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East Asian Economy

The economy of East Asia is one of the most successful regional economies of the world.

It is home of some of the world's largest and most prosperous economies: China, Japan,

Hong Kong, Taiwan and South Korea.

Major positive factors have ranged from favorable political-legal environments for industry and commerce, through abundant natural resources of various kinds, to plentiful supplies of relatively low-cost, skilled and adaptable labor.

In modern societies, a high level of structural differentiation, functional specialization, and autonomy of the economic system from government is a major contributor to industrial-commercial growth and prosperity. Currently in the Far East, trading systems are relatively open; and zero or low duties on imports of consumer and capital goods etc. have considerably helped stimulate cost-efficiency and change.Free and flexible labor and other markets are other important factors making for high levels of business-economic performance.

East Asian populations have demonstrated rapid learning capabilities – skills in utilizing new technologies and scientific discoveries – and putting them to good use in production. Work ethics in general tend to be highly positive.

Finally, there are relatively large and fast-growing markets for consumer goods and services of all kinds

DefinitionVarious organizations and disciplines define "East Asia" in different ways. The United Nations classifies South-east Asia (the 10 ASEAN members plus East Timor) as a distinct region, but other sources add North-east and South-east Asia together, which is the practice in this article.

The economic entities of East Asia are thus Japan; the Democratic People's Republic of (North) Korea; the Republic of (South) Korea; the People's Republic of China and its special administrative regions Hong Kong and Macau; Republic of China (Taiwan); and the 10 ASEAN members: the Philippines, Vietnam, Cambodia, Laos, Thailand, Burma, Malaysia, Singapore, Brunei, and Indonesia. The lack of useful statistical data makes including East Timor problematic, and so unless otherwise indicated, it will be omitted.

TheoryA 1997 Asian Development Bank (ADB) study identifies three conventional theories as to how and why Asia developed so much faster than other regions.

The classical theory The neo-classical theory The endogenous growth theory

The classical theory identifies outward orientation and relatively strong property rights protection as key ingredients, as well as access to good ports and major markets.

The neoclassical theory emphasizes rapid capital accumulation and the opportunity for high returns on investment that shortages presented.

The third, endogenous growth theory credits superior economic institutions such as lifetime employment and consensus building as the superior attributes of the Asian culture.

The study then notes that none of these theories attaches sufficient importance to demography, particularly changes in age structure, dependency ratios and overall population growth rates. This, according to the authors, is where much of the explanation lies.

Modern HistoryEast Asia became an area of economic power starting with the Meiji Restoration in the late 19th century when Japan rapidly transformed itself into the only industrial power

outside Europe and the United States. Japan's early industrial economy reached its height in World War II when it expanded its empire and became a major world power.

After the war with its defeat and economic collapse, Japan's economy recovered in the 1950s with the post-war economic miracle in which rapid growth in the Japanese

economy propelled the country into the world's second largest economy by the 1980s.

In the early 1960s, the British colony of Hong Kong became the first of the four Asian Tiger economies by developing strong textile and manufacturing economies and by the 1970s, had solidified itself as a global financial center and was quickly turning into a developed economy. Following in the footsteps of Hong Kong, the nations of South Korea, Taiwan, and Singapore soon quickly industrialized thanks to government policies. By 1997, the four Asian Tiger economies joined Japan as East Asia's developed economies. Present growthin East Asia has now shifted to China and the Tiger Cub Economies of the Southeast Asian economies of Thailand, Indonesia, Malaysia, and the Philippines. As of 2010, Japan, Hong Kong, and Singapore are the only East Asian nations that are considered developed markets in all economic indexes.

PolicyAmong the major policy choices commonly adopted in East Asia, are openness to foreign trade, significant levels of government savings and an emphasis on education for both boys and girls. While these attributes were far from universally applied, they are conspicuously present in the region to a much larger degree.

The North-east / South-east divide holds for other demographic indicators, too. The average age in the North-east was 33.1 years in 2005, and 26 years in South-east Asia. Life expectancy (74.1 years vs. 70) is not as distinctly different, although infant mortality rates differ by nearly a third: 21.8 per 1,000 in North-east Asia vs. 28.3 in South-east Asia.

East Asian economic crisis

The East Asian economic crisis is probably the most important economic event in the region of the past few decades and for the next few decades.Beyond this, there is yet no unanimity about its root causes nor about the solutions. The differences of views are being debated in academic circles and reflected in the media.

One thing though is certain: the earlier optimistic expectation that it would last only some months has proved wrong. Instead the financial crisis has been transformed into a full-blown recession or depression, with forecasts of GNP growth and unemployment becoming more gloomy for affected countries. Moreover the threat of depreciation has spread from a few countries to many in the region, and is spreading to other areas such

as Russia, South Africa, and possibly Eastern Europe and South America.

THE CAUSES, PROCESSES AND SOME ECONOMIC EFFECTS OF THE CRISIS

The domestic policies and practices Development of global financial system

The great debate on causes is whether the blame should be allocated to domestic policies and practices or to the intrinsic and volatile nature of the global financial system.

In the first phase of the crisis, as it spread from Thailand to Malaysia, Indonesia, the Philippines, then to South Korea, the international establishment (represented by the IMF) and others placed the blame squarely on domestic ills in the East Asian countries. They cited the ill judgment of the banks and financial institutions, the over-speculation in real estate and the share market, the collusion between governments and businesses, the bad policy of having fixed exchange rates (to the dollar) and the rather high current account deficits. They studiously avoided blaming the financial markets, or currency speculation, and the behaviour of huge institutional investors.

This view was difficult to sustain. For it implied that the "economic fundamentals" in East Asia were fatally flawed, yet only before the crisis erupted, the countries had been praised as models of sound fundamentals to be followed by others.

However, there rapidly developed another view of how the crisis emerged and spread. This view put the blame on the developments of the global financial system: the combination of financial deregulation and liberalisation across the world (as the legal basis); the increasing interconnection of markets and speed of transactions through computer technology (as the technological basis); and the development of large institutional financial players (such as the speculative hedge funds, the investment banks, and the huge mutual and pension funds).

This combination has led to the rapid shifting of large blocks of short-term capital flowing across borders in search of quick and high returns. Only one to two percent is accounted for by foreign exchange transactions relating to trade and foreign direct investment. The remainder is for speculation or short-term investments that can move very quickly when the speculators' or investors' perceptions change.

When a developing country carries out financial liberalisation before its institutions or knowledge base is prepared to deal with the consequences, it opens itself to the possibility of tremendous shocks and instability associated with inflows and outflows of funds.

What happened in East Asia is not peculiar, but has already happened to many Latin American countries in the 1980s, to Mexico in 1994, to Sweden and Norway in the early 1990s. They faced sudden currency depreciations due to speculative attacks or large outflows of funds.

A total of US$184 billion entered developing Asian countries as net private capital flows in 1994-96, according to the Bank of International Settlements. In 1996, US$94 billion entered and in the first half of 1997 $70 billion poured in. With the onset of the crisis, $102 billion went out in the second half of 1997. The massive outflow has continued since.

These figures help to show: (i) how huge the flows (in and out) can be; (ii) how volatile and sudden the shifts can be, when inflow turns to outflow; (iii) how the huge capital flows can be subjected to the tremendous effect of "herd instinct," in which a market

opinion or operational leader starts to pull out, and triggers or catalyses a panic withdrawal by large institutional investors and players.

In the case of East Asia, although there were grounds to believe that some of the currencies were over-valued, there was an over- reaction of the market, and consequently an "over-shooting" downwards of these currencies beyond what was justifiable by fundamentals. It was a case of self-fulfilling prophecy.

It is believed financial speculators, led by some hedge funds, were responsible for the original "trigger action" in Thailand. The Thai government used up over US$20 billion of that foreign reserves to ward off speculative attacks. Speculators are believed to have borrowed and sold Thai baht, receiving US dollars in exchange. When the baht fell, they needed much less dollars to repay the baht loans, thus making large profits.

In some countries, the first outflow by foreigners was followed by an outflow of capital by local people who feared further depreciation, or who were concerned about the safety of financial institutions. This further depreciated the currencies.

The sequence of events leading to and worsening the crisis included the following.

(a) Financial liberalisation

Firstly, the countries concerned carried out a process of financial liberalisation, where foreign exchange was made convertible with local currency not only for trade and direct-investment purposes but also for autonomous capital inflows and outflows (i.e. for "capital account" transactions); and where inflows and outflows of funds were largely deregulated and permitted. This facilitated the large inflows of funds in the form of international bank loans to local banks and companies, purchase of bonds, and

portfolio investment in the local stock markets.

(b) Currency depreciation and debt crisis

The build-up of short-term debts was becoming alarming. What transformed this into crisis for Thailand, Indonesia and South Korea was the sharp and sudden depreciation of

their currencies, coupled with the reduction of their foreign reserves in anti- speculation attempts. When the currencies depreciated, the burden of debt servicing rose correspondingly in terms of the local- currency amount required for loan repayment. That much of the loans were short-term was an additional problem. Foreign reserves also fell in attempts to ward off speculative attacks. The short- term foreign funds started pulling out sharply, causing reserves to fall further. When reserves fell to dangerously low levels, or to levels that could not allow the meeting of foreign debt

obligations, Thailand, Indonesia and South Korea sought IMF help.

(c) Liberalisation and debt: the Malaysian case

Malaysia also went through a process of financial liberalisation, with much greater freedom for foreign funds to invest in the stock market, for conversion between foreign and local currencies, and for exit of funds to abroad.

The Central Bank however retained a key control: private companies wanting to borrow foreign-currency loans exceeding RM5 million must obtain the Bank's approval. This is generally given only for investments that would generate sufficient foreign exchange receipts to service the debts. Companies are also not allowed to raise external borrowing to finance the purchase of properties in the country. (Bank Negara Annual Report 1997, p53-54). Thus there was a policy of "limiting private sector external loans to corporations and individuals with foreign exchange earnings" which according to Bank Negara "has enabled Malaysia to meet its external obligations from export earnings." According to a private-sector leader, this ruling saved Malaysia from the kind of excessive short-term priavte-sector borrowing that led the other three countries into a debt crisis.As a result of these controls, Malaysia's external debt has been kept to manageable levels. Nevertheless the debt servicing burden in terms of local currency has been made heavier by the sharp ringgit depreciation.

The relatively low debt level, especially short-term debt, is what distinguishes Malaysia from the three countries that had to seek IMF help. The lesson is that it is prudent and necessary to limit the degree of financial liberalisation and to continue to limit the extent of foreign debt, and moreover to, in the future, keep the foreign debt to an even

much lower level.

Economies of some major countries of East Asia: Economy of people’s republic of china Economy of Japan

Economy of the People's Republic of ChinaThe People's Republic of China (PRC) is the world's second largest economy by nominal GDP and by purchasing power parity after the United States. China is also the largest exporter and second largest importer of goods in the world. On a per capita income basis, China ranked 90th by nominal GDP and 91st by GDP (PPP) in 2011, according to the International Monetary Fund (IMF).The provinces in the coastal regions of China tend to be more industrialized, while regions in the hinterland are less developed. As China's economic importance has grown, so has attention to the structure and health of the economy.

State-owned enterprises

As of 2012 large state-owned enterprises (SOEs) were the backbone of China's economy producing over 50% of its goods and services and employing over half of the workers in China. 65 of the Chinese companies in the 2012 Fortune Global 500 list, were state-owned, including State Grid Corporation of China, which operates the country's power grid, and China National Petroleum Corporation and Sinopec, oil companies. Profits of the largest state-owned enterprises were much greater than the largest firms in the

private sector which were largely small and medium sized businesses. Reform efforts, spurred by problems with corruption at some firms, were focused on splitting state-owned firms or creating competing state-owned firms rather than privatization which is politically unacceptable to the ruling party. Firms attempting to maintain their position such as the State Grid point out the advantages of monopoly, using examples of

disorganization such as the 2012 India blackouts. As of 2011, 35% of business activity and 43% of profits in the People's Republic of China resulted from companies in which the state owned a majority interest. Liberal critics, such as The New York Times, allege that China's state-owned companies are a vehicle for corruption by the families of ruling party leaders who have sometimes amassed fortunes while managing them.

Regional economies

China's unequal transportation system—combined with important differences in the availability of natural and human resources and in industrial infrastructure—has produced significant variations in the regional economies of China.

Economic development has generally been more rapid in coastal provinces than in the interior, and there are large disparities in per capita income between regions. The three wealthiest regions are along the

southeast coast, centred on the Pearl River Delta; along the east coast, centred on the Lower Yangtze River; and

near the Bohai Gulf, in the Beijing–Tianjin–Liaoning region.

It is the rapid development of these areas that is expected to have the most significant effect on the Asian regional economy as a whole, and Chinese government policy is

designed to remove the obstacles to accelerated growth in these wealthier regions.

Hong Kong and Macau

In accordance with the One Country, Two Systems policy, the economies of the former European colonies, Hong Kong and Macau, are separate from the rest of the PRC, and each other. Both Hong Kong and Macau are free to conduct and engage in economic negotiations with foreign countries, as well as participating as full members in various

international economic organizations such as the World Customs Organization, the World Trade Organization and the Asia-Pacific Economic Cooperation forum, often under the names "Hong Kong, China" and "Macau, China".

Development

China, economically frail before 1978, has again become one of the world's major economic powers with the greatest potential. In the 22 years following reform and opening-up in 1979 in particular, China's economy developed at a remarkable rate, and that momentum was maintained into the early years of the 21st century.

China adopts the "five-year-plan" strategy for economic development. The Twelfth Five-Year Plan (2011–2015) is currently being implemented.

China's per capita GDP had grown from $153 to $1284, while its current account surplus had increased over twelve-fold between 1982 and 2004, from $5.7 billion to $71 billion. During this time, China had also become an industrial powerhouse, moving beyond initial successes in low-wage sectors like clothing and footwear to the increasingly

sophisticated production of computers, pharmaceuticals, and automobiles.

According to the 11th five-year plan, China needed to sustain an annual growth rates of 8% for the foreseeable future. Only with such levels of growth, the leadership argued, could China continue to develop its industrial prowess, raise its citizen's standard of living, and redress the inequalities that were cropping up across the country. Yet no country had ever before maintained the kind of growth that China was predicting. Moreover, China had to some extent already undergone the easier parts of development. In the 1980s, it had transformed its vast and inefficient agricultural sector, freeing its peasants from the confines of central planning and winning them to the cause of reform. In the 1990s, it had likewise started to restructure its stagnant industrial sector, wooing foreign investors for the first time. These policies had catalysed the country's phenomenal growth. Instead, China had to take what many regarded as the final step toward the market, liberalizing the banking sector and launching the

beginnings of a real capital market.

This step, however, would not be easy. As of 2004, China's state-owned enterprises were still only partially reorganized, and its banks were dealing with the burden of over $205 billion (1.7 trillion RMB) in non-performing loans, monies that had little chance of ever being repaid. The country had a floating exchange rate, and strict controls on both

the current and capital accounts.

Regional development

These strategies are aimed at the relatively poorer regions in China in an attempt to prevent widening inequalities:

China Western Development, designed to increase the economic situation of the western provinces through capital investment and development of natural resources.

Revitalize Northeast China, to rejuvenate the industrial bases in Northeast China. It covers the three provinces of Heilongjiang, Jilin, and Liaoning, as well as the five eastern prefectures of Inner Mongolia.

Rise of Central China Plan, to accelerate the development of its central regions. It covers six provinces: Shanxi, Henan, Anhui, Hubei, Hunan, and Jiangxi.

Third Front, focused on the southwestern provinces. Go Global, to encourage its enterprises to invest overseas.

Key national projects

The "West-to-East Electricity Transmission", the "West-to-East Gas Transmission", and the "South–North Water Transfer Project" are the government's three key strategic projects, aimed at realigning overall of 12 billion cu m per year. Construction of the "South-to-North Water Diversion" project was officially launched on 27 December 2002 and completion of Phase I is scheduled for 2010; this will relieve serious water shortfall in northern China and realize a rational distribution of the water resources of the Yangtze, Yellow, Huaihe, and Haihe river valleys

External trade

International trade makes up a sizeable portion of China's overall economy. Being a Second World country at the time, a meaningful segment of China's trade with the Third World was financed through grants, credits, and other forms of assistance. The principal efforts were made in Asia, especially to Indonesia, Burma, Pakistan, and Ceylon, but large loans were also granted in Africa and the Middle East (Egypt). However, after Mao Zedong's death in 1976, these efforts were scaled back though during that time, Hong

Kong and Taiwan both began to emerge as major trading partners.

Since economic reforms began in the late 1970s, China sought to decentralize its foreign trade system to integrate itself into the international trading system. On November 1991, China joined the Asia-Pacific Economic Cooperation (APEC) group, which promotes free trade and cooperation the in economic, trade, investment, and technology spheres. China served as APEC chair in 2001, and Shanghai hosted the

annual APEC leaders meeting in October of that year.

After reaching a bilateral WTO agreement with the EU and other trading partners in summer 2000, China worked on a multilateral WTO accession package. China concluded multilateral negotiations on its accession to the WTO in September 2001. The completion of its accession protocol and Working Party Report paved the way for its

entry into the WTO on December 11, 2001, after 16 years of negotiations, the longest in the history of the General Agreement on Tariffs and Trade. However, U.S. exporters continue to have concerns about fair market access due to China's restrictive trade policies and U.S. export restrictions.

With bilateral trade exceeding US$38.6 billion, China is India's largest trading partner.

China's global trade exceeded $2.4 trillion at the end of 2008. It first broke the $100 billion mark in 1988, $200 billion in 1994, $500 billion in 2001 and $1 trillion mark ($1.15 trillion) in 2004. The table below shows the average annual growth (in nominal US dollar terms) of China's foreign trade during the reform era.

Chinese investment abroad

Outward foreign direct investment is a new feature of Chinese globalization, where local Chinese firms seek to make investments in both developing and developed countries. It was reported in 2011 that there was increasing investment by capital rich Chinese firms in promising firms in the United States. Such investments offer access to expertise in marketing and distribution potentially useful in exploiting the developing Chinese domestic market.

Mergers and acquisitions

From 1993 to 2010, Chinese companies have been involved as either an acquiror or acquired company in 25,284 mergers and acquisitions with a total known value of US$969 billion.[144] The number and value of deals hit a new record in 2010. The number of deals that happened in 2010 has been 3,640 which is an increase of 17% compared to 2009. The value of deals in 2010 was US$196 billion which is an increase of 25% compared to the year before.

Economy of JapanThe economy of Japan is the third largest economy in the world by nominal GDP and is the world's second largest developed economy. According to the International Monetary Fund, the country's per capita GDP (PPP) was at $34,739 or the 25th highest in 2011. Japan is a member of Group of Eight. Japanese economy can be forecasted by Quarterly Tankan survey of business sentiment by the Bank of Japan.

Japan is the world's 3rd largest automobile manufacturing country, has the largest electronics goods industry, and is often ranked among the world's most innovative countries leading several measures of global patent filings. Facing increasing competition from China and South Korea, manufacturing in Japan today now focuses primarily on high-tech and precision goods, such as optical equipment, hybrid cars, and robotics.

Japan is the world's largest creditor nation,generally running an annual trade surplus and having a considerable net international investment surplus. As of 2010, Japan

possesses 13.7% of the world's private financial assets (the 2nd largest in the world) at an estimated $14.6 trillion. As of 2011, 68 of the Fortune 500 companies are based in Japan.

Economic indicators

Current account balance 2006

Net international investment position: 266,223 billion

Industrial Production Growth Rate: 7.5% (2010)

Investment (gross fixed): 20.3% of GDP (2010 )

Household income or consumption by percentage share:

Lowest 10%: 4.8% Highest 10%: 21.7% (1993)

Agriculture – Products: rice, sugar beets, vegetables, fruit, pork, poultry, dairy products, eggs, fish

Exports – Commodities: machinery and equipment, motor vehicles, semiconductors, chemicals

Imports – Commodities: machinery and equipment, fuels, foodstuffs, chemicals, textiles, raw materials (2001)

Exchange rates: Japanese Yen per US$1

88.67 (2010), 93.57 (2009), 103.58 (2008), 117.99 (2007), 116.18 (2006), 109.690016 (2005), 115.933 (2003), 125.388 (2002), 121.529 (2001), 105.16 (January 2000), 113.91 (1999), 130.91 (1998), 120.99 (1997), 108.78 (1996), 94.06 (1995)