bout de papier, Vol. 6, No. 2 (1988) — Summer 1988 // Été 1988, pp. 15–17
The present rules for international trade were not established by Pacific nations after World War II. But the countries of that region now play increasingly important roles in the world’s trade and investment. In recent years, the world’s financial markets have been deregulated; the significance of tariffs has been reduced, and exchange rate policies and capital flows have become the determining influences on the world economy. Fiscal and monetary policies adopted by individual countries have a direct impact on domestic economies, but the results of those policies come to grips with each other internationally in terms of exchange rates and capital flows.
Following the energy crisis years of the 1970’s, the Japanese export drive was more successful and led to more advances in industrial strength than even they had foreseen. The recent revaluation of the Yen, and a growing recognition by Japan of its obligations to the international community, have resulted in a strong economic expansion throughout East and Southeast Asia. While later than that of North America, it is once again producing rates of growth higher than those of the West and its pace is still accelerating.
Japan has become the world’s largest creditor nation. Its banking network now stretches further internationally than that of the U.S. and the entire financial world watches closely each month to see how much capital moves out of Japan and, in particular, how much flows to support new U.S. government debt. Through direct investment, innovative research and continuing investment to cut costs at home, Japan will continue to remain competitive in global markets.
South Korea, in the years after 1964, worked its own economic miracle, building on high domestic savings and an export led economy. In the years up to 1985, however, its growing debt load had become a source of concern for international lenders. Since 1985, however, having built up its infrastructure, and having raised the average educational level of its population to one of the highest in the world, South Korea has been able to capitalize on the effects of the currency realignments with a greater surge of exports and an increase in foreign investment approvals which rose to $1 billion in 1987, with Japan accounting for about half of the total.
Their net foreign debt, around $37 billion in 1985, has dropped to about $12 billion, and official estimates see them becoming a net creditor nation by 1991. South Korea should then be able to open up its financial markets more fully and rid itself of some of its remaining anomalies, which include some rather high interest rates. The opportunity for a major increase in domestic expansion will have been created and South Korea should become a more balanced industrialized country.
Taiwan, too, has had a well-developed expansion, based primarily on exports and a high level of savings. However, while the Republic of Korea developed infrastructure and capitalized on its existing talent by encouraging large companies to become larger, Taiwan’s approach has been more flexible and diversified. The revalued Yen has opened more opportunities for exports to Japan and to North America, and a huge surplus of foreign reserves has been built up.
Singapore, Malaysia and Indonesia are also on the move again. With its established role as an entrepot, its flexible oil refineries and its skilled workforce, Singapore has also benefitted from the Japanese move to foreign sourcing. But some knowledgeable people wonder when capacity constraints will prove to be a problem.
Malaysia and Indonesia both remain heavily dependent upon commodity markets and both live to varying degrees under the uneasy tensions of rising Islamic fundamentalism. Indonesia despite all of its efforts is still overly dependent on oil exports.
In ASEAN, Thailand has benefitted most from the changes emerging throughout the region since 1985. Always better placed than the others, with a strong agricultural base and no colonial past, not only has its indigenous energy supply been improving, but the industrial abilities and low wage rates have been discovered by the Japanese. Funds are streaming in for direct investment and their export levels are rising.
China has been growing at annual rates over 9% per annum, despite some hiccups along the way. Its continuing progress will help to sustain a high level of growth among its neighbours. Hong Kong has been prospering not only because it is a gateway into China, which in practical terms will soon include an eight lane highway into Canton, but also because it has a large and skilled workforce and the world’s largest container port. It is perhaps the most open economy in today’s world, and since 1985 has been a significant increase in manufactured exports and re-exports.
As we move towards 1997, Canada will undoubtedly see a continuing flow of immigrants from Hong Kong, for which we should be most grateful. There is still room for optimism about the post-1997 Hong Kong. However, as China creates additional economic zones around more coastal cities and improves its domestic port facilities, it seems reasonable to assume that the present advantages open to Hong Kong will gradually be shared with the mainland and increasingly with Taiwan.
These are the realities as I perceive them today. But what are some of the fundamentals which have brought Pacific Nations to this improving position.
Any talk about realities leaves considerable scope for misunderstanding and misinterpretation. Realities, as we perceive them, may be very different to the realities as perceived by others and this most importantly when it involves the perception of realities by people who have emerged from different historical, geographic and cultural backgrounds. This may go far towards explaining why progress in the field of international economic cooperation sometimes seems to be unconscionably slow.
Too often serious international discussions degenerate into rhetorical arguments, which increasingly are conducted through the media rather than in calmer atmospheres where all possible implications can be well understood.
Words such as protectionism and targetting are convenient but imprecise. Their use seldom improves our understanding of a problem.
In no arena do we have more difficulty than in agriculture.
The problems for exporting countries have become more acute because countries such as India and China have improved their ability to produce domestically. But it is Japan and other more advanced countries which attract criticism because of the high trade surpluses they run with their other products. We must ask however, if it is realistic to assume that the future will bring a significant improvement for the exporters. In nearly every country, including our own, there has been a long and continuing history of the influence of agriculture on the political decision makers. While it began when agriculture was a dominant occupation, it still remains true in countries where the farming population has dropped steadily to levels below 5% of the total and it remains strong in Japan and other Pacific countries.
So long as agricultural voices in the world’s major economies outweigh the voices of the consumers, who bear the financial burden of tariffs and quotas, it is unrealistic to assume that major policy changes will occur. It would be unwise, for example, to assume that if domestically stimulated growth in Western Pacific countries results in a reduction of their trade surpluses the arguments for protected agriculture will disappear.
Technology transfer is another important fundamental, particularly when technology is combined with large pools of labour.
There is no shortage of companies and countries willing to supply technology. The successful transfer of technology depends more on the ability of an acquiring company to receive and use the technology than upon the price paid for it or who the supplier may be. Where educational levels rise, which is certainly happening in the Pacific, the ability to receive, develop and use world-class technology grows. When this is combined with the large pools of labour and the strong central leadership in the Pacific, it is easy to see why the industrial base will continue to grow and strengthen there.
The shift of textile production from high wage to low wage countries has had high visibility and more than its share of international discussion and disagreement. The shift in heavier industry has been more profound.
One excellent example of this has been the start up and expansion, on the East coast of South Korea, of Pohang Iron & Steel Co., better known as Posco. Posco, in 1973, began production as an integrated steel complex dependent upon imported raw materials.
16 bout de papier Vol. recently as 1985 it had an employment cost per hour of $3.00 for its 14,000 regular workers. The additional 9,000 “contracting out” workers received about 15% less. Equipment and technology were provided by an international mix of suppliers. Between 1973 and 1985 three expansions raised its capacity from I million tons to 9 million tons of crude steel and the total investment cost was then about one quarter of the 1985 average cost of new capacity.
The company made profits in every year and is self-financing about two thirds of the $1.8 billion required to construct a second plant on the South Coast of Korea which, when in full production will raise Posco’s total capacity to 11.8 million tons and make it the 6th largest producer of steel in the Western world. Equipment for a further expansion is already on order.
Posco was inspired by the South Korean government, which contributed 33% of the capital and encouraged the Korea Development Bank and other banks to provide the balance. The government also provided infrastructure. But the company began paying dividends in 1984, is run as a private enterprise and is on the list to issue common shares to the public as the South Korean economy continues its liberalization programme. Posco was growing steadily, when the industrialised world, including Japan, was cutting back and restructuring its steel industry.
When the GATT was conceived, swift changes of this kind were not envisaged. Since the breakdown of the Bretton Woods Agreement, the GATT’s relevance has been diminishing. The forceful economic leadership of Command Economies such as South Korea and Consensus Economies, such as Japan, while adhering to GATT principles, has built their economies in ways which were not foreseen forty years ago. A new world of quotas, “voluntary export restrictions” and competitive exchange rates has emerged. Tackling the Japanese market among others. If Ken Ohmae of McKinsey is correct, in 1984, while exports to Japan by American-based businesses were only $25.6 billion, the domestic production and sales by companies in Japan owned by U.S.-controlled companies was $49 billion and those same units were shipping product back to the United States, thus helping to create what could be called a “self-inflicted trade deficit”. Companies from all major industrialized countries are now involved in this activity around the world, but no useful statistics about this pattern of international development have emerged. Consumers everywhere have benefitted, but its importance in the major flows of capital throughout the world is so large that the pluses and minuses involved need to be understood better by all of us.
This phenomenon has been present in the world for many decades, but the magnitude of the flows and the speed with which they can occur are new. The fact that it is not recorded or examined in a satisfactory manner, combined with the ability of Consensus and Command Economies to adjust more rapidly than the industrialized West, with its strong trade unions, aging plant and self-satisfaction, has not made international discussion on trade and investment easy and the continuing differences among major countries in their macro-economic perceptions and policies are not reassuring
The country with the world’s largest economy has become the world’s largest debtor. No prescription for a reversal is apparent. It seems inevitable that if current trends continue, Asia certainly, and perhaps Japan alone, will soon outstrip the United States in total GNP and not solely in GNP per capita. Sophisticated economists still suggest that the U.S. will either have a recession or grow at 1, 2, or 3% per annum, but growth in the Western Pacific continues at 5-9% per annum and Japan, now growing again in the 4-5% range, reached an annual level of 7% in the final quarter of 1987. Nobody in Asia will lose from a continuation of these trends. But it will be a cause for consternation in the West.
The human dimensions of such a changing world must be considered. High growth rates normally create more jobs and it is not unreasonable for the people of the less developed world to have a desire for better living standards. It is also not unreasonable for the people of the developed world to be fearful of a trend which could result in higher unemployment. But, with the open nature of the GATT, and the level of international aid which has prevailed, beginning with the generosity of the Marshall Plan after World
War II, we have been watching a slow but steady globalization of wage rates with all that that entails. Japanese wages, in dollar terms, now exceed those of the United States. Korean wages rose 112% between 1973 and 1985 and continue to grow. The same trend is found in other Pacific countries. current rising levels of job creation in Canada and the U.S. and the ever-increasing levels of national income in North America may suggest that no problem exists, but that is where the smoke and mirrors of exchange rates enter the picture. We tend to took at our domestic position solely in dollar terms.
There has been much discussion of the probable “wealth effect” on the spending patterns of consumers, following the stock market crash last October. However, there has been little if any discussion about the “wealth effect” on North Americans of the spectacular decline in the value of the U.S. and the Canadian dollars – although anyone visiting either Japan or Europe in recent months has had it driven home to them very quickly. As the international value of a currency reduces it goes without saying that the true value of the wages being earned in that currency also reduce and nowhere more than in a nation with a high level of international trade.
With the international value of wages in Pacific countries rising we must ask ourselves how we in North America can do something to maintain our own place in the sun.
Since 1985, the value of the U.S. dollar, has moved well below purchasing power parity, and while this will ultimately bring greater relief in the trade figures it is unlikely to be enough, to change the underlying trend. The only possible answer must lie in the pursuit, domestically, and support internationally, of economic policies which will contain inflation at home and continue to expand world trade. Emerging economies will continue to enjoy a high proportion of the growth in better living standards. A high level of world growth is needed to permit the developed world to maintain its standards. Unless we can find the correct solutions we must ask ourselves why we have supported so many aid programs over the years, for their success was destined to push us inexorably towards a broader distribution of the world’s wealth.
These perceptions focus on the broader issues for Canadians.
Looked at in isolation, Canada is an economic nonsense, made even more nonsensical by our inter-provincial trade restrictions. Spread out as we are, geographically, with a population which needs to double and ultimately go further, there is currently no way to capitalize on our resources and skills by looking inward. We must export to maintain and raise our living standards — and we should not be surprised that other countries have a similar problem.
With many other countries now able to supply many of the main products we have to offer at equally competitive prices, our trade surplus is no longer assured on a continuing basis and our current account is in real danger. We need more internal stimulus and the removal of obstacles to foreign investment, but if we do not keep our eyes on the whole world, and particularly the Western Pacific, we will be drawn so firmly into the United States relationship that we will lose what little economic independence we still have.
Within Canada there seem to be several trains of thought. Those who seek freer trade with the U.S. are certainly right, but only if they have a broader agenda with purposeful and explicit plans to follow up in the wider world and particularly in the Pacific. To succeed only with the U.S. will be to fail for Canada.
Those who emphasize the multilateral trade arena are certainly right, but only if they recognize the need for Canada to have continental conditions which will permit the achievement of world class competitiveness. Otherwise they would project us into a world of the past in which our competitive advantages would continue to deteriorate.
And those who worry about the human dimensions of structural change are also right, but only if they can produce solutions which will keep us competitive on a world scale, for that is what is essential if we are to protect and improve employment potential and permit a rising standard of living in Canada.
Clearly, our cousins to the South have a similar position, but they have a more balanced industrial structure and the world’s largest domestic market.
They are certainly over-consuming, and so are we, but they have been encouraged to do so by the sales and marketing of our trading partners. They are also carrying a disproportionate share of the Western world’s defence burden. The huge indebtedness they now have will not be intolerable if they can grow steadily enough to service the debt, expand their exports and accept a higher level of asset ownership by foreigners. But as those who are lending them money begin to shift from buying Treasury Bonds into acquiring real estate and industrial property, their sensitivities are already beginning to show and there are already legislative proposals to restrict investment from abroad. A re-apportioning of the Western world’s defence burden is required.
But the impact on others of a reduction in U.S. consumption must also be considered. It was a Japanese who first compared the western world’s economy to a flock of geese in flight, with the U.S. up front followed by Japan, then the Asian NIC’s and finally the other emerging countries all learning from those immediately ahead of them. He did not tell us what would happen if the leader was to slow down, but I can well imagine that it would have had some direct impact on the following members of the flock.
The Pacific Nations also have problems. Some are political, but in economic affairs South Korea, Taiwan, and the countries of ASEAN still see a need for caution as they increase the exposure of their domestic economies to external forces. China, which is growing fastest of all, will undoubtedly continue to have intermittent pauses as their open door policies sometimes run to excess. But taken as a whole we should assume that East and South East Asia will continue to move forward.
The greatest danger for all lies in the possibility of a failure of the international community to reinforce GATT and expand its role. The fall out from such a failure could well be a western world split into three economic regions. The European Community and Africa have been drawing closer for many years. The protectionists of North America could isolate the entire western hemisphere, and the Western Pacific, a term used increasingly in Asia and Oceania, could form a third bloc. As Japan adjusts from trade dependence on the U.S.A. and becomes the world’s largest economy, as China’s awakening continues, and as the NIC’s and Near NIC’s continue to grow, there may be increasing tendencies towards self-reliance in that region.
The world as a whole, and in particular the Western World, would be the loser, but truth remains stranger than fiction and stranger things have happened.
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Originally published in bout de papier, Vol. 6, No. 2 (1988) — Summer 1988 // Été 1988, pp. 15–17. Read the rest of this issue →
