The sharp fall in currencies and stock markets in south-east Asia in recent weeks have raised serious questions about the future of the "newly industrialising countries" (NICs) or "Asian tigers". The article printed here, by CHOW WEI CHENG, is excerpted from "Lessons of the East Asian NICs", which appeared in issue number 8 of Links, the international journal of socialist renewal.
The statistics on the NICs' performance are widely available. They depict rapid growth — double to triple that of the US, Japan and Germany in the 1960s to 1980s, rapid productivity growth, quick industrialisation, a high degree of investment and capital formation and a high propensity to export; manufacturing and machinery account for a larger share of exports than light manufacturing and agriculture.
These countries have also begun exporting capital in the form of investment and production facilities in China, Vietnam and other countries in south-east Asia.
However, it is important to place these achievements in context. According to Satoshi Ikeda (in The Age of Transition, Penguin, 1996), Taiwan, South Korea, Singapore and Hong Kong are the only Third World countries to have grown rapidly enough to close the relative income gap between themselves and the advanced capitalist economies.
The NICs account for only a tiny minority of Third World countries. Despite their successes, the combined GDP of South Korea, Taiwan, Hong Kong and Singapore was only 16% of Japan's GDP in 1994.
Government intervention
The NICs' key to success was marrying imported technology and cheap labour to an export market. That cheap labour advantage is disappearing, and export markets are tightening.
In 1993 the World Bank released its analysis of the causes of the NICs' development in The East Asian Miracle — Economic Growth and Public Policy. It states:
"Private domestic investment and rapidly growing human capital were the principal engines of economic growth. High levels of domestic financial savings sustained ... high investment levels ...
"In most of these economies ... the government intervened — systematically and through multiple channels — to foster development, and in some cases the development of specific industries ... targeting and subsidising credit to selected industries, keeping deposit rates low and maintaining ceilings on borrowing rates to increase profits and retained earnings, protecting domestic import substitutes, subsidising declining industries, establishing and supporting government banks, making public investments in applied research, establishing firm- and industry-specific export targets, developing export marketing institutions, and sharing information widely between public and private sectors."
The NICs also engaged in "financial repression": interest rates were kept low to cheapen borrowing by firms. Thereby savers, the majority of whom are households, subsidised corporate borrowers.
The World Bank counsels tax and investment incentives to encourage business profitability; guaranteeing banking profits to ensure a "stable and secure" financial system; spreading private investment risks to the public by state guarantees of the financial viability of investments; and granting subsidies to and bailing out distressed strategic firms.
The World Bank also notes that these governments have been "less responsive than other developing economy governments to organised labour's demands to legislate a minimum wage".
False explanations
One pseudo-explanation of the NICs' growth is that it was due to a high level of domestic savings, which allowed national capitalists and governments to fund investment without reliance on foreign finance.
It is certainly true that increased savings can assist existing economic growth by providing cheap finance. However, it is not true that a greater pool of savings necessarily leads to greater economic growth. This depends on factors such as profitability, investment and access to markets.
The critical combination in the NICs' case has been between high domestic rates of profit (dependent mostly on low real wages) and high demand abroad.
A high savings rate is a consequence of growth and cannot be raised until that growth occurs in the first instance.
In the 1960s South Korea had a much lower savings rate than Taiwan, Singapore and Hong Kong, and investment was overwhelmingly funded out of foreign savings in those years. This led to increased foreign debt, but it didn't hinder growth.
The savings-growth relationship has been empirically tested by the World Bank itself in regard to Asian NICs and the US from the 1950s to 1988. It found that real per capita growth rates underpinned increases in the savings rate, not vice versa.
Numerous studies have analysed the causes of the NICs' economic growth and associated increases in labour productivity.
The NICs grew mainly from increases to the industrial work force and physical capital stock, such as increasing education and more investment in machines. Alwyn Young (NBER Macroeconomics Annual, 1992) found that simple increases in inputs accounted for about two thirds of growth, rather than any change in technology or efficiency. In the case of Singapore, increased inputs accounted for 98% of growth over the 19701990 period.
Further productivity growth came from the process of industrialisation itself, relocating the country's resources from sectors of low productivity to high productivity, namely from agriculture to industry.
World Bank researcher Hollis Chenery concluded that the relocation of capital and labour to sectors of higher productivity accounted for about 20% of average growth.
We have thus accounted for about 85% of the NICs' growth "miracle". The rest most likely comes from increased technical efficiency such as improved shop floor organisation and gains from specialisation. Very little productivity growth was attributable to improving technology.
This has profound ramifications for analysing the NICs' achievements and prospects. A growth strategy based on massive increases in inputs will run into diminishing returns. The economy-wide implications are for the NICs' high growth rates to slow.
Technology gap
In order to reach the next stage of growth, the technology gap between the NICs and the advanced capitalist economies will need to close. Technology diffusion is often less wide than usually thought.
A recent book by noted Japanese political economist Professor Yamamura, Asia in Japan's Embrace, outlines the reality: "Japan is actually flying further and further ahead of the regional flock. The division of labour in Asia, based on technological capacity is becoming more, not less, vertical."
As a consequence of this structural dependency on Japanese technology, two thirds of Taiwan's technology transfer agreements are with Japanese firms. Taiwan, South Korea and the four biggest ASEAN countries all rely on Japan for some 40% of their machinery imports.
South Korea's most noted success stories are predominantly dependent on Japanese technology. There is a high dependence on US and Japanese-licensed technology: wafer fabrication in semiconductors, engines and transmission in cars, computer-aided design in textiles and garments, hardware and software design in computers.
South Korea combines others' technology with low wages and an efficient manufacturing process, but South Korean firms have been low in innovation and new product development.
Technological rents result in fat profit margins for Japanese and US firms and very thin margins for their Korean counterparts. In 1996, Hyundai automotive profit margins (net profit after tax divided by sales) were 1.4% compared to Toyota Motors 2.4% (despite the overvalued yen), Ford's 3.0% and General Motors 4.1%.
Despite these shortcomings, NIC growth is still an achievement that most Third World countries cannot attain. The NICs derive this growth from their specific role within a regional division of labour, a role from which many other countries are excluded.
Imperialism
The US policy for the region after the second world war was "containment" to stop the spread of communism. In particular, US policy for South Korea and Taiwan was to build up these states as centres of capital accumulation.
The US pumped in a vast amount of economic, military and food aid. South Korea and Taiwan were given preferential access to US markets for their exports, US technology and assistance from US technocrats and planners. During the US occupation of South Korea, the left and unions were severely weakened.
From 1945 to 1979 South Korea received US$13 billion in US military and economic aid and Taiwan $5.6 billion. South Korea's 194678 total of nearly $6 billion in US economic grants and loans compared with a total for all of Africa of $6.89 billion and for all of Latin America of $14.8 billion.
US military deliveries to Taiwan and South Korea between 1955 and 1978 (excluding the Korean War) totalled $9.05 billion.
In the 1950s, this US aid financed a staggering 95% of Taiwan's trade deficit. In South Korea, US aid accounted for nearly 15% of GDP and paid for over 80% of imports. In 195174 South Korea's receipt of $8 billion in US food shipments meant wages could be kept artificially low, and prices of exported commodities lower.
Military assistance flowed in at twice the rate of economic aid, allowing South Korea and Taiwan not only to maintain basic economic and social order but also to invest substantially in infrastructure, especially education.
Direct aid from the US for both countries ended in 1960s, to be replaced by increased dependence on Japan. During the 1970s Japan accounted for 25% of South Korean exports and 38% of imports. Together Japan and the US gave preferential access to their markets and accounted for two thirds of South Korean exports and 70% of imports.
This entire program had a huge influence on the ability of these countries to develop. The scale of aid, the preferential access to US markets and the degree of technical assistance represented a temporary easing of the main sources of imperialist exploitation and competition. Without these conditions, the "miracles" would never have started.
Labour exploitation
The super-exploitation of workers is integral to the NICs' growth. In 1987, before the present decade of union struggles broke out, hourly pay in South Korea was 11% that of US workers.
Today the average work week is around 54 hours, and there is minimal investment in safe working conditions. In 1989 South Korea had the highest rate of industrial accidents in the world, with five workers killed and 390 injured per day. Women are super-exploited, being paid around 50% of the male wage.
South Korea's work force is subject to military discipline within the firm and by state intervention through repressive laws which give the government power to void any union decision, and through the creation of yellow unions. Military intelligence also plays a large role in the surveillance and selection of union personnel.
Taiwan has a more dispersed industrial structure, with 90% of industrial enterprises having fewer than 30 employees. Over 80% of the employed labour force work in these shops. The Labour Union Law prohibits union activity in companies with fewer than 30 employees.
Taiwan and South Korea's key asset started to lose competitiveness in the early 1980s, as the rural labour supply dried up and growing labour militancy put upward pressure on wages.
New NICs?
It's clear that the main factors preventing a general spread of the NICs phenomenon is the changed stance of the major imperialist powers, especially the US, and the long-run slowdown in world economic growth.
With the collapse of the Soviet Union, there is no basis for a strategy of containment and pumping up economies to be bulwarks against "communism".
The economic policies the NICs undertook were also greatly facilitated by the long wave of post-second world war expansion, but today a long recessionary wave continues to prevail in the world economy, intensifying competition among all those countries aspiring to be NICs.
For all the "players", it is much harder to have a strategy of export-oriented growth. Average growth rates for the NICs, although still much higher than elsewhere, are declining.
South Korea's access to US markets is now being contested by the US itself.
The limits of an export push strategy are shown by the restricted conditions of market access under the WTO and the rise of non-tariff barriers among the three major trading and investment blocs. These agreements will hamper developing economies' use of policies that are viewed as "unfair" by major advanced capitalist countries.
In summary, the prospect for NICs and aspiring NICs is for slowing growth amidst heightened competition. As the more developed NICs lose their cheap labour advantage, they are forced into more direct competition with the advanced capitalist economies. To equip themselves for this competition, the "communitarian" and "social" aspects of Asian capitalism have to be sacrificed: such is the root cause of the 199697 strikes in South Korea.
Of course, it is not excluded that South Korea or other actual or aspiring NICs can continue to harvest what growth the system continues to generate. However, it is a fantasy that the NICs, with all their necessarily brutal forms of super-exploitation, can be a general development model for the Third World, even though this illusion is such an important tool in coercing the working people of the Third World to accept unending sacrifices.