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Note Ps 139 Essay

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What is east Asia and why study east Asia?
China, Japan, South Korea…
Asian tigers: South Korea, Singapore, Taiwan, Hongkong
They are the fastest growing regions in the world.

China’s the largest trading country in the world since 2011. 1.what is political economy?
Political culture: South Korean people’s more obedient to the government so it has strong economy growth in 1960,70. Political economist try to answer:
a. Would democratization help trading, economy growth?
2.what is international political economy?
Focuses on international relationship between countries that trade. Economic international relationship between countries: interest rate, trading, etc..

Economic liberal vs. political liberal
Economic liberal: generally politically conservative, more market oriented, let the market act itself, opposite from political liberal.

Adam smith
-Invisible hand
naturally operate to the best interest society, the strongest will win the competition, market will operate on its own. -Self-interest
individuals are self-interest, individuals will make rational choices, that’s best for themselves, serves their own needs and desires. -Competition
-Results??
Social harmony, supply and demand will be balance, market equilibrium. Nobody decides the wealth and resources to be allocated. It will bring the society to larger wealth. No monopoly so there will always be better product come out. -Division of labor and wealth accumulation

* liberalism
* David Ricardo
* -free-trade
* -the corn-laws: prohibit import food item at 1800, it negatively effects capitalists class. Result: less selection, higher price, increase wage for the labor because of the higher food price. * Allow importMore selectionLower priceLower labor priceBetter economy * enclosure movement

*
* John Stuart Mill
* -Market does create unequal income distribution and some people are living in extreme poverty * -State has to provide limited services in selective areas. Such as education or social welfare services. * -Still laissez-faire is the guiding principle. Let the market decide what is best. *

* John Maynard Keynes
* -Great Depression
* -What is the big problem in Adam Smith’s perfect world of the invisible hand? * -unlike Adam Smith’s argument. Good are not met with human wants, but met with demand. E.g. I desire 10 pair of shoes doesn’t mean I demand 10, I might only demand and buy 1. So sometime the state should come in and boost the economy. Keynes was a liberalism so he thought after the state boost the market and avoid the poverty trap it should step back again and let the market decide what is the best. * -Poverty Trap

* -Every boom is constantly threatened with collapse because business does not always invest. *
* Neo-Liberalism
* -Limited-state role of state in economy
* -State intervention will bring distortion of the market * -Promote growth instead of stability
* -Policies that are promoted:
* -Lower tax rates -- business can invest without paying too much tax * -Deregulate banking system
* -foreign investment can come with no intervention
* -Privatize state-owned enterprises
* -Market-friendly economy policy
* -Example: The Washington Consensus
*
* Criticism of Neo-liberalism
* -Increased inequality
* -Creation of sweatshops in underdeveloped countries
* -Exporting pollutant? – Ship breakers at Alang, India * -Financial Crisis in 2002 and 2007: neo-liberalism failure *
*
* Mercantilism
* -Example:
* -Japanese development strategy in the 60s and the 70s, and ‘unfair practice.’ * -Imperialism or colonialism
*
* -Response to criticism of Mercantilism
* -it is a natural and rational choice for a sovereign state to seek its best interests. * -to sustain benefits from globalization or to protect themselves from negative effects from globalization. *

Mercantilism
-economic policy is simply a tool to protect and promote national political and economic interests -realism and zero-sum game: you loss is my gain, and your gain is my loss. -promote export and restrict imports, creating trade surpluses Neo-mercantilist economic policy: use of various economic policies to protect their societies and certain groups from evermore increasing interdependence and globalization -non-tariff barriers: WTO members: no tariff more than 5%.

Protectionist policy:
-import license
-import limit
-protection of domestic producers
-Example: US Sugar industry
-US sugar import quotathe price of sugar in the US is twice of that of world market -Yearly consumer losses amount to 8 dollars per person or 30 dollars per household -Implicit subsidy from import quota is approximately 20000 dollars per employee, there’re 38000 employee in sugar industry.

Structuralism
-Definition: Structuralism believes that the current capitalist society is unfair and exploitative so some kind of correction is necessary to redistribute wealth more fairly to larger population. -Karl Marx

-laborers do not own capital, the means of production
-labors are now WAGE-WORKERS.

1.Why certain structure of system or relations in the world exists? -the North-the South(core vs. periphery)
-the West-the East
-ties: investment, aid, trade, security relations, etc.
2.Can we change such relations, structure, and ties that bind continues into such structure of system? 3.The biggest question is whether the market system is fair
4.the state – government has to provide necessary public services and redistribute wealth to the people. -so what is the difference between structuralism and the Keynesian Economics? * Keynesian economy: state intervention is temporary. Structuralism is opposite. *

* Leftist Economic Policy
* 1.state-planning is somewhat okay
* 2.distribution of wealth must be carried out by government or state * 3.welfare of the people must not be left alone. State has to come in and correct the market or redistribution systems. * 4.sustainable development instead of market-driven development, which creates inequality and widens income gap. Only the wealthy becomes wealthier. * Example: Chavez and the return of the left

* Criticism: Heavy state involvement in economy and market can distort the market system too much. *
*

0. Review:
Liberalism-lassie-faire approach to the market and economic policy. A. Adam smith’s invisible hand principle
B. the less government intervention, the better it is
Mercantilism
A. economic policy is a tool to enhance national interests
B. trading with other countries is okay as long as it brings trade surplus Structuralism
A. it asks whether the capitalist society is fair.
B. income distribution should be handled by the government.

Structuralism has evolved into two main development strategies A. big-push state-led development
-the Marxist structuralist model stressed state-led industrialization -china in the 1950s and the 60s, Cuba, North Korea, and Vietnam -build self-sufficiency
-isolate from the capitalist society
B. import substitution industrialization

1. Import Substitutions Industrialization
definition: efforts to industrialize by substituting imported consumer, manufactured good with domestically produced goods with protectionism against import competition. Why countries adopted ISI policies?

-development economics
-agricultural pessimism
falling terms of trade against agriculture product
technological advancement
easy to enter market, it doesn’t require much capital, with 20 years Vietnam becomes the 3rd largest coffee exporter in the world, so coffee price wont go up -trade pessimism
less developed country
-protection of infant industry against global competition

What kind of policies were implemented?
letter of credit: government ensure whatever you borrow from the banks, the government will pay back nationalized bank/low interest rate for industrial sectors
tariffs or non-tariffs barriers
fixed exchange rate
price control: by paying to the domestic industry, consumer would buy domestic product in a lower price which is cheaper than the import products. high tax on agricultural sector
control on labor activism

Results:

The liberal perspective growth with trade
-less developed countries should be integrated into the global market economy a. global integration is the key to economic growth
b. for capital-scarce society, FDI(Foreign Direct investment), and MNC(Multi National Corporations) are important

2. Export Oriented Industrialization
definition: you grow by promoting trade and becomes less protectionist than import-substitution industrialization when you promote export, free trade is more likely.
-protectionism is relatively inconsistent with export-encouraging policy because exporters general need free and easier access to international markets for imports of raw materials and intermediate and capital goods. a. row materials: oil, gas, natural minerals(coal, gold, diamond, iron, zinc, etc.) b. intermediate and capital goods: goods that you need to set up your industry(e.g. Desk, machines, air-conditioners, steel)

Anne Krueger - Why are export-oriented industrialization policies better than ISI? A. paradox of ISI
B. Foreign exchange earnings increase more rapidly, and markets become diversified -why is it good to diversify your market?
C. size of domestic market
-because domestic market is small, ISI encourages short production runs and high average variable costs -for export-oriented – efficient size of economy of plants and maintain long production runs D. infant industry and dynamic factors you can still protect infant industry by taxing non-infant industry while promoting trade E. lack of competition together with the small size of market and limitation of expansion of industriesslower growthmonopoly rents

indivisibility
What kind of policies were implemented?
Undervaluation of local currency
Free Trade (?)
subsidies for export sectors

Results:

3. East Asian Miracle
fast economic growth of east Asia post WWII

Structural Change from Agricultural Society to Industrial Service Sector dominated Society Graph: Agriculture (value added as % GDP) 10-year Average

Graph: Industry (value added as % GDP) 10-year Average

Graph: Services (value added as % GDP) 10-year Average

4. Why East Asian Miracle?
Neoclassical Economics
-They got the basics right
-right incentives for saving and investment – stable banking system and -----high interest rates -export-oriented trade strategy
-investment in human capital
-competitive market for factors of production(CAPITAL, LABOR, LAND) Development Economics: the state is focusing on economic growth -Developmental State
-State had to be strong
dictatorship(South Korea)

1. Japanese Growth Model
Professor Ellis Krauss
--vertical and personal networks of company and industrial organization --influential and powerful, yet small government role in economy Japanese company structure and key-features
--life-time employment and seniority systems
--“fixed costs” of labor for Japanese companies.
--makes companies to be growth-oriented, emphasizing market share in long-term profit instead of short term profits(because they will never get fired) --fierce market competition within sector because they are looking for long term growth in that sector firm oriented, not individual-goal-oriented.

Cooperate Association among companies in the same sector
In order to gain access to and influence central government
--example: the japan iron and steel federation or the japan automobile manufacturers association they cooperate in research and development efforts
--the government ministry, MITI, will aid development and research efforts and each company will divide the research task as a collaborative efforts.

Japanese government is centralized and its bureaucracy is small but the most elite and influential. The most elite and influential- graduates from the top universities join the government MITI: the ministry of international trade and industry

--responsible for trade and microeconomic(industrial) policy MOF: the ministry of finance
--responsible for macroeconomic policy(fiscal policy, monetary policy) Role of the MITI
--trade policy, resources, manufacturing, and commercial technology, commerce and small business --one small bureaucracy deals with everything related to trade and industrial development, so coordination problem is minimal --armed with the best, most elite, most talented people in the country Role of the MITI

--proactive role
--help important business sectors become more competitive and grow rather than be retroactive and respond to industrial failure and distribute subsidies to support industries like the US government. --MITI industrial policies discriminate among industries, technologies, and firms. --helps sectors adjust to ever-changing market and nature of production --helps some industries grow faster while help others decline in a more orderly fashion --domestic industries can respond to international competition and change in market situation more quickly and adopt to new conditions --the MITI sometimes help small businesses to merge to form a bigger company and thus increase global competitiveness --they suggest slow phase away of declining industry

* e.g. steel and ship-making industry after the 1960s heyday.

2. Post-war period and economic boom
a. security relations with the US and US occupation
Economic bureaucracy strengthened
B. The 1950s and early 1960s, the MITI policy focused on restructuring of economy post-war. --favored heavy-industries: steel, chemicals, and shipbuilding c. heavy state-intervention and protection of infant heavy industries --foreign exchange rate manipulation and import tariffs

d. how to solve scarcity of capital?
--the MITI select a winner in industry or technology, then banks are more than willing to give long-term loan. During the 1960s, emphasis on development of new technologies rather

The MITI and Development
After the late 1960s liberalization due to international agreements. The MITI switched its focus to technology --example of semi-conductor chips.
--IBM-Japan in 1960
--crea...

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