Early in the morning, factory whistle blows
Man rises from bed and puts on his clothes
Man takes his lunch, walks out in the morning light
It’s the work, the working, just the working life
– Bruce Springsteen
The East Asian export model is the worst economic model – except for all the others that have been tried.
Winston Churchill was actually referring to something else but we are going to apply his quip to development economics because the original hasn’t been aging so well.
While some may marvel at how Japan, South Korea, Taiwan and, of course, China exported their way to riches, it was, in reality, an arduous, grueling and brutal process that has left lasting scars. Economic development really is not supposed to happen this way.
The East Asian export model is swimming upriver, playing the video game on hard mode, running up the down escalator. What kind of development strategy requires poor countries to scrimp and save only to lend that money to rich customers to purchase one’s manufactures?
East Asia had to do battle with the Lucas paradox. East Asia won not because the export model is so effective; it won because East Asia is East Asia.
The Lucas paradox is the observation that capital does not flow from rich country to poor as predicted by classical economics. In theory, as capital experiences diminishing returns in rich economies, it will flow to poorer economies which still have low-hanging fruit.
In practice, however, rich countries have hoovered up capital from developing economies, leaving much of the world starved for investment.
East Asia, starting with Japan, was able to develop despite the Lucas paradox. After WWII, Japan’s Ministry of International Trade and Industry (MITI) husbanded the nation’s meager resources to invest in strategic industries – steel, autos, electronics, semiconductors etc.
The country bought treasuries with export revenues and slowly accumulated capital through reinvestment of retained earnings – bit by excruciating bit.
This didn’t reveal the efficacy of the export-driven development model as much as it demonstrated the diligence and self-sacrifice of the Japanese people as well as the managerial expertise of MITI.
In contrast, as postwar Japan pulled itself up by its own bootstraps, Europe was showered with Marshall Plan capital injections – the way it’s supposed to work.
The two postwar paths surely affected societal outcomes. Two generations of salarymen sacrificed family, health and private lives to pursue national rejuvenation through Kaizen (continuous improvement) for corporate Japan.
Europeans, with access to American capital, were able to take a more leisurely pace – enjoying cafes, alfresco dining, the Beatles and Serge Gainsbourg’s dirty ditties. A line can surely be drawn from Japan’s stark development model to its current afflictions – low birthrates, cultural anomie, otaku youths.
The Asian Tigers followed suit, achieving even more spectacular results and also accumulating similar costs. Ultimately, the biggest player came on the scene running a version of the model that, because of China’s size, is causing Western politicians to mash panic buttons.
Through methods fair and foul, the US had long since dismantled Japan’s export growth model and is now desperately targeting China.
The acid-tongued venture capitalist Eric Li recently quipped that China’s biggest economic problem is that it can’t go out and get itself a bunch of colonies. Imperialism is the other development model that has worked spectacularly well. But like the East Asian export model, it too has left lasting scars. On balance, overworked salarymen is probably less objectionable than colonial ills.
Economists twist themselves into pretzels trying to figure out the cause of the Lucas paradox. But is it all that mysterious?
C’mon, folks, America is a giant landmass with a temperate climate, coasts on both the Atlantic and the Pacific Oceans. America is beautiful with spacious skies, amber waves of grain, purple mountain majesties above the fruited plains.
America, America, God shed his grace on thee, it’s a fat bird of a country from sea to shining sea! America has always exchanged assets for labor, whether through settler colonialism, slavery, immigration or trade.
Classical economic theory will not function correctly when there is this America thing (you’re included Canada, Australia and New Zealand) – barely extant for a single Sinic dynasty – hoovering up people and capital from all over the world.
In this environment, not only is the East Asia development model the least bad one available – it is the only one possible. And it works not because busting one’s hump to lend to rich customers is such an easy way to accumulate capital but because East Asians (insert racist theory here) are able to pull it off.
In a world under perfect laboratory conditions, where natural resource endowments are evenly distributed and giant landmasses had not just been opened up for economic exploitation, capital would follow the rules of classical economics – flowing from rich to poor.
The Lucas paradox exists because perfect laboratory conditions are not possible given the realities of history. We, however, may be at a point where theoretical outcomes will start to assert themselves in the real world.
The imperial development model is defunct in modern times and the export model is not replicable outside East Asia (insert racist reason here) but, with China taking its place as the world’s largest economy, we are at a point where development economics can follow classical economic precepts.
US Treasury Secretary Janet Yellen’s recent trip through China kicked off a round of hand-wringing in the Anglo press over industrial overcapacity in China.
Without a single Chinese electric vehicle (EV) sold in the US, Senator Sherrod Brown has already called for their ban, declaring, “Chinese electric vehicles are an existential threat to the American auto industry.”
Western progressives are mired in cognitive dissonance over long-trumpeted climate commitments when the solution presented to them is low-cost, made-in-China solar panels.
This entire overcapacity issue is another tiresome demonstration of Western solipsism. As Asia Times’ David Goldman likes to say, “China’s just not that into you.”
When the US imposed “voluntary” export quotas on Japan in the 1990s, it constituted 40% of the world’s car market. That has fallen to 13% in 2023.
China does not export cars to the US and, given geopolitical realities, will likely tip-toe around the US by building factories in Mexico for regional markets. Around 35 million cars were sold in developed markets (North America, EU, Japan, South Korea, Australia) in 2023, unchanged since 1990.
Eighty million cars were sold in developing economies in 2023, up from 10 million in 1990. China has been and will likely continue to direct its export capacity to developing economies – ASEAN, Gulf States, Russia, Central Asia, LATAM, the Indian Subcontinent and Africa.
China’s car exports map larger trends. China’s exports to developing countries doubled in the past five years and now exceed exports to developed economies. Not only are China’s exports not a threat to industries in the Global South, but “overcapacity” in China is entirely necessary for their development.
The Global South cannot accumulate capital through imperialism and it should not accumulate capital through the backbreaking East Asian export model. They are in luck because China’s “overcapacity” is exactly how development should work under classical economics.
Excess capital in China should flow to developing economies in the form of loans and investments along with capital goods – 5G base stations, railroad equipment, electrical systems, commercial trucks and, yes, cars. This is the entire theoretical basis of President Xi Jinping’s Belt and Road Initiative (BRI).
Without “overcapacity” in China, the Global South would have access to neither capital nor capital goods. Given its current account deficit and capital account surplus, it is mathematically impossible for the West to provide development assistance to the Global South on an appreciable scale.
Long-forgotten initiatives like Build Back Better World (B3W) and the Blue Dot Network die on the vine because the US does not suffer from “overcapacity.”
Sanctimonious concern over China inundating developing markets with manufactured goods is confused thinking. A development model based on capital inflows requires developing countries to run trade deficits by definition. The inflow will be used to purchase capital goods required for industrialization. This is the Lucas paradox resolved.
The Communist Party of China appears to have embraced its Industrial Party faction. The Industrial Party is an ambitious political identity that dispenses with the hoary left-right divide and believes that industry, science and technology will determine China’s future.
While not necessarily an economic ideology, Industrial Party precepts have an intuitive understanding of the necessity of China’s “overcapacity” and that it is up to China to reverse the Lucas paradox.
Wang Xiaodong, a vocal Industrial Party champion recognized the trends as far back as 2011, exhorting China to globalize its industrialization:
We must go out to meet the world. Not only do we want our products to “go global,” we also want our industrialization to go global, and our high-quality talent to go global. We can spread industrialization to every corner of the world. Many of our scientists and technicians will travel around the world to work, bringing with them civilization, a dignified existence, and relief from poverty. This is one thing that Westerners have been unwilling or powerless to accomplish.
China’s Commerce Minister Wang Wentao has dismissed Secretary Yellen’s accusations of overcapacity as groundless, insisting that China’s industries are just more competitive. Both the US and EU are likely to erect trade barriers as China appears unlikely to compromise.
When all is said and done, the squabble between China and developed economies is ultimately a sideshow. The real action will be the flow of Chinese capital and goods to the Global South.
This “East Asian export model” is very Un-Pope Paul VI like. China’s “overcapacity” might just do what Pope Paul VI always wanted!
This article says two things. China’s Xi understands economics far better than Trump, Biden, Yellen et al. and China’s “overcapacity” mirrors the West inability to compete.
The rise of China has highlighted the shortcomings of the Western model of governance. Empires rise and fall as they have for milleniums. When Eric Li stated in a speech the main difference between China and the West he hit the nail on the head: He said “in the West money rules politics, in China politics rule money. In the West politicians change but policies remain the same, in China politicians remain the same but policies change and adapt” Which model do you think is the ‘future’?
There is no paradox with basic economics once political and social risk to capital is accounted for.
China is slacking off because Xi wants to be the next Chairman Mao. When he came to the top spot he inherited a quickly developing and burgeoning tech growth cycle– which he killed because he had to reign in the billionaires it was producing. The he embarked on an ‘anti-corruption’ campaign that mostly cleared out his political opposition within the party, paving the way to make himself a chairman in perpetuity, one that eschews standard global business practice in the name of continuing the system of graft which keeps the CCP in power. No wonder capital fled.
Similarly, capital fled the risk of poor governance in Asia before. Japan’s never been able to get back on the horse of solid growth because it has chosen time and again traditionalism and xenophobia over growth– and so the most brilliant minds of Japan leave it to escape the salaryman chains, while the country turns it’s nose up at foreigner immigrants who could help restore it to growth (and a growing population).
Capital leaves the developing world because the developing world fails to deliver security– often as basic as physical safety, but also security in predictable contract outcomes, political climate, protection from graft, etc. It’s no wonder Singapore is at the top of that graph– Singapore made taking bribes and corruption in business anathema to it’s culture and it’s laws, and then backed that up by enforcing those laws. Corruption is so rampant elsewhere through Asia that no wonder capital fled to Europe and the US, which is not just blue skies and big mountain land, but a land where you can get good returns on investment without playing games of politics or bribery. Who in their right minds wants to invest in an industry in countries where local political thugs, gangs, or autocrats with visions of communist glory might wipe out the investment on a whim? No one, that’s why capital goes where returns are predictable because the business environment is safe and protected– in other words the ‘developed’ world, whose primary development is a culture and politics that eschews corruption, graft, and authoritarians with delusions of grandeur.
I get it. China is being frugal and using their capital to create new markets that didn’t exist while the west is using profligate spending of their capital (through huge military costs) to hold on to control of their existing markets.