when the economic bubble burst.  Besides the reason of inefficiency, there were a few other causes for the economic recession:

1. Pressure to end asymmetrical trade with the U.S.: after 1947, because of strategic reasons, the U.S. allowed Japan to freely export to the U.S. while closing its door to American trade.  The end of the Cold War in 1989 and the fall of the USSR in 1991 made this U.S. accommodation unnecessary.  There has been increasing U.S. pressure for opening up Japan for trade.  Meanwhile, the exchange ratio between U.S. dollar and Japanese yen became more and more biased against Japan as American trade deficit increased: the Japanese yen became more and more expensive.  

2. Overheated financial market: The gradual appreciation of the yen came earlier than 1991, and not just against the U.S. dollar, but all major currencies in the world, as the world became indebted to the Japanese economy.  This eventually worked against the traditional Japanese style of export: to sell at below cost prices and win market share.  As Japanese goods became more and more expensive because of the appreciation of the yen, it became less and less worthwhile to sell goods abroad.  Instead, the strong yen led many Japanese companies to become international financial institutions and lend huge amounts of loans, encouraged by the loose lending policies of  Japanese banks.  Many loans were given to companies that did not receive a thorough investigation, both in Japan and abroad.  Buoyed by an optimistic belief that so long as these borrowers made money they would be able to return the loans, the money lenders were shocked in 1991 that some of the borrowers were bankrupting and defaulted on the loans. 

China:

In 1989 China became a Communist state, but it did not fare well in terms of economic development. Political instability rocked the Chinese society. The most (in)famous political movement was called the Cultural Revolution: a Communist party inner struggle where the communist leader Mao Tse-tung wanted to get rid of his rivals in the party who wanted economic development more in sync with Western theories and practices. After the Cultural Revolution, Deng Xiaoping steered China onto the stage of pragmatic reform. The forces unleashed by the reforms have challenged not only China's planned economy but also the party-state itself. Market reform, because it was accompanied by only limited political reforms and lacked a legal and regulatory framework, gave rise to bouts of inflation, rampant corruption, growing social and regional disparities, and economic and political decentralization. (Merle Goldman & Roderick MacFarquhar, "Dynamic Economy, Declining Party State," in idem, eds.,The Paradox of China's Post-Mao Reforms (Cambridge, MA: Harvard University Press, 1999), 4.) Nonetheless, these reforms ended the political chaos and economic stagnation of the Cultural Revolution. Deng and most of his colleagues rejected Mao's utopian visions of the egalitarian society of the Great Leap Forward, the unending class struggle of the Cultural Revolution, and state control of the economy, collectivization of agriculture, and emphasis on heavy industry. The failures of the Mao era led Deng to believe the only way for the party to hold on to its weakened mandate was to improve the standard of living for the majority of the population. Despite the student demonstrations of 1989 which were a reaction to some of the problems in the growing commercial economy, e.g. government profiteering, uncertainty about losing the iron rice bowl and finding a job on their own, inflation, unfair competition in the job market against children of government leaders, in 1992, Deng Xiaoping reemphasized the need for greater economic reforms in order to stave off a Soviet style collapse.

In the process of economic reform Deng Xiaoping withdrew the power of the party from many areas of life except for two: birth control (because of China's 1 bilion + population) and politics because of a market economy and because Deng wanted to repair Chinese life damaged under Mao's rule when politics dominated everything. But even in the area of politics, the party control of the state has changed from the Mao era. The Party state's loosening grip of the economy set in motion, however, processes in society, the political structure, and the cultural arena that it could not control. The establishment of the special economic zones in the 1980s (four coastal Chinese cities in the south) and foreign-Chinese joint ventures helped reduce the Party-state's control. Their appearance was concomitant with the state's decision to develop private and collective enterprises. Many state enterprises, formerly subsidized by the state, now were allowed to go bankrupt if they did not turn a profit. By the late 1990s, the state enterprise (or work unit) made up less than half of China's economic production was was shrinking at an aceclerating rate. In December 2001, China joined the WTO (World Trade Organization) which stipulated that by 2006, China should become a market economy and except for in a few areas, completely open its market to the outside world.

South Korea:

South Korea, patterning after Japan, Inc., developed a chaebol based, state regulated economy that similarly achieved rapid development in the 1980s.

The other three of the four little dragons, Taiwan, Hong Kong, and Singapore, similarly applied high handed state regulation in their economic development.

Taiwan:

Historically, Taiwan was populated by Chinese immigrants from southern China, and native Taiwanese of largely Malay origin. In the 1600s, Taiwan was briefly colonized first by the Portuguese (who named it Formosa) and then the Dutch. A Chinese general cleared the Dutch out of Taiwan in late 17th century and Chinese government started to establish offices in Taiwan some time later. In 1895, Taiwan became a Japanese colony and remained so till 1945. Japan's colonizing policy included mandatory Japanese language in all Taiwan schools. Nationalist troops of China took over Taiwan following the end of World War II, and by late 1948, the failure of the Nationalist government in the Chinese civil war with the Communists led to their retreat to Taiwan. In the 1950s, Taiwan and the U.S. drew more closely together because of the Korean War, when Communist China participated on the side of the north Koreans against South Korea and the U.S. American economic assistance and Taiwan state regulation of the economy pushed for a Taiwan economic takeoff.

Hong Kong:

The region comprises Hong Kong island, ceded by China in 1842 under the Treaty of Nanjing; Kowloon (Mandarin Jiulong ) peninsula, ceded (with Stonecutters Island) in 1860 under the Beijing Convention; and the New Territories, a mountainous mainland area adjoining Kowloon, which, with Deep Bay on the west and Mirs Bay on the east and some 235 offshore islands, was leased from China in 1898 for 99 years. China regained sovereignty of the colony on July 1, 1997.

Living on borrowed time, the Hong Kongers made their name as the fastest and most efficient workers in the world. With its strategic location, it also developed into one of the world's largest entrepots and financial centers in the second half of the 20th century.

According to Willem van Kemenade, Hong Kong's rapid economic development in the 1980s and 1990s were thanks to "fate, chance, its colonial rule, and the Communist revolution in China.The more than 6 million Hong Kong Chinese have nevertheless made excellent use of the opportunities offered them since 1949 by China's revolution and regional wars--not by design but by coincidence....Hong Kong owes its success to the unique synergy of flamboyant Chinese opportunism and the rule of law and stability of British colonial 'enlightened despotism.'" Its per capita income in 1997 was higher than England and 40 times that of Communist China. (Willem van Kemenade, China, Hong Kong, Taiwan Inc., The Dynamics of a New Empire (New York: Vintage Books, 1997), p.55.)

Global economy, state regulation, and the Asian economic flu.

Rapid Asian economic development caught global attention. International money poured into the emerging Asian market and was often regulated not just by the stock markets in these countries but also by their government policies on finance and national economy. The influx of international money into the emerging markets and the lack of careful check over which companies were worth their investments, led to an over heated economy in Asia, such as Thailand's real estate market. When international investors realized their mistakes and wanted to pull their money out, it triggered off an Asian economic crisis. Government regulation proves sometimes to be a hindrance in economic recovery as macroeconomic regulations tend to be slow in catching up with the open and rapid economic developments of the world. As a result, many Asian countries, including Japan, are encouraging greater private initiatives and making concessions in government regulations.