Introductory Overview: Rethinking the East Asian Development Model

Abstract

Introductory Overview Most of the economies in East and Southeast Asia have witnessed rapid economic growth over the last three decades. The economic progress witnessed in these economies, and their steep industrial development trajectories, have been both impressive and unparalleled. Indeed, the region has been at the forefront of the transformation of the so-called Third World countries to emerging markets, as evidenced by fairly avid investor appetite for exposure to East Asian business assets. At least, that was the case until the mid-1990s, the Asian financial crisis of 1997, and the regional economic downturn that immediately followed. It is said that pride comes before a fall, and perhaps East Asia had become a little too blase about its seemingly effortless ability to consistently register impressive gross domestic product (GDP) growth rates, almost year after year. In this regard, the Asian financial crisis was a wake-up call for the region. Some of the policy assumptions that the East Asian economies had started to take for granted are now being reevaluated, including the sorts of economic policies and implementation strategies that had apparently served so well in recent decades. Quite understandably, in the years immediately after the regional financial crisis of 1997-98, attention was primarily focused on getting East Asia's economies back on their feet. But as time has passed, and the recovery process shows (mixed) signs of nearing completion, there is an increasing awareness that the region's economies must now see how they can advance. The fallout from the Asian financial crisis has not been the only trigger for such an economic reevaluation process in East Asia. Other related changes in the external environment have also prompted policy-makers, academics, and business people to reconsider some past assumptions. The ongoing rise of China as an economic and industrial behemoth has caused some East Asian countries to reconsider their industrial development policies, as China begins to absorb an increasingly large proportion of East Asia's aggregate foreign direct investment (FDI) inflows. Should China's economic growth continue, the vast scale and broad diversity of China's continental-sized economy will oblige other East Asian countries to wholly rethink their relative positions in the food chain. Or, as one commentator cogently put it: what will the rest of East Asia do for a living now that virtually everything can be made more cheaply in China ?1 Able to competitively produce a range of goods that span the entire value chain, China poses an immense competitive challenge for many East Asian countries, at least in the short to medium term. Morgan Stanley recently posited that: China's rise as the world's factory ... fundamentally threatens Southeast Asia's ability to sustain foreign direct investment and manufacturing activity. In our view, [the Malaysian, Thai, Indonesian and Philippine] economies must either dismantle or reinvent their pro-investment, export, mass manufacturing model, as the East Asian Economic Model (EAEM) platform will no longer be viable for Southeast Asia.2 In another commentary the same author went on to assert that unless a different development strategy to the East Asian Development Model (EADM) is found and executed ... Southeast Asia is destined to face a dramatic economic decline over the next ten years.3 International business activities are also mutating, with the adoption of increasingly more complex and varied international production networks becoming common practice for multinational enterprises. A large proportion of global trade is now conducted between enterprises operating within the same transnational company. Foreign investment patterns are also changing, with merger and acquisition (M&A) activity now the principal driver of global FDI flows. The pace of plain vanilla greenfield foreign investment activity - which Southeast Asia is most familiar with - has become much less vigorous, as global overcapacity in a range of products has meant that companies are extremely reluctant to bring new capacity on-stream in the current economic environment. …