Development in Northeast Asia

By Víctor López Villafane

I’ve been studying northeast Asia—mainly China, Japan and South Korea—for the past four decades, and I’d like to share with ReVista readers what I consider to be the principal differences and lessons the rapid development of these countries can offer Latin America. 

 

One Region, Three Powers

After World War II, Japan became a world economic power. South Korea followed suit, and then finally after 1978, China. Nowadays, China is the second economic power in the world, Japan the third, and South Korea, the eleventh. Seventy years ago, the three countries were underdeveloped: their takeoff and economic growth have been exceptional in world history. And they became motors for the growth and development for the entire Asiatic region in terms of trade and mutual investment. 

In Latin America, Argentina was regarded as an emerging power at the beginning of the 20th century with great possibilities of becoming a world power, but that never happened. I remember that famous joke attributed to Russo-American economist Simon Kuznets when he was asked about how countries should be classified. He said that there were developed countries and underdeveloped countries—and then there were Japan and Argentina. No one could explain why Japan, with so many limited resources, was a developed country, and how Argentina with such abundant resources was underdeveloped. 

Japan
Japan revived its economic growth with savings.

 

Mexico and Brazil, the two other large countries on the continent, had spectacular economic growth between 1950 and 1970, which led them to be dubbed Latin America’s great economic miracles; however, this growth stagnated because of their high debt level which led to the so-called lost decade in Latin America between 1980 and 1990. Frequent financial crises followed. In spite of all this and because of their great economic potential, these two countries continue to figure as mid-size economic powers in the world system.  

As we might imagine, the great countries of Latin America—unlike Japan, China and South Korea—did not contribute to the internal development of the continent. Foreign trade and investments kept coming primarily from overseas. Mexico is a case in point. It has a large economy, but it is a platform for trade for big U.S., Asian and European companies, which focus their investments on taking advantage of closeness to the U.S. market and of the low salaries paid to Mexican workers. The attempts at regional integration up until now have suffered from this flaw. They do not depend on the region’s own economies by developing capability to restructure industrial and industrial platforms, making them dynamic as happened in East Asia. The majority of countries in Latin American and the Caribbean continue to be very dependent on the export of resources and primary materials, and this has given rise to new debates such as that about neo-extractivism as a form of evolution, but within the context of the exploitation of natural resources as an essential means in all economic operations. 

 

Lessons from Northeast Asia

The region provides varied and important lessons for Latin America. It seems to me that the intensity of industrialization policy in the three countries is one of them. In general, all of these cases were successful in transforming ample masses of urban and rural dwellers into workers in their new industries—more than Mexico, Brazil and other Latin American countries have been able to do. Over time, these new industries generated a cycle of change and technological development, confronting the challenges that these processes of restructuring demanded.  The job market absorbed many people, and later, in the face of industrial and technological changes, workers’ salaries increased, creating a virtuous cycle and increasing exports at the same time a new dynamic domestic market was created. 

China
China mixes the traditional with the ultramodern.

 

In contrast, the industrial growth that was important in some Latin American countries such as Mexico and Brazil, in the stages of development in post-war Latin America, was not sufficiently intense to prevent marginal populations in the countryside and the city from emerging as the bottleneck generated by inadequate rural and industrial development. 

The case of Mexico again began to receive a lot of attention when its industrial strategy started to emphasize foreign investment and international trade as the instruments with which to transform Mexico—according to its leaders at the time—into an economic powerhouse. Thus with the signing of the North American Free Trade Agreement (NAFTA) in 1994, the migration of workers to the United States accelated dramatically because of spiralling rural unemployment. Almost a million and a half jobs were lost in the rural areas of Mexico between 1994 and 2004. Other migrants left low-paying jobs in the cities in search of the American dream. Salaries paid to workers in Mexico are very low, and this basically constitutes a comparative advantage in keeping the costs of goods down. But, mostly because of these low wages, the domestic market lives with a permanent bottleneck. Levels of poverty are maintained just as they were in the past without new strategies to alleviate them. 

I believe that the Mexican case is an example of what has been happening to different degrees throughout Latin America. Many countries saw the NAFTA experiment as a great promise that free trade with the United States would shape Mexico into an economic power similar to that of eastern Asia. It did not happen that way, because integration was carried out without strategies and prior planning to strengthen the industrial, technological and human resource factors to bolster the effects of trade integration within the Mexican economy. Mexico has substantial exports  but basically foreign companies manufacure in Mexico and export to the United States. We should remember that Asian countries became export powerhouses in the world market without trade agreements, and that these were signed after the fact. 

Without an industrial policy, which was completely abandoned in Latin America in the last decades, the continent’s economies could not establish interconnections with their national industries, nor between their industries, and, indeed, in many cases industry did not even exist and foreign firms dominated the export sector. Thus, positive effects could not be generated in economic growth and job creation; technological transfer was limited. As a result, in the majority of Latin American countries, dependence on international oil prices and other natural resources continues to determine economic growth. Thus, the power of control and management of the economies follows the cycles of international prices. The continent is still—as the actual economic relation with China demonstrates—a provider of natural resources to the world market. 

The stage of industrial development and import substitution in Latin America was carried out without native technological development. This was the other key to the difference with East Asia where, as historian Bruce Cumings has pointed out, authoritarian bureaucracies placed emphasis on endogenous (without external factors) industrialization and promotion of the export sector. In contrast, Latin American national industries were developed, but they never could be competitive in international markets. In almost all Latin American countries, advanced technologies were implemented through investments in industrial plants. There were no strategies to learn and to transfer thse new technologies to local industries, as happened in Japan (more through the use of the acquisition of licenses and patents for technological use) and in South Korea. For decades now, China has been acquiring and transferring new technologies to its national companies, which now constitutes one of the points of conflict with the United States. 

Once the model of import substitution had run its course in Latin America, a reliance followed on external debt, implemented on a grand scale in Mexico, Brazil and Argentina during the decade of the ‘70s and the beginning of the ‘80s, which then led to financial crises and low growth. In contrast, Japan could fuel its industrial growth with financing that was a product of internal savings, while South Korea became greatly indebted almost on the levels of the large Latin American countries. The difference in the Korean case is that the borrowed resources were destined with preference to export industries that could pay off the debt and maintain growth. For its part, China has carried out its economic development with large and permanent injections of local credit derived mainly from local savings. Latin America’s debt in great part was not destined to export industries, but to basic industries such as oil and gas and to government expenditures, with the enormous possibility that a great percentage of this debt was channeled into corruption, which is an endemic evil in the entire region. 

 

Relations Between Asia and Latin America

Since the Spanish trading ships known as Manila Galleons engaged in regular trade between the two regions from 1565 and 1815, and perhaps since the first Asian migrants set foot on Mexican soil, the relations have existed, becoming very dynamic in the last decades between the end of the 20th century and the beginning of this 21st century. Migrations from Asia, mainly from China and Japan, have created one of the most important groups in almost all the countries on the continent. The population of Japanese origin in Brazil, for example, is the largest number of Japanese outside of Japan, and in many countries Chinatowns have become important because of China’s important presence in the region. Groups of Korean migrants and other Asian nations are also settling in Latin America as living proof of the dynamism of exchange that exists between the two regions.  

Investments and trade have increased notably in the last few years. Japan has had an important economic presence since the end of World War II and China with its enormous economic potential has become the primary trading partner for many Latin American countries. Trade with Asia now takes second place after the United States for Latin America and the Caribbean. 

Investment has also soared. For example, in  2008, total trade was already 143,000 million dollars, and in  2017, it had spiralled to more than 250,000 million dollars.  Trade between Asia and Latin America increases on an average of  15% yearly. If this pace continues, in the next ten years, Latin American markets will make up an enormously important part of China’s world trade.  

Moreover, in these years, China’s commercial penetration was decisive not only in helping many Latin American countries withstand the world economic crisis, but China became a primary or secondary partner for many. In the case of Chile and Brazil, China passed the United States as principal trading partner. In Argentina, Costa Rica, Peru and Cuba, China became the second most important market. The principal problem, as we have mentioned, is the fact that the trade is unequal, with Latin America selling raw materials and energy to China, while China exports manufactured goods. This puts Latin America at risk of once again creating a cycle of dependency. 

 

Víctor López Villafane is a professor at the Universidad Autónoma de Zacatecas, Mexico, and Professor Emeritus at the Tecnológico de Monterrey. He studied China and Japan at the University of Tsukuba, Japan  from 1977 to 1979. He has received the Japanese government’s Order of the Rising Sun for his contributions to Asia-Pacific studies. He can be contacted at villafane16@gmail.com.