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The East Asian Economic Model

The model which was associated with the economic development of Japan, Korea, Thailand and China may finally have had its day.

At the end of the Second World War, the victorious allies met to determine the nature of the post-war economic architecture of the world. The purposes were various: create an economy that would act as a disincentive to war, act as a deterrent to the spread of Communism and integrate newly post-colonial states into the global polity. Part of the solution derived from these meetings was the creation of the so-called Bretton Woods Institutions (named after the place where the particular meeting was held), which were the International Monetary Fund (IMF) and the World Bank. These institutions in turn began to support development in countries in East Asia, in particular, through the EAEM. Subsequently, countries from Japan to South Korea, Taiwan and Thailand, among others, achieved sensational levels of economic development and growth through following, to one extent or another, the prescribed model.

The EAEM encourages countries to adopt import-substituting, export-oriented growth through opening the economy to international investors and renting out the local labour force to those capitalists wishing to take advantage of low labour costs. In many cases, repression of the workers was required (e.g. through police or military violence, banning of labour unions and severe restrictions on democracy or freedom of speech) so as to keep those costs down. Factories were built across the countries concerned, often operating on the basis of Original Equipment Manufacturing (OEM), which means that factory managers were given contracts to create basic manufactures onto which the investor would then place a brand. Since, increasingly, the value inherent in consumer goods comes from the brand element, then the EAEM rewards the investor disproportionately in comparison to the workers. The exact configurations of the EAEM varied quite significantly from country to country – in some cases, notably South Korea, the relevant government completely ignored those prescriptions of the Bretton Woods Institutions which it found unwelcome.

With the onset of the current economic crisis, it would appear that the time of the EAEM is finally coming to an end. Perhaps the last great exponent of the Model has been China, which has achieved extraordinary levels of economic success in the last few decades through, essentially, manufacturing items for sale in the US and other western markets. Since those markets are now full of people not buying anything, the Chinese economy will need to restructure itself significantly to promote domestic consumption to substitute for now sagging exports (the alternative will be an economic collapse and probably widespread political unrest and perhaps violence). Promoting domestic consumption will lead to promoting domestic incomes (otherwise people cannot afford to buy goods) and this will mean an eventual end to low labour cost manufacturing. Other countries are likely to follow suit or to adopt alternative methods for development whenever the post-crisis world emerges.

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