Dragons in Distress: Asia's Miracle Economies in Crisis. - book reviews

Dragons in Distress: Asia's Miracle Economies in Crisis

Dragons in Distress: Asia's Miracle Economies in Crisis by Waldon Bello and Stephanie Rosenfeld. San Francisco: The Institute for Food and Development Policy, 1990. 426 pp. $12.95.

During a recent stay in South Korea I observed a steady flow of visiting government officials from Argentina, Vietnam, Nigeria, Poland, and Hungary. All were there to develop trade contacts and learn first hand about South Korea's "miracle" economy. Several of them shared with me their hope that by following the model of development pioneered by South Korea, Taiwan, and Singapore, their own countries could successfully join the club of Newly Industrialized Countries (NICs). I only wish I had been able to give them copies of Dragons in Distress.

As Waldon Bello and Stephanie Rosenfeld convincingly argue:

such is the cunning of history that at the very moment that the economists and technocrats have enshrined the NIC model as the new orthodoxy, that very strategy is running out of steam in Taiwan, Singapore, and South Korea....The troublesome truth is that the external conditions that made the NIC's export successes possible are fast disappearing, while the long-suppressed costs of high-speed growth are catching up with these economies. (p.2)

In this much-needed critique of the Asian NIC development model, Bello and Rosenfeld lay bare the causes as well as the negative consequences of South Korea, Taiwan, and Singapore's high-speed export-driven growth. They also demonstrate why, without a fundamental change in economic strategy, all three countries face a dismal future. While Dragons in Distress looks at each country separately (giving greatest attention to South Korea and least to Singapore), the strength of the book is the common framework that underlies the studies of the individual countries.

Command Capitalism

According to conventional wisdom, all three countries have achieved record growth because of the efficiency of free markets. As Dragons in Distress makes clear, however, the conventional wisdom has got it wrong: active state intervention rather than the market deserves the credit. Bellow and Rosenfeld's discussion of the different strategies pursued by the three states offers valuable material for those who want to learn more about the efficiency and techniques of social regulation of economic activity.

For example, governments in both Korea and Taiwan used their ownership of all major commercial banks and a comprehensive system of trade controls and industrial licensing to shape investment and production decisions. Korean firms that did not meet export targets could expect to be denied future loans as well as government subsidized electricity. Both governments also used public enterprise to dominate strategic sectors of the economy. Some analysts of the Taiwanese economy claim that about half of the country's assets are either directly owned by the government or under the control of the ruling Kuomintang (KMT or Chinese Nationalist Party).

There are, of course, differences among the states in how they used their power to shape industrialization. The South Korean government encouraged the development of huge family-owned conglomerates called chaebol and instituted one of the world's most restrictive foreign investment codes to protect them. The KMT, by comparison, was determined to keep the native Taiwanese business class weak. By denying them credit and opportunities to produce for the protected domestic market, the government left them no option but to export largely as subcontractors for foreign multinational corporations.

Singapore chose yet another route to high-speed export growth. While the state played the major role in shaping the country's industrialization process, foreign multinational capital was selected to dominate production. By the mid-1980s, foreign companies accounted for 70 percent of gross output in manufacturing, over 50 percent of employment and 82 percent of direct exports.

The experience of the Asian NICs offers strong support for those who argue that an activist state is essential for economic development. However, the economic success of their specific model of high-speed, export-oriented growth also depended heavily on favorable external conditions - what Bello and Rosenfeld describe as the U.S. connection and the Japanese factor.

The Asian NICs are not the only countries to try to use state power to direct private capital. They are unusual, however, in that the United States did not undermine their efforts. Governments in South Korea and Taiwan, for example, nationalized private commercial banks with no serious objection from the United States. In fact, in the name of anti-communism, the United States extended significant financial support to both for economic restructuring. Moreover, until recently, all three countries enjoyed relatively free access to U.S. markets.

Japan also played a key role in the development of all three countries. Japanese colonial rule influenced their state and industrial structures. Japanese foreign investment and technology supported their industrialization. And Japanese marketing firms carried their exports.

Internal Costs of the Model

Most economists writing about the NIC experience do so to explain the causes of growth. But as Bello and Rosenfeld show, the consequences also deserve serious attention. Farmers, the environment, workers, and democracy have all been sacrificed in the pursuit of rapid export-oriented growth.

South Korean and Taiwanese farmers have paid a heavy price for their countries' export success. Using their control over credit, fertilizer, and storage facilities, both governments drove farmers off the land and into industrial employment by forcing down grain prices. As the authors note in speaking about Taiwan, "Price policy was, in fact, used not simply to feed the labor force for export-oriented industries but to create it." (p. 187) Squeezed by a lack of access to capital for modernization and massive imports of U.S. agricultural products, those who continue to farm have been driven deep into debt.

A single minded concentration on exporting has also left the environment devastated. The South Korean countryside suffers from deforestation and flooding as well as poisoned groundwater, rice fields, and rice crops. Conditions in Taiwan are even worse: 20 percent of farm land is polluted by industrial waste water and 30 percent of rice grown is contaminated with heavy metals. Air pollution and acid rain have also become major health hazards for those who live in urban areas.

Bello and Rosenfeld worry even more about the consequences of Taiwan and South Korea's heavy commitment to nuclear power. Storage problems for waste and poor quality-control in components and construction suggest a major disaster in

the making.

Workers also have paid a high price for export success. All three countries aggressively pursued policies designed to ensure corporations the cheapest and most productive workers possible, including state directed violence against labor activists, state controlled labor organizations, and repressive labor laws.

Bello and Rosenfeld present a grim picture of working conditions. Korean workers, for example, were forced to work the world's longest work week under conditions that produced the world's highest rate of industrial accidents. While both men and women suffered, working conditions were far worse for women.

As in South Korea, young women from rural areas form the backbone of Taiwan's labor intensive export industries. It is their low wages and long hours which make Taiwan's manufacturers internationally competitive. Workers in both Taiwan and South Korea now also confront the effects of growing income inequality, conspicuous consumption, and a serious housing shortage.

Singapore's rulers also use women workers to cheapen the cost of producing labor-intensive exports such as electronics and textiles. But, in contrast to the other two countries. Singapore also makes heavy use of highly exploited and controlled foreign workers to attract export-oriented multinational corporations. These workers - from Indonesia, Thailand, Sri Lanka, India, Bangladesh, and the Philippines - make up approximately 12.5 percent of the overall work force, but about 25 percent of all manufacturing workers.

The lack of democracy, apparently necessary to ensure total commitment to rapid export growth, may well be the model's greatest cost. From 1961 to 1987 South Korea was ruled almost continually by military dictatorship. Taiwan has suffered under the longest state of martial law in modern history, from 1949 to 1987. But in many ways, democratic rights have been most restricted in Singapore, where the government is engaged in massive social control and social engineering.

Singapore, Taiwan, and South Korea have indeed grown rapidly. But they have done so by following a model which places exports over domestic needs, growth over the environment, profits over worker and farmer rights, and thus, of necessity, the interests of the few above the democratic rights of the many.

The Onset of Crisis

Bellow and Rosenfeld's rejection of the NIC strategy as a model for others to follow is based on more than recognition of the serious internal costs noted above. As they point out, the economic strategy itself appears to have run out of steam: changes in both external and internal conditions and a resulting structural squeeze pose a serious challenge to future export growth.

The U.S. government has begun to limit NIC exports while simultaneously demanding that the NICs open their markets to U.S. goods and services. Perhaps even more threatening to Taiwan and South Korea, the U.S. government has successfully forced them to revalue their currencies upward relative to the dollar.

Higher wages brought about by growth and militant labor organizing also has impacted NIC exports negatively. With labor costs significantly above those in other third world countries, the three NICs are finding it difficult to remain competitive in a number of traditional product lines like shoes, textiles, and apparel.

Faced with closing markets and rising costs, NIC planners in all three countries have responded by attempting to move their economies away from dependence on labor-intensive manufacturing processes to more skilled, higher-value-added production. Through a series of industrial case studies, some of the strongest and most valuable parts of the book, the authors show why South Korea, Taiwan, and Singapore can be expected to fail in this restructuring.

Singapore, for example, recently tried to mandate an increase in wages in order to force foreign capital to upgrade its production activities. Foreign multinationals were not, however, cooperative: they stopped investing and began to move production to other low wage countries. The Singapore economy fell into serious recession in 1985-1986, and only recovered when the government reversed its policies, declaring a wage freeze and lower corporate taxes.

Taiwanese planners face similar frustrations in trying to redirect economic activity to higher-value, more technologically advanced production. In case studies of textiles and garments, autos, and electronics, the authors convincingly argue that Taiwan's many small exporters are incapable of carrying out the research and development or financing the investment necessary to compete in new product lines. Rather than trying, growing numbers of firms are relocating to other countries.

The South Korean economy, built around large national conglomerates, has the best chance of upgrading production. But as case studies of textiles, auto, and electronics make clear, past success was based on low-cost labor, efficient manufacturing engineering, and licensed technology, not the establishment of an independent research and development infrastructure. Higher-cost labor and a reluctance on the part of Japanese firms to share advanced technologies make it unlikely that Korean firms will be able to successfully compete in new product markets. Korean firms also appear pessimistic. They appear to have adopted a profit-maximizing strategy based on moving production to other countries and engaging in massive land speculation rather than investment in research and development.

Perhaps the greatest threat to the NIC model, however, is the growing domestic challenge to existing political and economic institutions. Dragons in Distress presents an exciting picture of farmers, workers, and environmentalists engaged in ever more effective struggle to defend as well as extend their rights. In 1987, for example, popular protests forces the government in Taiwan to end martial law and the government in South Korea to allow direct elections for president.

But as the authors point out, late democratization has not proven to be stabilizing. While the leadership in Taiwan and South Korea are seeking minor reforms to improve the legitimacy of existing political and economic institutions, opposition movements are demanding changes that cannot be contained easily within existing structures.

Only Singapore has so far proven successful in forestalling opposition. But the government's overpowering social control may not, in the long run, prove any more successful in creating a stable domestic climate. Seeing little possibility for change, people appear to be leaving for other countries, especially the skilled workers the government so desires.

Without fundamental change, the Asian NICs appear headed for serious difficulties. Current policies seem likely to intensify these problems. To keep their export-driven economies growing, governments have been forced to further open up agricultural markets to U.S. imports, drive down wages, and disregard the environment in order to attract new industries. The widely celebrated NIC model appears to have run up against self-generated limits.

For the NICs to avoid falling back into the dismal state of most third world countries, they must radically change their approach to growth. Without offering a detailed blueprint, Bello and Rosenfeld outline an alternative vision for development based on democracy, income equality, rural revitalization, environmental sensitivity, and regionally based and limited trade. If political movements in the NICs develop sufficiently to translate such principles into a development strategy, not only would the NICs truly become a model for other countries to follow, they would themselves become a powerful force for change in the world. There is indeed a lot to learn from the experiences of the Asian NICs, both positive and negative. But as Dragons in Distress makes clear, the lessons are far different from those the conventional wisdom would have us learn.

Martin Hart-Landsberg teaches economics at Lewis and Clark College, Portland, Oregon.

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