UNDERSTANDING THE MACROECONOMIC BUSINESS ENVIRONMENT Of EAST AND SOUTHEAST ASIA

A Reader

H.C. Blomqvist

2 Definitions of terms East and Southeast Asia comprises the region roughly situated south of Russian Siberia and East of India. See Figure 1.

Figure 1. Map of East and Southeast Asia

Note that the terminology is not always clear. Sometimes the whole region is referred to as East Asia especially in economic contexts. Sometimes China + Korea + Japan are called Northeast Asia, sometimes East Asia. Moreover the following labels are often used: Far East, meaning roughly the same as East and Southeast Asia Asia-Pacific: East and Southeast Asia + Australia and Pacific island states Pacific Rim: All countries bordering to the Pacific Ocean (includes the American side).

3 In this reader, we use Asia for short when referring to East and Southeast Asia.

ASEAN is the Association of Southeast Asian Nations, the most important vehicle for co-operation and integration in Asia. All Southeast Asia countries are members. ASEAN + 3: A loose co-operation structure between ASEAN and China, Korea and Japan; aims at establishing a free trade area (and maybe more) in the long term. NICs or NIEs: Newly Industrialised Countries (Economies); refers traditionally to Hong Kong, Korea, Singapore and Taiwan (but de facto today several other countries could also be included).

The importance of Asia in the world economy Asia as a whole (including India etc.) accounted for 60 percent of the global production as late as 1820. The share reached its lowest level after World War II with 18.5 percent in 1950 and was 37 percent in 1998 (Bigsten 2002). East and Southeast Asia accounted for 31 percent of the worlds population and 00 percent of its exports in 2000. Foreign Direct Investment1 inflows to Asia (excluding Japan) has been dominating among developing countries 2 and comprised 60 percent in 2002. See Table 1.

Table 1. FDI inflows to Asia, USD billion

2001 2002

Source: United Nations (2003): World Investment Report. N.Y. and Geneva.

East and Southeast Asia, excluding Japan, absorbed 21 percent of global inward FDI on average 1991-96. (Japan took only 0.3%.). In 2002, East and Southeast Asia received 13 percent, excluding Japan, while Japan received 1.4%. As to outward flows, Asia (exclusive of Japan) accounted for 5 percent in 2002 and Japan for another 5 percent. Between 1991 and 1996, on average, the figures were 11 percent,

4 excluding Japan, while Japan alone accounted for 7.5 percent. Note that the figures may differ rather drastically from year to year.

The direction of the FDI flows has changed over the years: In the 1980s and 1990s, Southeast Asia was the major recipient, while recently (after the Asian crisis 1997-98) China has become the leading recipient. Note that inwards FDI to Japan was very small until recently. However, during the last few years Japan has received increasing volumes of FDI, partly as a result of deliberate policy.

In the global economy, Asia interacts mainly with North America and Europe (the socalled triad), while the rest of the world is more or less marginalised. Note also that the economic relations between Asia and North America are much closer and more developed than those between Asia and Europe. See Figure 2.

Figure 2. The triad

East Asia

North America

Europe

Some basic economic facts A characteristic trait for the region is its heterogeneity: N.B. the size of the Japanese economy: Japan alone accounts for 65 percent of the regions production (but only 29 percent of its exports). Note that these figures used to be much higher. Chinas share of production is about 15 percent and its share of exports is 15 percent, too. Some of the worlds richest countries and territories are in Asia (Japan, Hong Kong, Singapore) but also some of the poorest (Myanmar, Laos, Cambodia). Endowments of resources are very diverse. Some are rich in natural resources (many Southeast Asian countries), some have abundant low-skilled labour

5 (China, Indonesia, Philippines), some are very capital-abundant (e.g. Singapore), etc. Economic and political systems are very diverse. Some (like China, Vietnam and Laos) are still one-party (nominally) socialist economies, some very liberal market economies (such as Hong Kong). Some are very large (China) and some very small (Singapore, Brunei).

Diversity seems to provide scope for a beneficial division of labour in the region. The Asian development has been development of interdependent economies. Much of the trade and FDI flows are intra-regional. This reduces the dependence of the region on trade cycles in other parts of the world. On the other hand, trouble in one major economy spreads easily to the rest of the region, as shown by the Asian crisis in the late 1990s.

There are also common traits, however, with occasional exceptions: High growth rates on average over the long term High rates of savings and investment Emphasis on education and health care

Structural change Economic development is regular accompanied by a restructuring of the economy. The share of the primary sector (agriculture etc.) decreases while that of industry increases. Finally, the service sector tends to take over as the dominant sector. For Asia, see Table 3.

Income distribution East and Southeast Asia are known for growth with equality, i.e., the income distribution has usually not deteriorated despite high rates of growth. Note that the income distribution may be crucial for the sustainability of growth; only a reasonably even distribution makes mass markets for goods and services possible. Note also that distribution factors may be important for foreign investors how to plan their investment and marketing strategies! See Table 4.

Table 3. Sectoral distribution of GDP, % Country China Indonesia Philippines Thailand Malaysia Korea Hong Kong Singapore Japan Agriculture 1970 2001 42 11 35 16 28 20 30 8 n.a. 23 30 5 n.a. 0 2 0 n.a. 2 Industry 1970 2001 45 66 28 36 34 34 26 44 n.a. 43 24 44 n.a. 14 36 31 n.a. 37 Services 1970 2001 13 24 37 48 38 46 44 48 n.a. 49 46 51 n.. 86 61 69 n.a. 61

Source: Dowling & Valenzuela, World Bank. Table 4. Income distribution, 2000 Income share of bottom 20% China Indonesia Malaysia Philippines Thailand Vietnam FINLAND Source: Kokko 2003. 5.9 9.0 4.4 5.4 6.4 8.0 10.0 Income share of top 20% 46.6 41.1 54.3 52.3 48.4 44.5 35.8 Top 20%/ Bottom 20 % 8.0 4.6 12.4 9.8 7.6 5.6 3.6 Share of pop. With less than 1$/day 22 8 4 27 2 n.a. n.a.

Health status

Health is another indicator of development; see Table 3. Health status is closely, but not perfectly, correlated with national income per capita.

Education and technology

Table 5 shows some indicators of the level of education and technology, both regarded as paramount for successful economic development.

Table 3. Helth indicators

Japan Korea Taiwan Hong Kong China Indonesia Malaysia Philippines Singapore Thailand Vietnam

Life Underweight expectancy children < age 5, % 2000 81 n.a. 75 n.a. 74 n.a. 80 n.a. 70 10 66 26 72 18 69 28 78 14 70 19 68 33

Infant mortality, 2000 4 5 n.a. 5 32 35 8 30 4 25 30

Sanitation Public expenditure on health, % of facilities, %, GDP, 1998 2000 n.a. 5.7 63 2.4 n.a. n.a. n.a. 2.3 38 2.1 66 0.8 1.4 83 1.6 100 1.1 96 1.9 73 0.8

Source: Kokko 2003 Table 4. Some indicators of the level of education and technology

Japan Korea Taiwan Hong Kong China Indonesia Malaysia Philippines Singapore Thailand Vietnam

Public expenditure on education, % of GDP, 1995-97 3.6 3.7 2.9 2.3 1.4 4.9 3.4 3.0 4.8 3.0

Adult literacy rate, 2000 Male 99 96 92 92 91 96 96 97 93 Female 96 90 76 82 83 95 88 94 91

People per telephone, 1997 2 2 2 9 32 5 25 2 11 31

Scientists and engineers per million people, 1990-2000 4,960 2,139 93 459 154 156 2,182 102 274

Source: Kokko 2003

8 Explaining economic development in Asia

With some notable exceptions, East and Southeast Asia is the most successful example of economic development during the last four decades. See Figure 3, to get an idea of the growth of the GDP/capita3 in the region.

Figure 3. Real GDP per capita in Asia, 1960 2000 at 1995 prices

Source: Lau 2003.

Given the favourable development, researchers have been looking for an Asian development model, i.e., is there a common set of policy measures that can explain what happened? A typical formulation is the following one (El Kahal 2001):

The Asian Model A stable macroeconomic and financial system

- limited fiscal deficits - encouraged savings - encouraged investment, including FDI - avoided overvalued exchange rates - pegged the exchange rate against the US dollar

9 State interventionism

- selective interventions (industrial policy): targeting credit to selected industries, artificially low borrowing rates, protecting import substitutes, public investment in applied research, etc. - export promotion - performance-based credit allocation (cheap funding required meeting certain performance targets) Administrative competence

- public spending on education - governments guided but did not override the decisions of firms policies were constantly subject to review, ineffective policies were quickly abandoned - qualified government bureaucracy Political and economic stability and social cohesion

- government adapted the principle of wealth-sharing (all groups should benefit from growth) - strong bureaucracy, insulated from political pressure; formalised negotiations between public and private sector to avoid lobbying - Confucian values and work ethic have been invoked as a reason for success

Note, however, that the above model is very oversimplified, as the various points apply to a very different extent in different countries. Hence the talk about an Asian model is strongly exaggerated. This is now widely recognised. Instead, the discussion has largely evolved about the question of whether a market-friendly environment or selective government interventionism has been the decisive factor behind the development, or whether there may be other important reasons as well. Moreover, there are also examples of less successful development in the regio. Even those cases should be possible to explain!

The main competing arguments are:

1) The governments have, by and large, let the markets function, which fostered efficiency and allowed specialisation according to each countrys comparative

10 advantages. This, in combination with favourable external conditions, such as strongly expanding global trade in the late 1900s, fuelled economic growth. 2) Government intervention was crucial for guiding the development. The government provided, often within an authoritarian framework, promotion of selected industries (picking winners) investment in education, health care, housing etc. basic institutions (law and order, property rights etc.) prudent macroeconomic management (keeping inflation and

unemployment in check, balanced government finances etc.) protection against self-serving special interests

3) Other factors Culture (Asian cultural tradition may be conducive to development) Geographical factors (good possibilities for optimal division of labour, according to comparative advantages; cf. the Flying geese model below. Note that these factors must be seen as complementary to the first two categories.

Problems

It is easy to see that all the above explanations are wrong in the sense that they all can be easily criticised:

It is misleading to think that markets have been left alone, although they were often less distorted than in most other developing countries. Most government have, in fact, intervened more or less heavily in the markets.

Government regulations are not unusual in developing countries, but the result has often been poor. One reason is the danger for interventions to cause distortions and promote inefficiency. Another reason is that authoritarian governments may easily turn predatory. See article in Appendix 1.

Culture etc. are long-term characteristics of a country, so why did development come so late?

11 It seems clear that most countries have applied a mix of market-led development and government interventions. To see what the market and the government, respectively, can do, we look at the two major trade and industrialisation strategies: Import substitution (IS) and export orientation (EO):

Import substitution model: Produce for a protected home market; substitute domestic goods for imports. To achieve this, trade barriers, subsidies or foreign exchange controls were imposed. This was the strategy applied by most developing countries until the 1980s. Although it has been largely abandoned by now, especially in Asia, there remain traits of that policy in many countries.

The theoretical rationale for the IS model is the so-called infant industry argument which says that new industries are not competitive with established ones in developed countries without protection. In the long run, it is argued, the protected industry will become competitive without protection through learning by doing. However, in practice, the results have been mostly discouraging: Since the domestic market is small, they are soon saturated and the growth potential is exhausted. Moreover, there is little competition, leading to inefficiency, high costs and low quality; It is hard to get beyond the easy phase of IS, production of simple consumption goods; when IS was extended to capital and intermediate goods production the result was often poor products at a high price. IS requires regulations: bureaucracy leads to slow decision-making. Decisions on investment and technological innovation at the firm level are delayed. Special interests are created, which want protection to go on. Firms may use resources to influence government and secure more protection; this may lead to corruption, and mitigates the incentive to produce efficiently. In extreme cases the special interests take over the govt and form so-called predatory regime, see below. Even if this is not the case, protectionism is difficult to dismantle.

12 Conclusion: IS as a strategy has been unsuccessful. It is difficult to back down, however, because of strong special interests and because extensive restructuring of the industry is often necessary.

In Asia, most countries (exceptions Hong Kong, Singapore, Brunei) adopted IS policies after the war. The IS policies were gradually abandoned, beginning, with the Newly Industrialised Economies (NIEs), Korea and Taiwan in the early 1960s. From the mid 1980s most of Asia had abandoned IS, but selective protection did not disappear altogether. The export-led model: Produce for the world market according to your comparative advantages, i.e., each country should specialise in products that it is relatively good at producing and import the rest. The country is then engaged in the global division of labour. Several interpretations of the EO concept is possible:

a)

Deregulate and let the markets determine what to produce; the govt may

step in, however, when the markets do not work properly (e.g., research and development (R&D), education, training of labour, housing and health care);

b)

Measures that favour the export sector or particular industries with

comparative advantages or potential comparative advantage. (Tax concessions, cheap credits, tariff exemption for inputs, government enterprises for input manufacturing). This alternative means heavy intervention, too. This is what is meant by industrial policy. How can government intervention be defended in the case of EO, which is, in principle, a market-oriented strategy?

Firms may be reluctant to take the risk involved in venturing into global markets; Information on foreign business environments is scarce and costly and may be an obstacle for operating on the global market;

13 Capital markets are often rudimentary in developing countries (difficult to borrow for a firm to overcome initial losses, even if the long-run prospects may be good); New export-oriented industries may have external effects (effects that extend beyond the industry itself). For instance, technological and/or managerial knowledge can be diffused to other parts of the economy.

c) Encourage FDI. FDI are package deals, involving real capital (machinery and equipment), technology, management and marketing knowhow. Host countries hope for linkage effects to domestic firms and technology transfer is supposed to contribute to further growth.

Criticism of export-led industrialisation

A pure market solution may produce a lopsided economy (cf. Brunei (which is very dependent on oil and gas), Singapore (which became concentrated in electronics);

Distortions in favour of exports may be equally damaging as distortions in favour of import-competing goodspicking winners is difficult; ex. heavy and chemicals industries in Korea in the late 70s; heavy industries in Malaysia in the 1980s, the aerospace industry in Indonesia in the 1990s etc. Cf. also the collapse of the Korean chaebol (diversified conglomerates), which were largely built with the aid of industrial policy, in the 1990s.

The fallacy of composition argument: What can be done by one cannot be done by all, if all developing countries would go for export-oriented industrialisation it would not work out because of protectionism and lack of markets. Counter argument: more exports leads to more imports; the Asian countries are important trade partners for each other.

14 When are interventions successful? As a matter of fact, the Asian governments have been interventionist (with few exceptions, such as Hong Kong), although export-oriented. To which extent this is an explanation of growth is controversial, it is not certain that the countries have been successful because of this interventionism. The question is, whether the countries could have done as well or better without interventions. (In fact, also many unsuccessful governments are interventionists.) There are some prerequisites for successful interventions, however:

It is important that interventions do not work against the market forces in the long run. (A country whose main asset is unskilled labour, for example, should not try and develop hi-tech industries.) This view sees the government as helpful if it intervenes when markets do not the do the job properly. Interventions should not be an instrument for promoting the interest of pressure groups. In East Asia authoritarian but developmental governments kept special interests at bay, and they were prepared change policy quickly if necessary;

A capable and reasonably uncorrupted bureaucracy, insulated from special interest groups, is important; The economic and social institutions should be efficient. This means factors like law and order, protection of property and contract rights, a transparent and predictable business environment etc.

These qualities are present to differing extent in different countries in Asia. There is not perfect case. (In Southeast Asia generally weaker public service and institutions than in Northeast Asia.)

The role of cultural factors and geographical synergy Culture The East Asian culture (particularly Confucian philosophy) is allegedly conducive to development through emphasising:

Industriousness,

15 Thrift, Education, That the group is more important than the individual, Respect for authority).

This is also the core of the so-called Asian values. These values appear most prominently in Northeast Asia, Vietnam and among the ethnic Chinese community in Southeast Asia. The idea of Asian values is a controversial one, for some discussion, see Appendix 3.

Criticism: Although there may well be some truth in these ideas, it is hard to prove them as it is difficult or impossible to measure the effect of culture Confucian philosophy was earlier cited as an obstacle to economic growth. Several non-Confucian countries have been successful as well. Note, however, the role of Chinese minority in, e.g., Malaysia, Indonesia, the Philippines and Thailand, where this group is important or decisive for the economy.

Geographical synergy East Asian countries are close to each other but very different as to factor endowments. Some are labour abundant, some skill abundant and some capital abundant, etc. This may encourage a division of labour that benefits the whole group. The closeness may also promote spill over effects from one country to another; a country may benefit from being close to a successful neighbour through trade and investment links. This argument is embodied in the so-called The Flying Geese model. This model argues that the structural changes in the Asian economy follow a flying-geese pattern, in which economic changes in more developed countries are gradually repeated in the less developed countries, with time lags, when the comparative advantages change. Foreign direct investment from the former to the latter plays an important part in this process. This pattern also encourages trade flows. See Appendix 2 for detail on the flying geese model. Japan has a crucial role in the flying geese pattern in East Asia as the leader of the flock. Hence: The growth in Asia has been interdependent large intraregional trade and investment flows.

16 Criticism of the Flying Geese: Services are difficult to fit into the model: many although not all services cannot be removed from their users; The pattern has recently become blurred because of the fragmentation of production: The final product may be put together from a large number of standard components, manufactured in many different countries and then assembled.

The overseas Chinese: More or less informal networks have been built by the activities of ethnic Chinese in Southeast Asia who conduct business between themselves. These networks also play a great role in engaging China in the economic interaction in the region. Industrial, trade and investment policy Industrial policy refers to selective interventions by the government in order to change the industrial structure of a country in a way that is perceived as favourable, i.e., more advanced. A broader definition of industrial policy includes attempts at creating a favourable business climate in general. Obviously, this includes trade policy (cf. the discussion on IS and EO policies above) and policy towards FDI. Many Asian countries used, and still use, industrial policy extensively as an instrument for development.

Examples of industrial policy:

Japan

A new Ministry of Trade and Industry (MITI) was empowered to guide the industrial development (engaged in industrial planning, financing, enforcing mergers, setting production quotas, rationing foreign exchange, and sourcing and allocating foreign technology to individual firms)

Rationing of funding and foreign exchange the major instruments, especially in the beginning; later more indicative guidance by the state

The Ministry of Finance exerted strong influence on the allocation of credits The exchange rate of the yen was fixed at a low level: Japanese products were cheap

17

Firms were encouraged to aim for export and the infant industry protection such as subsidised loans, tax holidays treatment, etc were conditional on satisfactory export performance

FDI not encouraged The regulation of competition different from that of the West: Industries were allowed to concentrate, however, competition was fierce despite a small number of players

Korea

Change took place from IS to EO in the early 1960s Export promotion through credit allocation, tax favours, tariff exemptions on inputs; measures mostly targeted very big chaebol Incentives linked to export performance Simultaneously, protection of home market, also depending on export performance Exchange rate policy (the value of the won was kept low) FDI not encouraged Forced mergers, sales or liquidation because of inefficiency or excessive competition

Occasional failures happened, especially in the context of the emphasis on heavy industry in the 1970s

Taiwan Targeting first labour intense industry; from the mid 1970s heavy industries (with less success) and high-tech industries from the 1980s Tax incentives, export credits and insurance etc., but not selective financing FDI were encouraged State-owned enterprises (SOE) prevalent in basic industries; otherwise industrial structure was dominated by small and middle sized enterprises (SMEs)

18 Southeast Asia The region took up many traits from export oriented industrial policy in Northeast Asia from the mid 1980s, but the state bureaucracy was usually weaker (except for Singapore) and less insulated from special interest groups and, hence, corruption a bigger problem.

Indonesia Export promotion and liberalisation of foreign trade from the mid 1980s but continued targeting of some strategic sectors (capital and/or skill intensive, e.g., aerospace!) with doubtful comparative advantages. Direct state involvement (SOEs) in targeted sectors was also common Restrictions on FDI lifted Targeting of industries created elite of special interests, which were protected through monopoly rights etc. Foreign borrowing was encouraged, which led to a big foreign debt

Malaysia Leading theme: Assisting the indigenous population i.e., the Malays through SOEs, ownership and employment quotas in private firms (certain percentage had to be Malay), govt procurement, university quotas etc. This was the New Economic Policy (NEP), but the similar polices prevail today Problems with inefficient SOE and other protected industries and vested special interests, cronies Less protectionist IS policy to begin with than most LDCs FDI encouraged but channelled to special export processing zones (EPZs) Recent emphasis on information and communications technology (ICT); a special zone, the Multimedia Supercorridor set up around the capital area

Thailand Started out as a major exporter of agricultural goods IS policy was sharpened during the 1970s: Textiles, pharmaceuticals, and automobile assembly were especially targeted, and the high trade barriers were

19 often coupled with domestic content requirements. However, investment incentives were applicable to a wide range of industries Shift from IS towards EO in the 1980s, especially in labour intensive industries, but domestic industry was still protected by rather high tariffs From mid 80s, large inflows of FDI and rapid industrialisation and export growth until the crisis in 1997-98 Favourable development resumed in the 2000s

China Market oriented reforms from 1978 beginning with agriculture Increasing role of town-and village enterprises (TVEs) and private firms contributed to strongly increasing exports from the mid 1980s Special economic zones and 14 coastal cities were used as vehicles for development and designated sites for FDI. Investment incentives, infrastructure etc. were available at those locations From the late 1980s possible to set up FDIs also in other parts of the country China tried to target certain industries (textiles, electronics, machinery) but with less than full success SOEs encouraged to export The exchange rate of the renmimbi was kept low in order to preserve and improve international price competitiveness China joined the World Trade Organization (WTO) in 2001; this entails further liberalisation of trade and financial markets (Kokko 2002)).

Economic co-operation and integration In Asia there is a high degree of de facto integration (the economies are interdependent, their economic structure complementary, leading to large intraregional trade and investment flows). However, there is relatively little organised integration and co-operation, compared to other parts of the world. Reasons: a) Colonial background, economic relations tended to be geared towards colonising countries b) Newborn states in the 1950s and 1960s had other priorities than international co-operation c) the Cold War imposed barriers through the region

20 d) the big players (Japan and China) have relied on multilateral arrangements (WTO) instead of regional solutions. Institution building for regional co-operation only slowly got started in the 1960.

In the 1990 the situation has gradually changed, but co-operation and (organised) integration still proceed slowly because of the heterogeneity and large size of the region (note that North America often have to be included because of their importance as trade partners). Several organisations also have a de facto background in security considerations despite being referred to as economic co-operation.

Terminology Economic co-operation is a more general and looser term than integration. In principle, co-operation can concern everything between a one-off consultation (e.g. taking a common standpoint in international negotiations, building a bridge or railway between neighbouring countries, etc.) to total co-ordination of economic policies. In international organisations, co-operation is usually about production of socalled public goods (goods whose production has a positive or negative side-effect on the society at large). Examples: International trade regime (WTO), industrial standards, customs terminology and classifications, etc.

Integration means either a spontaneous process of merging economies due to the working of market forces or a deliberate policy aiming at abolishing discrimination between domestic and foreign good, services and factors of production. The latter can be carried out at different levels of ambition: 1) Trade preferences = partners lower trade barriers for certain or all goods between themselves, but not against third countries 2) Free trade area (FTA) = trade barriers are abolished between partners, but trade policy against third countries are not harmonised 3) Customs union = as FTA but members also have a common external trade policy 4) Common market = free movement of goods, services and factors of production 5) Economic Union = as customs union but also common currency and more or less unified economic policies among members

21 Only the two first ones are realistic alternatives for Asia-Pacific at this stage. The only regional one up and working today is AEAN Free Trade Area (AFTA), which is strictly not yet a FTA since trade barriers, although low, still exist. Moreover Asia Pacific Economic Cooperation (APEC) aims at free trade among its members, but the goals are vague and far away. Moreover there are some bilateral FTAs in the region if Australia and New Zealand are included, notably between Singapore on the one hand and Japan, Australia and New Zealand, respectively, on the other.

Organisations for co-operation and integration This activity got started only slowly in the 1960s and 1970s. The early attempts often have a membership extending to more than East and Southeast Asia. ASEAN was the first intra-Asian organisation; see below. There were also a few non-starters, e.g. the Pacific Free Trade Area (PAFTA), which was proposed as a FTA between the developed parts of Asia-Pacific and the Organisation for Pacific Trade, Aid and Development (OPTAD) modelled on the OECD.

Important non-government organisations (NGOs) Such organisations emerged from the late 1960s on. They tended to have a very small bureaucracy and loose political connections. This made participation possible from countries without formal relations (such as China and Taiwan).

Pacific Basin Economic Council (PBEC); consists of national committees of leading business people (over 1000 firms are represented). Builds relationships between the regional business communities, aims at increasing trade and FDI and promote economic and social development. Advises (and lobbies) governments as to development issues. Member committees from Australia, Canada, Chile, China, Colombia, Ecuador, Hong Kong, Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand, Peru, Philippines, Russia, Singapore, Taiwan, Thailand and the United States. Today PDEC is closely affiliated to APEC; see below.

Pacific Trade and Development Conference (PAFTAD); private organisation of academics and policy advisers. Promotes policy-oriented research and

22 discussion of Asia-Pacific economic issues, and produces publications on international economic and development issues pertaining to Asia-Pacific.

Pacific Economic Cooperation Conference (PECC); est. in 1980. The members are officially private individuals, but the membership makes sure that the results of its deliberations reach the ears of the decision makers. The membership has a tripartite structure: Representatives from the business community, universities and government agencies. PECC is a regional forum for co-operation and policy co-ordination in order to promote economic development in the Asia-Pacific region. PECC is the only NGO official observer of APEC; see below. Gives analytical support and information to APEC. Member committees from: Brunei Darussalam, Canada, Chile, China, Colombia, Ecuador, Hong Kong, Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand, Peru, The Philippines, Russia, Singapore, Pacific Islands Forum, Taiwan, Thailand, United States, Vietnam.

Inter-governmental organisations Asia-Pacific Economic Cooperation (APEC), formed in 1989 and originally modelled on the OECD is a rather loose consultative forum, but with ambitions to form a free trade area by 2010 (for developed members) and 2020 (for developing members); also including free FDI movements. APEC is important because it accounts for about 40 percent of world trade and 50 percent of world production. It is weakened, however, by its heterogeneous membership. For instance, there have been conflicts as to whether the activities should be regulated by formal agreements or voluntary coordination and peer pressure. (Americans propose more formal structure, Asians a less formal.)

APEC is a discussion forum on trade and economic co-operation, and aims at increasing co-operation between developed and developing countries, as well as being a counterforce against trade barriers and protectionism. It aims specifically at open regionalism, i.e. wants to avoid forming a closed bloc.

APEC holds annual summits, but recently the summits have been hijacked by the Americans political agenda, and little progress on economic issues has been

23 achieved. Committees, working groups and task forces provide a broad and largely informal contact surface for the member economies, however, and foster an ongoing dialogue.

Membership: Australia, Brunei Darussalam, Canada, Chile, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, Philippines, Russia, Singapore, Taiwan, Thailand, United States, Vietnam.

Important non-starter: East Asian Economic Group (EAEG) was mooted by then Prime Minister Mahathir Mohamad (Malaysia). The idea was to form an Asian counterforce to the emerging blocs in other parts of the world and a common platform for the members in, e.g., trade negotiations. Non-Asian countries would not be accepted as members.

Due to American (!) resistance the EAEG never materialised a watered-down version the East Asian Economic Caucus (EAEC) was established instead under APEC but never became anything beyond rhetoric. Note, however, that the recent cooperation between ASEAN and Northeast Asia (the so-called ASEAN + 3 process, see below) may create something that resembles the original EAEG.

The Association of Southeast Asian Nations (ASEAN) was established in 1967 and is the most important regional organisation in Asia. All Southeast Asian countries are now members: Indonesia, Malaysia, the Philippines, Singapore and Thailand (1967), Brunei Darussalam (1984), Vietnam 1995, Burma and Laos (1997) and Cambodia (1999). Important schemes: AFTA (ASEAN Free Trade Area); most tariffs between members reduced to 0 5% by the end of 2002. A rule of origin of 40 percent is applied (i.e. at least 40% of the value of a product must originate in ASEAN in order to qualify for preferential tariff rates.) Aims at full abolishment of trade and, eventually, an ASEAN Economic Community by 2020, implying free movement of goods, services, capital and labour among members; AICO (ASEAN Investment co-operation; An AICO Arrangement is a cooperative arrangement consisting of a minimum of two participating

24 companies from two different ASEAN countries. It is not a legal entity but merely an "umbrella association" under the scheme wherein the output of the participating companies will enjoy a preferential tariff rate in the range of 05% (ASEAN Secretariat); ASEAN Forum; security dialogue; ASEM (the Asia-European Meeting) was originally proposed by ASEAN; System with discussions with so-called dialogue partners at the PostMinisterial conferences (i.e., after the annual meetings of ASEANs economic ministers) on issues of common interests. Dialogue partners are: the US, Canada, the EU, Japan, Australia, New Zealand, South Korea, China and India. The benefits of AFTA are controversial. This is because trade may be diverted towards less efficient producers than would be the case under non-discriminatory arrangements. However, it is clear that making the region more attractive to foreign investors is more important as a goal of AFTA than increasing intra-regional trade.

ASEAN + 3; Inofficially implements the EAEC, but not a real organisation yet.

Recognising the importance of establishing the same link with Northeast Asia and the important role that East Asian countries play in the region, the heads of state and government of China, Japan and Korea were invited to the Second ASEAN Informal Summit in Kuala Lumpur in 1997. The first ASEAN+3 summit was followed by separate ASEAN+1 meetings with the leaders of China, Japan and Korea. ASEAN now regularly holds joint meetings usually after ASEAN summits or ministerial conferences with representatives of China, Japan and Korea on issues of economic co-operation. Free trade ASEAN-China is aimed at officially by 2010. For Korea and Japan (2012) the process has not gone that far, but in the case of Japan a framework agreement has already been signed.

ASEAN has also agreed to form a partnership with the Closer Economic Relations group (consisting of Australia and New Zealand), comprising of a FTA, among other things.

25 Growth triangles The process of regional integration in ASEAN has partly taken place through socalled growth triangles. The general idea is to link adjacent parts of two or several countries with different comparative advantages based on, e.g., differences in technology, labour endowment, natural resources, capital etc., to form a sub-region conducive to growth. Such a growth triangle is borderless regarding goods and capital movements, although there remain barriers against the movement of labour. Thus large wage differences remain part of the picture.

The first, and most important, such triangle the Singapore-Johor-Riau (SIJORI) area was conceived after 1988 with a revision of investment regulations in Indonesia. At first the development was mainly based on joint ventures between Singapore government-linked companies and the Indonesian private sector. Subsequently MNCs based in Singapore began to locate investments in Batam and Bintan (in Indonesia), which both can offer land and labour at low cost. The cost of labour in Riau province is only about one-fifth of that in Singapore and land is very cheap compared to Singapore, too. Business grew rapidly after development of infrastructure and transport links.

The greatest impact of the SIJORI triangle has been in Batam. Relations between Singapore and Johor are much older than the Growth Triangle concept, for historical reasons. Companies from Singapore moved to Johor before there were any formal agreements because of the short distance and cultural closeness. However, the third leg of the triangle, the Johor-Riau link is still weak due to the alleged lack of complementarities and the physical distance. The central government in Malaysia has also been less interested in the project than Indonesia and Singapore.

Other attempts at forming growth triangles: In ASEAN Penang (Malaysia) Sumatra (Indonesia) South Thailand (the Northern Triangle) Brunei Mindanao (Philippines) Sabah & Sarawak (Malaysia) Kalimantan & Sulawesi (Indonesia) (the East ASEAN Growth Area)

26 These are far less important and have to a great extent remained in the level of rhetoric only. One problem is that they lack an important hub like Singapore. In East Asia Guangdong & Fujien provinces (China) Hong Kong Taiwan The area around Tumen river: China Korea Russia

Although all these hold some activities they are much less formal than the growth triangles in Southeast Asia.

27 Appendix 1.

THE ENDOGENOUS STATE AND ECONOMIC DEVELOPMENT: A SURVEY

International Journal of Development Issues, Vol. 1, No. 2, 2002
Hans C. Blomqvist Swedish School of Economics and Business Administration POB 287 FIN-65101 Vasa Finland E-mail: hans.blomqvist@wasa.shh.fi Tel.: +358-6-3533 734

August 2002

28 Introduction The history of post-war economic development is mostly rather depressing reading in that there are few success stories. There are some, however, most of them East Asian1. Even the recent serious recession cannot wipe out the enormous progress that took place over preceding decades in these countries. Because of this there is now a voluminous literature on what has sometimes rather misleadingly been called the Asian model (see, e.g. Islam 1994, Jomo 1997: 27, 157), aiming at finding out its secrets. Much of the discussion has evolved around the relative importance of market forces versus government interventions (cf., e.g., Aoki et al. 1997: 1, Smith 1995, World Bank 1993). In the context of explaining the successful Asian development it is possible to distinguish roughly between two groups of authors, the neo-classicists and the structuralists (or statists) emphasising either the role of the free market or the selective interference of governments. The dichotomy between state and market is, however, unfortunate in two respects. Firstly, the importance of interaction between market forces and institutions, mostly created by the state, is obscured by this distinction (cf. Zysman and Doherty 1995). Due precisely to a complicated interaction of this kind we can observe many different types of development patterns, not least in Asia, which all seem to be viable. Secondly, the role of the state has mostly been seen in a traditional instrumental perspective by both neoclassicists and statists. The proper role of the state is presumably one of identifying and correcting market failures, according to the neoclassical approach (cf. the approach taken in, e.g., Balassa 1991, World Bank 1993, 1997) and one of governing the market (Wade 1990) according to the structuralist approach. In both cases government interventions may be misguided and excessive and create distortions and rents which are potential sources of additional distortions (c.f. Islam 1992). What then determines what types of interventions are actually undertaken and to what extent? It seems like mainstream economics has been slow at addressing those problems. The weakness of traditional economic analysis of the state in economic development has been the neglect of the endogenous character of the public sector. Hence it has not been taken into account why politicians and state bureaucracy behave as they do to the extent it deserves. Similarly, the fact that both markets and governments are constrained by institutions (rules of the game) which, in turn, evolve in interaction with them (North 1993), is often neglected. An obvious consequence has been difficulties to explain why some countries develop and some do not. A third way, the institutional approach to economic development has been the subject of much interest recently and there is now a rapidly increasing body of literature on the topic (for an excellent recent overview, see Clague 1997). East Asia, with many different types of state, as well as a (mostly) outstanding development record, appears to be a particularly interesting object for case studies on the role of the state in development.
The term East Asia as used here includes the region roughly east of India exclusive of the Russian part of Asia.
1

29

The focus of this paper is thus on the developmental role of the state, a term that is used here to denote the group of people, government and core bureaucracy that make and implement decisions in the name of the public interest. For simplicity I will use the terms state and government interchangeably, even though there may, in principle, be objections to this. The emphasis of the paper is on a theoretical survey of the state in interaction with the surrounding society, where the occasional illustrations are mostly taken from the Asian experience.

The state and economic development: a historical overview The role of the state as an agent of development has been perceived very differently in different times. The basic proposition, that the state indeed has a role to play in economic development has mostly been taken for granted, however. The basic justification for a state as the body that defines and enforces property and contract rights and provides public goods such as law and order and defence has been uncontroversial. The same is largely true for so-called functional interventions (Jomo 1997: 119, Lall 1996: 5) when the state steps in to correct market failures. Other typical fields of state intervention, like income redistribution, stabilisation and selective industrial policy, have been much more controversial, even if most states in reality are involved in all of them. Analytically, the state has mostly been treated in a similar way in economic analyses no matter how its proper role has been interpreted, that is, as an exogenous and basically benevolent monolith that intervenes in the economy in order to improve its functioning. Accordingly, the approach has usually been to find appropriate and welldefined means to reach equally well-defined targets. Policy failures have been explained in terms of imperfect information or lacking capability of the state apparatus (cf., e.g., Lall 1996: 21, World Bank 1997: 23) while successful interventions have not required any particular explanations as the prescribed instrument has produced the expected result. Imperfect information and implementation costs certainly play a role when explaining policy failures. Some policy measures (such as devaluations) are relatively easy to carry out, from an administrative point of view, while others (such as tax reforms) are much more demanding (cf. Krueger 1993: 68). The more complicated tasks a government takes on the more obvious is the risk of failure. The problems are typically much more prevalent in developing countries with limited human resources which may be spread too thinly as a consequence of too ambitious government programmes. As argued in this article, there are other reasons for poor policies as well, however. In particular, the state need not be benevolent in the first place and what it wants is typically determined by a complicated interplay of factional interests. Most specific discussions on the role of the state in the economy emanate from the period after World War II. During the first decades after the war an active role for the state seemed almost self-evident. The reasons for this were several. New theoretical developments, such as the Keynesian economics and the new welfare economics, as well as the recent experience of the Great Depression suggested a new, active role for

30 the state. Command economies of the Soviet type also seemed to be successful at the time, and were then perceived as a serious challenge to the market system (cf., e.g., Krueger 1993: 39, 42). In the specific context of economic development, the dominating view was that illfunctioning markets and vicious circles prevented industrialisation and other development. The market was perceived as part of the problem, not part of the solution (see, e.g., Srinivasan 1985). Hence, the markets alone could not be relied on for achieving growth and development. Instead, it was held that only a strong and well co-ordinated effort by the state could bring about development. This implied a large public sector as well as extensive interventions in the private sector (see, e.g., Blomqvist and Lundahl 1997). An important and far-reaching result of this thinking was the import-substitution (IS) model of industrialisation, prescribing industrialisation behind trade barriers. This model was largely because of the mistrust of markets frequently combined with a good deal of central planning and regulations of, e.g., prices, wages as well as foreign trade and capital flows. Government officials were thought to be able to foresee which industries would eventually be viable and were expected to set up incentives for promoting them (Krueger 1993: 48). In countries with an elite leaning towards Marxism the ideal was to eliminate the market mechanism to the greatest extent possible, although this could seldom be fully accomplished in practice. Although the import-substituting model remained dominating for a long time, it was met by increasing criticism, although little was actually published before the 1970s (Hicks 1989). The reasons for the criticism can be found both in theoretical developments and in the unfolding empirical experience of applying the model. Together they produced the so-called neo-classical counter-revolution of development economics (Toye 1987). Policy-induced distortions in the economy, government failures, which were seen as a more serious problem than the deficiencies of the market system by the representatives of this school, became the focus of attention in work by, e.g., Lal (1983); see also Srinivasan (1985). A major interpretation problem with these government-induced distortions is that their detrimental effects are often evident, so the question then is why they are undertaken at all. The seemingly obvious conclusion that economic agents may be as selfish when operating in the public sector as they are regularly assumed to be in the private sector did not seem to occur to researchers. The traditional way out instead is to point at non-economic or political factors. Since this introduces a black box as well as a tautological element into the argument it is not an entirely satisfactory solution, however. Apart from the theoretically based criticism of the IS strategy the empirical developments seemed to suggest serious problems as well. It became obvious that import substitution led to a dead end (see, e.g., Balassa 1989, Krueger 1993, ch. 2 and 3, Krueger 1998). Countries that switched early to an outward-oriented strategy, especially the Asian newly industrialising economies (NIEs), soon chalked up impressive rates of growth. (For some recent evidence on trade reform and growth, see, e.g. Greenaway et al. (1998).) Notably, this switch was a bold move, since it took place against all standard advise of development economics of the time. In fact, it

31 took some time before it became evident what was going on in the first place (cf. Hicks 1989). The reason for the switch of strategy was hardly an inherent marketfriendly conviction of the governments of these countries, however, but it happened rather because they met constraints such as a small home market that forced them out of the IS paradigm. The planned economies proper also performed poorly which induced half-hearted and largely unsuccessful attempts at reforms. After lagging behind more and more the system at least in its Soviet version broke down altogether (see, e.g. Winiecki 1991). Both in the case of import substitution and in the case of central planning, rentseeking interest groups and a self-serving state, with hindsight, appear to have played a key role in the failure. As a consequence of the apparent defeat of the interventionist approach due to related government failures, the ideal of a minimalist state became fashionable both among academics and international agencies (see Chang and Rowthorn 1995: 719, Hicks 1989, Martinussen 1997: 263). Except for granting basic public goods, such as law and order, and institutions like a system of property and contract rights, the state should stay out of the economy, according to this view. Several important international agencies, especially the World Bank and the International Monetary Fund, became proponents of this approach, and many academics explained the successful development of many East Asian countries as a consequence of adhering to the basic principles of the market system (cf., e.g., Balassa 1981, Burenstam Linder 1986, Chen 1979. See also Chiu and Lui 1998 and Friedman and Friedman 1980). Several recent developments have challenged this neo-liberal ideal of an noninterventionist government. Theoretical research, especially within the so-called new institutional economics paradigm, has been instrumental in changing the views on the potential role of the state. A central contribution of this approach is its emphasis on the importance of efficient institutions2, many of which are created or supported by the state (cf., e.g., North 1997, Chang and Rowthorn 1995, Clague 1997). In other words, even if reasonably undistorted markets have an indisputable role in a successful development strategy a well-functioning market economy also presupposes the support of institutions. Again, however, a major reason for reconsidering the ideal of the minimalist state was empirical. Firstly, the unprecedented success of the East Asian economies became subject to closer scrutiny and was partly re-interpreted. Many of these countries represent strongly interventionist states, suggesting that the laissez-faire approach may not be the optimal one when rapid economic development is called for. There are indeed good reasons to believe that the need for interventions by the state is stronger the less developed the country is (Reinert 1999). (In other words, East Asia has been invoked as an example of both market-led and government-led growth.) Such sentiments have been expressed, of course, for quite a while with Chalmers Johnson as one prominent, but far from the only example (see, e.g. Johnson 1982). Secondly, the spectacular lack of success in many transition economies, particularly the former Soviet Union where the state is weak and passive and the institutional
Efficient in this context means an arrangement that leaves all involved parties better off (Voigt 1998a).
2

32 framework undeveloped, underlines the importance of well-functioning government (and other) institutions. Recently we have perhaps witnessed the beginning of a new swing of the pendulum, when the once solid growth of East Asia plummeted in 1997. Even though this was arguably a short-term disturbance, it rekindled the discussion on state versus market once again, this time with a more critical view on the activities of the state. All government measures need not be beneficial for development, not even in successful economies, and the extent of interventions may be less important than their quality (cf. Chiu and Lui 1998).

The endogenous state Theoretical development from the 1960s on eventually improved our understanding of the non-economic factors behind seemingly irrational and distorting government policies. Emerging theory in the realm of political economy, above all Mancur Olsons work on interest groups (Olson 1965), the theory on public choice (Buchanan and Tullock 1962) and rent-seeking (Krueger 1974, Bhagwati and Srinivasan 1983), etc. contributed to a new and more complex view on the role of the state. Another issue, indirectly related to this was the question of culture as a factor behind economic development. In the case of East Asia the potential role of the Confucian ethic (and, later, so-called Asian values) has been widely discussed, starting from the contribution by Kahn (1979) but with rather inconclusive results. The institutionally inclined economist typically had a rather negative view on the role of the state to begin with. The state is allegedly represented by largely self-serving politicians and officials, who see more to their own interest than to that of the general public. Interest groups, in turn, put pressure on the state in order to obtain favours and are willing to pay for these in various ways. Outright corruption is not unusual. Resources are wasted in the process and the outcome is likely to be distorted. In the extreme case the state itself becomes the dominating interest group with the aim of maximising the revenue of the ruling elite while giving little or nothing in return. This is the so-called predatory state. In other cases, however, the state seems to have contributed considerably to a positive economic development, which seems to suggest that there may be checks and balances that may direct the inherent selfishness of decision makers into favourable activities from the societys point of view. This seems to have been the case especially in East Asia. One reason why the role of the state has been perceived so differently over time may be that the view of the state as an economic and political agent has been flawed, or at least incomplete, in standard economic analyses. The image of a state as a singleminded decision maker with certain economic and social goals, which it tries to reach with more or less success by selecting appropriate policy instruments, is misleading since it neglects the fact that the political elite may have selfish goals of its own. According to Olson (2000:2) we have to find out what those in power have an incentive to do and why they obtained power. Even if it had not goals of its own, a government frequently has to balance between various special interest groups and may be influenced by rent-seeking activities by such groups. It is also normal that the

33 will of the state is formulated through competition between different factions and their interaction with non-state actors (cf., e.g., Clark and Roy 1997: 6). Thus if the state behaves in a way that seems inoptimal, it is not necessarily because the right kind of action is unknown. In fact, it is fairly easy to state the basic prerequisites for favourable economic development: reasonably undistorted markets, a stable macroeconomic environment, a high rate of investment in physical and human capital, provision of basic public goods and institutions (cf., e.g., World Bank 1993, ch. 2). Favouring specific firms and sectors through suppressing competition seems, in turn, to be a certain recipe for failure. Adhering to the general principles of development promotion just outlined still gives a great deal of leeway to the policy makers as to what type of policy they prefer to pursue. Empirically, of course, the experience of the state as an agent of development varies a great deal. In East Asia, in particular, the experience of strongly intervening states has arguably been encouraging, even if it remains controversial to what extent interventions really have been a major reason for the rapid development (cf., e.g. World Bank 1993, ch. 2). There are many examples of interventionist states that have been much less successful, however while some Asian economies have been successful with a minimum of intervention. Understanding the mechanisms that lead to more or less successful state activities would be important indeed. Even if a good deal of research has been done in this realm, the mechanisms are still far from fully understood. Considering the East Asian region only, it is evident that the degree and type of interventionism have been very different in different countries and that excellent results seem to have been compatible with very different policy stances. The cases of Hong Kong and Singapore are instructive here as the former relied heavily on the markets while the latter had much more government interference. Nevertheless both have reached about the same level of GDP per capita. Another illuminating pair would be Thailand and Malaysia, where the latter has had a much more interventionist government but both have been able to display very high growth rates. Thus it is hard to see a clear relation between the degree of government intervention per se and development. An active government is no guarantee for good governance. The important thing, instead, is what kind of interventions is carried out, and this, in turn, depends on the motives of the political elite to intervene in the first place. As noted by North (1979), the creation of a state is, on the one hand, a precondition for economic growth; on the other hand the state is the reason for man-made decline. In order to understand its role it has to be endogenised, i.e., it is necessary to analyse the motives and incentives of the individuals that are entitled to act in the name of the state and their interaction with the surrounding society. This interaction is constrained by various institutions. What is crucial for economic development, then, is whether the institutions created by the state are efficient, i.e. conducive to economic development, or not. Earlier research largely emphasised the negative effects of state intervention, leading to the scepticism towards government activity in general that was mentioned earlier (cf. Low 1998: 17). Later work has provided a more nuanced view, stressing particularly the positive role of the state as a builder of institutions. Olson, for example, in a recent

34 contribution observes that states with relatively good institutions are able to grow rapidly due to the catch-up effect and they do not have to be particularly benevolent in order to do so (Olson 1997). Basic cultural values may have a deep influence on the formation of institutions and choice of policies (cf. Hicks 1989, Lal 1998a). Hence the institutional structure may differ widely in different countries due to the fact that institutions are formed as a result of an evolutionary process. To some extent institutions are also an outcome of deliberate design by the elite, however (Robinson 1998), largely depending on the room for manoeuvring it has. Hence, poor institutions are not necessarily due to incompetence and ignorance but can be a consequence of rational decisions by the those in power aiming at promoting their selfish interest before that of the society.

Types of statea simple taxonomy In order to understand the actual behaviour of a particular state it is useful to classify different types of states into different groups, depending on the ultimate goals of the state and on the kind of popular support it enjoys. I will use a classification scheme originally proposed by Lal and Myint (1996) and later modified by myself (Blomqvist 1998, 2000). I assume here, somewhat simplifying, that a state always can promote development if it wishes to do so. While this may not always be the case, it is highly doubtful whether differences in developmental capability can explain systematic differences in development record (Robinson 1997). The classification, of course, identifies models, not real states, which more often than not display characteristics from more than one category. On the one hand, a state can be classified according to its benevolence, i.e. whether it is genuinely oriented towards economic development or not. Depending on this, a state can be either developmental or predatory. The ultimate objective of the predatory state is to maximise the welfare of the ruler or ruling clique. On the other hand, a state can be either autonomous or dependent (or factional, according to the terminology of Lal and Myint 1996). The autonomous state is insulated from the pressure of special interests, but also from the electorate at large, and is able to set its own objectives independently, while the dependent state functions as an instrument for an electoral majority or a special interest group that happens to be in power at the moment (see Lal and Myint 1996) and whose behaviour reflects collective decision making subject to various constraints (Krueger 1993: 59). An autonomous state is non-democratic by definition while a dependent state may, but need not be democratic. Combining the two principles of classification gives us a taxonomy, illustrated in Figure 1.

35 Figure 1 Types of State

Au tonomous Deve lop me ntal

Dependent Parli amentary de mocracy

Guardian

Predatory

Abs olutis t Bure auc raticauth ori tarian

Hijacked

Source: Blomqvist 2000.

The guardian state is developmental and inclined towards maximising the welfare of the society (including, of course, the elite) as the state perceives it. (As the ideas as to what constitutes the best for a country may sometimes be rather peculiar, a guardian state is not necessarily benevolent in the common sense of the word (cf. Krueger 1993: 60).) Since it is independent of the electorate, the guardian state is not democratic, although some democratic institutions may be entertained. Basic Confucian ideals are compatible with this type of state, even if such ideals are by no means necessary or sufficient to bring about such a model. In Asia, Hong Kong under the last decades of British rule may serve as an example of this type of state. Singapore has been mentioned as a case in point as well (Lal and Myint 1996) but is actually a more complicated case (see, e.g. Low 1998). The democratic version of the partial state can a priori be assumed to be more developmental than the authoritarian (predatory) type. Whether it is necessarily more developmental than any autonomous state is a moot point, much discussed in the context of East Asia, see, e.g., Clark and Roy (1997: 151), Lal (1998b), Low (1998: 2236), McGuire and Olson (1996), Okuno-Fujiwara (1996: 403). One reason speaking for democracy in this context, according to McGuire and Olson (1996), is that a majority in a democratic society earns some market income in excess of its tax income. The argument seems rather unconvincing, however, since it is not unusual that the ruling clique of authoritarian, predatory regimes earns a market income as well (cf. the crony capitalism in the Philippines under Ferdinand Marcos). A more persuasive argument in favour of democracies is the checks and balances built into a democratic system rather than inherent benevolence. Almost by definition the leaders cannot repress the political rights of any group in a democracy, which limits

36 the power of the elite to tinker with property and contract rights (Clague et al. 1997). This is not really the case with autonomous governments, where there is always a risk that the state changes the rules in its own favour (cf. Olson 2000:36). Moreover, there are usually built-in checks such as a constitutionally determined division of power. The democratic system is also, as a rule, more transparent than other systems because the flow of information is less controlled. The characteristics just mentioned make abuse of power more difficult although grey areas, such as financial support to party-controlled organisations, political appointments and rent-creating regulations, may remain. There is no reason to believe that a democratic government, a priori, would be entirely free from predatory traits compared to other forms of government, although it may be more constrained and although predation may take on different forms (cf. Lal 1998a: 122). Pressure groups may concentrate their efforts on certain parts of the government, or even certain key officials, who may affect decisions in a direction favourable to the groups through, e.g., passing on selective information (Tirole 1994). The need of a democratic government to court key interest groups in order to get re-elected is also widely believed to increase the size of the public sector and its interventionist stance over time, with doubtful effects on allocative efficiency and economic development (cf. Doshi 1996). Thailand or the Philippines of today may be good examples of a democratic, partial state. The autonomous predatory state can, according to Lal and Myint (1996), be of two types. In an absolutist state the full authority of the state rests with a ruler (a king, dictator or colonial power) and the raison d'tre of the state is maximising the welfare of this ruler. The Philippines under Marcos or, possibly, Indonesia under Suharto may perhaps be used as examples here, even if much more extreme cases can be found in other parts of the world. In the bureaucratic-authoritarian type of state a dominating group wields the power in a more or less collective manner. The group referred to may be a political party, or an ethnic or religious group. Bureaucratic-authoritarian states are often one-party states where maximisation of public employment is a means through which the ruling group attempts to maintain support (cf. Krueger 1993: 63). The remaining socialist countries in the region may be mentioned as examples in this case. Obviously, the distinction between the two main types of autonomous predatory states may not always be sharp. In both cases, the bureaucracy itself may be rent-seeking as well, which is easier if the costs of monitoring it is high, which often is the case in developing countries (cf. Sartre 1998). This adds, of course, to the predatory character of the government and to its detrimental effects. These versions of a predatory state may not entirely lack developmental traits even if development is not the main policy target. There is no reason for the state to be nondevelopmental per se, even if it is predatory, as the elite usually gains from development if it can hold on to power (cf., e.g., McGuire and Olson 1996). Hence, its actions will be determined by the interest of the ruler (or the elite). If a policy measure makes it more difficult for the ruler to take advantage of the system or to stay in office, it will not be carried out (Blomqvist and Lundahl 1997). Deterioration of the economy in itself tends to undermine the authority of the state and weaken the

37 instruments of power but if the time horizon of the ruler is short enough he may still prefer to steal from the citizens instead of developing the economy (Olson 2000:26). The dependent predatory state, the "hijacked" state, finally, is based on smaller coalitions or cliques that are able to capture the state for longer or shorter periods of time with the aid of brute force or superior financial resources. Many military regimes have been of this type and so have some ethnically based governments in multi-ethnic societies. Factional rivalry among a powerful landed oligarchy may produce a similar result as may powerful private companies (Hellman et al. 2000). In this case, there is very little that keeps the government from turning predatory. The partial state is inherently unstable which implies that it probably has little to gain from economic development and indeed from taking into account the consequences of its actions on the economy as a whole. China, between 1911 and 1949, is a case in point.

Evolution of the type of state

From the point of view of development it is interesting to look into reasons why a state comes to be of a certain type, and what mechanisms may take a state from one type to another, for, example, from a partial to an autonomous predatory state, and further to a more developmentally inclined one and perhaps on to a multipolar democratic one. Although some research has been done on that, our knowledge is still far from complete. The type of state that can be found at a given moment of time is an outcome of an evolutionary process, where the basic endowments of an economy interacts with developing institutions and where the bargaining power of organised groups play a central role. Rules tend to be changed when the bargaining power changes (Voigt 1998). As a rule, the intrusive role of the state tends to be reduced and becomes more indirect as the economy becomes more developed (Reinert 1999). The hijacked state is likely to be the worst alternative from the development point of view since it is weak and thus very unstable (cf. Lundahl 1997). As noted already, the ruling clique tends to concentrate on extracting as much income as possible in the short run without paying much attention to the overall effects on the economy. The result is bound to be ambiguous and distorted property rights as well as lack of any commitment on the part of the state, leading to a situation where the incentives promoting productive activities are minimal. Even if the social return to such activities is likely to be high the prospects for private gains are poor. This type of state is characteristic for a situation when several factions compete for power but all of them are too weak to be able to hold on to it for more than a short time. The end result is often a total break down of the state apparatus. The situation is not unlike that in Cambodia after the Vietnamese occupation, where the international community (viz. the United Nations) in effect had to take over the role of the state. When a clique manages to secure its position and this depends a good deal on its ability to extract resources that can be invested in security the state becomes a autonomous predatory one. Such a state has an interest in secure (although perhaps distorted) property rights and in promoting development, since the elite tends to have,

38 or be able to acquire, a large stake in the economy. It is easy to show that the larger the share of the economy the elite controls, the less distorting its policies are likely to be (Olson 1982: 41-44). This is because it stands to gain more from growth (and lose more as a result of declining production that may follow from predatory behaviour) if it controls a large part of the economy than if it only controls a small part. It can also be shown that a predatory state has an interest in providing collective goods that enhance the productivity of the private sector, if the increase in income can be expropriated, fully or partly, by the ruling elite (see, e.g., Findlay and Wilson 1987). In that case the government should normally aim at maximising the national income. In the case of a bureaucratic-authoritarian state, for which a central way of distributing favours to the members of the ruling elite is through public employment, there is a tendency for the public sector to grow excessively, however, as all state revenue is spent on employing more government staff (Blomqvist and Lundahl 1997). The prospects of economic gain may thus discipline the state to behave in a reasonably restrained fashion. If the economic incentives for a state to promote economic growth, by means of prudent macroeconomic policy, provision of public goods and efficient institutions, are strong enough, it may develop towards a guardian state. The probability and the time pattern of a positive response to policies are likely to be a crucial factor. Obviously, the discount rate of the government is important here. If the risk of being thrown out of office is high the discount factor tends to be large. Then it is more or less irrelevant for the ruling elite what is going to happen in the long run. The optimal strategy for the government is to concentrate on expropriating as much as possible, as quickly as possible. While the idea of development prospects is an intuitively attractive one it may not explain all cases of developmental governments. In fact, the Asian NIEs are all examples of countries, which were not regarded by the experts as promising candidates for rapid development in the late 1950s and early 1960s (cf., e.g., Blomqvist and Lundahl 1997, Hicks 1989). In fact, their favourable development went unnoticed, by and large, until the 1970s. Ex post we know, of course, that these countries are just about the best examples of successful development that can be found. An important reason for this seems to be that all Asian NIEs developed under a serious external threat. A strong economy was then a prerequisite not only for the governments ability to stay in power, but also for the survival of the state as such. National security and economic development are then two sides of the same coin (see, e.g., Gunnarsson and Lundahl 1996, Gunnarsson and Rojas 1995: 103104). Another factor pertaining to the inclination of an authoritarian government to be developmental appears to be the endowment of natural resources. Since these are relatively easy to exploit within enclaves even with a poor general level of infrastructure, a rich endowment of resources may, in fact, encourage predatory behaviour of the state (cf. Robinson 1997, Leite and Weidmann 1999). This may well have been one of the factors behind the delay in development in the large ASEAN (Association of Southeast Asian Nations) countries as compared to, e.g., the Asian NIEs, which were all resource-poor. Even if a government is predatory and lacks interest in developmental measures, it has an incentive to minimise its transaction costs. What is relevant for them is net, not

39 gross, revenue. Because of this, and because control and coercion is costly, it is preferable if the resource transfers from the citizens to the government can be voluntary. It is often most efficient to enter into explicit or implicit contracts with interest groups instead of individuals. The groups are then granted favours in return for their compliance (Blomqvist and Lundahl 1997). The need of a predatory government to co-operate and to develop basic institutions may also contribute to a transition towards a guardian type of state, although this is not by any means certain. What happens seems at least partly to depend on the natural openness of the economy (determined by its size and geography). This is because poor institutions tend to drive out international trade and inward FDI both of which are important for this type of economy (Wei 2000). Developing legal institutions, particularly property and contract rights, tends to promote economic development and, as noted above, tends to contribute to a transition from a predatory to a guardian state. A problem for the predatory (and partly, guardian) state is, however, that development tends to alter the structure of political power. For instance, better infrastructure, communications and education make it easier and less costly to organise collective action against the government. This could, according to some research, give the incumbent elite a reason to resist being developmental. The resistance could even be harder the larger stake in the economy the ruling elite has (Robinson 1997). Such a conclusion, of course, goes contrary to the observation above, that a government is more developmental the larger part of the economy it controls. There may not be a contradiction, however. Much is likely to depend on whether the elite is able to hold on to its economic power, while loosening its grip on the political power. This is likely to be easier if the inequality is not too glaring to begin with (cf. Robinson 1977). Then comparatively large parts of the population stand to gain immediately from a positive development, which may allow the elite to stay in power and consolidate its economic assets. Such development may imply a gradual legalisation of the assets of the ruling elite regardless of how they originally were acquired. Being more secure economically the elite may be increasingly willing to relinquish its hold on the political system. If this is the case, a more democratic type of government may eventually develop. How easily this legalisation is done may depend on what type of resources are at stake. Resource-based wealth, like land, is likely to be most difficult for the elite to protect, since it cannot be moved away and is relatively easy to nationalise or distribute among the population while wealth in the form of capital is much safer. According to Olson (2000: 31-32) a development towards democracy is facilitated if there is a balance of power that makes it difficult for one leader to take control. As demonstrated, it is possible to outline a plausible process of development from a factional predatory state to a multi-party democracy. Having said this, I want to stress, however, that such a development is not necessarily smooth and certainly cannot be taken for granted. Backlashes and reverse development may and do occur at any stage. Especially the inherent danger of succession crises of non-democratic governments may jeopardise a smooth development (cf. Olson 2000:27). One may also, for instance, start out with a guardian state that builds up a network of wellintended regulations, which gradually create special interest groups as well as a state of the bureaucratic-authoritarian type. According to Krueger (1993: 86), India and

40 Turkey are examples, albeit not extreme ones, of this kind of development (cf. also Srinivasan 1985).

Discussion The paper has elaborated on some ideas about the developmental role of the state when the state is looked upon as an endogenous agent in the economy with, at least partly, egoistic goals. This type of reasoning may help understand why economic policies sometimes appear irrational and counterproductive. While the preceding discussion provides some ideas on reasons for inefficient economic policy, it also suggests that it may be easier said than done to eliminate the problems. Predatory behaviour cannot be eradicated by clear leadership, the setting up of appropriate institutions and internal checks on the allocation of favours (Lall 1996: 23) simply because the ones that should do the job are likely to be precisely those who benefit from the present situation and thus may decide to act otherwise. There is no automatic guarantee either that a regime will develop towards a more welfare oriented inclination over time even if that may happen under certain circumstances. Every state is the unique result of an evolutionary process where economic and institutional constraints have interacted to produce the result that can be observed at a certain point of time.

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45 Toye, John (1987): Dilemmas of Development. Reflections on the Counter-Revolution in Development Theory and Policy. Basil Blackwell, Oxford. Voigt, Stefan (1998): Constitutional Law, Legal Science Network <http://papers.ssrn.com/sol3/paper.taf?ABSTRACT_ID= 141476> Wade, Robert (1990): Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization. Princeton University Press, Princeton. Wei, Shang-Jin (2000): Natural Openness and Good Government. NBER Working Paper No. 7765. Winiecki, Jan (1991): The Distorted World of Soviet-Type Economies. Routledge, London. World Bank (1993): The East Asian Miracle: Economic Growth and Public Policy. Oxford University Press, New York. World Bank (1997): World Development Report 1997. The State in a Changing World. Oxford University Press, New York. Zysman, John and Doherty, Eileen (1995): The Evolving Role of the State in Asian Industrialization. Berkeley Roundtable on the International Economy (BRIE), Working Paper 84.

46
Appendix 2.

Hans C. Blomqvist

THE FLYING GEESE MODEL OF REGIONAL DEVELOPMENT: A CONSTRUCTIVE INTERPRETATION

Journal of the Asia Pacific Economy, Vol. 1, 1996.

1. Introduction In established economic theory there are models for dealing with both commodity trade, international capital flows in general and foreign direct investment (FDI). Some theoretical frameworks, such as the so-called dependency theory, also try to address the economic relations between countries at a more general level. Some of these theories are often difficult to take full advantage of at the macroeconomic level, partly because they are usually difficult to unite in one coherent framework that is not too complicated to be practical, while some of the more comprehensive frameworks have been criticised for being tautological and ideologically biased. Although not free from problems, the analytical framework presented in this paper, the flying geese model, incorporating both trade and FDI, appears to be a useful tool for dealing with regional economic interaction between a group of countries. It is also useful for understanding the industrial policy, and arguably foreign aid policy pursued in Japan and East Asia in general. The concept of the flying geese goes back to the time before the Second World War, but has been little known by Western economists until recently. In Japan, however, this theory is common knowledge among economists. The reason for the recent interest in the model by Western economists is no doubt the rapid ascendance of several East Asian countries to a status of important industrial producers and actors in international trade. As this development is frequently seen as a miracle, scholars have been keen to look for explanations, also unconventional explanations, to what is going on in this region. The flying geese was originally constructed as a piece of applied economics only. Nevertheless, its flavour of political economy is very clear. In the background there was always the interest of the Japanese nation in the international context, and the flying geese helped to interpret the regional activities of Japan in a positive, almost altruistic fashion (cf. Korhonen 1992: 186). The model seems to have been one of the rationales lending legitimacy to the expansion of the Japanese presence in the region before and during World War II (see Holden 1991 and Korhonen 1994). After the war, it envisaged a way for Japan to catch up with the Western industrialised countries (Korhonen 1994). This approach was useful after the war, both in the rhetoric of domestic politics and in the contacts with the countrys Asian neighbours. Due to their experiences before and during the World War II, the latter, as well as many scholars were suspicious, however, and tended to see the model as a rationalisation of economic, and perhaps political, imperialism. The foundation of the flying geese framework was laid in the early and midthirties by the late Professor Kaname Akamatsu. Akamatsu was familiar with Marxist-

47 Hegelian thinking and saw economic development as a kind of dialectic, determinist and unstoppable process, gradually taking an economy to higher levels of sophistication. The ideas of Akamatsu were virtually unknown in the West until he published his model, now in a more developed form, in two articles in English in the early 60s (Akamatsu 1961 and 1962). In Japan, he was remarkably influential during the whole post-war period and his ideas were guidelines for those responsible for the Japanese reconstruction after the war (Korhonen 1992: 68). The late international dissemination of the flying geese model may apart from the language problem have been due to its role as an economic underpinning of the Japanese expansionary policy before and during the war. After the war, Japan was occupied and virtually cut off from mainland Asia by this and other circumstances. Although the model was never abandoned in Japan, and was often referred to in the Japanese literature, it did not turn up much until the 70s in the internationally published writings of Japanese economists. The best known of these are Kiyoshi Kojima, who elaborated especially the role of FDI, and Terutomo Ozawa, who has tried to generalise the theory beyond the relation between Japan and its neighbouring countries. Former Foreign Minister and academic, Saburo Okita, seems to have been the one that more than others conveyed the concept to a more general public, in the late 1970s (Cronin 1992: 28), although the somewhat related idea of forming a Pacific free trade area was mooted as early as in 1965 by Kojima, an idea taken up by the then Foreign Minister of Japan, Takeo Miki (Korhonen 1992: 910). Today, the concept is well known and widely used among students of East Asia. Apart from the possible correctness of the model, it has been regarded as useful for understanding the Japanese industrial policy and the way the Japanese interpret their international environment (cf. Rapp 1975). The flying geese model is not an watertight theoretical construction in the sense that it can be formally deduced from a given set of assumptions, nor is it one alternative for explaining economic development in an open economy context that can be tested against other, competing models. Rather it is an inductive type of model, to a great extent induced from the Japanese experience of industrialisation. It consists a set of related, rather loosely formulated ideas if modern economic theory is used as the yardstick on structural change and economic interdependence between open economies, where different elements are often perfectly compatible with mainstream economic analysis. Moreover, the model has been formulated in three different, although interrelated varieties. Firstly, it can be used to illuminate the development over time of one industry only. Secondly, if we observe several industries at a time, it can illuminate the change in the industrial structure in one country, and thirdly it can be employed to show the interdependence between different countries as foreign trade is affected by the rise and fall of industries and of transfers of productive resources between countries. The specific purpose of this paper is to present the essence of the flying geese model and to discuss the implications of the model on trade, industrial and foreign aid policy issues.

2. The Dynamics of Trade Flows and Production Structure Akamatsu focused on a group of countries developing together in two main groups, the leaders and the followers (and possibly some in between) but with a

48 common goal in the form of ever-higher levels of technological sophistication (cf. Korhonen 1992: 69). The relative position of countries on the ladder of development does not necessarily stay unchanged, however, but some followers may move faster than others and gradually advance towards the leading position, while earlier leaders may lose momentum after some time and may be overtaken by other countries. The formation of countries and its development over time is thus similar to a flock of flying wild geese. Akamatsu realised that no country could hope for more than a temporary advantage over others. Permanent domination of some countries over others is not possible with this type of development pattern. As a matter of fact, the position of a follower country is easier than that of a leader, as the latter has to make continuous efforts in order to remain at the technological edge. Hence, it is not possible to create a stable international division of labour (Korhonen 1994, 1992: 76, 78). Originally, the flying geese refers to the microeconomic pattern of development, however, sometimes referred to as the catching-up product cycle (Yamazawa 1990) of one industry, as illustrated in Figure 1. In the figure, panel A illustrates the hypothetical behaviour of domestic production, domestic demand, exports and imports of a particular product. Panel B illustrates the behaviour of imports and exports as shares of domestic demand and production, respectively, and in panel C, finally, the relation between domestic production and domestic demand is depicted. The horizontal axis measures the time dimension and is divided into five stages of development: introductory, import substitution, export, mature, and reverse import. In the first stage domestic demand develops, presumably because of information from abroad on the availability of a product and subsequent imports. The imports of cheap foreign goods drive craftsmen out of work and disrupts the stationary state of a less developed country, but simultaneously brings forth the labour force necessary for future industrial expansion. Availability of the product tends to change the habits of the population and as the demand increases domestic production is taken up, in a second stage, through technology transfer or imitation, but cannot replace entirely the imported product due to a low quality/price ratio of the domestic product. In the next stage, import substitution takes place because of learning effects, standardized technologies and larger volumes allowing economies of scale to be taken advantage of. The relative production costs, as compared to more advanced countries, tend to be low and thus the production is competitive except on the domestic market also internationally. In the third, export stage, the domestic production spills over into exports, and while the domestic demand gradually stops growing, the momentum of production can be kept up by increasing exports. (The above three stages constitute the original form of the model; cf. also Korhonen 1994 and 1992: 73). In the mature (fourth) stage, domestic demand stagnates or decreases and exports decline, the latter because production has now been taken up by other, less developed countries with lower production costs, and because the growth of demand of the product itself slows down at the global level. In the final, fifth stage there will be net imports again, even if domestic production may not disappear altogether, when the domestic producers are outcompeted by foreign firms (including overseas subsidiaries of domestic firms). Meanwhile, other industries producing more advanced manufactures and in particular, capital goods needed to produce the consumer goods being produced already, enter the import-substituting and export stages, as the comparative advantages of the country change. Hence, the industrial

49 structure changes over time according to dynamic comparative advantages. Note that the country under consideration may import both more and less capital intensive goods than what its own production range consists of (to see this, see Krueger 1977). This part of the story is, of course, entirely compatible with mainstream neoclassical economics, as discussed in detail in Blomqvist (1991), although Akamatsu does not argue in terms of comparative advantages.
Figure 1. The Catching-up product cycle

Panel A Quant it y X M D

M Panel B 1 .0 R t ios a M/ D Panel C 1 0 .0 R t ios a

X/ S

M/ D

S/ D I II III IV V

Level of Development Source: Yamazawa 1990

Traditional theory assumes that there is no mobility of factors of production across national borders, however. In the flying geese framework physical, financial and human capital from the declining industries can be used for FDI (Akamatsu 1962). (Labour, especially unskilled labour, on the other hand, is much more immobile across national borders.) In this way FDI contributes to structural changes in the less developed host countries as well. The factors of production are, although mobile, sometimes difficult to sell off in the short term and sometimes the firms may prefer not to sell or lease this type of intangible technology due to the consequent lack of control and fear of abuse. Kojimas theory of FDI, which we will comment on later, can be interpreted as an attempt to capture this part of the flying geese process (cf. Peltola 1994). In a traditional two-factor context highly mobile capital would lead to identical relative factor prices in different countries and, hence, to eliminating international trade based on relative factor abundance in the tradition of Heckscher-Ohlin. (Some trade could still take place, due to differences in consumer preferences, etc.) At the micro level the resemblance with the well-known product cycle theory (Vernon 1966) is striking, although the interplay between production, demand, exports and imports is rather different. Moreover, it should be stressed that Vernon based his idea on a framework of imperfect competition. The flying geese model is fully compatible with perfect competition, as the product cycle in the latter case is

50 driven by changing comparative advantages. As made clear by Rapp (1975) the main difference is due to the fact that for a country not at the technological frontier new products are usually introduced via imports, while production is taken up later on, often supported by protectionist measures. Government intervention may change the details in the process outlined above. Especially in the early phases of the cycle, government measures falling under the import substitution and export promotion categories can be used to speed up different phases of the process. Because of learning effects, aggressive export promotion at an early stage of the product cycle may reduce unit costs and enhance further export penetration. In the late phase of reverse import, the government may slow down the process by imposing trade barriers or by subsidizing the domestic industry (cf. Yamazawa 1990: 32). A flying geese pattern of development may also take place through systematic changes of exchange rates, as suggested by Kwan (1994: 3235). It is no use, however, for any government to try to conserve a certain production structure, as the system tends to develop in a way that makes such attempts more and more futile. The flying geese pattern is dynamic while the orthodox trade models are based on comparative statics. The production structures overlap to a certain extent in different countries, as is obvious from the catching-up product cycle. Hence, at a national level, the countries both complement each other but also compete to some extent. The follower in general, as noted by Rapp (1975), can start from lower unit costs than the innovator and may thus overtake the latter just by growing faster. The dynamics of the model is thus inherent partly in the competitive process implicitly embodied in the overlaps of two or more countries industrial structure and, more fundamentally, in the changing relative endowments of factors of production over time. This mixture of a competitive and a complementary structure is the driving force of the dialectic process (Akamatsu 1961) propelling the geese formation. It should be noted that the microeconomic process in figure 1 is incomplete in the sense that the driving forces behind the development over time are not fully explained. In order for the depicted process to take place the relative endowments of the factors of production have to change (cf. Yamazawa 1990: 33). At the macro level the flying geese model describes the changing industrial structure in economies at different levels of development. A particular industry, according to this framework, emerges, grows and recedes in a group of economies in an order determined by the dynamic comparative advantages in each economy. The present structure of an economy holds the seeds to its own destruction and is gradually succeeded by another structure, which in turn is doomed to be destroyed in the longer run. This way of seeing the development process clearly points at the Marxist origins of Akamatsus thinking. Needless to say, this picture is oversimplified, as many irregularities can be expected to occur. Technical development, in particular, may cause a revival of a sunset industry. Similarly, a technological break-through may cut short the product cycle of a growing industry. This notwithstanding, the model gives a stylised account of structural change that is valuable even if it is not perfect. Depicting the development of a particular industry, as outlined in Figure 1, against time in several countries, we would end up with a series of inverted u-shaped curves, allegedly reminding of the wings of a flock of flying geese, one for each economy (cf. Kwan 1994: 8283). Another way of capturing the essence of the idea of the flying geese on the macroeconomic level is depicted in Figure 2. In this figure, value added per employment (in industry) is used as a rough approximation of sophistication of the

51 production structure in an economy. The position and length of an arrow denotes the range of goods produced in a certain economy. This proxy for sophistication is certainly highly positively correlated with GDP per capita but, primarily because endowments of natural resources differ, the income level may differ between economies producing approximately in the same range of goods. Over time, the flock moves to the right and upwards, in the direction of the arrows. The economies involved thus tend to move in a V-formation, like a flying flock of wild geese. Now, choose a country somewhere in the midst of the group, say, E. This economy tends to import raw materials and simple components from its less developed neighbours and more advanced capital goods and consumer durables, not domestically produced, from more advanced countries. If the stock of capital and know-how expands faster than that of raw labour, the relative factor endowments change, inducing the country gradually to abandon production of the more labour intensive goods (which can profitably be overtaken by other, more labour-abundant countries) and take up the production of goods that require more real and human capital. As the accumulation of capital continues, however, even more capital intensive production will be taken up, and the production structure will be further upgraded. The level of development of a country within a flying geese framework can be determined by the foreign trade structure using a specialization index. In Figure 3 below, which follows Kwan (1994: 8485), the developments are followed up in three sectors: primary goods (SITC 04, and 68), other manufactures (SITC 5, 6, 8 and 9, excluding 68) and machinery (SITC 7). The idea is that in each country the primary sector develops first, then other manufacturing and last the most advanced sector, the machinery industry.

Figure 2. Macroeconomic development

GDP/cap. D A C E F B

Value added/employment

52 Hence, the position of each country in a development continuum can be determined by the relative value of the specialization index for the different industries. Kwan (1994: 85) suggests the classification presented in Table 1. The stages are: Developing Country, Young NIE, Mature NIE and Industrialised country.

Figure 3. Changes in trade specialization over time

Specialisation Index Machinery

Time (income) Other manufactures Primary commodities

II

III

IV

Source: Kwan 1994: 85)

Table 1. Relative values of the specialization index for different stages of development

Specialization index I. Developing country stage Young NIE stage Mature NIE stage Primary commodities > Other manufactures >

Machinery

II.

Other manufactures > Other manufactures >

Primary commodities >

Machinery Primary commodities

III.

Machinery >

IV.

Industrialized country Machinery stage

>

Other manufactures >

Primary commodities

Source: Kwan 1994: 85.

53

3. The Role of Foreign Direct Investment

Although not much discussed in the original versions of the flying geese model, international direct investment is easily fitted into this framework.3 Inward investment may help the catch-up process to get started, especially as FDI is basically a package deal bringing in industry-specific know-how, including management, marketing and, not least, international market access. Outward investment in turn, becomes interesting for declining industries, which may survive by moving their production process, or part of it, abroad. As pointed out by several authors, e.g. Kojima and Ozawa (1984) and Phongpaichit (1990: 5), the Japanese approach to FDI, represented by above all Kojima (e.g. 1973, 1975, 1985), differs in an interesting way from that of mainstream economics. While the latter developed the theory from a microeconomic point of view (for a succinct survey, see Lizondo 1991), focusing on the behaviour of the multinational corporation (MNC), the Japanese approach was concentrated on (changing) comparative advantage, to which firms adapt through e.g. engaging themselves in FDI. These theoretical elements rather than contradicting each other, are complementary, however. (An illuminating discussion on the pros and cons of the two approaches can be found in Hitotsubashi Journal of Economics 198 198). According to the so-called Kojima hypothesis there are two classes of FDI: trade-oriented and anti-trade oriented (Kojima 1973, 1975, 1985, OECD 1987: 36), depending on whether the investment works in harmony with or against comparative advantage. In the former case, the general idea is to exploit location advantages of production in order to take better advantage of the international market place. Hence, the source country is the one with a comparative disadvantage, and the investment tends to generate trade and enhance industrial restructuring in both source and host countries as the share of industries with a comparative advantage (or at least a potential comparative advantage) grow, compared to other industries (Daquila & Nguyen 1994, Kojima 1973, Lizondo 1991, Mortimore 1993). Investments in low-tech industries may be beneficial also in the sense that the technology is easier for the host country to adopt which may facilitate linkage effects through subcontracting in the host country. Since the investments usually do not represent front-line technology the investors are often willing to co-operate in joint ventures with domestic firms (Ozawa 1979: 7275). In the latter (i.e. anti-trade oriented) case the FDI are in industries where the investor has a comparative advantage. The investor wants to protect his oligopolistic advantage and a crucial objective is preserving the investors market share (Peltola 1994). This type of investment will substitute domestic production for trade and in the process is likely to drive the domestic firms of the host country out of business. Moreover, being technologically superior, this type of investment can link up to a very limited extent with domestic firms in the host economy. Kojimas hypothesis was that Japanese investment is predominantly of the former type while American investment is of the latter type. As the American investment pattern does not comply with comparative advantage, Kojima concludes that it tends to reduce welfare in both source and host countries. (The welfare effects of different types of FDI are discussed by Kojima & Ozawa 1984.)

The main reason for this was undoubtedly the fact that direct investment was of very limited relevance in the 1930s and even during the immediate post-war period.

54 Kojimas ideas have been formalized by Kojima and Ozawa (1984, 1985). The scope for international trade is created by a situation with internationally immobile factors of production and mobile goods. (If capital is mobile, the relative capital/labour abundance and, hence, the relative price between labour and capital are equalized. In that case no foundation for (traditional) trade remains.) Kojima and Ozawa want to show that a third factor of production, mobile industry-specific entrepreneurial endowment, may render trade more advantageous than in the traditional Heckscher-Ohlin case, if the other factors are immobile and if there are differences in the relative stock of that third factor between the industries. Kojima also showed, however, that provided some conditions are fulfilled, an industry with a comparative disadvantage could improve its profitability by relocating to a country where the same industry has a comparative advantage (Kojima 1979). The FDI in this case comprises the firm-specific corporate assets (e.g. technology and management skills). This reallocation of resources tends to widen the basis for trade and enhance welfare in both source and host countries. Several details in Kojimas exposition has been subject to criticism, however (see Peltola 1994). In a less restrictive context, where capital is mobile in addition to know-how, outward FDI may be useful in industries that are losing their previous comparative advantage in the home country. Since capital is homogenous only in abstract neoclassical models it cannot generally be transferred to the growing sectors of the economy. Instead, the firms may use the fact that other countries still have comparative advantages similar to those of the home country at an earlier stage, and make a FDI to the latter countries instead of closing down. In such a way the firm can utilise its capital and know-how, while the production capacity of the host country is increased (cf. Yamazawa 1990: 3536 and Jesudason 1989: 177, 183). Kojimas hypothesis has not, by and large, stood the test of time very well in the sense that a distinct type of investment cannot readily be discerned for different source countries, even if his thesis is still subject to debate. Also from a theoretcal point of view the theory may be too simplistic. The host country may be useful for the investor not only as a production platform but also as a source for product development (cf. India in the case of software). In that case, the American type of invetsment may make perfect sense, also from a social point of view. 4 The questionable performance of the Kojima model is evident especially for the more recent years (Hill 1990; see also e.g. Ariff 1991: 123.). This does not mean, however, that Kojimas idea in itself has become irrelevant as a framework for explaining a certain important type of FDI. What it does mean is apparently that the kind of FDI cannot easily be classified according to source country. Kojimas theory is not very useful for explaining FDI between countries at a similar level of development, either, where differences in relative factor abundance is usually small. It is not difficult to think of other cases either where this theory seems less well suited. Hence, it can hardly be interpreted as a general theory of FDI (cf. Peltola 1994).

4. The Role of Development Aid

A third form of economic linkage, relevant for regional interdependence, is development aid. Such resource transfers may lead to increasing trade both directly and indirectly, providing necessary infrastructure for industrialisation and subsequent
4

This point was brought to my attention by an anonymous referee.

55 international trade. In the case of East Asia, Japan is now the principal donor whose contributions make up the bulk of development assistance in ASEAN. The NIEs today do not receive any aid to speak of. Instead, they are becoming important donor countries themselves (cf. Grosser & Bridges 1990). Aid does not have any specific role in the original formulations of the flying geese model. If this model is conceived as an economic policy guideline, however, development aid may be planned in order to facilitate a regional and international restructuring of industry. The allocation of the Japanese aid has often been discussed critically arguing that the Ministry of International Trade and Industry (MITI) makes plans for allocating development aid and FDI in a fashion that is supposed to be most beneficial to the Japanese (Orr 1989/90, Wysocki 1990, Guisinger 1991; cf. also Kojima 1973). At least there seems to be a distinctly regional approach by leading officials in Japan, suggesting that they have been brought up with the flying geese as part of their economic education. That allegation may be supported to some extent by a quotation from a speech of then Prime Minister of Japan, Toshiki Kaifu: Japan will, for example, continue to seek to expand imports from the countries of the region and promote greater investment in and technology transfer to there countries, in line with the maturity of their trade structure and their stages of development. And as the necessary complement to this effort, I hope that the host countries will make an even greater effort to create a climate receptive to Japanese investment and technology transfer.(Kaifu 1991.)

5. Concluding Comments
The preceding paragraph takes us directly to the issue of the ideological significance and policy influence of the flying geese model. It must be stressed that the model originally did not contain strong normative elements, at least not explicitly, such as suggestions concerning industrial policy, regional integration or political cooperation. Despite this, the theory seems to have had a strong influence over the thinking of Japanese policy makers, through its general influence on their way of conceiving the economic realities. As pointed out by Korhonen (1992: 76): its importance ... lies in its way of understanding the global economic system, and Japans place in it. In Japan, industrial policy has always been active, with an aim to discard comparatively disadvantaged industries and favour comparatively advantaged industries (Kojima & Ozawa 1984). Gradually the ideas propounded by the model have spread among scholars in other countries as well. The deterministic nature of the model may also have contributed to the general feeling of development optimism that can be discerned so clearly in East Asia. The implicit message, implying that as economic prosperity spreads, no country can hope for dominating the global economy in the long term, has probably been important, too (cf. Korhonen 1992: 77). In this context we may draw the readers attention to the fact that industrial restructuring today reflects the decisions of a relatively small number of MNCs apart from policy measures proper, taken by governments. This may add to the determinism as conceived from the point of view of national governments. In a way the flying geese model is significant regardless of whether it is correct or not, judged as an economic-theoretical model. Although formally a purely economic-theoretical framework the flying geese model evidently has a hidden agenda, which guides and directs the economic policy both towards the

56 domestic industries and towards other regional economies. The model can easily be seen as a prescription, founded on the historical development of Japan, determining both a goal for the development process and the means to be used (Korhonen 1994). The conscious policy of industrial upgrading that has been taking place in many East Asian countries, followed by foreign direct investments by the same countries in other regional economies seems to fit into this framework extremely well. The flying geese model is an interesting attempt to capture a dynamic process of international interdependence, despite deficiencies and the fact that it is not necessarily a panacea for a developing open economy. The model is formally about economics alone, if interpreted strictly, without explicit political connotations. As we have noted already, such political and policy implications are not very deep beneath the surface, however. Ideas about Japans role in the regional context, and the changes in these ideas over time, and the implicit implications for industrial policy implicit in the model are the most obvious examples. Possible parallels regarding the political interdependence between nations could also be drawn (Korhonen 1994). In that case too, permanent domination by the leading countries is doomed to fail. Nevertheless, those countries may well try to exert their influence to their less powerful neighbours by military force or by divide-andrule based politics. Their efforts will be marred by a process similar to the one at work in the realm of industrial development. Foreign influence will cause domestic cultural and political institutions to crumble but the more a country is influenced by foreign impulses at an early stage which tends to be the case when the degree of domination is great the less dependent it will become in the future.

References
Akamatsu, Kaname (1961). A Theory of Unbalanced Growth in the World Economy. Weltwirtschaftliches Archiv 86, 2245. Akamatsu, Kaname (1962). A Historical Pattern of Economic Growth in Developing Countries. Developing Economies 1, 1-23. Ariff, Mohamed (1991). The Malaysian Economy. Pacific Connections. Oxford University Press, Oxford and New York. Blomqvist, Hans C. (1991). The Flying Geese Hypothesis, Rent Seeking, and Neoclassical Trade Theory. Working Papers No. 215, Swedish School of Economics and Business Administration, Helsinki. Blomstrm, Magnus (1990). Transnational Corporations and Manufacturing Exports from Developing Countries. United Nations, New York. Cronin, Richard P. (1992). Japan, the United States, and Prospects for the Asia Pacific Century. Three Scenarios for the Future. Institute of Southeast Asian Studies, Singapore. Daquila, Teofilo C. & Nguyen, D. T. (1994). The Role of Northeast Asia in Singapores Trade and Investment. In D. T. Nguyen & K. C. Roy (eds.). Economic Reform, Liberalisation, and Trade in the Asia-Pacific Region. Wiley Eastern, New Delhi. Grosser, Kate & Bridges, Brian (1990). Economic Interdependence in East Asia: The Global Context. Pacific Review 3, 114. Guisinger, Stephen (1991).Foreign Direct Investment Flows in East and Southeast Asia. ASEAN Economic Bulletin 8, 2946.

57 Hill, Hal (1990). Foreign Investment and East Asian Economic Development. AsianPacific Economic Literature 4, 2158. Holden, Ted (1991). All Roads Lead to Tokyo. International Business Week (Nov), 3235. Jesudason, James V. (1989). Ethnicity and the Economy. The State, Chinese Business, and Multinationals in Malaysia. Oxford University Press, Singapore. Kaifu, Toshiki (1991). Japan and ASEAN: Seeking a Mature Partnership for the New Age. ASEAN Economic Bulletin 8, 8794. Kojima, Kiyoshi (1973). A Macroeconomic Approach to Foreign Direct Investment. Hitotsubashi Journal of Economics 14, 121. Kojima, Kiyoshi (1975). International Trade and Foreign Investment: Substitutes or Complements? Hitotsubashi Journal of Economics 16, 1-12. Kojima, Kiyoshi (1977). Japan and a New World Economic Order. Croom Helm, London. Kojima, Kiyoshi (1985). Japanese and American Direct Investment in Asia: A Comparative Analysis. Hitotsubashi Journal of Economics 26, 135. Kojima, Kiyoshi & Ozawa, Terutomo (1984). Micro- and Macro-economic Models of Direct Investment toward a Synthesis. Hitotsubashi Journal of Economics 25, 120. Kojima, Kiyoshi & Ozawa, Terutomo (1985). Toward a Theory of Industrial Restructuring and Dynamic Comparative Advantage. Hitotsubashi Journal of Economics 26, 135145. Korhonen, Pekka (1992). The Origin of the Idea of the Pacific Free Trade Area. Jyvskyl Studies in Education, Psychology and Social Sciences 92, University of Jyvskyl, Jyvskyl. Korhonen, Pekka (1994). The Theory of the Flying Geese Pattern of Development and Its Interpretations. Journal of Peace Research 31, 93108. Krueger, Anne O. (1977). Growth, Distortions, and Patterns of Trade among Many Countries. Princeton Studies in International Finance No. 40, Princeton. Kwan, C. H. (1994). Economic Interdependence in the Asia-Pacific Region. Routledge, London and New York. Lizondo, J. Sal (1991). Foreign Direct Investment. In Determinants and Systematic Consequences of International Capital Flows. Occasional Paper 77, IMF, Washington, D.C. Mortimore, Michael (1993). Flying Geese or Sitting Ducks? Transnationals and Industry in Developing Countries. CEPAL Review 51, 1534. OECD (1987). International Investment and Multinational Enterprises. Recent Trends in International Direct Investment. Paris. Orr, Robert M. (1989/90). Collaboration or Conflict? Foreign Aid and U.S. Japan Relations. Pacific Affairs 62, 476489. Ozawa, Terutomo (1979). Multinationalism, Japanese Style. The Political Economy of Outward Dependency. Princeton University Press, Princeton. Peltola, Jari (1994). Kojiman suhteellisten etujen hypoteesi suorille sijoituksille kiista lnsimaisen teorian universaalisuudesta. Discussion Papers No. 522, Research Institute of the Finnish Economy (ETLA), Helsinki. Phongpaichit, Pasuk (1990). The New Wave of Japanese Investment in ASEAN. ASEAN Economic Research Unit, Institute of Southeast Asian Studies, Singapore.

58 Porter, Michael E. (1990). The Competitive Advantage of Nations. Macmillan, London and Basingstoke. Rapp, William V. (1975). The Many Possible Extensions of Product Cycle Analysis. Hitotsubashi Journal of Economics 16, 2229. Vernon, Raymond (1966). International Investment and International Trade in the Product Cycle. Quarterly Journal of Economics 80, 190207. Wysocki, Bernhard Jr. (1990). In Asia, the Japanese Hope to Coordinate What Nations Produce. Wall Street Journal (Aug.). Yamazawa, Ippei (1990). Economic Development and International Trade. The Japanese Model. East-West Center, Honolulu.

59
Appendix 3.

This paper was downloaded from http://www.anu.edu.au/asianstudies/values.html on June 15, 2004.

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What's Happened to Asian Values?

by Anthony Milner
Professor Anthony Milner is the Dean of the Faculty of Asian Studies at the Australian National University. This paper was first published in a volume titled Beyond the Asia Crisis, edited by David Goodman and Gerald Segal Rutledge, 1999.

On the face of it, the case for 'Asian values' is in tatters. The advocates of 'Asian values', from the outset, met powerful intellectual and ideological opposition, particularly from Western commentators. By the end of 1998, faced by the humiliation of a far-reaching Asian financial crisis, these values were presented as having been utterly discredited, and we read increasingly of the triumph of 'Anglo-Saxon Market values' [1] and even of a new, expanded, American 'hegemon' [2] . A certain degree of triumphalism, it must be admitted, is tempting at the present time. The assertive and sometimes arrogant tone of many advocates of 'Asian values' - Prime Minister Mahathir of Malaysia and Senior Minister Lee Kuan Yew, for instance - has helped to provoke this response. But however tempting a comprehensive dismissal of 'Asian values' might be, it is also an unwise strategy for those seeking to look 'beyond the Asia Crisis' because it may lead us to ignore deeper social and cultural processes that tend to work against a liberal convergence of values in the region.

The Asian Values Debate

The main facts of the so-called 'Asian values' debate, which emerged with some vigour in this decade, are by now reasonably well known. The most prominent advocates of the importance of the role of 'Asian values' in the economic, social and political development of East and Southeast Asian nations have certainly been Mahathir, Lee and a number of public intellectuals who tend to be associated with the ruling regimes of Malaysia and Singapore. [3] The 'Asian values' position consists of a complex combination of arguments and assertions, some of them capable of causing considerable confusion. They include the following:

A set of values is shared by people of many different nationalities and ethnicities living in East Asia. (Although some Asians contributed to developing the concept of 'Asia' in the first half of this century [4], 'Asian values' are today usually associated solely with East and Southeast Asia). These values include a stress on the community rather than the individual, the privileging of order and harmony over personal freedom, refusal to compartmentalize religion away from other spheres of life, a particular emphasis on

60
saving and thriftiness, an insistence on hard work, a respect for political leadership, a belief that government and business need not necessarily be natural adversaries, and an emphasis on family loyalty. [5] In seeking to understand the economic success of certain Asian societies, due credit must be given to the role of these 'Asian values'. It is not enough to analyse such economic success in culture-free economic terms, or as a result of the adoption of specifically Western values. In the process of developing modern political systems in Asian societies due recognition must be given to the need to ground these systems in the specific Asian cultures in which they are to be situated. It is not acceptable to reform or criticise such societies solely on the basis of liberal-democratic forms developed in Western societies. A belief that a major international shift is underway, involving the rise of 'the East' and the fall of 'the West'. An expression of disquiet regarding certain 'Western values', especially related to a perceived excessive stress on the individual rather than the community, a lack of social discipline and a too-great intolerance for eccentricity and abnormality in social behaviour. The suggestion is sometimes present here that Western countries would do well to learn from 'Asian values'.

A further feature of the case for 'Asian values' concerns the way it has been delivered. The style of Mahathir's and Lee's pronouncements, in particular, conveyed the new confidence that emerged in the region at the time of record-breaking economic growth, and also a degree of irritability arising from what some saw as the complacent dismissal of 'Asian values' over many years by Western commentators. It needs to be remembered that for decades those usually Western, development specialists who attempted to identify why Asian societies had lagged behind the West in economic development often cited the role of Asian values, and they were in many cases precisely the same values that were to be cited later in a spirit of triumph by Mahathir and others [6] To some extent provoked by the assertive way in which Mahathir and Lee advocated 'Asian values', their pronouncements met a rapid and vigorous response, particularly from academics and other intellectuals, many but not all of whom are based in 'the West'. This response has included the following points:

The suggestion that a set of 'Asian values' operated throughout the Asian region, or even just in East Asia, contradicts what we know about the presence of long-standing religious (Islamic, Buddhist, Confucian) and other divisions in the region, and of the major social and cultural transformation that has been underway, especially in the last decade or so. [7] Many so-called 'Asian values' are equally Western values, and, in some cases, they have been deliberately inculcated in Asian societies as a consequence of the influence on Asian elites of Western models. The role of the writings of the popular philosopher, Samuel Smiles, in developing the philosophy of 'hard work' and 'self-help' in Japan and a number of other Asian societies over the last century is an excellent example of such influence. [8] The role in social and economic analysis of 'Asian values', 'Western values' or 'culture' in general is to be questioned: economic change may in fact be seen to be the result of other, deeper processes. Cultures, that is to say are contingent things; they are reconstructed, constructed or invented to serve the specific purposes of their inventors. The specific purpose in the case of a number of Asian regimes, it is argued, is that of defending an illiberal form of government. Such regimes are believed to cloak their autocratic strategies and methods in arguments of cultural exceptionalism. [9] 'Asian values', it is argued, are the ideological constructs of Asian leaderships rather than the genuinely-held beliefs of their subjects. The ideology of 'Asian values' is a radical conservatism that serves the needs of capitalism at a particular stage of its development in specific Asian societies; it is an ideology that 'combines organic statism with market economies'. [10] There is disagreement within the Asian region about 'Asian values' - NGO's and even some political leaders, such as President Lee of Taiwan, are powerful advocates of 'universal', liberal values. [11] As a unifying ideological system in the Asian region, the doctrine of 'Asian values', like the idea of 'Asia' itself, has proved of little use. ASEAN, despite the apparent growth in enthusiasm for the idea of 'Asia', is a relatively weak international association incapable of real executive action, and the East Asian Economic Caucus (which is intended to include East as well as Southeast Asian countries) has made little headway.

61

'Asian values' are based on double standards. For example, those claiming to believe in filial piety are in fact accused of being worried by young people not supporting their parents; those claiming the West is materialistic are accused of being engaged in enriching themselves.

The 'anti-Asian values' case, it is clear for all to see, has had a massive extra boost with the collapse of the economies of a number of Southeast Asian and East Asian countries. The specific point that is urged, of course, is that the 'Asia crisis' discredits the 'Asian values' position. (In fact, logically, it might be argued that the crisis only proves that 'Asian values' could not have been a sufficient explanation of the 'miracle'). The rhetoric of many of the opponents of 'Asian values', however, would suggest that it is not merely the economic potency of 'Asian values' that is considered to be discredited at this stage. In many public pronouncements the anti 'Asian values' spokespeople now write with a triumphalism that seems to announce that Mahathir and others could not have been more wrong about the rise of Asia and the fall of the West. In the words of one commentator, the economic crisis has sounded 'the death knell for the Asia-values debate'. It shows that 'in the long run you need openness and accountability to have sustainable economic growth' [12]0 . 'Asian values', claims the Editor-in-Chief of the US News and World Report , 'have become Asian liabilities' [13]1 . According to the widely-read Francis Fukuyama, 'What the current crisis will end up doing is to puncture the idea of Asian exceptionalism. The laws of economics have not been suspended in Asia' [14]2 . Writing in The Independent , Diane Coyle concludes that the crisis will 'finally lay to rest this unquestioning worship of Asian values ... capitalism in its free-wheeling, Anglo-Saxon variety is coming into its own' [15]3 . The New Statesman is explicit in going beyond economics. In May of this year, it observes that 'yesterday, we admired Asian values and almost despised our own. Today, deregulated America is in fashion' [16]4 . Sebastian Mallaby, writing recently in The National Interest , sees with perhaps unrivalled clarity the imperialist possibilities in the Asian economic crisis. The 'Rise of the East' could not be further from his mind. America, he observes, 'enjoys world dominance in diplomacy, warfare, industry, science, media and the sheer sense of how to live'. He admits that some 'conservative' Americans ponder 'whether Asian values might teach Americans something'. In fact, however, America now has the opportunity, especially through the IMF, to 'spread its worldview at almost no cost to itself', though, Mallaby adds with due humility, 'a hegemon should proceed cautiously by all means' [17]5 . The case for 'Asian values' does indeed seem to be in retreat, although, revealingly, some of the critics at least now admit that these values were once significant, albeit in the most damaging way. In the rest of this paper, however, I wish to go further and draw attention to a number of reasons why we should be careful not to underestimate the continuing significance of the 'Asian values' discourse, or at least some elements of that discourse.

Why 'Asian Values' cannot be dismissed

First, it would be unwise to overlook the ideological resourcefulness of the leading 'Asian values' advocates. Lee Kuan Yew, for instance, argues with some bluntness, and some justification, that 'Asian values are not the cause of the meltdown because nepotism, favouritism and corruption have been endemic and present since the 'Asian Economic Miracle' which - with its high growth rates - began nearly twenty years ago' [18]6 . Furthermore, if Asian values were to blame, he asks, 'how come Hong Kong and Singapore have not been affected?'. Turning to the Philippines, he notes that that country has been 'praised for democracy and freedom of the press', but 'have they done better in this crisis?' [19]7 . Lee is not rigid in his defence of Asian values. He admits the advantage of certain institutions inherited from the West - particularly institutions related to the civil service and open competition - and also criticises 'cronyism and corruption'. The latter, he says, is not the result of Confucianism, as some would claim, but of the 'debasement of Confucian values'. In the final outcome, he insists, 'Asian values will help these countries recover', just as they helped economic growth in the past [20]8 . Prime Minister Mahathir's response to his liberal critics possesses no hint of compromise. He actually seems to see the Asian crisis as an opportunity to reassert Asian values and Asian unity, warning that it was Western capitalism not Asian values that brought about the crisis in the first place [21]9 . He even raises the spectre of a 'Western conspiracy' to 'shake up the economies of the Asian Miracle nations' [22]0 , and speaks of 'racists' who are 'not happy to see us prosper' [23]1 and who are 'descendants of the old white-supremacist colonialists'. Mahathir then proceeds to identify some solutions to the crisis that entail employing the

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traditional 'Asian' style of intervention by government and, furthermore, he suggests such a solution should involve greater collaboration between Asian countries [24]2 . There is real defiance in Mahathir's statements, and at present this is inevitably encouraged by the seriousness of the domestic, political and economic challenges which he faces. He reminds the world that, despite Western attacks on Asian values and Asian governments, 'East Asian countries had all grown at a rate well above that of the developed countries of the West. And their growth can be shown to have benefited people as a whole'. He also repeats his long-time praise for what he calls the 'Asian system of lifetime employment and low wages' [25]3 . He confirms that he 'still believes Asian values will pull us through' [26]4 . After all, Mahathir says, 'hard work, discipline, a strong commitment to the community, thrift and moderation are Asian values which have in fact contributed to the emergence of the Asian Tigers and Dragons' [27]5 . As for Western or Anglo-Saxon triumphalism, Mahathir could not be more dismissive. Those who brought down Asia's economies he accuses of being 'totally materialistic, inconsiderate of the problems of others'. He asks whether 'Asian values are bad as compared to Western values'. 'History', he argues in an angry and almost foolishly one-sided account of the twentieth century, 'provides the answer. The two world wars and the dropping of the atomic bombs on Asian cities, the holocaust, the killings of Bosnians - these are not perpetrated by Asians' [28]6 . It would be easy to portray Mahathir as an isolated and perhaps desperate figure, especially in the context of the international and local criticism he faces over his treatment of former Deputy Premier, Anwar Ibrahim. But Mahathir's (and Lee's) response to the economic crisis cannot be portrayed as unique in the Asian region. Although systematic critiques of the type carried out by Mahathir are rare, from time to time we see clear evidence from elsewhere of support for the type of viewpoints he enunciates. To take some random examples, Kim Yong Hwan, the former Chairman of the Joint Presidential Committee on economic policies in South Korea, has criticised the International Monetary Fund program for his country, arguing that reform should be more suited to the 'Asian constitution', and that closer cooperation should be fostered among Asian nations [29]7 . Thailand, in 1997, it should be noted, proposed a single Asian currency [30]8 . Sura Sanittanant, Adviser to the Thai Deputy Prime Minister, was reported in January 1998 to be engaged (in the spirit of Mahathir) in promoting the idea of Asians bonding together to overcome the financial crisis. He is reported as having pointed to special meetings with Malaysia, Singapore and the Philippines, and having argued that an Asian trading block similar to Mahathir's East Asian Economic Caucus (EAEC) is currently gaining international support [31]9. Whether or not Mahathir-type solutions to the Asian economic crisis make economic sense, the need to estimate how far they have attracted support around the region is clearly a matter of genuine significance even for economists [32]. As already suggested, the view that the 'Asian values' support base is narrow has long been a feature of the condemnation of those values, and this feature has probably been promoted by the media's tendency to concentrate on Mahathir and Lee. But if we look back over the last few years the support base, in fact, has long been far from narrow. Indeed in a general sense the 'Asian values' viewpoint has a longer history than many observers admit. With respect to the breadth of support, the evidence is largely anecdotal. Thus, the Seoul Bureau Chief for the Far Eastern Economic Review commented in 1994 on the 'suspicion arising from Malaysia to Korea to Japan, that the Western media's agenda of human rights and environmental protection......are means to keep Asia from developing further economically' [33]0 . Chinese spokespeople, not surprisingly, have made so-called 'Confucian' values central to an 'Asian' cultural unity, arguing that in East Asia the 'Confucian' commitment to 'hard work, thrift, filial, piety and national pride' has encouraged rapid economic growth [34]1 . In Japan, Thailand and the Philippines there has also been a growing interest in 'Asian values' and an upsurge of enthusiasm for the whole concept of 'Asia' [35]2 . The expression 'the Asianisation of Asia' has been used by the Japanese intellectual, Yoichi Funabashi, to describe the well-documented development of regional interest in the 'Asia' ideal and 'Asian values' [36]3 . One tactic used to demonstrate the narrowness of support for the Mahathir-Lee position has been to cite what are perceived to be the liberal views of their most influential, Asian opponents. It is true, for instance, that Anwar Ibrahim, the beleaguered former Deputy Prime Minister of Malaysia, has pleased the international proponents of liberal values with the declaration that 'it is altogether shameful, if ingenious, to cite Asian values as an excuse for autocratic practises and denial of basic rights and civil liberties' [37]4. It is also true that the Philippines leadership has not tended to provide enthusiastic public support specifically for the 'Asian values' case. But one cannot move from these observations to the conclusion that Anwar and the current Philippines leader are advocates of universal liberal values. They seem to be

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influenced by the spirit, at least, of the 'Asian values' argument, in the sense of being determined to assert the local against the global, the national or regional perspective against the Western one. In September 1997, for instance, Anwar was using Mahathir-type language when he spoke of the need for ASEAN members to 'draw up collective strategies to fight those vicious speculators' who had been destroying Asian economies [38]5 . It is also important to remember Anwar's long and impressive record as an Islamic intellectual and activist. Once the leader of the reformist Muslim youth movement, ABIM (Angkatan Belia Islam Malaysia), that called for a return in Malaysian society to true Islamic values, he was recruited to the UMNO (United Malays National Organisation) government in 1982. As a junior Minister visiting Australia in 1983, Anwar complained about the 'wholesale imitation of Western values and practices' in Malaysia and explained that 'Islam provides an ideological alternative to the dominant paradigm' [39]6 . In recent years and months he has continued to speak of a Western/Asian dichotomy, noting in particular that, unlike the Westerner, 'the Asian man is a persona religiosus . Faith and religious practice....permeates the life of the community' [40]7 . Anwar goes on to argue that 'Asians firmly rooted in their cultural and spiritual traditions do posses the intellectual capacity to perceive the cultural unity of Asia, its meta-culture' [41]8 . Another Asian leader - one who has been supportive of Anwar since his arrest in October 1998, and who has therefore been associated with a liberal perspective - also deserves more careful attention from Western commentators. Joseph Estrada, President of the Philippines, possesses an approach to government which involves not only support for democratic procedures but also the aim of re-establishing the national leadership's communication with the non-elite, Filipino community and, indeed, re-establishing its roots in the populist heritage of the country. He is remarkable for having been the first Philippines' President to give his inaugural address in the Tagalog language rather than English and, at the time of celebration of the centenary of the Philippines' revolution, the nineteenth-century revolutionary hero he appears most to admire is not the largely Spanish-speaking Jose Rizal, who is usually given most official adoration, but the Tagalog-speaking populist figure, Bonifacio, who was remarkable for addressing the masses in the language and idiom of their own folk literature [42]9 . In this sense, in this seemingly most Western democratic of Asian states, President Estrada seems to be engaging in the 'reAsianisation' of The Philippines.

Why culture still matters

Looking a little more closely at Anwar and Estrada is important because it reminds us of the danger of relying too heavily on an overly simplistic opposition between 'Asian values' and liberal democracy. As stated above, some of the criticisms of the 'Asian values' position carry the further implication that the stress on 'Asian culture' is found only at the elite, leadership level. The wider population in Malaysia, Singapore and the other countries of Asia, it seems to be suggested, hold values that are not radically different from those usually associated with liberal democracy. Condemnation of the analytical concept of 'culture' as a factor in social investigations, which has achieved academic potency in recent years [43]0 , adds to the credentials of this argument. Despite these question marks over the practice of cultural analysis, however, a number of recent studies underline the danger of dismissing entirely the role of different cultural perspectives in analysing processes of change and interaction within the Asian region. Some of these studies involve surveys of opinion. Take for example, David Hitchcock's 1994 survey of the value preferences of officials, business people, scholars and professionals from the United States and eight East Asian societies. This survey is not supportive of the 'Asian values' case in that it confirms that genuine differences in value perspective exist in the region, and in certain areas it also points to clear agreement over values between United States and Asian interviewees. Nevertheless, Hitchcock reports that a strong majority of Asian respondents favoured an 'orderly society' and 'harmony', which were values given little attention by Americans. The reverse result occurred, it should be added, in respect of the value of 'personal freedom' [44]1 . In a further survey analysis, Joel Kahn has reported on the one hundred and twenty interviews with 'middle class Malays' he carried out from 1992-1994. He 'found that almost all respondents articulated some form of the Asian values argument'. They stressed concerns about the 'threat posed to Malay culture by modernisation' and criticised the West for its 'lack of family values, individual and selfishness, a lack of cultural values, permissiveness, secularisation and uncaringness.' [45]2 Apart from conducting and assessing surveys that focus on values in the abstract, there has been a certain amount of other, recent culture analysis that is concerned with everyday economic and social behaviour in the Asian region and that does take into account current conceptual critiques of the category 'culture'. This new analysis does not seek to establish

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evidence of a homogeneous body of 'Asian values' and is impatient with the idea of civilisational blocs (as formulated by the political scientist, Samuel Huntington). It does not expect 'culture' to be unchanging, or uncontested, even within a single society, and takes note of the obvious and multiple ways in which Western, global influences continue to transform behaviour, style and taste in the region. Moreover, this new analysis accepts that 'culture' is a contingent thing, dependant upon political and other imperatives. At the same time, however, it does insist that 'culture' has a potential independent significance in explaining human behaviour. Although it accepts that the phrase 'Asian values' possesses real inadequacies as a descriptive expression, it also argues that we cannot proceed from this point to the further assumption that there is no need to examine the substantial range of cultural perspectives and values which influence behaviour within and between Asian societies. One recent exercise in such 'open' cultural analysis, concerned primarily with specific features of commercial activity in the Asian region, has drawn attention to the particular characteristics of 'Chinese capitalism', insisting that it is 'first and foremost a network capitalism. It is built from the ground up, not on the basis of legal contracts and the supervisory authority of the state but on particularistic relationships of trust'. In turning to a discussion of Malay and Javanese organisational perspectives, the analysis observes that quite unlike the Chinese, they tend to be 'reluctant to submit to patriarchal authority, at least when it comes to economic affairs', and thus their families seem 'more individualistic than their Chinese counterparts'. Another contrast within the Asian region in the area of business culture, remarked upon in this study, is the way successful Chinese businesses are 'marked not by the creation of an everlarger and vertically integrated corporation as in South Korea or Japan, but by a mother company's establishment of independent firms loosely tethered in a multi-firm business group' [46]3 . In a second, Australia-based investigation dealing with Asian values and conceptual perspectives in a broad range of practical relationships, Malay business people, for instance, are described as perceiving the Chinese habit of charging interest on loans to family members as repugnant to their sense of family obligation. Industrial relations is presented in this study as a further area in which there exist considerable contrasts in perspective in the Asian region, with South Korea, in particular, being especially confrontationist by other Asian standards. In business ethics, to take another dimension of business culture, Thais and Indonesians are identified as holding a very different view of gifts of money in the carrying out of a commercial transaction, compared, for instance, with Chinese or Malaysians. In a series of other areas including the analysis of such phenomena as perceptions of 'national security', the role of government and the meaning of democracy - this Australian study draws attention both to the range of perspectives operating within the Asian region and to the way in which virtually any value or perspective is subject to far-reaching processes of change [47]4 . The type of observations made in both these studies - which focus on day-to-day practical experience rather than the broad influence of, and contest between, cultural traditions reinforce strongly the image of cultural complexity in the Asian region. The presence of such cultural complexity, it should be stressed, contradicts the viewpoints of both the 'Asian values' proponents and their critics. The examination of economic and social interaction provides little evidence of a coherent value system across Asia, but it also makes absolutely clear that it is impossible to discount the importance in the society and economy of the role of contrasting value systems. Mahathir and Lee Kuan Yew, of course, are well aware of the political usefulness of 'Asian values', but the type of recent cultural analysis I describe, like the conclusions offered by opinion surveys and questionnaires, demonstrates that these Southeast Asian leaders do not by any means construct their ideological packages in a cultural vacuum.

Ideological work
The rhetorical style of both these men, it is true, has helped to focus attention on the instrumentalist, didactic aspect of the 'Asian values' point of view in Asian societies. What has received too little notice [48]5 is the degree of genuine intellectual and ideological endeavour involved - the real ideological work of probing the often contested, constantly changing, value systems of the Asian countries in order to formulate 'national' and 'Asian' political visions appropriate to the post-colonial era. Anwar Ibrahim has been someone who does not disguise the confusion and uncertainty that exists about ideological objectives. He has explained, for instance, that 'Asia has no settled identity as yet. It is in the process of coming into being. The long and intense process of self-definition and self-understanding is just beginning' [49]6 . Anwar, it is clear, has been well aware of the developing contest between Islamic, East Asian, Western and many other types of perspectives and values in Malaysia and other parts of Asia. He has, in fact, promoted ambitious 'dialogues' on Asian civilizations that aim to assist Asian 'self discovery' by investigating 'the myriad Asian traditions in order to understand and know each other better' [50]7 .

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The much-published Singapore diplomat, Kishore Mahbubani, is also eloquent in his portrayal of the intellectual endeavour and contest that has been a part of the 'Asian values' debate. He observes that 'it is vital for Western minds to understand that the efforts by Asians to rediscover Asian values are not only or even primarily a search for political values. They involve, for instance, a desire to reconnect with their historical past after this connection had been ruptured both by colonial rule and the subsequent domination of the globe by a Western Weltanschauung '. What Asian thinkers have been undertaking, Mahbubani insists, is 'an effort to define their own personal, social and national identities that enhances their sense of self-esteem in a world in which their immediate ancestors had subconsciously accepted the fact that they were lesser beings in the Western universe' [51]8 . The 'Asian values' project, from this perspective, is part of a far-reaching intellectual and ideological enterprise taking place in the Asian region. Moreover, the cultural 'rediscovering' spoken of by Mahbubani and Anwar Ibrahim is by no means a phenomenon only of the 1990's. Historians are well aware of the way in which intellectuals in nineteenth and early twentiethcentury Japan, China, Southeast Asia and India responded to the challenges of modernity not only by adopting the novel European doctrines, but also by interrogating their own indigenous, cultural resources. It was in the opening years of this century also that, especially in India and Japan, influential thinkers began to experiment with the concept of an 'Asian' cultural unity. In the nineteen thirties and forties such experimentation, for very different reasons in each decade, was intense [52]9 . An historical account of the ideological work in the area of both national and regional 'Asian' value systems would reach back into these developments in the nineteenth century, providing an intellectual genealogy for the current protagonists in the 'Asian values' debate. Such an historical account would also explore the different practical ways in which, year by year and week by week, an 'Asia' consciousness has been promoted in the region. The operations of the Japanese Co-prosperity Sphere, the Indian 'Asian Relations' conferences of the nineteen forties, SEATO, ASA, ASEAN, ASEM, APEC and so forth, all play a role in shaping the way those living in the Asian region view their national and regional identities. In recent times a number of these organisations, including ASEAN, have been criticised for their failure to achieve executive solutions to major crises in the region. In these circumstances it is easy to overlook the apparently mundane way in which their routine processes can promote a sense of community in a growing sphere of bureaucratic and other participating groups. For example, in the first week of September, the ASEAN Sub-Committee of Health and Nutrition met in Brunei; the ASEAN Experts Working Group in WTO matters met in Bangkok; the coordinating meeting for the ASEAN Network for Rapid Exchange of Strong Earthquake Data met in Jakarta; the ASEAN Work Group on Air Navigation met in Singapore and the 'ASEAN Select Committee' met in Kuala Lumpur. The meetings continued with the same frequency right through September and October, so that merely reading the relentless listing of such events helps to promote a sense of community that reaches beyond the individual nation states involved. Aspects of popular culture, of course, also contribute to the development of community identity, though probably unintentionally so on the part of the participants themselves. The increasing numbers of people in Asian countries outside Japan who have been converts to Japanese New Religions, or the Taiwanese and Hong Kong soap opera producers who are selling their products in Malaysia and Singapore are, in their way, drawing attention to issues concerning the creation of an 'Asian' consciousness [53]0 . The Japanese concert video cassettes so popular in Thailand, or the Japanese clothing that sells so well in Singapore and South Korea also play a part, as does the TV show 'Asia Bagus' which is conducted in Japanese, English, and Malay, and is compered by a Malay man and a Japanese woman [54]1 . The tension between the 'Asia' ideal and a range of national, religious or ethnic aspirations is nearly always present. In an important essay on 'the empowerment of Asia', for instance, Alexander Woodside has cited the planning for an Asia-Pacific information highway as an example of a specific attempt to promote 'Asianness'. Although the plans speak of an 'Asia' ideal, explains Woodside, the fact that it would be based on the Chinese language, focuses on China, Taiwan, Hong Kong and Singapore, and invokes the 'sunshine of Confucian culture' suggests it would do more to promote 'Chineseness' than 'Asianness' [55]2 . 'Asian' or 'Confucian', whichever prevails, there is an implicit resistance to the idea of a solely Western-driven globalisation. The superhighway, the ASEAN meetings, the criss-crossing of religious influences, television programs and clothing styles within the Asian community, are all in their different ways helping to develop alternatives to the powerful European and American

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discourses that have been seeking hegemony in Asia since the beginning of high-colonialism in the nineteenth-century. In resisting the West, however, it is perhaps for once that the intellectual deserves pride of place.

Listening to the Intellectuals

The attempt to discover alternatives to the Western narratives and Western conceptual architecture is an academic enterprise, as much as any other, and one of its consequences is to breathe new life into previously moribund academic disciplines [56]3 . In the words of Partha Chatterjee, the influential Indian historian, 'against the arrogant, intolerant, self-aggrandising national subject of modernity, critics in recent years have been trying to resurrect the virtues of the fragmentary, the local, and the subjugated...' [57]4 . When Anwar Ibrahim speaks of Islam as providing 'an ideological alternative to the dominant paradigm', he is engaged in precisely this type of intellectual subversion on behalf of Islam. He and other Islamic intellectuals are well aware of the complex, deep-running influences of colonialism in Malay society. In social, legal and economic matters they look for ways to introduce an Islamic perspective, including an Islamic epistemology. To quote an English philosopher who engaged in close debate with Muslim intellectuals at the high point of Islamic revivalism in Malaysia during the 1970's and 1980's, Islamic critics of the 'dominant paradigm' have been 'reasserting the place of Revelation as an epistemologically legitimate mode of knowledge' [58]5 . Even in the Philippines, after centuries of Spanish and, later, American rule, there has been an academic endeavour to resist the Western global, especially in the form of an attempt to reestablish dialogue with a pre-colonial past. The written evidence of the 'Malayan' heritage of the Filipinos is being closely examined with the warning that 'our so-called national culture is still emerging'. Certain old values, or key concepts located in the different Filipino languages are identified - concepts concerned with 'spirit', 'internality', 'conscience', 'life drive', 'personhood' and so forth - and then consideration given to the way in which these critical categories might be incorporated in interpretations of the past and, by implication, future projections for Filipino society [59]6 . This type of intellectual inquiry is integral to the ideological project announced so eloquently by Anwar Ibrahim, Mahbubani and others. Also, although it often leads to conclusions that differ sharply from the specific package of values and aspirations insisted on by Mahathir and Lee, the determination to counter the pervasive colonial heritage is very much in the spirit of the 'Asian values' ideology. Linking together these different types of activists - ranging from the defiant, didactic Mahathir to the determined academic researcher who seeks to strip back the layers of Western hegemony - helps to underline the fact that the 'Asian values' phenomenon cannot be seen in crude terms merely as a tool manipulated by a political or capitalist regime, or an artificial screen behind which to hide willfully illiberal government. The 'Asian values' debate of the 1990's, it must be emphasised, is an episode in the long-term, post-colonial cultural project. There is no question about the colonial heritage being the target of this ideological attack, but there is genuine confusion and debate about precisely what type of regional, national, religious and other visions will be developed to replace, or at least modify, the powerful globalising forces that in many cases trace their origins to that European heritage. The 'dialogue' with Asian civilisations, the attempt to 'reconnect with (an) historical past' (to recall the aspiration of Mahbubani) is a genuine intellectual inquiry and the possible outcomes, as he himself admits, are not yet fully known to the participants.

Conclusions
During the years of the 'Asian miracle', of course, there was a sense of exhilaration about the 'Asian values' campaign. Mahbubani wrote of the 'explosion of confidence' that gave East Asians the sense that 'they can do anything as well as, if not better than other cultures' [60]7 . These were indeed heady days for those public intellectuals who, working to some extent in sympathy with the 'Asian values' political leaderships, committed themselves to the task of asserting intellectual as well as political agency on behalf of their region. Today Mahbubani admits a 'genuine hint of regret at having spoken so confidently of the rise of Asia' [61]8 . But I think he is right to see the 'Asian values' debate of the 1990's as only one episode in a much longer process of international, cultural reconfiguration. Mahbubani is quite mistaken, however, in my view, when he expects that this 1990's debate will be seen in retrospect as the 'initial round' in the long campaign. It actually strengthens his case to situate the debate in its proper place, as occurring well into the long-term process of defending the 'local' in the Asian region against what is seen to be the Western global. To understand the 'Asian values' program within the context of this larger historical realignment, that began in the nineteenth-century, draws attention to the well established forces that will

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help maintain the momentum for change, even at a time of economic reversal. While the economic crisis certainly challenges the 'Asian values' proponents and their intellectual allies, the way it is interpreted in the region has to be influenced by the firmlyestablished 'Asian' campaign of resistance against the liberal, Western ideological program. As we have seen, Mahathir is by no means the only influential figure in the Asian region who resists IMF interpretations and solutions. For many intellectuals and other opinion leaders in Asia the economic downturn has been perceived as a reason for condemning liberal as much, or more than, Asian values. Bitter about the revealed economic vulnerability of their countries and their region, prominent many members of Asian societies feel a renewed distrust of 'The West' and are hardened in their resolve to develop post-colonial visions and meanings for the people of Asia. The main game in the next months and years will be economic, and the forces of globalisation continue to be formidable in bad as well as good times, as anyone visiting Kuala Lumpur, Shanghai, Taipei or Manila notices immediately. The power of the United States is such that it is not surprising to hear talk of the triumph of 'Anglo-Saxon market values' and the likelihood of a consolidated American 'hegemon'. In speculating about future directions in Asia, however, it may be dangerous to trivialise 'Asian values'. The real, everyday presence of different and contrasting value systems to be encountered as one crosses the Asian region will continue to influence practical developments in all sorts of fields, including the economic. We need to be aware also that the category 'Asian', however problematic it might be in cultural terms, is attracting a growing emotional investment. Consciousness of 'Asian', as well as 'Confucian', 'Islamic' or 'Malay' identity - just like the promotion of nationalism within the specific nation states of the region - works to reinforce resistance to the claims of a purportedly universal, global community. For many people, ' the global' has a Western flavour. And the fact that a global economy seems to have failed Asian states makes it possible that the long ideological campaign that seeks to undermine the colonial heritage, and that has underpinned the 'Asian values' proclamations, may gain rather than lose momentum in the next decades. I should like to thank Alison Broinowski, Rey Ileto and Deborah Johnson for their assistance and advice in writing this essay. [1] Diane Coyle, 'Why Asian Capitalism is faltering', Canberra Times 26 November 1997. [2] Sebastion Mallaby, 'In Asia's Mirror', The National Interest, Summer 1998, 21 [3] Noordin Sopiee in Malaysia; Tommy Koh, George Yeo, Kishore Mahbubani in Singapore. Other proponents of 'Asian values' outside this group will be discussed later in this paper. [4] Anthony Milner and Deborah Johnson, 'The Idea of Asia', in John Ingleson (ed) ]Regionalism, Subregionalism and APEC , (Clayton: Monash Asia Institute 1997) 1-19 [5] See, for instance, Noordin Sopiee, 'The Development of an East Asian Consciousness', in G. Sheridan (ed), Living with Dragons (St Leonards: Allen & Unwin, 1995), 180-193. A listing of 'Asian values' by Hong Kong Chief Executive, Tung Chee-hua, is contained in J. Mirsky, 'Asian values, a fabulous notion', New Statesman , 3 April 1998, 26. Also, 'The Asian Way', Asiaweek, 2 March 1994, 22-25. [6] See, for instance, WM. Theodore de Bary, Asian Values and Human Rights Cambridge: Harvard University press, 1998, 159. [7] Anthony Milner and Mary Quilty, Australia in Asia: Communities of Thought (Melbourne: Oxford University Press, 1996), 10-17; Chen Maiping, 'What are 'Asian Values'', NIAS nytt , 1997, 2: 5-6. [8] See especially, Earl H. Kinmonth, The Self Made Man in Meiji Japanese thought from Samurai to Salary Men , (Berkeley: University of California 1981); Anthony Milner, The Invention of Politics in Colonial Malaya (Cambridge: Cambridge University Press, 1995), 125. [9] S. Lawson, 'Cultural Relationism and Democracy: Political Myths about 'Asia' and the 'West', in R. Robison (ed), Pathways to Asia (Sydney: Allen and Unwin, 1995). [10] Kanishka Jayasuriya, 'Asian Values as Reactionary Modernization', NIAS nytt 1997, 23. See also R. Robison, 'The Politics of 'Asian Values'', Pacific Review (3), 309-327. [11] See China News , 13 May 1996, for a statement by President Lee Teng-hui. [12] 'Democracy in Asia', the CQ Researcher, 24 July 1998, p629.

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[13] Mortimer B. Zuckerman, 'Japan Inc. unravels', US News and World Report 17 August 1998, 77. [14] Francis Fukuyama, 'Asian Values and the Asian Crisis', Commentary, February 1998, 27. [15] Diane Coyle, 'Why Asia Capitalism is faltering', The Independent , reprinted in The Canberra Times 26 November 1997. [16] 'It's best to be unfashionable', New Statesman , 22 May 1998, 4. [17] Sebastian Mallaby, 'In Asia's Mirror', The National Interest , Summer 1998, 21. For See also David Roche, 'And now for the Political Premium', The Asian Wall Street Journal , 1 October 1997; Christopher Lingle, 'Eternal Contradictions stifle the tigers', The Australian , 27 October 1997; Robert Elegant, 'A region lost in unreality', The Australian , 10 November 1997. [18] Bangkok Post , 15 March 1998. [19] Time, 16 March 1998. [20] 'Asia will rise again', Forbes, 23 March 1998, 114; also, 'Asian values did not cause meltdown', Npq Spring 1998, 32-34. [21] 'No gain in making others poor', Utusan Express , 2 October 1997; 'Mahathir blames West', The Canberra Times , 20 June 1998; Mahathir Mohamed, 'Management of an economy in crisis', 6th Prime Ministerial Lecture of the Harvard Club, 5 October 1998. [22] Adlina Wahab, 'Fight Back', The Star 31 August 1997. [23] 'Malaysia plans economic war as ringgit plummets', The Australian , 5 September 1997. [24] 'Mahathir airs Asian financial unity', The Australian , 17 October 1997; 'Mahathir in call for unity to overcome speculations', The Australian , 18 August 1997; 'Financial woes due to greed', Utusan Express , 10 November 1997. [25] 'Management of an economy in Crisis', 5 October 1998. [26] 'Region making most of Devaluation - generated opportunities', Utusan Express , 14 March 1998. [27] 'No gain in making others poor', Utusan Express , 2 October 1997. [28] Ibid. [29] Oon Yeoh, 'Asian Leaders dissect what hit the region', The Nikkei Weekly , 8 June 1998. [30] 'Mahathir blames Manipulative West', The Australian , 22 September 1997. [31] Paul M. Sherer, 'Thailand Rethinks notions of Globalization', Asian Wall Street Journal , 18 January 1998. For evidence of a spread of support for an Asian Monetary Fund, see R Higgott 'The Asian Economic Crisis: A study in the politics of resentment' New Political Economy, 3,3 1998, 340-346. Higgott also predicts that despite the battering of the 'Asian Way' in the international media 'Asia's greater permissiveness towards state intervention may not yet have run its course' (351) [32] I thank Ross Garnaut for making this point to me. [33] 'Asian values and the role of the media in society', Freedom Forum and the Foreign Correspondents Club in Hong Kong, 1-3 December 1994. [34] Quoted in Alan Dupont, 'Is there an 'Asian Way'', Survival, Summer 1996 page 15. [35] Ibid 14-15. [36] Yoichi Funabashi, 'The Asianisation of Asia', Foreign Affairs , 72, 5 1993. [37] Anwar Ibrahim, The Asian Renaissance (Singapore: Times Book International, 1996), 28. [38] Ian Stewart, 'Malaysia plans economic war as ringgit plummets', The Australian , 5 September 1997. [39] Anwar Ibrahim, 'Development and changing political ideas', 50th Anniversary Conference of the Australian Institute of International Affairs, 26-28 August 1983.

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[40] Anwar Ibrahim, 'Asia's Moral Imperative', Asian Wall Street Journal , 13 May 1996. [41] Anwar Ibrahim, 'The Next 50 Years', Far Eastern Economic Review , 50th Anniversary Issue, 187. [42] Reynaldo C. Ileto, Filipinos and their Revolution (Quezon City: Atenao de Manila University Press, 1998), 20, 243-251. [43] See, for instance, the discussion in Joel S. Kahn, 'Culture, Demise or Resurrection?', Critique of Anthropology , 9,2, 1989, 5-29. [44] David Hitchcock, Asian Values and the United States: How much Conflict? (Washington: Centre to Strategic and International Studies 1994). See also Donald K. Emmerson, 'Singapore and the 'Asian Values' Debate'', Journal of Democracy , 6,4, October 1995, 101-102; and the Far Eastern Economic Review , survey of 1996, cited in Diane K. Mauzy, 'The human rights and 'Asian values' debate in Southeast Asia: Trying to clarify the key issues', The Pacific Review , 10, 2, 1997, 216-217. [45] Joel S. Kahn, 'Malaysian Modern or Anti-anti Asian values', Thesis Eleven , 50 August 1997, 29-30. [46] Robert W. Hefner (ed), Market Cultures (Singapore: Institute of Southeast Asian Studies, 1998). [47] Anthony Milner and Mary Quilty (eds), Asia in Australia: Comparing Cultures , (Melbourne: Oxford University Press, 1997). [48] For example, see Alan Dupont, 'Is there an 'Asian Way'?', Survival, Summer 1996, 22, for a stress on 'strategies', 'instrument', 'manipulation', 'image building' and 'inculcating'. [49] Anwar Ibrahim, 'The Next 50 Years', Far Eastern Economic Review , 50th Anniversary Issue, 186. [50] See his opening chapter, 'Islam-Confucianism Dialogue and the quest for a New Asia', in Osman Bakar (ed), Islam and Confucianism. A Civilizational Dialogue (Kuala Lumpur: Centre for Civilizational Dialogue, University of Malaya, 1997), 11-17. See also Osman Bakar, Islam and Civilizational Dialogue. The Quest for a Truly Universial Civilization (Kuala Lumpur: University of Malaya Press, 1997). [51] Kishore Mahbubani, 'Can Asians think?', The National Interest , 52, Summer 1998, p35. [52] Anthony Milner and Deborah Johnson, 'The Idea of Asia', in John Ingleson (ed), Regionalism, Subregionalism and APEC (Clayton: Monash Asia Institute, 1997), 1-19. See also Tessa Morris-Suzuki, 'Invisible Countries: Japan and the Asian Dream', Asian Studies Review , 22, 1, March 1998, 5-22; and Pekka Korhonen, 'Monopolizing Asia: the politics of Metaphor', The Pacific Review , 10, 3, 1997, 347-365. [53] Sharon Siddique, 'The Asian Diaspora', Pemikir, July/September 1993, p64. [54] Milner and Quilty, Comparing Cultures , 202. [55] Alexander Woodside, 'The Empowerment of Asia and the Weakness of Global Theory', in The Empowerment of Asia: Reshaping Global Society (Vancouver: University of British Columbia, 1996), 22-23. For further discussion of the 'Asianization of Asia', see Yoichi Funabashi, Asia Pacific Fusion. Japan's role in APEC (Washington DC: Institute for International Economics, 1995), chapter 1; and Mazakazu Yamazaki, 'Asia, a Civilization in the Making', Foreign Affairs , 75, 4 July/August 1996, 106-118. For a discussion of how Huntington's 'Clash of Civilizations' thesis may actually promote cultural and political assertiveness in Asia, see Wang Gungwu, 'A Machiavelli for Our Times', The National Interest , 46, Winter 1996/1997. [56] For some preliminary comments on this challenge, see A.C. Milner and T. Morris-Suzuki, 'The Challenge of Asia' in Knowing Ourselves and others. The Humanities in Australia into the 21st Century , Volume 3 (Canberra; Australian Research Council, 1998), 113-128. [57] Partha Chatterjee, The Nation and its Fragments. Colonial and Post-colonial Histories (Princeton: Princeton University Press, 1993), xi. [58] John Bousfield, 'Islamic philosophy in Southeast Asia', in M.B. Hooker (ed), Islam in Southeast Asia (London: Brill, 1988), 128. [59] Prospero R. Covar, 'Unburdening Philippine Society of colonialism', in N.M.R. Santillan and M.B.P. Conde (eds), Kasaysayan at Kamalayan (Quezon City; Limbagang Pangkusaysayan,

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1998). See also Ferdinand C. Llanes, 'New National Perspective in Filipino historiography' in Putu Davies (ed), Constructing a National Past (B.S. Begawan: Universiti Brunei Darussalam, 1996), 314-327; Z.A. Salazar The Malayan Connection (Quezon: Palimbagan ng Lahi, 1998). For discussion of the global/local interaction in Thailand over recent years, See Craig J. Reynolds, 'Globalization and Cultural Nationalism in Modern Thailand', in Joel S. Kahn (ed), Southeast Asian Identities (Singapore: Institute of Southeast Asian Studies, 1998), 115-145; Craig J. Reynolds, 'Self-cultivation and self-determination in Post-coloinial Southeast Asia', in Craig J. Reynolds and Ruth McVey, Southeast Asian Studies Reorientations (Ithaca: Cornell Unviersity Southeast Asia Progam, 1998), 7-36. [60] Kishore Mahbubani, 'The Pacific Way', Foreign Affairs , January/February 1995, 103. [61] Kishore Mahbubani, Can Asian Think ? (Singapore: Times, 1998), p12.

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Investment over which the investor has some operative control. That excludes mainly Western Europe, the US and Canada, Japan and Australia. 3 Gross domestic product = value of production within the borders of a country, roughly equal to national income.
2