China

Neo-Mercantilism And Asia’s Rise

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(Image by kees torn via Wikimedia Commons)

The economic rise of Asia coincided with the demise in the Western world of Keynesian economics, regulation and state intervention. Neoliberalism, a revamped form of laissez-faire, has since replaced state-led economic policies such as the United States’ traditional protectionist and nationalist system.

In the post-war era Keynesian economics was concerned with maintaining balance in international trade. “[I]f nations can learn to provide themselves with full employment by their domestic policy . . . there need be no important economic forces calculated to set the interest of one country against that of its neighbours,” wrote Keynes in his critique of mercantilism, adding that “there would no longer be a pressing motive why one country need force its wares on another or repulse the offerings of its neighbour.” [1]

Keynes understood that in order to maintain peace, stability and high living standards countries should stop trying to sell to other nations more than they were willing to buy. The system set up after the Second World War aimed at expanding overall trade while avoiding excessive trade imbalances, as highlighted by the Proposals for Expansion of World Trade and Employment drafted by the US State Department in 1945.

In the 1960s and 70s Japan dealt a first lethal blow to Keynes’ vision of a balanced global trade system when it began to pursue an aggressive trade surplus economic policy.

In 1995 Chalmers Johnson wrote that Americans were “baffled by the Japanese economic and technological challenge … because the Japanese economy is guided by a state strategy.”

Americans, he argued, struggled to understand this concept because in the US the guidance of the economy was “left in the hands of those who inherited their wealth, those who represent institutional investors and who face narrowly defined fiduciary responsibilities, those who seek private interests without any regard for the public consequences, and those who through lobbying or trust violation can obtain insider or political advantages.” [2]

Johnson argued that Americans were blind to and distrustful of the Japanese economic system because in the context of the Cold War neoliberal economists had become “priestly defenders of laissez faire” who had “vested interests in perpetuating their ideological influence as long as possible.” Unfortunately, he added, “they did not anticipate that Japan would become very wealthy.” And, we may say, neither did they anticipate the rise of China, Taiwan, South Korea, or Singapore – economies in which the state played a fundamental role in guiding development. [3]

The Cold War “was portrayed as a contest between a socialist state that displaced the market in order to achieve its goals and a state-as-referee that allegedly let its goals be set and achieved by private actors seeking private interests,” Johnson continued. [4]

But in Japan, state and market were interdependent by design. Realizing that it lagged behind Western economies, Japan adopted mercantilist trade policies to catch up with more developed nations, pursuing a trade policy that “emphasized promotion of exports and protection from imports.”

[T]rade became the focal point of a far-reaching industrial policy through which the state shaped Japan’s postwar economy. Policy- makers sought to develop globally competitive firms in a few well-chosen sectors that promised long-term growth. The methods combined initial import protection — motivated by infant-industry arguments that date to at least Elizabethan England — with vigorous export-promotion programs centered around credit provided at very favorable terms by the state-run Japan Development Bank.

Achieving rapid export growth required a complex set of policies that controlled credit and imports, permitted monopoly situations unthinkable in the American context, and deprived certain sectors (and consumers in general) to advance others. Direct subsidies, tax relief, and public support of research and development consortia, in addition to easy credit, fueled a huge expansion of investment.

These efforts were coordinated by Japan’s Ministry of Finance (MOF) and Ministry of International Trade and Industry (MITI). The unusually close connection between the government and private industry and the unusually prominent position of MOF and MITI within the government gave rise to the term Japan Inc. to describe the total social mobilization undertaken in support of these fledgling export industries. [5]

The Japanese model disrupted the post-war order for three reasons: first, it fundamentally dismantled the equilibrium that Keynesian economics had sought to achieve in international trade; second, it hit Western economies at a time when neoliberal orthodoxy made them defenseless; third, it was emulated by Japan’s neighbours, including mainland China. Later it was also emulated and adapted by Germany.

Some people have argued that Japan’s economic stagnation since the 1990s proves that its model was fundamentally flawed. This is wrong not only because Japan remains an economic super power that only lags behind far larger and resource-richer countries such as the US and China, but also because Japan was a pioneer of the Asian state-led economic model. Japan sowed the seeds of East Asia’s rise and is the reason why so many countries nowadays welcome and try to achieve trade surpluses, thus undermining international trade balance. Japan’s aggressive trade policies forced everyone else to adjust, thus changing the global economy to a degree many people underestimate. We will discuss in another post the reasons for Japan’s relative decline.

Interestingly, Japanese scholars and politicians often described Japan’s model as a hybrid between capitalism and communism or socialism. In 1992 Hoshino Shinyasu, former vice minister of the Economic Planning Agency and president of the National Institute for Research Advancement (NIRA), was invited by the Ministry of Economics of the Russian Federation to explain the Japanese model:

The postwar Japanese approach was something close to a planned economy, not true capitalism but capitalism under strict control…. In this type of society … non-transparent rules are accepted in the belief that their purport is understood implicitly.

Non-transparent methods such as the Japanese government’s administrative guidance would have been regarded as ‘unfair’ outside of Japan . . . and most likely could not function in the United States …

In the American model, emphasis is placed on the method of competition among equally powerful industries, while Japan has been emphasizing an industrial policy of shifting comparative advantage. [6]

Johnson and others have defined this planned capitalist system as the ‘capitalist developmental state’, in which the government promotes and sustains high level of economic growth and structural change in the productive system [7].

The ideological conflagration between ‘socialism’, ‘planned economy’ and ‘developmentalism’ shows why Communist China could easily integrate the concept of a market economy into what had previously been an orthodox Soviet-style planned economy. Many Chinese will say that China is not capitalist; that’s because they have adopted the mistaken notion propagated by neoliberals that capitalism means laissez-faire. In this context, China’s ‘socialist market economy’ is nothing more than an adaptation of Japan’s model of a ‘planned’ market economy.

Chinese President Xi Jinping‘s notion of a “socialist market economy“,  in which the market should play “a decisive role” that will enable the government to more effectively carry out its role, is similar to Japan’s old-style bureaucratic, planned market capitalism.

The Asian model, with its emphasis on export, nationalism and power, is itself largely an evolution of Western mercantilist economic practices, which were still widely used until the Second World War as a means of regulating economic dependency between the West and its colonies.

Mercantilism emerged in Europe in the 16th and 17th century, when large kingdoms with centralized governments and bureaucracies were gradually formed. The modern state controlled social and economic life to an unprecedented degree.

Mercantilist policies had several purposes. First, they aimed at creating a uniform economic system by eliminating local coinage, weights and measures, customs and tolls between cities as well as local taxation, thus establishing a cohesive  national economy.

Second, mercantilism was a way for rulers to exercise control by taking over the economic functions formerly carried out by the church, towns, provinces, feudal lords and gilds. Monarchs wanted to “regulate industry and commerce, to handle poor relief and taxation, to set the interest rate and make laws on economic matters, to build up a national administration of economic life.”

Third, mercantilism resulted from the quest for power of competing states. “Each national state wanted to make itself strong and prosperous … to build up its industry and agriculture and to extend its commerce.” Most saliently, states tried to “gain wealth at the expense of other states and to win colonies overseas,” as well as “to secure the means of supporting large armies and navies and of waging victorious wars.” Kingdoms sought to mobilize larger sections of the population than ever before, instilling in their citizens a sense of political and economic patriotism. [8]

To a certain degree, the goals of mercantilism were consistent with a school of thought that had existed in China and Asia for centuries: Legalism. Although Legalists emphasized ‘wealth and power’ as the main objectives of good governance, they failed to realize the importance of commerce and manufacturing. Their traditional focus on agriculture ultimately marks the fundamental difference between monarchical statecraft in China and modern European kingdoms.

After the Second  World War, Japan adopted a mercantilist stance, pursuing a policy of economic nationalism aimed at outcompeting other countries and restoring Japan’s collective sense of pride. States such as Singapore, South Korea, the Republic of China (Taiwan) and the People’s Republic of China soon followed suit, learning from their neighbour the art of successful state-building and economic development.

Read also: Taiwan’s Economy and the Myth of Free Market

Singapore and the Myth of Free Market Economics

The United States and The Myth of Free Market – The Role of the Government In Historical Perspective


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Notes

[1] Seymour E. Harris, ed., The New Economics: Keynes’ Influence on Theory and Public Policy (New York: Alfred A. Knopf, 1947), 285.

[2] Chalmers Johnson, Japan, Who Governs?: The Rise of the Developmental State (New York: Norton, 1995), 97.

[3] ibid., 98.

[4] ibid., 99.

[5] Bruce E. Moon, Dilemmas of International Trade, 2nd ed. (Boulder, CO: Westview Press, 2000), 122.

[6] Johnson 1995, 58.

[7] ibid., 67.

[8] Shepard Bancroft Clough and Charles Woolsey Cole, Economic History of Europe, 3rd ed. (Boston: D. C. Heath, 1952), 197.

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