TOKYO/SEOUL – As the first non-Western country to achieve true industrialization, Japan’s development model is the one by which the world still tends to measure success in Asia.  It also provided a blueprint for others to work to. By the 1980s, two breeds of “Asian Tiger” – high-income East Asian economies – had emerged. While ex-British colonies Hong Kong and Singapore came into their own as post-war trading hubs and service centers, ex-Japanese colonies South Korea and Taiwan became manufacturing superstars.  Both the latter harnessed Tokyo’s strategies, for better or worse, to hone competitiveness and raise living standards via industrial growth. Now, millennial China is turning this tried-and-true progression on its head. Never was this clearer than during last week’s four-day Central Committee meeting
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TOKYO/SEOUL – As the first non-Western country to achieve true industrialization, Japan’s development model is the one by which the world still tends to measure success in Asia. 

It also provided a blueprint for others to work to.

By the 1980s, two breeds of “Asian Tiger” – high-income East Asian economies – had emerged. While ex-British colonies Hong Kong and Singapore came into their own as post-war trading hubs and service centers, ex-Japanese colonies South Korea and Taiwan became manufacturing superstars. 

Both the latter harnessed Tokyo’s strategies, for better or worse, to hone competitiveness and raise living standards via industrial growth. Now, millennial China is turning this tried-and-true progression on its head.

Never was this clearer than during last week’s four-day Central Committee meeting in Beijing, where President Xi Jinping’s Communist Party detailed a multipronged warp-speed development plan. So vast is its ambition, it was likely met with dropped jaws in Seoul, Taipei, Tokyo and Washington.

The long view of Beijing’s 14th Five-Year Plan is that it’s a roadmap for owning the future. Xi’s team is rolling out strategies to take leadership in industries from artificial intelligence to finance to healthcare to renewable energy to semiconductors.

Xi Jinping on a stroll with comrades in tow. Image: Facebook

To see where Chinese development is going, though, it is useful to recap how Asia’s biggest economy got to where it is now – ie the cusp of global economic leadership.

For China, as well as Korea and Taiwan, all roads led through Tokyo. Though details and applications differ, East Asia’s industrial growth stars all harnessed Japan’s keiretsu system to achieve industrial economies of scale.

By grouping sets of interlocking companies together, linking them via cross-shareholdings and flushing them with government capital and support, governments in Seoul, Taipei and elsewhere generated growth in ways that lifted all proverbial boats.

Was it capitalism? Certainly. But it was never laissez faire.

South Korea’s surge

South Korea’s zero-to-hero development from war-torn, agricultural backwater to global manufacturing powerhouse took place under a president who had seen the Japanese development model up close – in Manchuria during the Pacific War.

Park Chung-hee – a junior Korean officer in the Imperial Army who traded his Japanese uniform for Korean after 1945 – was that man. But his model was not simply Japanese. 

In a shadowy episode, he briefly flirted with communism, was later trained by the US Army, and also took advice from West Germany, then benefitting from its “Miracle on the Rhine.”

Park would merge all these elements into a policy mix that would generate the “Miracle on the Han.” His industrial revolution of the 1960s was set forth by elite bureaucrats working to a series of Five-Year Plans, and funded by a compliant finance system that was essentially a utility.

Deploying scarce national capital, Park followed the German autobahn model with a Seoul-to-Busan highway. That required a a concrete/construction industry to build it; steel and auto industries for the cars to run on it; and a refining industry to supply them with fuel.

However, while the policy direction was Seoul’s, implementation was done by favored private enterprises. These companies – the proto chaebol of Samsung, Hyundai and LG – were led by entrepreneurs who, once they had proven competence in one area, were handed out further sectors, such as chemicals, electronics, ship building, etc, to develop.

The chaebol were incubated in a protected home market, but the genius of a model that might otherwise have led to mediocre and complacent companies was globalization. Seoul coerced and incentivized its players to develop global competitiveness by battling it out in export markets worldwide.

Samsung has become a major global brand as it struts the world stage. Photo: Handout

Within two decades, a middle class had arisen. They provided the chaebol with a home market for their transistors and semiconductors, their TVs and their cars, alongside traditional export markets.

Korea’s second industrial revolution followed a similar blueprint. In the early 1990s, a new infrastructure – a national broadband backbone, and a CDMA mobile telecommunications network – was government mandated.

Again, private companies would run with it, creating products, such as PCs and cellphones, and services, such as portals and online games. Thus was born high-tech Korea.

That revolution was nearly interrupted by disaster. After Park’s death in 1979, the chaebol had lost discipline and doubled down on ambition. Result? Bloating and over-leverage, aided and abetted by compliant finance and corruption all round.

It crashed in 1997. The IMF stormed in, and hand-in-hand with a government led by Korea’s first opposition president, enacted harsh, but brilliant, reforms.

New discipline was imposed on finance. Closed markets were thrown open. Labor laws were tweaked to enable layoffs. Chaebol were forced to divest non-core assets, and those which resisted foundered. Meanwhile, a weak won enabled an export surge.

The end results were formidable. The banking-corporate relationships that were a hangover from the early development period were (largely) severed. And the surviving chaebol were leaner and more focused than ever. The erstwhile “chips-to-ships” commodity players became global brands. The days of low-tech, commodity exports were over.

Korea never shifted from manufacturing to services. But as old players exited, new players entered. In the entertainment space, with digital as their marketing/distribution platform, new firms producing K-pop and K-games appeared. Hallyu – “The Korean Wave” of pop culture – added gloss to the brand of an economy formerly perceived as a land of grim-faced metal bashers.

Post-crisis Korea has become one of the most competitive economies on earth. Before 2020 and Covid-19, it had not suffered a recession since 1998. It’s an impressive story, and one that it is easy to draw the wrong conclusions from for this was capitalism, but policy-led capitalism.

“Korea developed under a strictly government-led model and gradually market reforms were introduced over time – often painfully,” said Mike Breen, author of The New Koreans. “Someone once quipped that South Korea is the most successful centrally planned economy ever: It did what the Communists hoped to do, but never achieved.”   

And the story is not over yet. Korea’s next challenge is threefold. It must maintain its alliance with America, while simultaneously interfacing with leading trade partner China and also fending off the challenges posed by fast-rising Chinese companies.

Taiwan’s take off

Taiwan ran with what Tokyo’s post-war boom taught it. And the post-1949 Kuomintang-led government didn’t disappoint.

Taipei instituted myriad labor laws and land reforms that Mao Zedong avoided aggressively in mainland China. Land law changes alone, inspired partly by what Americans had done in occupied Japan, relegated the landlord class to history. Efforts to raise agricultural output increased food self-sufficiency and economic efficiency.

With Japan-like government control of banks and import licenses, Taiwan pursued a hybrid capitalism/protected domestic market system as it industrialized the economy. It invested heavily in industrial infrastructure, education, health and communications.

The payoff: between 1965 and 1986, gross domestic product surged 360% to exceed the growth of other recently industrialized nations, narrowing the rich-poor gap. The industrial system Taiwan built over the decades produced its own stable of national champions, not least of which Taiwan Semiconductor Manufacturing Company (TSMC) in 1987.

TSMC is a leading chip maker. Photo: AFP/Sam Yeh

Over time, though, the private sector earned both its independence from the government, and its international spurs. And a role-model status that Communist Party bigwigs in Beijing were slow to internalize and emulate.

“There is a temporal aspect to Taiwan’s technological policy that shouldn’t be ignored,” observed American University’s Douglas Fuller.

“The ability of the state to determine Taiwan’s technologicl policy orientation has diminished over time,” said Fuller. “The twin trends of the growth in size of the new high technology firms and the willingness of the older conglomerates to enter high-technology sectors once the industrial infrastructure for these new sectors matured caused the shift from public to private dominance over Taiwanese industrial policy.”

This, however, didn’t create an adversarial public-private dynamic.

“In a case that parallels Japan’s, the decline of state power has not heralded a distinctly different approach to industrial policy,” Fuller explained. “Taiwanese policy embodies elements both techno-nationalism and techno-globalism, and may yet produce an even denser set of international linkages with private enterprise leading the way.”

China goes ‘Super Tiger’

What’s interesting about events in Beijing last week is how Xi’s government is veering in a similar direction to its predecessors.

Yet while Xiconomics borrows elements from Japan, Korea and Taiwan, Beijing is clearly forging its own path – and in very, very big way that only the country with the world’s largest population and its second largest economy can.

The “Made in China 2025” plan threw down the gauntlet early in the Xi era. It created a sort of anticipatory bulwark for the coming Trumpian onslaught. It means that even as Trump’s tariffs and attacks on tech companies slammed Xi’s economy, a variety of structural reforms were already afoot to drive the transition from smokestack industries to services forward.

Beijing’s new five-year plan raises the ante exponentially, and in ways that could teach Japan a thing or two.

The technological self-sufficiency for which Xi is gunning is something that far-more-developed Japan never achieved. Japan Inc. icons such as Sony, NEC, Olympus, Toshiba once led the global innovation race. Today, they’re content to exist as mere links in global supply chains.

China is creating its own corporate and innovative universe, one destined to dwarf Tokyo’s, even in Japan’s heyday. The need to boost both domestic demand and domestic technologies, is something that China now clearly recognizes – understandings that Korea and Taiwan reached organically.

The really tantalizing question is how much Trump’s tariffs and bombast helped propel China up the value chain. As Wang Zhigang, minister of science and technology, put it: This “is the first time that a Five-Year Plan has dedicated a specific chapter to technology.” In other words “technological self-reliance.”

Jack Ma’s Ant Group is the innovative embodiment of Xi’s Chinese model. With some 900 million users already, the fintech giant is creating a gravitational pull all of its own from West to East. Pulling off history’s biggest initial public offering is just the start.

Jack Ma is at the forefront of China’s rise on the technological stage. Photo: AFP / Minasse Wondimu Hailu / Anadolu Agency

Ant promises to upend the world banking system, remaking it with Chinese characters. Beijing is also miles ahead of Washington and Tokyo in test-driving a digital currency that accelerates the timeline for the yuan to trump the dollar and establish a new global financial model.

The push for semiconductor self-sufficiency might not have such urgency if not for Trump’s campaign to build a wall between China and the most advanced computer chips and the machines that perfect them. Trump’s moves to suffocate China’s 5G industry are backfiring spectacularly.

So have Trump’s efforts to punish China for Covid-19. Beijing should indeed be called out for opacity in late 2019 as the pandemic began, but the blame for America’s shockingly inept response to the pandemic is all Trump’s.

The coronavirus is actually showcasing the advances China is making in AI algorithms for contact-tracing purposes. A burst of AI startups, many in the public health universe, may have Silicon Valley, and officials in Tokyo, Seoul and Taipei, looking more to Beijing than Washington for warp-speed solutions.

And not just speed. China presents a development model the scale of which the world has never before seen.