Today I continue with a region by region assessment of the impact of the Global Minotaur’s demise post-2008. The last post looked at Japan. This one focuses on the nexus between Japan, SE Asia and the USA
Ever since the Korean and, more significantly, the Vietnam wars caused advanced capitalism to take root in South East Asia, Japan began to play the hegemonic role in the region (recall this post). Japan lent to the South East Asian tigers both the necessary technology and its initial growth spurt. However, it would be false to argue that Japan was to South East Asia what the United States were to Germany and Japan under either the Global Plan or the Global Minotaur. The difference is that Japan neither enjoyed substantial trade surpluses vis-à-vis South East Asian countries (as the United States had with Europe and Japan under the Global Plan) nor went through a period of absorbing South East Asia’s trade surpluses (as America was doing with Europe’ and Japan’s under the Global Minotaur). Instead, South East Asia was always in a structural, long term, trade deficit with Japan, having to rely on net export revenues from America and Europe for its growth.
During the Global Minotaur‘s best years, especially during 1985-1995, the decline in the value of the dollar was accompanied by a shift of Japan’s foreign direct investment towards Asia. In a few years, the Japanese keiretsu had spread their wings over Korea, Malaysia, Indonesia and Taiwan by exporting capital goods used both in production and in the building of new infrastructure. This development was always part of the intention behind the 1985 Plaza Accords, a part compensation for Tokyo’s acquiescence to American imperatives. The American government, the IMF, the World Bank, indeed the complete panoply of advanced Western capitalism, leant on the South East Asian governments, pushing relentlessly for a complete liberalisation of their capital markets. The idea was, simply, to facilitate Japanese investment in South East Asia, but also to spread Wall Street’s reach and profiteering in that part of the world (where returns were higher, due to fast growth, than in the West).
South East Asia buckled under the pressure. Foreign capital streamed in, pushing real estate and share prices up and causing those countries’ trade deficit vis-à-vis Japan to rise. And as the Japanese were always incapable of generating sufficient overall demand for their own output, the pressure to find export markets for South East Asian output outside Japan grew even stronger. At that point, once again, the United States came to the rescue. For unlike Japan (that could produce everything except the requisite demand necessary to absorb its shiny, wonderful industrial products), America, under the Minotaur‘s gaze, had mastered the art of creating immense levels of demand for other people’s goods. Thus the United States became the export market for the area as a whole, inclusive of Japan, while South Korea and Taiwan imported mostly from Japan. This process created, perhaps for the first time, the Japanese vital space that the Global Plan‘s designers had imagined in the late 1940s, but was never implemented after Chairman Mao’s unexpected victory.
After the Plaza Accord, the flood of Japanese liquidity and foreign investments spread rapidly into South East Asia. These capital inflows into the tiger economies came on top of the increasing revenues from net exports into the United States. Soon they spearheaded a real estate bubble. Toward the end of the 1990s, the bubble burst and foreign capital departed much faster than it had poured in, plunging these countries into a terrible nightmare. Building sites were abandoned, currencies devalued precipitously, investment dried up, unemployment heightened social tensions, poverty began to rise again and, worst of all, the IMF was called in. Its loans were conditional on policies that were designed for countries with an unproductive, corrupt public sector. The tragedy was that these policies were completely ill-suited to the tiger economies whose problem was not too much social spending or corruption but over-extended financial institutions and a liquidity crisis.
After a hideous period of utterly unnecessary austerity imposed by IMF’s fundamentalist austerian logic, the South East Asian tigers gradually recovered, partly due to the Minotaur‘s continuing rude health and partly because of the large devaluations of the local currencies. Their governments came out of the late 1990s crisis with one cast iron commitment in mind: Never again would they call in the IMF! Never again would they allow Wall Street and assorted foreign bankers to destroy their hard earned progress!
From that day onwards, South East Asia made a point of accumulating dollar reserves for a rainy day. Those reserves were then merged with the New York-bound tsunami of capital that kept the Minotaur vibrant, insolent and, ultimately, dominant.
After the Crash of 2008, the yen re-valued substantially, giving another blow to Japan’s plans for export led growth. The tigers, on the other hand, kept their currencies tied to the dollar. The conventional wisdom is that, at a time of crises, capital flows back to the largest economies in search of safe havens and that this is the reason why the dollar and the yen rose in 2008. But that leaves unanswered the question of why the yen rose so fast against the dollar (and thus against the South East Asian currencies). The explanation is that, with interest rates in Europe and America competing against Japanese interest rates in a frantic race-to-zero, Japanese privately owned capital no longer had a good reason to stay abroad: Thus, a mass repatriation of Japanese capital (the part of it that did not ‘burn up’ during the Crash) pushed the Yen up, placing Japanese industry at a disadvantage both with the United States and in relation to South East Asia.
The long term effect of this repatriation of Japanese savings is of global importance. On the one hand it deepened Japan’s stagnation, through the appreciation of the Yen, while, on the other, the end of the Yen carry trade translates into an upward push for world interest rates at a time when the global economy is wrestling with powerful recessionary forces. Additionally, it is the real reason why China, which had in the meantime emerged fully, resists western attempts to make its currency convertible and un-peg it from the US dollar: The Dragon had learned its lessons from the tigers’ bitter experience.
The only silver lining of the Crash of 2008 for East Asia is that South East Asia has strengthened its position relative to Japan, even though it faces great uncertainty on the demand-for-its exports front. Its struggle to maintain net exports to the rest of the world will prove particularly challenging, especially as it must proceed under the long shadow of the Great Dragon to the north.
Summing up, Japanese capitalism’s Achilles Heel was that, unlike the United States, it never managed to cultivate an hegemonic position in relation to South East Asia. While Korea, Taiwan, Malaysia, Singapore etc. relied on Japan for technology and capital goods, they could not look to it as a source of demand. The whole area remained tied to the Global Minotaur and its whimsical ways. China grew into a superpower in this context. It is determined not to get caught either in a Japanese type of malaise or in a trap like that in which the South East Asian tigers found themselves in the late 1990s.