East Asian Economy: Northeast Asian Economy

1. East Asian Economy <Lecture Note 3 > 2013..10.10 East Asian Economy: Northeast Asian Economy * Some parts of this note are summary of the references for teaching purpose only. Semester: Fall 2013 Time: Thursday 2:00-5:00 pm Classrom: 423 Professor: Yoo Soo Hong Mobile: 010-4001-8060 E-mail: yshong123@gmail.com Home P.: http://yoosoohong.weebly.com 1 1

2. Geography, History and Culture

3. Definition of “Northeast Asia” • Broad definition: Entire countries of China, Taiwan, Japan, Korea, Mongolia, Russia • Narrow definition 1: Northeast China, Japan, Korea, Mongolia, Russian Far East • Narrow definition 2: China, Japan, Korea

4. Geographical Map

5. Broad Northeast Asia

7. Chapter 1 , Section 1 Population Density

8. China Japan The Koreas • A land of extremes • Oldest civilization on Earth • More people than any other nation • Mountains and deserts make up two-thirds of China • Home to some of the highest mountains • An archipelago in the western Pacific Ocean • Four major islands and more than 3,000 smaller ones • Every major city is located on the coast • Nearly 80 percent of the country is mountainous • “Land of Golden Embroidery” • A peninsula, stretching into the Yellow Sea and Sea of Japan • More than 70 percent of the land consists of steep and rocky slopes • Since 1945, has been divided into two separate countries. Chapter 1 , Section 1 China, Japan, and the Koreas

9. North Korea South Korea Japan China • Coal and iron are plentiful • A developing country with low industrial production • Does not get along, and therefore does not share, with South Korea • Lacking natural resources • A developed country with many industries • Must import minerals it needs from other countries • Lacking natural resources • A modern industrial society • Must import vast quantities of minerals, such as coal, natural gas, and oil • Large supply of natural resources • They mine copper, tin, and iron • Huge oil reserves and lots of coal • Still must import some raw materials Chapter 1 , Section 3 Mineral Resources

10. Confucian Influence

11. Economic Growth and Status

12. Graph: growth over time ANIEs Growth Rate in the Main Period

13. Rates of Economic Growth and Inflation in North-East Asian Economies, 2011-2013 (%) Reprinted from: ESCAP 2013. p.72.

14. Northeast Asia Economic Growth, Past and Future Source: ISA Economic Forecasts, national statistics • China’s economic growth slowed in recent years as export demand weakened. Japan suffered a deep recession in 2011 as a result of the natural and nuclear disasters in that country, but bounced back in 2012 and early 2013. Growth will remain below previous levels across Northeast Asia over the near-term as export markets continue to struggle. Reprinted from: International Strategic Analysis. 2013. p. 32

15. Introductory Remarks • East Asia is the most populous region in the world. • China is the most populous country with the oldest continuous national culture. • Eastern China is undergoing rapid economic development. • China and Japan have been rivals from time to time. • Northeast Asia has seen international conflict and one of the forefront of international tension. • Japan has been extremely successful and wealthy, but has been more than three decades of recession or difficulties. • Northeast Asia (Sometimes also called East Asia) is one of the core areas of the world economy and an emerging center of political power

16. Industrial Expansion Spectacular Growth • Countries followed the pattern similar to the postwar Japanese model. • Investment in human resources through education and training helped industrial development. • Outward-looking industrialization strategy • Asian Rim started the 1960s as undeveloped region. • Over next few decades Asian Tiger economies performed spectacularly. • Growth higher than that of similar economies in Latin America and Africa Asian Tigers While Japan was building one of the world’s strongest economies in the years after World War II, other Asian nations were also making great economic growth. Because of economic successes, South Korea, Hong Kong, Taiwan and Singapore became known as the Asian Tigers.

17. Early Stage of Japan, Korea, and Taiwan-China • Resource-poor economies -Shortage in natural resource • Less diversified ethnic groups (one nation) • The Cold War environment - The importance of strategic location (anti-communism) -> US military assistance: improving stability, more budget assignment to economy -> Economic assistance: American Aid, expanding American Market • Successful land reform - Away with the landholding classes - Made wage income the main source of advancement - Equity of income

18. Means for Economic Development  Korea • Deliberately created large private conglomerates, the chaebol • 7 Five-Year Economic Development Plans  Japan • Deliberately created large private conglomerates, the keiretsu • 12 Economic development plans: Set up the way of economic and social development  Taiwan • Directed FDI into areas where local firms lacked world-class capability • Played a very active role in helping SMEs to locate, purchase, diffuse and adapt new technologies

19. JAKOTA Triangle  After World war II, Japan emerged as an manufacturing leader. • JAKOTA Triangle - Japan, Korea and Taiwan-China make up the JAKOTA triangle. - The area has become an attentive part of the global economy. - Countries become dependent on each economically.

20. The First and the Second ANIEs • East Asia comprises 23 countries. All these economies grew faster than all other regions from mid-1960. This growth has been unprecedented in eight of these countries. • These are clubbed under two heads: “Four Tigers” and the “ Asian Newly Industrializing Economies (ANIE’s) - Four Tigers or the 1st ANIEs: Hong Kong, the Republic of Korea, Singapore and Taiwan (China). - The 2nd ANIE’s: Indonesia, Malaysia and Thailand • Growth Performance: Some highlights - Between 1960 and 1985 Japan and the Four Tigers recorded over 4-fold increase in their real per capita income. - This increase was more than two-fold in the case of three second ANIE’s .

21. - GNP average annual growth rates ranged 7.1% in Korea during 1965- 1990. - Since 1960, these economies (HPAEs) have grown more than twice as fast as the rest of the East Asia, roughly three times as fast as Latin America and south Asia, five times faster than Sub-Saharan Africa - They also outperformed significantly the industrialized and the oil-rich Middle East-North African region. • Most of these economies ranked higher even in respect of leveling income inequalities. • Their growth has been inclusive as gender inequalities have also come to be smoothed to a good extent. • Life expectancy in the region increased from 56 to 71 years between 1960 and 1985.

22. Some of these countries did not hesitate to import educational services especially in vocationally and technologically sophisticated disciplines. • Primary education came to be universalized in record time. • Hong Kong, Korea and Singapore attained this distinction by 1965. • By 1987 half of these fast growing countries had universalized primary education for the female children. • Quality of education was top priority, realized through continuous rise in real per capita expenditure while holding teachers salaries stable. • Korea, the leader here, recorded 355% increase in educational expenditure between 1970-1989, comparative figures for Mexico, Kenya and Pakistan were 64%, 38% and 13%, respectively.

23. Northeast Asian Lead

24. Jakota Triangle and Growing Competition

25. Three Poles in the World - A major trend of globalization today is the concentration of global producion networks, trade, technology transfer, and financial flows into three key geographic regions: North America, the European Union, and Northeast Asia. - Northeast Asia today- China, Korea, and Japan – has become the global center of manufactured goods, producing one-fifth of global production, and leader in information technology.

26. Economic Position of NEA (2010, Bil.US$) • The three countries share 20% of the world total GDP. • Exports share 19%, imports share 16%.

27. Key Economic Indicators of Northeast Asian Countries, 2011 Reprinted from: Kawai, Masahiro. 2013. p.5.

28. Business Environment Rankings of Countries in Northeast Asia, 2012 Reprinted from: Kawai, Masahiro. 2013. p.7.

29. Global Competitiveness Index and Infrastructure Quality in Northeast Asia Reprinted from: Kawai, Masahiro. 2013. p.8.

30. Levels of Selected Infrastructure in Northeast Asia—International Comparison Reprinted from: Kawai, Masahiro. 2013. p.9.

31. Disparate Powers in NEA For more recent economic data, refer to the individual economies’ data, provided in other pages.

32. Current Picture of Northeast Asia International Relations -Lack of full reconciliation -North Korean nuclear issue -Competition on leadership No foundation for sound competition and cooperation Economy -Surge of China as the World’s factory and market -Japan’s high-tech capacity -No FTA yet Common ground for Northeast Asia Culture -No sense of common identity as Northeast Asian community -Collision of nationalism

33. NorthernHPAEs

36. Industrial Policy in NEA and SEA - A big difference between Northeast and Southeast Asian economies is the extent to which government attempted to influence the allocation of resources during the industrialization process. • The governments of Japan and Korea pursued significantly more active industrial policies than their Southeast Asian counterparts. The Southeast Asian economies relied more on market forces to determine winners and losers among industries. - Southeast Asian countries do not have the strong tradition of a powerful and capable indigenous bureaucracy as did Japan and later Korea. The state could thus not play a dominant role in national economic development in Southeast Asian nations as it did in Northeast Asia.

37. Northeast Asia: Strong Fundamentals • Economic - China is expected to grow 7~8 percent annually in several decades ahead. • Japan may move out eventually of the several decades long recession and returning to a normal growth path. • Korea will be able to maintain 4~5 percent annual growth again albeit the recent slowdown. • Exports (trade) will remain the engine of growth in the region. • Price and Financial Market Stability • Inflationary pressure is mounting. • Despite the banking sector problems and structural weakness of capital markets, financial crises originating in domestic financial markets of any country will not be serious enough to spill over into other neighboring economies. However, the world economic crisis will change this.

38. Factors characterizing China’s development • China has a window of opportunity framed differently from that of previous latecomer countries and firms. • If Japan and Korea’s catch-up model is a half-opened one, that of China is a wide open one with three specific features. • First, information technology has changed the rules of the game for catch-up. Information technology is a new system of technology that is totally different from that dominating manufacturing. It has given rise to new business models, products and services. Obviously. China has benefited from this trend. • Second, modular production-enabling low cost and high product variety-emerges with global competition. Modular products may be machines, assemblies or components that accomplish an overall function through the combination of distinct building blocks or modules. Modularity allows the outsourcing of design and production of components and subsystem within the product system architecture. 38

39. The implication of modularization for innovation is that companies in developing countries, whether they are assemblers or suppliers, can enter the innovation competition more easily than before. They may not be good in technological innovation but they can excel and succeed commercially by sourcing modules and assembling them. • Third, related to the globalization of technology, global technology outsourcing gives Chinese companies a new way to make quick product innovations. • The globalization of technology can be either a window of opportunity or a further burden, depending whether the firm playing catch-up has made the technological effort supporting the absorption, adaptation, mastery and improvement of technology or not. • In order to grasp the windows of opportunity in a much faster way, relying less on absorption and adaptation, and driven more by market-oriented innovation supported by technology outsourcing and alliances is encouraged. China has been successful in medium-level technology products by this. (However, most of innovations by Chinese firms have been incremental type.) 39

40. The result is that a strategy based on market-oriented innovation and technology outsourcing has become the primary approach for China’s leading companies. • The technology may come from anywhere, although most of the core, proprietary technology comes from the USA, Japan, Europe and Korea. This has enabled Chinese companies to rapidly catch up in product innovation competition at higher levels of technological sophistication, not just at the low-margin end. However, this has retarded China’s own innovative capability so that China has recently been emphasizing ‘self-reliant technological innovation’ . 40

41. Liaoning (North-East Area) Chinese Industrial Clusters • Heavy Industry, aircraft • Software • Para-statal enterprises Beijing/Tianjin (Zhongguancun Area) • R&D • IT, bio, space & defense • Gov’t Services Chang Jiang Delta Area Shangdong Area • Textiles • Automobiles • Laptop PCs • Mobile phone • Financial Institutions • Semiconductors • Production area of frozen vegetables & processed food • Home appliances • Korean presence Xiamen/Fuzhou Area Zhu Jiang Delta Area • Agricultural & Fishery products • Taiwanes companies • Textiles • Tea • IT/ PC • Electronice components • Taiwan hinterland • Chemicals & Petrochemicals • Automobiles

42. Comparison of Two Models

43. Regional Economic Growth Comparisons Size of the circle indicates the size of the economy Source: ISA Economic Forecasts, Avg. Annual GDP Growth 2007-2011 Per Capita GDP at PPP Reprinted from: International Strategic Analysis. 2013. p. 28

44. Comparison of Development

45. Comparison of Political Economy

46. Recovery from Global Financial Crisis

47. Gross Domestic Product (GDP)-Growth Rates The Rise and Fall of NEA Growth Reprinted from: Naughton, Barry. 2013. p.6.

50. International Competitiveness, Trade and FDI