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2. POLS 459 Politics of East Asia Lecture Two Theories of Political Economy A Brief Introduction September 27, 2007 Timothy C. Lim Department of Political Science California State University, Los Angeles Lecture Two Theories of Political Economy A Brief Introduction September 27, 2007 Timothy C. Lim Department of Political Science California State University, Los Angeles Background Image: A view of Seoul, South Korea (Source: http://dance.unlv.edu/danphotosforweb/seoul1.jpg)

3. Introduction to Theory/Political Economy To begin our study of theory/political economy, let’s consider the following set of statements about economic development, and specifically, capitalist economic development … Politics of East Asia Theories of Political Economy

4. Introduction to Theory/Political Economy In the modern age, capitalist development is dependent on establishing and taking part in system of relatively open, free trade. Free trade allows individual countries to maximize their prosperity through specialization and comparative advantage. Countries that participate fully and openly in the global trading system will, over time, become efficient and prosperous, while those that do not, will remain poor and economically stagnant. Politics of East Asia Theories of Political Economy Statement No. 1

5. Introduction to Theory/Political Economy Some societies possess specific social or cultural attributes that can, under the right set of circumstances, contribute significantly to the process of economic development. Conversely, other societies may be characterized by values, attitudes and practices that pose serious (albeit not necessarily permanent) obstacles to “rational” economic decision-making, thus making large-scale, sustained economic development very difficult to achieve. Politics of East Asia Theories of Political Economy Statement No. 2 Some people argue that Japan’s warrior code, bushido, combined with its Confucian heritage provided the perfect cultural foundation for rapid industrialization

6. Introduction to Theory/Political Economy The international economic system is inherently biased and unequal: some countries are simply stronger and better positioned than others. In world of “free trade” and “free markets,” therefore, the stronger and richer countries will always win. Late industrializers, in particular, face almost impossible odds. The only way to reverse this situation is for weaker countries to purposefully manipulate so-called free markets. Typically, this requires the intervention of a “strong state,” which often explicitly subverts free market principles. Politics of East Asia Theories of Political Economy Statement No. 3 Friedrich List (1789-1864) is a well-known advocate of this position, known as mercantilism

7. Introduction to Theory/Political Economy Economic development is almost entirely a function of external, rather than internal, factors. In general, poor or developing countries are forever locked into exploitative positions of subservience. In a few cases, however, poor countries can achieve a degree of “development” when such development serves the interests of “core” capitalists. In rare cases, poor countries can achieve a degree of economic autonomy and dynamism, but what is true for this tiny minority can never be true for the majority. Politics of East Asia Theories of Political Economy Statement No. 4

8. Introduction to Theory/Political Economy Politics of East Asia Theories of Political Economy Statement No. 1: The free market explanation (a.k.a: neo-classical) Statement No. 2: The culture explanation Statement No. 3: The statist (or developmental state) explanation Statement No. 4: The Marxist or dependency explanation Discussion Question: Which of the four statements do you find most plausible? Why?

9. General Points All four statements represent general or specific theoretical views of economic development All make core assumptions about the nature of the social world; some assumptions are clear, others are largely hidden All are simplifications (or abstractions) of a more complex reality, but each purports to identify those factors/forces/processes that are most important While each statement reflects a particular theoretical perspective, the “theory” embedded in each is probably not entirely abstract or disconnected to your thinking/understanding of the world Politics of East Asia Theories of Political Economy Consider statement no. 1, for example. The neo- classical positions assumes that questions of power can be largely excluded from an analysis of economic development. (This is a hidden assumption.) Statements nos. 3 and 4, by contrast, assume power is critical, but both have very different assumptions about the basic nature/source of power. All statements also make assumptions about the relative importance of structure and agency.

10. The Neo-classical Perspective Politics of East Asia Theories of Political Economy Miracle? What miracle? Asia’s economic success is no mystery, and it’s not even particular noteworthy. Bah humbug, I say! Paul Krugman According to Paul Krugman--a good representative of the neo-classical perspective--there has been no miracle in Asia. Asia’s economic growth, instead, can be explained very simply as a product of ______________________________. a rapid growth in inputs

11. The Neo-classical Perspective Politics of East Asia Theories of Political Economy Paul Krugman What is Krugman’s basic argument? Why does he spend so much time talking about economic growth in the former Soviet Union? What’s his main point? Asian growth is a lot like Soviet growth. It depended primarily, almost wholly, on a huge increase in basic inputs, such as labor power. This was impressive (in both cases), but economic growth through massive increases input is basically a one- shot deal.

12. The Neo-classical Perspective: Other Aspects Other neo-classical analysts understand that Asian growth is not entirely a function of a rise in inputs: productivity has also increased, albeit not a the same level or pace Most neo-classical economists argue that Asian productivity, however, is not the product of government or state intervention; indeed, government intervention is seen as anathema to capitalist development since it interferes with the free workings of the market Politics of East Asia Theories of Political Economy So what is the basic reason for increases in productivity?

13. The Neo-classical Perspective: Other Aspects Simple answer … Politics of East Asia Theories of Political Economy So what is the basic reason for increases in productivity? “Getting the prices right” “Getting the prices right”

14. The Neo-classical Perspective: Other Aspects “Getting the prices right” means letting prices find their right levels, where “right” refers to the the prices established in freely operating domestic and international markets (via “supply and demand”) To neo-classical economists, then, East Asian economic success is largely--even necessarily --a product of participation in and adherence to free market principles. Simple. More concretely, neo-classical economists argue that East Asian economic success derives from a strong bias toward export-oriented industrialization Politics of East Asia Theories of Political Economy

15. The Neo-classical Perspective: Other Aspects Export-oriented industrialization (EOI) Politics of East Asia Theories of Political Economy “Exports contribute to resource allocation according to comparative advantage. At the same time, these gains cumulate over time as the efficiency of new investment is enhanced through its orientation toward industries that correspond to the comparative advantage of the countries concerned.” ~ B. Balassa

16. The Neo-classical Perspective: Evaluation What do So and Chiu have to say about the neo-classical perspective? Rightly points out the importance of EOI: it is indisputable that the Asian economies are export-based and that exports played a key role in their development  In particular, export-led growth helped Asian economies overcome limitations of (relatively) small domestic markets  EOI also forced domestic companies to compete internationally; rent seeking and inefficient production, therefore, were made much more difficult Politics of East Asia Theories of Political Economy RENT SEEKING occurs when an individual, organization, or firm seeks to make money by manipulating the economic and/or legal environment rather than by making a profit through trade and production of wealth. The term comes from the notion of economic rent, but in modern use of the term, rent seeking is more often associated with government regulation and misuse of governmental authority than with land rents.

17. The Neo-classical Perspective: Evaluation On the other hand: The neo-classical perspective fails to account for the impact of …  Transnational corporations  The Interstate system  Regional dynamics Other factors  The state and other institutions  Cultural dynamics Politics of East Asia Theories of Political Economy Examples: What impact do the interests and power of large corporations play in the economic prospects of developing countries? What impact have changes in production process have? What role does competition among TNCs play? Examples: What role did de- colonialization and Cold War dynamics play in Third World development? How did the construction of the Bretton Woods system impact developing countries? What part did changes in trade policy--from mercantilism to free trade--play? Did different wars play a key role? Examples: How did Japan’s dominant position in Asia shape the development of South Korea and Taiwan? What impact will China’s emergence have? What about regions without a dominant industrial/technological power, such as Africa or the Middle East?