Background 
RegionalEconomic Dynamics and Industrial Change 
GlobalChange in the 1990s and their Regional Impact 

TheNodules of Global Change 
AsianIntegration into the New E-IS Led Industrial Cycle 
TheIntensification of International and Interregional Competition and theChallenge of NAFTA

TheJapanese Crisis and its Effect on the Region 

ANecessary Theoretical Intermediary 
TheJapanese Accumulation Cycle and the Regional Crisis

TheAsian Financial Crisis (1997-1998) and its Consequences for Production 

ImmediateAntecedents 
TheCrisis Per Se 
TheDistinct National and Sub-regional Crises

Conclusion 
Endnotes 
Bibliography 

Background 

     The 1997-1998Asian crisis was the most relevant economic event of the 20th century'sfinal decade.  It was the central topic of the confrontation betweenorthodox and heterodox economic theories. As such, it was an importantexperience as knowledge gained from this crisist permitted the verficationof the complexities of the world economy.  Simultaneously it demonstratedthe necessity of deepening and developing an alternative economic thoughtin which historical and structural issues become pivotal to a new perceptionon the space and cycle of regional development. 

     For thisreason, this article will study the Asian crisis in terms of the interrelationshipbetween different aspects of regional economic development, with specialemphasis on the following. First, the spatial level applied to the regionoverall, in order to determine the dynamic forces, the poles of integration,and the evolution of linkages with the global space. Second, the cyclicalaspect of this growth, understood in two manners: a) as a relationshipof the global industrial cycle, that is, of sequences in production thatstem from the use of computer technology and that entail the predominanceof the electronics-computer-informatics sector; b) as a short-term regionaleconomic cycle, that is, the path periodically followed by the economy,culminating in overproduction and the temporary decline in the capitalistrate of return.  

RegionalEconomic Dynamics and Industrial Change  

     As far backas the early 1970s, East Asia was the world’s most dynamic region, dueto a convergence of factors, most notably, its type of insertion in theglobal economy starting in a period of economic strength in which the tradeopportunities for developing nations were rising. Japanese influence interms of state dirigisme and industrial policy was essential forthe transition from a learning-process economy, allowing for the structuraltransformation first of the Tigers and then of the ASEAN-4. In addition,in the 1980s, China’s “market socialism” came into play, with the enormousburden of its market-oriented command economy; a much larger internal economicspace; low-cost, mass production; and a dynamism similar or even superiorto its neighbors’. However, what is the relationship between this successfuldevelopment model and the subsequent crisis? What was the historical rootof this development and how did it evolve until the resulting 1997 collapse?Below we put forth some historical elements to answer these questions andto move forward to following sections. 

     The strategythat made these successes possible (an interventionist state, learningpolicies) cannot be divorced from the equally successful use of opportunitiescreated by the great international changes that took place after WorldWar II. The starting point for these changes was the bare bones industrializationleft by the Japanese occupation in countries such as South Korea and Taiwan(Henderson and Appelbaum, op. cit.) and the enormous achievements of China’sagrarian revolution, in addition to the advantages afforded by the ColdWar for many of these countries. Just as Japan had done, South Korea, Taiwan,and the original core group of ASEAN (originally a political-military groupallied with the United States against Communism) benefited from their rolein containing the Soviet Union and China, in exchange of which they receivedlarge U.S. subsidies and investments. However, the most important factorwas likely the institutional support afforded by the West to promote socialhomogenization, in order to avoid the spread of Communist ideology (agrarianreform, widespread educational campaigns, a professionalization of thebureaucracy, etc.). Starting in the second half of the 1960s, this wasenhanced by the emergence of a new international division of labor, openingunprecedented opportunities that are key elements for explaining the progressof what today are the Asian NICs (an international transfer of productioncapacity to those countries, which later further bolstered internationaltrade and subsequent productive and financial investments). The developmentof these countries’ social capacity for accumulation explains the enormousincrease in foreign direct investment, principally by U.S. electronicscompanies, which located in those countries rather than in Latin America,although at the time (the 1970s and early 1980s), the latter had higherper-capita incomes.¹   

     To understandthe implications of the structural transformation of the region’s developingeconomies and the trend towards excess capital accumulation in some ofthem, we need to examine their integration into the global economy as wellas some of the internal effects of this integration. No developing countryor group of countries had experienced such intense integration since theAsian NICs (and later the ASEAN-4) integrated around two poles—the Americanand the Japanese, with a certain degree of specialization, as noted byErnst—that, despite their intense competition, complemented each other.These countries received FDI, their companies entered into a wide rangeof agreements with foreign companies, contracted foreign technology, andconducted reverse engineering in order to accumulate technological know-howand develop internationally competitive export industries. Although numerousauthors²  have analyzed and discussedthe implications of this process from the standpoint of technological learningand industrial development, one key aspect that has been disregarded (ormisplaced) a certain extent is the shaping of so-called “dual” economies,mainly in Japan and South Korea.³  Therelative backwardness of agriculture and services (principally telecommunications)in both countries was the result not of policy decisions but of historiccircumstances stemming from their original backwardness and, in the contextof their significant leap forward, their need to make decisions that discriminatedagainst other sectors.⁴  Nor should thegreat efforts in production integration be ignored, as shown by Amsden(1989) in discussing the formation of networks of small suppliers in steel,automobiles, chemicals, and shipbuilding. Below we will discuss the roleof “duality” in the run up to the crisis.  

     In internationalproduction integration, Japan took the first step (Ernst, op. cit., Borrus1996, Gereffi 1998). In the 1960s, Japan began locating assembly plants—mainlyin South Korea, Taiwan, and Singapore—in order to supply those countries’protected markets, thereby creating a production network that became increasinglycomplex in coming years. Almost simultaneously, U.S. companies also establishedplants to assemble electronic products that were subsequently re-exportedto their home country. Likewise, these plants became interlinked in complexproduction networks that were spread throughout the region and beyond.Borrus, Ernst, and other authors have studied the structuring and dynamicsof the international production networks established in East Asia, andhave stressed the differences between the Japanese and U.S. models. However,the important thing to emphasize here is the regional integrating roleof these production networks. The flying-geese paradigm has accuratelydescribed that structuring and integration as a successive incorporationof countries governed by the consequences of the loss of competitivenessof the most labor-intensive links.⁵   

     The coexistenceof Japanese and U.S. production networks, which express the potential andthe contradictions of companies as well as their home countries, accountsfor the intense international capitalist competition taking place in Asia,and therefore, the existence of additional factors that encourage overproductionin the region. U.S. networks, in addition to slashing internal costs withinthe United States, have battled Japanese companies for market share; andJapanese companies, in turn, have responded by restructuring their regionaloperations (Ernst, op. cit.). The pressure on Japan and its networks increasedconsiderably starting in the late 1980s, with the overvaluation of theyen. The Japanese response contributed to heightening international competition,since it sought to create a new export network in nearby countries, tothe detriment of investment in captive markets.⁶ The sudden emergence of China, as well as of the networks based in SouthKorean and Singapore, further increased competition in various industries,beginning with the most labor-intensive ones.  

GlobalChange in the 1990s and their Regional Impact

The Nodules of Global Change  

The first half of the 1990s was crucialfor the region, because various global phenomena became interlinked andwould have a decisive affect on its subsequent development, through globalspatial effects that were largely implicit in the processes discussed above.We group these phenomena into the following five categories:

a) The extension of the technologicalrevolution and its new effects on production: Between the late 1980sand the early 1990s, global capitalism entered a new phase—the informaticsrevolution—which was based on the predominance of software, the telecommunicationsand computer networks, and their massive spread to the most diverse economicand social activities. This evolution consolidated and extended the predominanceof informatics and global trade, leading to the emergence of a new corethat linked together social production, capital accumulation, and the businesscycle, and which we call the electronic-informatics sector (E-IS).⁷ On the international level, this sector would become the new dynamic lynchpinof global trade, even without including software figures (see table 2), and the principle basis of the new global division of labor, thanks tothe enormous possibilities of new technology for geographically atomizingand dispersing production. 

b) Geo-economic change and theredistribution of global economic power. Technical-productive changehad very significant consequences for the globalization of the internationaleconomy, the interconnecting of countries and regions, and the redefinitionof world economic power. As a result of its central role in the new phaseof the technological revolution, the United States recovered the globaleconomic leadership that it had lost in the 1970s (Mowery and Nelson, 1999;Lester, 1998), just as Japan was entering an economic crisis and Chinawas becoming a regional economic power. In 1992, U.S. GDP began to riseat nearly 4% per annum and its exports increased at a rate of 10% (lowerthan the 12-13% jump in imports), while unemployment fell to 4%, and laborproductivity began to rise quickly, starting in 1995, to nearly 3% (U.S.Department of Commerce, 2000). Internationally, the U.S. recovery was tiedto the reduction in costs brought about by the transfer of much of itsmanufacturing industry to newly industrialized countries, especially thosein East Asia (Borrus, op. cit.; Gereffi, op. cit.). Because of this, theU.S. economy and U.S. companies were able to recover their rate of profits,bring down inflation, and reduce the interest rate; however, this alsoallowed East Asia to take advantage of U.S. demand for products from theregion⁸ and to benefit from technological learningin the new export industries, so as to maintain and even accelerate itsprolonged growth boom.  

c) New, flexible multinationalcompanies and international production networks. Another of the broadchanges in the world was the international expansion of a new type of flexiblemultinational company (MC) with a global reach and dependent on the developmentof international production networks (Ernst, 1992) and global productionchains (Gereffi, forthcoming), operating as base cells of the so-calledglobalization of industry (OECD, 1996) or integrated worldwide production(UNCTAD, 1994). International production networks are to be understoodas cross-border investment, production, trade, and collaboration relationshipsthat promote the development of products, suppliers, and markets, and inwhich different companies revolve around nuclear multinational companies.Network-companies are made up, in addition to traditional MC components(home offices, subsidiaries, and affiliates), of subcontractors and regularsuppliers, franchise holders, and other independent units with which theyhave agreements. In addition, they have a complex system of strategic allianceswith other company networks of the same or a different national base. Authorssuch as Ernst, Gereffi, and Borrus have verified the decisive importanceof these networks for understanding the acceleration of informal economicintegration in the region in the 1990s, beginning with U.S., Japanese,European, and, increasingly, ethnic Chinese (Taiwanese, Hongkongese, Singaporean,etc.) or even South Korean production networks. These networks were thematerial foundation of the new processes of regional economic integrationand of their highly unequal dissemination, concentration, and spatial linkage(Gereffi, op. cit., Scott, 1998), both within the region as well as interms of their ties to the U.S. and European economies.⁹    

d) The new, open regionalizationof the asymmetrical integration of domestic economies with very differentlevels of development. Another change in the 1990s linked to globalizationwas the emergence of regional economic blocs of countries oriented to globalcompetition, such as the APEC (Pacific Basin), NAFTA, the European Union,MERCOSUR (South America), or ASEAN. Throughout the 1990s, these blocs expandedunder various formal and informal arrangements and included most of theperipheral countries of each region: Central America and the Caribbeanwith North America; much of Eastern Europe, the Middle East, and NorthAfrica with the European Union; and the Indonesian peninsula and Myanmarwith ASEAN. In global terms, these blocs tended to act as connections betweenregional industrial and financial powers and peripheral countries withlow labor costs or cheap natural resources, formed around areas with freelycirculating goods and capital and where transportation was inexpensiveand quick, within a global competitive logic that, in fact, discriminatedagainst trade or international investment from countries and regions thatwere excluded. East Asia failed to form a unified economic bloc and wasthus subsumed in the broader APEC space, with two sub-regional integrationspaces—one formal (ASEAN) and one informal (Greater China)—from which theregion’s two most important industrial powers were excluded: Japan andSouth Korea. 

e) The new global financial system.The first half of the 1990s also saw the culmination of process of financialliberalization and globalization that had been underway since the late1970s, although it was now linked to new, much more complex and volatilefinancial intermediaries and instruments (securitization of credit, thepredominance of mutual and hedge funds, the greater role of the stock anddeviates markets, etc.). East Asia joined the process late, and under pressurefrom international institutions such as the IMF and OECD and the U.S. government,which increased dramatically after the 1994-95 Mexican financial crisis(Singh, 1995). The liberalization of capital accounts here occurred hastily,as it had in Latin America, encouraging over-borrowing by companies andgovernments at a time when the explosion in international liquidity wasexacerbated at the regional level because of the massive entry of Japaneseand Chinese capital onto the credit and stock markets of the entire region.In addition, some of the fastest growing countries of the region lackedstrong public institutions (that is, a developmental state) to encouragedevelopment and to mediate between the domestic economy and the internationaleconomy in critical periods, as in the case of Thailand or Indonesia (Henderson,1999).

AsianIntegration into the New E-IS Led Industrial Cycle 

     In the late1980s and early 1990s, East Asia’s dynamic economies became large globalproducers and exporters of electronic products, allowing them to take partin the computer revolution from the outset (Hobday, 1995). The most competitivegroup of countries consisted of Taiwan, South Korea, Singapore, and Malaysia,which were quickly joined by Thailand, China, and the Philippines. However,to the extent that by far most Asian electronic producers are integratedinto global, regional, and sub-regional production networks, this processshould not be studied from a strictly national perspective (Gerefi, op.cit.; Borrus, op. cit.; Ernst, op. cit.).  

     The Asiannetworks of electronics products evolved in two stages: the first, fromthe late 1970s through the mid-1980s, was marked by the rise of Japan asan electronics powerhouse and the parallel retreat of U.S. producers, andit was mainly based on the production of consumer goods and semiconductors.The second stage, beginning in the late 1980s, which revolved around there-linkage of informatics technology and production and of the types ofcommunications discussed in item a) of the preceding section, was led bythe U.S. computer industry’s recovery of its competitive position; Japan’srelative lag, as noted above; and the consequent supremacy of U.S. productionnetworks and the greater autonomy in production of Asian suppliers. Accordingto Borrus (op. cit.), in this second stage, the deployment of the new,flexible, U.S.-based networks allowed for: a) advancements in production,such as the lowering of costs and production times or the maintenance (forthe United States) of its lead in technological innovation; b) the givingof greater autonomy to regional suppliers in a broad range of components,and therefore, these suppliers’ technological learning, and c) becauseof Asia’s new plant capacity, direct competition with Japan in productsthat it had hitherto dominated, such as memory chips, electronic consumergoods, and displays. 

     The greateroperational autonomy of Asian companies within U.S. networks allowed fora relatively large increase in the production autonomy of subcontractingcompanies based in the Asian tigers, ASEAN-4, and, later, China.¹⁰ Except for South Korea (which specialized in integrated circuits), regionalplant capacity was concentrated in personal computers and related equipment,mainly in Taiwan and Singapore, to supply the United States, Japan, andWestern Europe as well as the aforementioned countries of the region.¹¹ However, Japan, as we know, responded to the U.S. networks by restructuringits own production networks around an orientation similar to that of U.S.companies (supplying third countries such as the U.S. and Europe and targetingpart of its production to its own market and to the region’s producer countries).Despite the entry of other extra-regional producers (see next section),the joint role of U.S. and Japanese networks made the region into the mainworldwide theater of electronics production (see figure 1). However, overlappingentrepreneurial networks unleashed strong intra-regional competition thatultimately led to the overproduction of items such as integrated circuitsand consumer goods, which in 1995-1996 translated into the sharp drop inworld prices for those products.  

Figure1 

EastAssia's Share of Total Electronics Exports
(exludingJapan) 

     Within thisframework of ever-increasing plant capacity, the weakest entrepreneuriallinks were the South Korean chaebols, which had opted for the model leastintegrated into U.S.-based production networks and which, therefore, placedmore emphasis on competition (global and regional) outside of collaborationand complementary networks, as would occur with the regional companiesthat were most integrated into international production networks, suchas those from Taiwan and Singapore. Another factor contributing to thevulnerability of South Korea’s corporate sector was the similarity of itssectoral makeup with Japan’s, which forced it to become mired in head-oncompetition with the keyretsu in highly capital-intensive industries, verylarge-scale economies, and relatively rigid technologies, leaving lesscapacity for reducing the scale of production and diversifying.  

     The differentpaths followed by Taiwan and South Korea are fully illustrated by the developmentof each country’s integrated-circuit industry. The most important differencelies in their industrial structures. In South Korea, integrated companies(the three large chaebols) control a large part of the market, whereasspecialized firms are in a minority. In Taiwan the opposite is true: thereis almost no presence of integrated firms in integrated-circuit manufacturingand an overwhelming presence of small and medium-sized companies, mostof which (as noted above) have contractual relations with U.S. companies(Abe et al, op. cit.). The second factor is the make-up of production.In South Korea, production is heavily concentrated in integrated-memorycircuits (DRAMs), whereas most Taiwanese companies are located in the foundryand computer parts and components sectors. This difference accounts forthe varying amount of impact that each country experienced regarding decreasingworldwide prices for integrated circuits in the mid-1990s. Because of theeconomic and technical nature of DRAM production (a standardized producthighly dependent on economies of scale), South Korea’s export success furtherexacerbated global overproduction, making the country much more of a prisonerof the path it had followed.  

TheIntensification of International and Interregional Competition and theChallenge of NAFTA  

     Anotheressential factor in the run-up to the Asian crisis was heightening internationalcompetition stemming from the entry of new countries with lower unit wagecosts. These countries had recently been integrated into the most globalizedindustries of the new regional spaces of North America and Europe, whereAsian presence had been the strongest, such as garments, electronics, power-generatingequipment, and, to a certain degree, automobiles. Although the roots ofthis process go back as far as the mid-1980s, it was directly triggeredin the 1990s, and it was a crucial factor in declining prices of severalindustrial products, which also affected Asian exporters (see Figure 2). 

Figure2

WorldPrices for High-Technology and Labor Intensive Goods, 1990-1997 
Source: World Bank, 1998,p. 21. 

  
     Althoughthe group of new competitors is heterogeneous, within it we can distinguishthe American group, which includes Mexico and countries such as those ofCentral America and the Caribbean, which are increasingly integrated intothe U.S. and North American economy, thanks to manufacturing networks andfree trade licenses and agreements (NAFTA, Caribbean Basin Initiative),and the groups on the periphery of the European Union, including membersof the community itself (Ireland, Portugal, Finland) or associated in oneway or another with it, such as the central-eastern European countries(Poland, Hungry, the Czech Republic, Slovakia), and the Middle East (Turkey),or North Africa (Morocco and Tunisia). As with the preceding case, thesudden emergence of these countries occurred when the spreading of bothEuropean (especially German) and U.S. entrepreneurial networks convergedwith economic-integration and trade-preference accords between blocs andnations.

     This typeof competition is taking place not only among companies and nations butalso, to a different extent, among regional blocs and spaces, since thenational base of origin of the networks often enters into conflict withthe macroeconomic and political base of national states, regional blocs,and regional spaces. As correctly suggested by Gereffi and Borrus withregard to the enormous development of U.S. networks in Asia and their relativetendency to become independent from their original national base and competewith it on levels (national and regional) other than a strictly entrepreneurialone, this phenomenon may affect the principles that govern competitionamong nations and regions.¹²  This isthe case of the silent integration of the economy of northern Mexico andthat of the Midwest of the United States, the crowning moment of whichwas the signing of NAFTA, leading to the constitution of a new tradingbloc that exercised significant competitive pressure on East Asia.¹³  

     The impacton competition exercised by the new regions and countries in specific industrieshas clearly been felt by both traditional labor-intensive industries, suchas the garments, as well as by very important segments of technology- orcapital-intensive industries. The data in figure 3 shows the progress madeby Mexico’s garment industry, followed by that of the countries of theCaribbean, Central America, and Canada. In addition, we must take intoaccount the growing presence of European producers and other competitorssuch as Turkey, Morocco, and Tunisia.  

Figure3 

ForeignSales of Inputs to the U.S. Garment Industry, 1990-1996 
Source: Gereffi and Blair,1998 

     In the electricpower equipment sector, there is also strong competition between Mexicoand other counties. The competitive impact of Mexican exports was enormousin markets such as electricity-generation and distribution equipment, wherethey equaled the sum of exports from the four East Asian countries mostaffected by the crisis (South Korea, Thailand, Malaysia, and Singapore),as shown in figure 4. Competition in the electronic sector began to takeoff in the early 1990s, especially with products such as computer and telecommunicationsequipment, semiconductors, and the like. 

Figure4

WorldwideExports, Electric Sector  

      However,although the competitive challenge to East Asia was the greatest in low-techindustries, such as garments, electricity and the electronic consumer-goodassembly industries, also made very significant advances in the highervalue-added segments that contain certain knowledge inputs (although, tobe sure, to a much lesser extent than they might have if governments suchas Mexico’s had developed Asian-type proactive and technological-learningindustrial policies). The time it will take Mexico to succeed in advancingtechnologically, and the conditions under which it will do so, is unknown,although the external conditions for this are more favorable than priorto the signing of NAFTA (Rivera 1998 and 1999). 

Figure5

ElectonicExports from Four Asian Countries and Mexico
Source:UN 
  

TheJapanese Crisis and its Effect on the Region  

     Startingin the mid-1980s, the Japanese economy suffered the effect of several phenomenathat were retransmitted to surrounding countries and that impinged on thetype of integration these countries had in the global and regional economy,particularly the new E-IS-led industrial cycle. The most critical, butnot the only, phenomenon was the enormous over accumulation of capitalresulting from the exhaustion of the extremely long cycle of expansionthat had begun in late 1950s, which created a structural crisis that hasnot been resolved through the use of traditional entrepreneurial, political,and institutional mechanisms. The Japanese economic crisis (or what wecall chronic over accumulation or structural crisis) and its subsequentevolution constitute the lynchpin necessary for understanding the Asiancrisis and its more long-lasting repercussions in the rest of the world.Hence we will briefly discuss this, first examining the historical cycleof accumulation in Japan and then Japan’s integration into the E-IS ledindustrial cycle.  

ANecessary Theoretical Intermediary 

      Keyissues relating to historical accumulation cycles and crises have beenrelegated from the discussion in the theoretical context dominated by theintellectual rise of neoliberalism and its superficial view of dynamic-structuralproblems and the “anomalies” of the expansive dynamics of capitalism.¹⁴ However, the fragmentary and insufficient development of alternative orheterodox economic thought on the economic cycle and crises also causesdifficulties, because it has failed to integrate into a single explicativebody contributions such as Marx’s on the role of capital over accumulationand the tendency for the rate of profit to fall, the Neo-Schumpterian evolutionistreintroduction of the relationship of the long cycle with technologicalrevolutions (Freeman and Pérez, 1992)—already defended by Mandel—orthe highly important complementary formulations on French regulation (Aglietta,Boyer, Lipietz, Coriat) and of American radical neo-institutionalism (Gordon,1980) on the socio-institutional conditions that make possible and regulatelong accumulation cycles.¹⁵  

      Forthese reasons, before examining the Japanese cycle, we will define andlay the theoretical foundations for the notion of historical accumulationcycle used herein and its relationship with the so-called “structural”or terminal crises of a given historical cycle. To this end we will bringtogether the theories of the short and long accumulation cycles orientedto national cases or cases related to regional groups of countries. Drawingon the classic teachings of Marx, Schumpeter, and Kalecky, on regulationistor radical neo-institutionalist contributions, on previous works of ourson the relationship of the long cycle with the historical stages of capitalism(Dabat, 1993: 4-2; Dabat and Rivera, 1993), case studies on national accumulationcycles (Rivera, 1986) and the role of spatial determinations (Dabat, forthcoming),we define the historical accumulation cycle as the process as one of prolonged¹⁶and sustained growth of production and capitalist rate of return, whichis made up of a succession of short-term cycles¹⁷joined around a single historical-structural growth pattern (techno-economic,socio-institutional, and stemming from the insertion in the global socioeconomicspace).  

      Indynamic terms, historical accumulation cycles, thus understood, are theresult of endogenous phases of a) deployment and growth (upward stage)and b) relative depression and restructuring (downward stage), operatingwithin the broader context of the global economic cycle (or global industrialcycle, to use the common terminology) with which it has relationships ofsynchrony and disynchrony. The beginning of an upward phase of the longcycle requires radical technical-productive transformations (“creative,”rather than solely “stabilizing,” destruction, with the simple eliminationof over capacity) that will allow for the return to methods for generatingan economic surplus, the reduction of production and transaction costs,and the broadening of demand through the introduction of new socially useful,lower-priced goods. It also requires the reintroduction of credit and theconsequent replacement of “bad” over borrowing with a new dynamic financingmaking it possible to pay for the required expansion of plant capacity.No less important is the role of state and public policies and institutions,which varies with countries’ differing historical circumstances and levelof economic development (the need of developing countries and, in general,of latecomers for a higher level of government intervention). 

     However,no long cycle may be deployed beyond certain limits. It will necessarilyculminate in a historical crisis of over accumulation, overproduction,and over borrowing when the traditional amounts and mechanisms of investment,financing, and conventional government support cease to operate as theyonce did and the capitalist rate of return plummets for a protracted period,under the burden of output over capacity, chronic over borrowing, and theinability of the productive sector to respond to the potential requirementsof social demand and the increasing challenges of international competition.Excess capital accumulation (a plethora of capital)¹⁸can weigh heavily, for undetermined periods, on circuits of productionand circulation, depending on attenuating factors linked to state intervention.However, sooner or later this will likely lead to a financial explosion,accelerating the collapse of output, in accordance with specific patterns,as corroborated by the Japanese case.  

TheJapanese Accumulation Cycle and the Regional Crisis 

     The growthcycle that began in late-1950s in Japan linked together two successiveeconomic transformations into a single, uninterrupted growth process¹⁹:the 1960s leap from a labor-intensive economy to a capital-intensive one,and, starting in the mid-1970s, the leap to a technology-intensive economy.The cycle was organized around a rapid growth model, propelled by the stateand based on large, vertically integrated export companies, networked withsmall and medium-sized ones interrelated through cross-shareholding, andbased on a dual economy in which an extraordinarily dynamic and competitiveexport sector (automobiles, machine tools, electronics, and optics) existedalongside an non-dynamic sector that is highly protected and largely controlledby cartels (agriculture, construction, chemicals, commerce, telecommunications). 

     Thanks tothese successive transformations, in the 1970s, while the United Statessank into recession, the Japanese economy surpassed its latecomer and technological-apprenticestatus, becoming in the 1980s a global leader in various industries andthe world’s leading banking power and creditor. But such a strong and prolongedaccumulation cycle necessarily had to run out of steam under the very burdenof excess accumulated, non-replaced capital and the consequent collapseof business’ rate of return—as various authors note, although they failto establish the necessary causal link between the magnitude of accumulatedcapital and the evolution of the profit rate.²⁰ This result was also brought about by Japanese pro-competition institutionsand policies—which were also adopted to varying degrees by its neighbors.Although at the time they were fundamental for promoting the country'srapid rise, in the long run they exacerbated (rather than correcting) thetrend toward over accumulation. This was the case of the organization orfrequent promotion of mergers, the coordination of expanding plant capacities,the restrictions on entry into specific industries, the orientation ofacquired and applied technology, or the promotion of cartels for variouspurposes, resulting in an a nearly uninterrupted accumulation that wouldlead not only to higher costs but also to the creation capital beyond thepossibilities for profitably using it.²¹   

     But excessJapanese capital would have other repercussions as well. On the one hand,it appears to have been an important driving force of intense asset speculationin the late 1980s, which led to the so-called bubble economy, the subsequentbursting of which forced Japan into a protracted recession (Taylor 1998;Whittaker and Kurosawa, 1998). Moreover, the capital glut (which persistedeven after the 1992 stock market and banking crisis) fueled the enormousexport of liquid funds to the United States, Europe, and finally East Asia.The latter process initially buttressed regional integration, but in theend (on the eve of the financial crisis) it contributed to the liquidityexplosion through bank loans, enabling the countries of the region to financecurrent account imbalances and leading to inflation in assets (stocks andreal estate), which would play a key role in the run-up to the regionalcrisis.²²   

     The debateon Japan’s relationship with the new global industrial cycle—shaped aroundthe E-IS in the 1990s—suggests that Japan was weakly integrated into thiscycle, preventing the country from capitalizing on previous achievementsin leading-edge sectors and causing it to lag considerably behind the UnitedStates in strategic industries such as computers, software, telecommunications,and digital networks. On the purely techno-economic level, Bresnahan-Malerba(1999) and Mowery (1999) link this fact to the backwardness of Japan’scomputer industry (which in early 1990s was still mired in the mainframephase) and its weak progress in commercial software—factors that mutuallyreinforced each other. Large corporations’ production (and use) of mainframes,for example, stymied the production of independent commercial softwareand hindered the development of telecommunications and computer networks,which was an inherent part of the new global industrial cycle (Mowery,op. cit.). In addition, Japan’s personal computer industry long adheredto standards that were incompatible with the worldwide IBM/Microsoft/Intelstandard, to the detriment of the establishment of personal computer networks,which are the material foundation of the Internet and Intranet (Bresnahanand Malerba, op. cit.).  

     But howwas it that Japan managed to fall behind in computer technology, despitethe huge lead of its electronics industry and its enormous ability to maketechnological breakthroughs? A conclusive answer to this question goesbeyond the scope of this article. However, we can tentatively state thatthis lag clearly had to do with the that fact that the country’s organizationand development strategy had become outmoded, as well as with: a) rigidityin recent years in MITI planning (Bresnahan and Malerba, op. cit) and itsunderestimation of the autonomy Japanese corporations had achieved aftertaking the lead from the United States in electronics technology in the1980s (Callon, 1995); b) high domestic prices caused by the lack of competitionin industries (such as telecommunications) that are key to the disseminationand development of the network economy (Fransman 1995; Mowery, 1999); c)the closing of the computer market to imports (Mowery, 1999); and d) thelimited emphasis given to computer sciences by the educational system.These internal factors converged with external ones, such as the UnitedStates’ unwavering pressure on the MITI to abandon its aggressive industrial-promotionpolicies and the effects of the overvaluation of the yen starting in 1985.²³   

      Establishinga relationship between the recent failure of the Japanese innovation systemand the country’s socio-institutional and production structure (at timesreferred to as the Japanese model or Japan, Inc.) is beyond the scope ofthis article too; nonetheless, it appears clear that the Japanese economyrequires a deep restructuring to deal with the root institutional and socialcauses of chronic overproduction and to re-link the actors of the Japanesemiracle within a new, more flexible socio-institutional framework capableof facing external conditions radically different from those that prevailedduring the Japanese miracle.  

TheAsian Financial Crisis (1997-1998) and its Consequences for Production 

ImmediateAntecedents 
 
     Two antecedentsof East Asia’s foreign exchange and financial crisis have been widely studied.The first is the collapse of regional exports in 1996 and 1997 (prior tothe crash), following many years of sustained growth. The most affectedcountries were Japan and Thailand, but also China (although only in 1996),Hong Kong, Taiwan, South Korea, Singapore, and Malaysia (see Table 2) whilethe Philippines and Indonesia were affected to a much lesser degree. Themain cause of the collapse was the sharp drop in world prices of the region’sleading exports. However, a secondary cause—the shift from the overvaluationto the rapid depreciation of the yen after 1995—also contributed, affectingabove all South Korea—by causing it to lose price competitiveness—becauseits export structure was very similar to Japan’s. 

Table 1 and 2

ExportsFrom the Ten Leading Economies in East Asia

table 2

  The largestprice drop occurred in the electronics industry, especially computers,semiconductors, and telecommunications equipment (World Bank, 1998). Pricesfor 16-MB DRAMs (South Korea’s leading export) dropped, according to theWorld Bank, from 150 dollars per unit in 1993 to nearly 10 dollars in 1996(see Table 2). Prices for labor-intensive manufactured goods such as textilesand garments were less affected and had a smaller impact on the least advancedASEAN countries such as Indonesia.²⁴ The worldwide recession in electronics was aggravated by increases in theexport volumes of the countries of the region, in an attempt to make upfor plummeting prices. The plunge in export revenues occurred within acontext of sharply rising labor costs and decreasing productivity improvements,which could only lead to a nearly universal collapse in the rate of return.²⁵ This was particularly significant in South Korea, whose important stridesin structural change and increased productivity were neutralized by effectson rate of return, due to the conditions mentioned above.²⁶   

     Thesecountries’ liberalization of their balance-of-payments capital accountsin the early 1990s facilitated external financing of trade deficits. However,the entry of foreign capital was excessive and poorly managed, causingserious macroeconomic distortions. A lack of oversight led to unhedgedshort-term borrowing, especially in Thailand and South Korea, which, togetherwith speculative activities, market glut, etc., encouraged the accumulationof risk taking in the banking sector, the stock market, and among companiesmost exposed to international competition. The World Bank acknowledgesa market failure (argument put forth by Chang, among other authors), sinceforeign investors failed to properly evaluate the risk of their transactionswith governments and companies. Spreads for non-sovereign borrowers inthese countries declined steadily until nearly equaling that of long-termloans for U.S. corporations (World Bank, op. cit.). 

TheCrisis Per Se 

     The enormousgrowth in regional investment and output in export industries, far outstrippingproductivity gains and production-cost declines in these sectors, causeda strong decrease in business’ rate of return in most of the ASEAN-4 countriesand South Korea, affecting especially the less flexible producers, suchas South Korean chaebols or Thai conglomerates (World Bank, op cit). Atthe same time, since financial deregulation in the countries of the regioncoincided with high international liquidity and the growing weight of newfinancial agents and mechanisms (merchant banks, investment funds, greateropening of stock markets), it encouraged excessive borrowing and increasedthe vulnerability of their banking systems, in the context of an even-greaterprolongation of accumulation cycles in the most dynamic countries, whichacted as magnets for excessive financial speculation. 

      Ina context of excessive short-term leveraging, rising asset values, andthe extreme vulnerability of banking systems such as Thailand’s, the crisiswas triggered by the sharp drop in exports in 1996. The convergence ofthe glut in the real-estate market (signaling that employment levels werebeginning to plummet) with the drop in exports in 1996 caused panic andaffected the overvalued, fixed exchange rate, encouraging so-called speculativeattacks. This triggered a full-blown financial crisis, centered first inThailand (mid-1997), then South Korea (December of the same year), andfinally in Indonesia (early 1998), dragging the rest of the region downas a result of the trade and financial ties between the different countries.Next, output dropped in Indonesia, Thailand, South Korea, Malaysia, HongKong,²⁷ Japan –in that order of importance-growth was reduced to zero in Singapore and the Philippines, and outputdropped moderately in China and Taiwan and the new areas of the ASEAN.²⁸   

     The spreadof the financial crisis throughout the region and to the rest of the worldfollowed a pattern familiar in previous crises, which most authors whowrote on the topic tried to explain as being related to psychological factors(gregarious and copycat behavior), to the detriment of objectives suchas the bringing the growth cycle to an end and excessive investment andspeculation. Nevertheless, the lessons of the crisis show that preciselythe opposite occurred (greater significance should be given to structural,institutional, and cyclical factors). The stock market crash and disruptionsin the exchange rate were the only phenomenon felt throughout the region,while the remaining aspects of the crisis (disruptions in the banking sectorand production) only affected countries with certain internal conditionsin terms of output, international insertion, entrepreneurial and stateorganization, and the valorization of capital. Hence there was little impacton the Chinese sphere, due to factors like the continuity in the virtuouscombination of the internal, export-oriented development of the PeopleRepublic of China, the role of public regulation of capital flows, andthe lesser importance of foreign borrowing and portfolio investment vis-à-visdirect investment (Dabat and Toledo, 2000). For the same reason, the Philippinessimultaneously experienced a profound foreign-exchange and banking crisis(similar to other ASEAN-4 countries, and also due to the weakness of thecentral bank and the commercial banking sector) and a much less pronouncedproduction crisis, because of its more favorable insertion into the internationaleconomy, allowing for the continuity of its export-led dynamism.  

TheDistinct National and Sub-regional Crises 

     Within theEast Asian crisis, we need to distinguish between factors that were commonto the region overall (stock market crash and plummeting exchange ratesin conditions in which short-term national and sub-regional crises converged,leading to a regional cycle and crisis) and the different national processesthat converged in it. We have divided the crisis into three categories,each having its own particularities.  
The first of these is the Japanesestructural crisis, analyzed in certain detail above which arose when along cycle of accumulation ran its course; its resolution will requirea deep techno-economic and socio-institutional restructuring, as well asa reconfiguring of the global and regional space. That the Japanese economy,despite the fact that all known expansionary measures have employed, hasfailed to recover from the crisis even after the other countries of theregion have done so merely confirms this. 

     By contrast,the effects on South Korea, Thailand, and Malaysia (and probably on Indonesia,as well, although this country appears to face much more complex obstaclesto a full recovery) can be considered part of a second category. Thesewere very acute short-term or (from the standpoint of their consequences)developmental crises, insofar as they imposed a deepening and correctingof approaches that had already begun to be implemented, to an extent thatdepended on conditions that were quite different in each of the three countries.Therefore, and unlike what has occurred in Japan, all three have quicklyrecovered from the crisis, and even Indonesia, the country that has laggedthe furthest behind, is now on the path to recovery. 

     The SouthKorean crisis was brought about by other decisive factors: it was a typicalcapital-over accumulation crisis in which the collapse of the profit ratewas exacerbated by an extremely high and rising level of over borrowing²⁹and largely questionable liberalizing public policies,³⁰although its strong dynamism and the existence of a modern state in thethroes of transformation and democratization worked to the country’s favor.The key element here was the relative exhaustion of a protracted, sustainedinvestment cycle in capital-intensive industries with large economies ofscale and which since the late 1980s had displaced integrated circuits,in a climate of explosive growth in labor and exchange-rate costs (seefootnote 13) and, starting in the 1990s, a poorly managed financial liberalization.However, unlike in Japan, the collapse in South Korean output was verybrief (1988) and led to a still-ongoing restructuring that allowed fora very quick and extremely vigorous economic recovery (growth above 10%in 1999 and 2000 to date).  

     The crisesin the ASEAN-4 countries, and particularly in Thailand and Malaysia (inthe Philippines and Indonesia the crisis took on particular characteristics),were different from that of South Korea, because there was a small burdenof capital over accumulation on heavy industry and for the greater importanceof speculative-financial and banking factors. The accumulation cycle beganmuch later in these countries than it did in South Korea (from 1986-87on) and it culminated in the early 1990s, thanks to a very intense real-estateand stock-market boom that attracted massive amounts of foreign capitaland strained weak national banking systems (World Bank, op. cit; Corsetti,Pesenti and Roubini, 1998; Henderson, 1999).³¹ The unique importance of the performance of the real-estate market in thesecountries appears to have been a much more general phenomenon linked tothe intense pressure of the economic cycle on the territorial resourcesof relatively small and overpopulated countries, as was demonstrated inJapan, where the transfer of capital to urban property was a mainstay ofthe speculative bubble that had begun in the late 1980s. In Thailand, justa few years before the outbreak of the crisis, the concentration of portfolioinvestment in real estate was led by Japanese capital (40%) and followedby capital from the United States (19%) and Hong Kong (11%) (Henderson,op. cit.). The same pattern was repeated with 40% of the average directinvestment in 1995 and 1996. Regarding these countries response, this wasalso a short-lived crisis with a successful restructuring and recoveringprocess, thanks to their level of integration into the new global industrialcycle (especially Malaysia) and their progress in state organization.  

     The Indonesianeconomic crisis contained the same cyclical elements as that of the remainingASEAN countries examined here, although it was more complex and severe,because of two structural factors not present in the other countries. Thefirst factor was the terminal political crisis of the historical form ofstate organization (Suharto’s patriarchal and nepotistic regime), linkedto a bureaucratic over regulation of the economy, which benefited a corruptstate bourgeoisie (Dabat and Toledo, 1999). The second factor was Indonesia’srelatively (that is, in comparison with the other countries studied here)outmoded type of integration into the world market, based on extractive,labor-intensive industries, with a peripheral share (through the electronicconsumer-goods industry) of the new global industrial cycle. The two factorsbrought about a complex relationship between cyclical (short-term) economicissues and structural (political and economic) ones, giving the crisisunique characteristics. This explains both the extent and the duration(from 1997 to 1999) of the collapse in output as well as the tentativenature of its economic recovery, largely stimulated by the strong improvementin international oil prices.  

     To concludeour examination of the different types of national crises, we need to considerwhat we might call the imported crisis, brought about by the regional spreadingof the destabilizing and depressive effects of ruptures in the networkof production and financial relationships. This was the case of the downturnand brief recessions that affected most countries linked to the Chinesesphere.  

Conclusion 

     The Asiancrisis led to a broad debate on issues such as the nature of the financialcrisis, IMF policies, and the relationship between the so-called “Asianmodel” and the crisis. The latter is the only issue we will examine here,because of its direct relevance to this article. For Krugman (1998) andother authors who follow a neoliberal line of reasoning, the regional crisiswas the result of excessive state intervention, encouraging moral hazardin the framework of “crony capitalism.” With regard fundamentally to SouthKorea (although largely applicable to other countries), these authors stressthat government industrial policy encouraged corporations to enter unprofitablebusinesses by giving them subsidized access to public credit. Accordingto this view, the low rate of return of these projects would reveal thechaebols’ inefficiency, because they operated in a pathological systemof corporate management (diversification under non-economic criteria, patriarchalcontrol, and a lack of transparency before minority shareholders and thepublic).³²  

     These criticismsdo not, however, hold up to serious analysis. They confuse corruption—awidespread phenomenon common to most countries, including, to no smalldegree, the United States³³ —with crumblingpolitical-institutional regimes such as Suharto’s or with institutionalor structural traits characteristic of the late industrialization studiedby Gerschekron, Hirschman, and Amsden, and which do not conform to present-dayparameters of “market” morality. The late industrialization traits includescross-shareholding, a unique view of long-term rate of return, and Krugman’sand Young’s extensive accumulation, which in fact is part of what we callthe “structural duality” of this countries, briefly considered below.  

     As Changet al argues (Unpublished manuscript) the cross-shareholding system inSouth Korea (and other countries that followed the Japanese model) playsa role in sustaining late industrialization. As an “state-controlled insidersystem”, it isolates manager-owners from the influence of external investors,so as to favor the accumulation of technological knowledge by domesticagents; hence, its performance should be evaluated on the basis of progressin this area. Regarding rate of return, ever since the Japanese experience,the relative compression of profit rates has been recognized as a historicalneed of the “newcomers,” which fight established companies and countriesfor market share. To this we must add the structural cyclical or short-termeffects that affect the rate of return.³⁴ The same can be said of so-called “structural duality,” since export sectorswill come, rather quickly, to base their accumulation on intensive methods,but the rest of the economy will continue reproducing itself under an extensivelogic for a longer period. The application of an ahistorical method tothis reality diluted its meaning, and the progressive nature late industrializationwent unperceived.  

     Regardingthe view that Asian developmentalism possesses, in principle, an institutionalpathology with a proclivity to crises, historical experience shows thecontrary. U.S. capitalism has experienced—as a result of the greater vulnerabilityof that country’s stock-market and equity-based capitalism to the vagariesof the business cycle—five major economic crises since the postwar recovery(1957-1958, 1966, 1973-1974, 1980-1981, and 1990), whereas Japanese capitalismhas experienced three (1975, 1992, and 1998) and South Korean two (1980and 1998). However, this does not mean that the greater stability of Asiancapitalism lacks cyclical counterparts or that would not benefit from reformsto adapt to the new historic and international conditions.  

     Indeed—asPorter points out—the main cyclical counterpart is that the historic formsof the “Asian model” appear, because of its inclination to rationalizeplant capacity, to be more prone to long-term capital over accumulationand severe rate-of-return crises than does U.S. capitalism, which, instead,suffers violent short-term upheavals. In a historical era with a rapidsuccession of technological changes, the ability to shake off excessive,obsolete accumulated capital places a country at an advantage vis-à-visothers that, although they experience greater long-term growth and stability,may be trapped in relatively long structural crises.  

     To the degreethat South Korea and most of the countries of the region continue to belatecomers, they cannot do without active industrial policies and mechanismsto regulate financial markets, as noted by Chang and other authors. However,the new global conditions (information revolution, globalization, new industrialcycle) and the greater degree of international openness also raise newneeds, such as autonomy and flexibility for companies, the advancementtoward higher technological levels, or the modernization of backward sectors.³⁵ For this reason, preserving the most advanced aspects of the “Asian model”(technological learning or the social role of accumulation) requires reformsthat will return to and reformulate the industrial policies and publicregulation of economic activity. Unlike what the orthodox critics of theAsian model assume, the crisis has reinforced rather than weakened thisneed, insofar as it has required an all-out battle against overproductionand the chronic lowering of business’ rate of return through deep-seatedtechno-economic and socio-institutional reforms that could not be achievedwithout those instruments.  

Endnotes 
 
¹  As noted by authors such as KlausEsser (1993), Carlota Pérez (1996), or even Fernando Fanjzilber(1983), Latin America’s relative exclusion from the early internationaldivision of labor and the new wave of investment was fundamentally dueto the nature of state intervention and active industrial policies in thatregion, which, unlike in East Asia, continued to be oriented toward importsubstitution with obsolete technology, the attraction of FDI toward captiveoligarchic markets, and rising foreign indebtedness, resulting from themanufacturing sector’s almost null export capacity. 

²  The most significant contributionsinclude those of Westphal (1978), Pack and Westphal (1986), Amsden (1989),Wade (1990), Hobday (1995 and 1995ª), and Stiglitz (1996).

³  In accordance with estimates of aggregateproductivity in the economies of East Asia, Young (1994), Krugman (1994),and to a certain extent the World Bank (1993), totally or partially disregardthe Asian miracle by concluding that growth has been extensive (based onincorporating inputs) rather tan intensive (based on productivity increases).This thesis (aside from questions related to correctly measuring thesevariables, as discussed above) underestimates the enormous, intensive progressof the industries most integrated into the world market (whose statisticalvalues become diluted when averaged with the most backward sectors) and,in fact, make the absurd assumption that productivity would have to beginto increase almost simultaneously in all sectors. However, as Porter (1998a)notes, developing countries necessarily begin from a competitiveness modelbased on natural resources and labor, in order to lift themselves up gradually,through large sectoral “dualities,” to another competitiveness model basedon investment and innovation (a phase which South Korea has entered onlymarginally). Porter points to Japan as an example of a country that succeededin passing through all the phases in a few decades, which has left importantislands where productivity continues to be low. Hence, we understand, followingPorter, that productivity cannot be dealt with separately from the stagesand the “duality” of development. 

⁴  Mowery (1999) acknowledges as muchwhen he discusses the lag of Japan’s computer industry. 

⁵ The flying-geese paradigm, although itaccurately represents and sums up the phenomenon of regional specializationthat is nearly unique in the world, oversimplifies the process, by apologeticallyoverestimating Japan’s role while minimizing that of the United States.Criticism of this concept can be found in Oman (1994), Bernard and Ravenhill(op. cit.), and Gereffi (op. cit.). 

⁶ If Japan’s international production networksin East Asia were originally geared to supplying internal markets, U.S.pressure obliged them to restructure and focus on exporting; nevertheless,the retrofitting process was very quick and haphazard. Hence, both typesof plants frequently coexisted in a single country, thereby exacerbatingcompetition and overproduction (see Ernst, op. cit). 

⁷Information and telecommunications technologies—thepresent technological paradigm—consist mainly of the following elements:microelectronics, computer science, telecommunications, and software. Therelationship between these elements has fluctuated, but starting in thelate 1980s, with the proliferation and networking of personal computers,software (operating systems, tools, and applications) became, through itsintegration with telecommunications (digitalization and fiber optics),the dominant factor, with enormous advances in databank management andautomation. At the same time, the various components of hardware production(semiconductors and computer and telecommunications equipment) became commoditieslacking technological rents, which has concentrated in U.S.-led softwareproduction and industrial design. Consequently, we understand the informatics-electroniccycle as the trajectory derived from the new paradigm, in which the mostadvanced transformations in production and distribution become connectedto the type of good mentioned above, which, in turn concentrate technologicalrents. The concept of E-IS is proposed in Dabat and Ordóñez,synthesizing theses put forth in OECD (1988), Langlois and Steinmueller(1999), Bresnahan and Malerba (1999), and Mowery (op. cit.).

⁸ The U.S. trade deficit became a key factorin the world economy dynamics, particularly in East Asia, but while theUS trade defict widen, its enormous intangible income (from software, etc.),generated to a large extent in Asia, more than offset the U.S. trade deficit. 

⁹ U.S. networks have focused mainly on Taiwanand Singapore and these countries’ links to the ASEAN and, to a lesserextent, on China. Japanese networks are more dispersed; they continue tohave strong links with Indonesia and other ASEAN countries such as Thailand;and they also have a relatively negligible presence in China. Ethnic Chinesecompanies (especially those from Hong Kong and Taiwan) are very involvedin mainland China, while those from Singapore have a role in Malaysia,Thailand and, increasingly, Vietnam. Korean companies are less spread outthan are Japanese and South Korean companies and appear to be focusingon China and the new areas of the ASEAN (see Borrus, op. cit.; Ernst, op.cit.). 

¹⁰ This greater relative autonomy of subcontractingcompanies was seen only in the sphere of production, per se, since technologicalrents continued to be concentrated in the United States and to a certainextent in Japan, rather than in the new producing countries (Kaplinsky,op. cit.). 

¹¹ Taiwan became the world’s leading producerof motherboards, mice, scanners, monitors, and keyboards; Singapore tookthe lead in hard drives and compact disk player sound cards; and SouthKorea became the second largest exporter of memory chips, after Japan (Borrus1995; Hobday, op. cit).

¹² Within the globalized economy, multinationalcompanies play a contradictory role as microeconomic agents of global competitionand generators of output, employment, and exports in given countries (andblocs of countries) competing with other countries and regions to maximizeoutput, employment, and domestic export capacity. In one sense, a givenmultinational company’s competitive success benefits both the company itselfas well as its home country, insofar as it raises the average domesticrate of return (both at the company level and in the stock market) of itscountry of origin and strengthens its economic power and global presence.However, to the extent that a company located abroad operates as an externalforce competing on world markets with the country’s domestic output andemployment, in certain conditions it may have a negative effect on growthin its country of origin. 

¹³ The formation of this bloc stemmed, aboveall, from the enormous relocation of multinational capital toward new exportplatforms, such as Mexico, involving not only U.S. but also European, Japanese,Taiwanese, and South Korean companies, among others. 

¹⁴ Indeed, the theory of rational expectationsdissociates economic fluctuations from financial crises, by assuming thatmarkets react rationally (according to the standard economic model) tochanges in economic variables. Friedman goes even further, stating thatdestabilizing speculation cannot exist. This theoretical shortsightednesscondemns the lender of last resort to act ambiguously, thereby worseningthe crisis, as was shown by the history of the financial crisis of the1980s-1990s and, we would add, the Asian case (see Kindleberger 1989, Ch.1 and p. 30)^. 

¹⁵ Of the important recent works that dealwith the issue from this perspective, one that stands out is Brenner (1998),which explains the historical exhaustion of the U.S. postwar boom and thepresent possibilities for recovery based on the endogenous accumulationcycle (the end of over capacity and manufacturing overproduction) and therole of international competition; another important work is the theoreticalcriticism made by  Shaikh (1999). However, it is surprising that theseworks, and especially Shaikh’s, do not take into account issues such asthe informatics revolution and other historical transformations in capitalism,particularly in terms of competition or in the international division oflabor. 

¹⁶ What we call a country’s or a group ofcountry’s “historical accumulation cycle” is merely the upward (longwave)expression of the Kondratief cycle applied to that country or group ofcountries, seen from the endogenous perspective of capital accumulationand capitalist rate of return. Each long accumulation cycle (LAC) resultsfrom a specific historical-structural combination of techno-economic (Schumpeter,Mandel, Freeman and Pérez), socio-institutional (Aglietta, Gordon,Boyer, Freeman and Pérez), and spatial (Dabat, forthcoming) components.The main structural changes that pave the way to a new LAC (historicalprocesses of techno-economic retrofitting and socio-institutional reorganization)occur in the downward long waves or phases that follow the exhaustion ofthe previous LAC (Dabat, 1993: Ch. 7; Pérez 1986); however, theycan only be deployed in the upward phases, which result from the historicreestablishment of the rate of return, accumulation, and credit. In everyinstance, the processes of restructuring and expansion contained withinLACs are the result of successive non-linear advances deployed throughouta succession of short-term cycles (STCs).

¹⁷ We use the notion of short-term cycles(STCs) in the classic sense given to it by Marx or Hicks, that is, as abasic unit of temporary fluctuation in economic activity determined bythe succession of phases of depression, recovery, boom and bust, startingwith the very logic of capital accumulation and variations in rate of return,demand, and credit that are the foundation for the long cycle; however,their duration is much shorter and they express the potentiality and declineof the broader movement. STCs pave the way for deep-seated historical-structuralchanges when they coincide with the end of a historical accumulation cycle,such as was the case of the 1929 crisis (the demise of classic monopolist-financialcapitalism) or that of 1974-75 (the end of organized or mixed capitalism).Hence we can speak of terminal crises that cannot be resolved withina country’s historical-structural framework. This raises the need for industrialrestructuring and financial reorganization as a condition for a new waveof expansion. By contrast, when short-term crises take place within a contextof the restructuring or the upward deployment of the production cycle,they can be considered development crises, insofar as they merelyimpose the need to consolidate or correct the course of the changes requiredby the logic of incremental changes in the technical-productive model andthe imperatives of competition. 

¹⁸ Liquid capital becomes excessively abundantin periods of decline in productive accumulation, not because it is greaterin absolute terms (generally there is accumulation because of the devaluationof assets provoked by the depreciation of stock exchange), but becauseof the decline in reinvested earnings and the companies’ demand for credit.Therefore, a relatively small amount of liquid capital will generate agreater supply of money on the financial and speculative markets. 

¹⁹ Between the postwar recovery and 1993,the Japanese economy failed to grow in only one year—1974, when GDP fell0.6%, under the impact of the oil shock and the global crisis (Maddison,1995: Table C, 16a).

²⁰ In criticizing the interpretation thatreduces Japan’s crisis to a banking problem, Krugman stresses that evenat a negative interest rate existing aggregate demand is insufficient to(profitably) employ that country’s plant capacity. That is, Japanese savingswill outstrip investment beyond its current account surplus. Hence, withoutusing the concept of overproduction, or decline in the rate of return,this author refers to Japan’s fundamental economic problem. See Krugman,Financial Times, 27 Oct. 1998.

²¹ Chang (2000), in referring to South Korea’sindustrial policies prior to 1990, correctly observes that the Japanese-inspiredmeasures taken to coordinate investment neutralized overinvestment by eliminatingexcess plant capacity. However, at the same time, and to the extent thatthese measures continued to encourage capital accumulation, they saturatedthe markets, increased pressure on productive resources (especially thelabor force and land), and reinforced the avidity for new investment capital,provoking an upward cost spiral that would finally lead to a productioncrisis. 

²² The accumulated value of Japanese bankloans to the five countries most affected by the Asian crisis in late June1996 was 97 billion dollars—nearly triple that of the United States andequal to the amount lent by the European Union (Financial Times,3 April 1998).

²³ The overvaluation of the yen between1985 and 1995 (its dollar-exchange rate rose 2.5 times) coincided withproductivity increases in the United States and, to a lesser degree, inEurope, and acted together with Japan’s loss of competitiveness. Japan’sresponse entailed a strong decline in domestic investment, in order toreduce excess plant capacity (or what we call excessive capital accumulation),triggering a recession starting in 1992. Externally, the more significanteffect was the transfer of plant capacity and surplus capital to the low-wagecountries of the region, which converged with the increase in imports (UNCTAD1996, pp. 94ff).

²⁴ Nevertheless, in Indonesia, the lessdamaging consequences of the drop in international prices for labor-intensiveproducts may have been offset by the tendency to displace production ofthose very goods to the peripheral areas of the ASEAN (Gereffi, op. cit.;World Bank, op. cit.).

²⁵ In Thailand and South Korea, the capital-outputratio increased steadily beginning in the late 1980s (World Bank, 1998,p. 7). Also see McKinnon and Ohno (1997). 

²⁶ Labor costs began to skyrocket in 1988,just as the South Korean economy entered a stage of growth in capital-and technology-intensive production (led by the semiconductor industry).This, and the widespread unrest among workers, led to a reduction in theworkweek between 1988 and 1995 from 54 to 44 hours, while real wages inmanufacturing increased 58% in won and 100% in dollars—because of a 27%revaluation of the won vis-à-vis the dollar. In the same period,manufacturing productivity rose at a level similar to domestic costs (inwon), but 27% below labor costs in dollars (based on data from the Bankof Korea [http://www.bok.or/index_html]and Laborsta [http://ilo.cgi-bin/broker.exe])^.

²⁷ The severity of the crisis in output(that is, the fall in GDP) in Hong Kong was largely due to the importanceof financial activities, but also to something completely unrelated tothe regional financial crisis—concern in business circles regarding theterritory’s transfer to the People’s Republic of China, which occurredaround the same time as the onset of the Thai crisis.

²⁸ In Vietnam, GDP growth fell from 9% for1995 to 1996 and to 6% for 1997 to 1998; in the same years, the growthrate in Myanmar remained constant, and in Laos it decreased from 6% to5%. Only Cambodia appears to have been hard hit, although we were unableto quantify the impact there, because the source we examined (IMF, 1999)does not include data for 1998.

²⁹ According to the World Bank, South Koreancompanies’ rate of return fell from an already-low 2% in 1991 to nearlyzero in 1996 (0.4%). In the same year, the countries’ leading companies’recorded leverage levels (debt/equity ratio) close to 550% (World Bank,op. cit.: 58), or 50% higher than the average rate for the 1980-1991 periodgiven by Chang (op. cit., Chart 3). 

³⁰ Chang (1999) questions above all theabandonment of industrial policy and the coordination of investment (whichfavored the disproportionate growth of plant capacity in certain industrialsectors), the rupture of barriers limiting foreign borrowing, and the appearanceof credit institutions not subject to state supervision, such as the newmerchant banks, which acted as intermediaries between domestic and externalagents through operations that gave preference to short-term, unsecuredloans.

³¹ The Philippines was a unique case, becauseits export boom began only in 1993-1994, at least seven years after theremaining ASEAN-4 countries, and resulted from the inflow—thanks to itslower production costs—of investments previously located in other ASEANcountries, especially Thailand. The incipient nature of its economic cycletranslated into small stocks of accumulated capital and debt. Moreover,its speculative stock-market and real-estate cycle appears to have beenvery similar to that of the other countries discussed here. 

³² This summary draws from Chang 1998 and1998a.

³³ In 1999, the Corruption Perception Index,by International Transparency—the most widely used index to gauge the extentof corruption in different countries—ranked the United States in eighteenthplace, well behind Denmark (the country with the least corruption) andSingapore (the seventh), but also behind Hong Kong, the city famous forits “triads.” 

³⁴ This was one of the lynchpins of Japaneseexpansion in the U.S. market, as Dertouzos et al. (1989) correctly pointout. Moreover, we must distinguish between short-term and long-term rateof return. Porter (1998), for example, notes that one of the weakest pointsof the U.S. business system is the optimization of short-term rate of return,associated with the excessive importance of foreign shareholders. On thispoint, Porter (who criticizes the Japanese system on other issues) considersthat both the Japanese and the German systems are more advanced (that is,more geared to long-term growth) than is that of the United States, althoughboth tend to “overinvest in capacity, to proliferate products, and to maintainunprofitable business indefinitely in the name of corporate perpetuity”(ibid: 449).

³⁵ In the case of Japan, the high cost ofagricultural products, land, processed food, construction, and commercialbrokerage make the domestic labor force 40% more expensive than U.S. workers.In turn, the relatively (by international standards) high cost of telecommunications,computers and software is a very significant barrier on Japan’s entry intothe computer age. In South Korea, by contrast, the costs of reproductionof the labor force are mitigated by its greater commercial openness andits progress in industries such as construction and telecommunications;however, duality, which has been preserved for cultural and political reasons,constitutes a very important encumbrance, thwarting its possibilities foreconomic and social growth. 
  

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