Both China and Japan operate essentially the same authoritarian — and almost universally misunderstood and underestimated — economic model. Let’s call it the Confucian model. …
First, let us note that this model is fundamentally incompatible with American hopes for a global rollout of free markets. There are two immediate problems:
- The Confucian model is not only protectionist but unalterably so. Aspects of the model cannot work without a protected home market.
- The Confucian model features a complex latticework of corporate structures that clearly conflicts with American free market capitalism. Not the least of these structures is cartels, which are, of course, strictly forbidden under U.S. law. Another problem is Japan’s keiretsus and other similar corporate groupings (known as chaebols in South Korea, qiye jituans in China, quangxi jituans in Taiwan). As we will see, such structures are undoubtedly on balance helpful in improving East Asian productivity.
The Confucian system makes considerable use of markets and this, of course, encourages hopes in Washington for a general trend towards greater freedom in East Asia. In reality, officials throughout the region claim the right to overrule market forces almost at will. …
If a nation’s savers save more, corporations can invest more. If corporations invest more, workers can produce more. (Whereas in the United States corporate leaders focus on profits, almost to the exclusion of everything else, in East Asia worker productivity gets priority.) Equipped with the most advanced production machinery, such as robots in the car industry, nations can quickly leap to the forefront in productivity. Economic growth is thereby stimulated.
Of course, savers need a return, and here is where protectionism is so important. Corporations earn super-high profits in the home market and these are then applied to looking after the various sources of capital. Meanwhile, producers can aggressively cut prices in export markets.
Enforced frugality — nothing to spend it on:
For an economy to keep growing, savers must keep saving. This is where the Confucian model really comes into its own. The model’s most important — and most counterintuitive — feature is its savings process. With few exceptions, American observers assume that culture is sufficient to explain the region’s super-high savings rates. Supposedly, Confucianism instills in everyone a powerful tendency to frugality. …
Behind all this is a policy virtually unheard of in modern America: suppressed consumption. To anyone tutored in modern American economic thought, the idea of suppressing consumption may seem to border on insanity. But that is not how things look in modern East Asia.
Nor is it how things looked to U.S. economic planners in World War II. Soon after Pearl Harbor, the United States began tightly suppressing consumption. The program started with rubber tires, and was later extended to cars, sugar, typewriters, and gasoline. By the end of the war, rationing covered coffee, shoes, stoves, meats, processed foods, and bicycles. Lo and behold, the result was a preternatural increase in the savings rate. According to the economist Laura Nicolae, U.S. households’ excess savings during the war totaled nearly 40 percent of national income.
In modern East Asia, the effort to suppress consumption is less direct but equally effective. For a start, East Asian governments restrict the import of key consumer products. Another important strategy is to minimize consumer credit. … Fewer than 30 percent of Chinese adults had at least one credit card, compared to 79 percent of Americans.
Meanwhile, in many East Asian nations, zoning is so tight that housing is rendered stunningly expensive. Restricted living space means consumers consume less electricity and gas. They also buy fewer appliances and items of furniture. Other ways of suppressing consumption include barriers to imports and limits on foreign vacation travel. …
As a matter of etiquette, major East Asian employers do not hire from direct competitors. Moreover, they rarely resort to lay-offs, even in the worst recessions. This creates by default a settled system of long-term employment. …
The psychological advantages that accrue to employers from a no-layoffs policy are a lot more beneficial than is understood in modern America. East Asian workforces feature a far greater degree of long-term accountability. They are also impressively strong on teamwork. Because the East Asian employment system expects employees to commit for the long term, there are rarely second chances for employees who fall out with their first employer. That means that workers are considerably more cooperative in taking on tough assignments. Certainly East Asian employers enjoy the observed advantage that at all times they have at their disposal battalions of hard-working employees willing to be sent anywhere and do anything to further their employer’s agenda.
Another advantage of the East Asian system is that it provides employers with a much greater incentive to invest in worker skills. American employers have to worry that any workers they train may be quickly hired away by rival employers. …
Outlasting the free market:
Faced with the never-undersold nature of East Asian competition, American employers often enter a process of terminal shrinkage. They slash jobs in a recession but rarely fully restore these in a recovery. Instead many resort to outsourcing, which they consider to make particular sense in the early, tentative stages of a recovery. A devastating ratchet effect is therefore at work in which over the long haul the Americans keep losing market share.
In withstanding a global recession, East Asian companies have an important cushion in undervalued home currencies. Put another way, the U.S. dollar has long been massively overvalued. Just how overvalued is suggested when you consider America’s forty-year record of huge trade deficits. How low would the dollar have to go before we might see a revival in industrial investment? A reasonable guess is that even a devaluation of as much as 75 or 80 percent would not have an appreciable effect. Yet a revaluation on this scale would imply that total U.S. gross domestic product would at a stroke be cut to less than China’s and even Japan’s. No presidential administration is likely to contemplate such a haircut.
Meanwhile, the big exporting nations — including Germany as well as China and Japan — will probably for several years to come continue to prop up the dollar as a quid pro quo for continued access to the American market. These nations’ top priority is not financial but rather industrial. They aspire to continue to hone their production skills. The super-long production runs provided by an open American market are an important help in this regard. …
Cartel efficiency at home, competition abroad:
East Asian cartels are quasi-regulated institutions answerable at all times to the national interest. Yes, members of such cartels fix prices, but they can’t shut down all forms of competition. Rather, cartel members are generally encouraged to compete on quality and service. As for unrestrained free-market pricing, this is seen as wasteful because it diverts executive attention away from the weightier matter of delivering ever higher quality at ever lower production cost. …
Another advantage of cartels is in standard setting. In former times, industrial standards typically originated in the United States. Not anymore. Most standards these days emerge from East Asia. This is important because those who set standards tend to favor their own interests.
Then there is perhaps the most important advantage of these cartels: They reduce the cost of research and development. Cartel members divide up research projects among themselves, thus minimizing duplication. This feature alone may make all the difference, as it is not unusual for leading manufacturing corporations elsewhere in the world to spend as much as 5 percent of sales on research and development. East Asian cartels get far more innovation for their money, and this benefit is passed on to each member. …
The future might belong to the cartels:
The conclusion is epochal. A system that rivals Soviet communism in its grim suppression of individualism is now powerfully outperforming American free-market capitalism. The outperformance is most obvious in international trade. On closer examination, the Confucian system’s superior wealth-creating capabilities are evident almost across the board.
In short, we are witnessing a fundamental revolution in the human condition. The world is transitioning from an era when free societies did well precisely because they were free, to a new era in which authoritarian societies are doing well precisely because they are authoritarian.
In one sentence, authoritarianism is set to inherit the earth.
Will the Confucian model work when there are no wealthy free market consumers to plunder, and everywhere is your high-priced home market? China and Japan were pretty stagnant until the Europeans rocked up.
Commodore Perry forced the Japanese to end their isolation in 1853
hat-tip Stephen Neil