Assignment

On
East Asian Economy

The economy of East Asia is one of the most successful regional economies of the world.
It is home of some of the world's largest and most prosperous economies: China, Japan,
Hong Kong, Taiwan and South Korea.
Major positive factors have ranged from favorable political-legal environments for
industry and commerce, through abundant natural resources of various kinds, to
plentiful supplies of relatively low-cost, skilled and adaptable labor.
In modern societies, a high level of structural differentiation, functional specialization,
and autonomy of the economic system from government is a major contributor to
industrial-commercial growth and prosperity. Currently in the Far East, trading systems
are relatively open; and zero or low duties on imports of consumer and capital goods
etc. have considerably helped stimulate cost-efficiency and change.Free and flexible
labor and other markets are other important factors making for high levels of business-
economic performance.
East Asian populations have demonstrated rapid learning capabilities skills in utilizing
new technologies and scientific discoveries and putting them to good use in
production. Work ethics in general tend to be highly positive.
Finally, there are relatively large and fast-growing markets for consumer goods and
services of all kinds
Definition
Various organizations and disciplines define "East Asia" in different ways. The United
Nations classifies South-east Asia (the 10 ASEAN members plus East Timor) as a distinct
region, but other sources add North-east and South-east Asia together, which is the
practice in this article.
The economic entities of East Asia are thus Japan; the Democratic People's Republic of
(North) Korea; the Republic of (South) Korea; the People's Republic of China and its
special administrative regions Hong Kong and Macau; Republic of China (Taiwan); and
the 10 ASEAN members: the Philippines, Vietnam, Cambodia, Laos, Thailand, Burma,
Malaysia, Singapore, Brunei, and Indonesia. The lack of useful statistical data makes
including East Timor problematic, and so unless otherwise indicated, it will be omitted.
Theory
A 1997 Asian Development Bank (ADB) study identifies three conventional theories as to
how and why Asia developed so much faster than other regions.
The classical theory
The neo-classical theory
The endogenous growth theory
The classical theory identifies outward orientation and relatively strong property rights
protection as key ingredients, as well as access to good ports and major markets.
The neoclassical theory emphasizes rapid capital accumulation and the opportunity for
high returns on investment that shortages presented.
The third, endogenous growth theory credits superior economic institutions such as
lifetime employment and consensus building as the superior attributes of the Asian
culture.
The study then notes that none of these theories attaches sufficient importance to
demography, particularly changes in age structure, dependency ratios and overall
population growth rates. This, according to the authors, is where much of the
explanation lies.
Modern History
East Asia became an area of economic power starting with the Meiji Restoration in the
late 19th century when Japan rapidly transformed itself into the only industrial power
outside Europe and the United States. Japan's early industrial economy reached its
height in World War II when it expanded its empire and became a major world power.
After the war with its defeat and economic collapse, Japan's economy recovered in the
1950s with the post-war economic miracle in which rapid growth in the Japanese
economy propelled the country into the world's second largest economy by the 1980s.
In the early 1960s, the British colony of Hong Kong became the first of the four Asian
Tiger economies by developing strong textile and manufacturing economies and by the
1970s, had solidified itself as a global financial center and was quickly turning into a
developed economy. Following in the footsteps of Hong Kong, the nations of South
Korea, Taiwan, and Singapore soon quickly industrialized thanks to government policies.
By 1997, the four Asian Tiger economies joined Japan as East Asia's developed
economies. Present growthin East Asia has now shifted to China and the Tiger Cub
Economies of the Southeast Asian economies of Thailand, Indonesia, Malaysia, and the
Philippines. As of 2010, Japan, Hong Kong, and Singapore are the only East Asian nations
that are considered developed markets in all economic indexes.
Policy
Among the major policy choices commonly adopted in East Asia, are openness to
foreign trade, significant levels of government savings and an emphasis on education for
both boys and girls. While these attributes were far from universally applied, they are
conspicuously present in the region to a much larger degree.
The North-east / South-east divide holds for other demographic indicators, too. The
average age in the North-east was 33.1 years in 2005, and 26 years in South-east Asia.
Life expectancy (74.1 years vs. 70) is not as distinctly different, although infant mortality
rates differ by nearly a third: 21.8 per 1,000 in North-east Asia vs. 28.3 in South-east
Asia.
East Asian economic crisis
The East Asian economic crisis is probably the most important economic event in the
region of the past few decades and for the next few decades.Beyond this, there is yet no
unanimity about its root causes nor about the solutions. The differences of views are
being debated in academic circles and reflected in the media.
One thing though is certain: the earlier optimistic expectation that it would last only
some months has proved wrong. Instead the financial crisis has been transformed into a
full-blown recession or depression, with forecasts of GNP growth and unemployment
becoming more gloomy for affected countries. Moreover the threat of depreciation has
spread from a few countries to many in the region, and is spreading to other areas such
as Russia, South Africa, and possibly Eastern Europe and South America.
THE CAUSES, PROCESSES AND
SOME ECONOMIC EFFECTS OF
THE CRISIS
The domestic policies and practices
Development of global financial system
The great debate on causes is whether the blame should be allocated to domestic
policies and practices or to the intrinsic and volatile nature of the global financial
system.
In the first phase of the crisis, as it spread from Thailand to Malaysia, Indonesia, the
Philippines, then to South Korea, the international establishment (represented by the
IMF) and others placed the blame squarely on domestic ills in the East Asian countries.
They cited the ill judgment of the banks and financial institutions, the over-speculation
in real estate and the share market, the collusion between governments and businesses,
the bad policy of having fixed exchange rates (to the dollar) and the rather high current
account deficits. They studiously avoided blaming the financial markets, or currency
speculation, and the behaviour of huge institutional investors.
This view was difficult to sustain. For it implied that the "economic fundamentals" in
East Asia were fatally flawed, yet only before the crisis erupted, the countries had been
praised as models of sound fundamentals to be followed by others.
However, there rapidly developed another view of how the crisis emerged and spread.
This view put the blame on the developments of the global financial system: the
combination of financial deregulation and liberalisation across the world (as the legal
basis); the increasing interconnection of markets and speed of transactions through
computer technology (as the technological basis); and the development of large
institutional financial players (such as the speculative hedge funds, the investment
banks, and the huge mutual and pension funds).
This combination has led to the rapid shifting of large blocks of short-term capital
flowing across borders in search of quick and high returns. Only one to two percent is
accounted for by foreign exchange transactions relating to trade and foreign direct
investment. The remainder is for speculation or short-term investments that can move
very quickly when the speculators' or investors' perceptions change.
When a developing country carries out financial liberalisation before its institutions or
knowledge base is prepared to deal with the consequences, it opens itself to the
possibility of tremendous shocks and instability associated with inflows and outflows of
funds.
What happened in East Asia is not peculiar, but has already happened to many Latin
American countries in the 1980s, to Mexico in 1994, to Sweden and Norway in the early
1990s. They faced sudden currency depreciations due to speculative attacks or large
outflows of funds.
A total of US$184 billion entered developing Asian countries as net private capital flows
in 1994-96, according to the Bank of International Settlements. In 1996, US$94 billion
entered and in the first half of 1997 $70 billion poured in. With the onset of the crisis,
$102 billion went out in the second half of 1997. The massive outflow has continued
since.
These figures help to show: (i) how huge the flows (in and out) can be; (ii) how volatile
and sudden the shifts can be, when inflow turns to outflow; (iii) how the huge capital
flows can be subjected to the tremendous effect of "herd instinct," in which a market
opinion or operational leader starts to pull out, and triggers or catalyses a panic
withdrawal by large institutional investors and players.

In the case of East Asia, although there were grounds to believe that some of the
currencies were over-valued, there was an over- reaction of the market, and
consequently an "over-shooting" downwards of these currencies beyond what was
justifiable by fundamentals. It was a case of self-fulfilling prophecy.
It is believed financial speculators, led by some hedge funds, were responsible for the
original "trigger action" in Thailand. The Thai government used up over US$20 billion of
that foreign reserves to ward off speculative attacks. Speculators are believed to have
borrowed and sold Thai baht, receiving US dollars in exchange. When the baht fell, they
needed much less dollars to repay the baht loans, thus making large profits.
In some countries, the first outflow by foreigners was followed by an outflow of capital
by local people who feared further depreciation, or who were concerned about the
safety of financial institutions. This further depreciated the currencies.
The sequence of events leading to and worsening the crisis included the following.
(a) Financial liberalisation
Firstly, the countries concerned carried out a process of financial liberalisation, where
foreign exchange was made convertible with local currency not only for trade and
direct-investment purposes but also for autonomous capital inflows and outflows (i.e.
for "capital account" transactions); and where inflows and outflows of funds were
largely deregulated and permitted. This facilitated the large inflows of funds in the form
of international bank loans to local banks and companies, purchase of bonds, and
portfolio investment in the local stock markets.
(b) Currency depreciation and debt crisis
The build-up of short-term debts was becoming alarming. What transformed this into
crisis for Thailand, Indonesia and South Korea was the sharp and sudden depreciation of
their currencies, coupled with the reduction of their foreign reserves in anti- speculation
attempts. When the currencies depreciated, the burden of debt servicing rose
correspondingly in terms of the local- currency amount required for loan repayment.
That much of the loans were short-term was an additional problem. Foreign reserves
also fell in attempts to ward off speculative attacks. The short- term foreign funds
started pulling out sharply, causing reserves to fall further. When reserves fell to
dangerously low levels, or to levels that could not allow the meeting of foreign debt
obligations, Thailand, Indonesia and South Korea sought IMF help.
(c) Liberalisation and debt: the Malaysian case
Malaysia also went through a process of financial liberalisation, with much greater
freedom for foreign funds to invest in the stock market, for conversion between foreign
and local currencies, and for exit of funds to abroad.
The Central Bank however retained a key control: private companies wanting to borrow
foreign-currency loans exceeding RM5 million must obtain the Bank's approval. This is
generally given only for investments that would generate sufficient foreign exchange
receipts to service the debts. Companies are also not allowed to raise external
borrowing to finance the purchase of properties in the country. (Bank Negara Annual
Report 1997, p53-54). Thus there was a policy of "limiting private sector external loans
to corporations and individuals with foreign exchange earnings" which according to
Bank Negara "has enabled Malaysia to meet its external obligations from export
earnings." According to a private-sector leader, this ruling saved Malaysia from the kind
of excessive short-term priavte-sector borrowing that led the other three countries into
a debt crisis.As a result of these controls, Malaysia's external debt has been kept to
manageable levels. Nevertheless the debt servicing burden in terms of local currency
has been made heavier by the sharp ringgit depreciation.
The relatively low debt level, especially short-term debt, is what distinguishes Malaysia
from the three countries that had to seek IMF help. The lesson is that it is prudent and
necessary to limit the degree of financial liberalisation and to continue to limit the
extent of foreign debt, and moreover to, in the future, keep the foreign debt to an even
much lower level.
Economies of some major
countries of East Asia:
Economy of peoples republic of china
Economy of Japan

Economy of the People's Republic
of China
The People's Republic of China (PRC) is the world's second largest economy by nominal
GDP and by purchasing power parity after the United States. China is also the largest
exporter and second largest importer of goods in the world. On a per capita income
basis, China ranked 90th by nominal GDP and 91st by GDP (PPP) in 2011, according to
the International Monetary Fund (IMF).The provinces in the coastal regions of China
tend to be more industrialized, while regions in the hinterland are less developed. As
China's economic importance has grown, so has attention to the structure and health of
the economy.
State-owned enterprises
As of 2012 large state-owned enterprises (SOEs) were the backbone of China's economy
producing over 50% of its goods and services and employing over half of the workers in
China. 65 of the Chinese companies in the 2012 Fortune Global 500 list, were state-
owned, including State Grid Corporation of China, which operates the country's power
grid, and China National Petroleum Corporation and Sinopec, oil companies. Profits of
the largest state-owned enterprises were much greater than the largest firms in the
private sector which were largely small and medium sized businesses. Reform efforts,
spurred by problems with corruption at some firms, were focused on splitting state-
owned firms or creating competing state-owned firms rather than privatization which is
politically unacceptable to the ruling party. Firms attempting to maintain their position
such as the State Grid point out the advantages of monopoly, using examples of
disorganization such as the 2012 India blackouts. As of 2011, 35% of business activity
and 43% of profits in the People's Republic of China resulted from companies in which
the state owned a majority interest. Liberal critics, such as The New York Times, allege
that China's state-owned companies are a vehicle for corruption by the families of ruling
party leaders who have sometimes amassed fortunes while managing them.
Regional economies
China's unequal transportation systemcombined with important differences in the
availability of natural and human resources and in industrial infrastructurehas
produced significant variations in the regional economies of China.
Economic development has generally been more rapid in coastal provinces than in the
interior, and there are large disparities in per capita income between regions. The three
wealthiest regions are along the
southeast coast, centred on the Pearl River Delta; along the east coast,
centred on the Lower Yangtze River; and
near the Bohai Gulf, in the BeijingTianjinLiaoning region.
It is the rapid development of these areas that is expected to have the most significant
effect on the Asian regional economy as a whole, and Chinese government policy is
designed to remove the obstacles to accelerated growth in these wealthier regions.
Hong Kong and Macau
In accordance with the One Country, Two Systems policy, the economies of the former
European colonies, Hong Kong and Macau, are separate from the rest of the PRC, and
each other. Both Hong Kong and Macau are free to conduct and engage in economic
negotiations with foreign countries, as well as participating as full members in various
international economic organizations such as the World Customs Organization, the
World Trade Organization and the Asia-Pacific Economic Cooperation forum, often
under the names "Hong Kong, China" and "Macau, China".
Development
China, economically frail before 1978, has again become one of the world's major
economic powers with the greatest potential. In the 22 years following reform and
opening-up in 1979 in particular, China's economy developed at a remarkable rate, and
that momentum was maintained into the early years of the 21st century.

China adopts the "five-year-plan" strategy for economic development. The Twelfth Five-
Year Plan (20112015) is currently being implemented.
China's per capita GDP had grown from $153 to $1284, while its current account surplus
had increased over twelve-fold between 1982 and 2004, from $5.7 billion to $71 billion.
During this time, China had also become an industrial powerhouse, moving beyond
initial successes in low-wage sectors like clothing and footwear to the increasingly
sophisticated production of computers, pharmaceuticals, and automobiles.
According to the 11th five-year plan, China needed to sustain an annual growth rates of
8% for the foreseeable future. Only with such levels of growth, the leadership argued,
could China continue to develop its industrial prowess, raise its citizen's standard of
living, and redress the inequalities that were cropping up across the country. Yet no
country had ever before maintained the kind of growth that China was predicting.
Moreover, China had to some extent already undergone the easier parts of
development. In the 1980s, it had transformed its vast and inefficient agricultural sector,
freeing its peasants from the confines of central planning and winning them to the
cause of reform. In the 1990s, it had likewise started to restructure its stagnant
industrial sector, wooing foreign investors for the first time. These policies had catalysed
the country's phenomenal growth. Instead, China had to take what many regarded as
the final step toward the market, liberalizing the banking sector and launching the
beginnings of a real capital market.
This step, however, would not be easy. As of 2004, China's state-owned enterprises
were still only partially reorganized, and its banks were dealing with the burden of over
$205 billion (1.7 trillion RMB) in non-performing loans, monies that had little chance of
ever being repaid. The country had a floating exchange rate, and strict controls on both
the current and capital accounts.
Regional development
These strategies are aimed at the relatively poorer regions in China in an attempt to
prevent widening inequalities:
China Western Development, designed to increase the economic situation of the
western provinces through capital investment and development of natural
resources.
Revitalize Northeast China, to rejuvenate the industrial bases in Northeast China.
It covers the three provinces of Heilongjiang, Jilin, and Liaoning, as well as the five
eastern prefectures of Inner Mongolia.
Rise of Central China Plan, to accelerate the development of its central regions. It
covers six provinces: Shanxi, Henan, Anhui, Hubei, Hunan, and Jiangxi.
Third Front, focused on the southwestern provinces.
Go Global, to encourage its enterprises to invest overseas.
Key national projects
The "West-to-East Electricity Transmission", the "West-to-East Gas Transmission", and
the "SouthNorth Water Transfer Project" are the government's three key strategic
projects, aimed at realigning overall of 12 billion cu m per year. Construction of the
"South-to-North Water Diversion" project was officially launched on 27 December 2002
and completion of Phase I is scheduled for 2010; this will relieve serious water shortfall
in northern China and realize a rational distribution of the water resources of the
Yangtze, Yellow, Huaihe, and Haihe river valleys
External trade
International trade makes up a sizeable portion of China's overall economy. Being a
Second World country at the time, a meaningful segment of China's trade with the Third
World was financed through grants, credits, and other forms of assistance. The principal
efforts were made in Asia, especially to Indonesia, Burma, Pakistan, and Ceylon, but
large loans were also granted in Africa and the Middle East (Egypt). However, after Mao
Zedong's death in 1976, these efforts were scaled back though during that time, Hong
Kong and Taiwan both began to emerge as major trading partners.
Since economic reforms began in the late 1970s, China sought to decentralize its foreign
trade system to integrate itself into the international trading system. On November
1991, China joined the Asia-Pacific Economic Cooperation (APEC) group, which
promotes free trade and cooperation the in economic, trade, investment, and
technology spheres. China served as APEC chair in 2001, and Shanghai hosted the
annual APEC leaders meeting in October of that year.
After reaching a bilateral WTO agreement with the EU and other trading partners in
summer 2000, China worked on a multilateral WTO accession package. China concluded
multilateral negotiations on its accession to the WTO in September 2001. The
completion of its accession protocol and Working Party Report paved the way for its
entry into the WTO on December 11, 2001, after 16 years of negotiations, the longest in
the history of the General Agreement on Tariffs and Trade. However, U.S. exporters
continue to have concerns about fair market access due to China's restrictive trade
policies and U.S. export restrictions.
With bilateral trade exceeding US$38.6 billion, China is India's largest trading partner.
China's global trade exceeded $2.4 trillion at the end of 2008. It first broke the $100
billion mark in 1988, $200 billion in 1994, $500 billion in 2001 and $1 trillion mark ($1.15
trillion) in 2004. The table below shows the average annual growth (in nominal US dollar
terms) of China's foreign trade during the reform era.

Chinese investment abroad
Outward foreign direct investment is a new feature of Chinese globalization, where local
Chinese firms seek to make investments in both developing and developed countries. It
was reported in 2011 that there was increasing investment by capital rich Chinese firms
in promising firms in the United States. Such investments offer access to expertise in
marketing and distribution potentially useful in exploiting the developing Chinese
domestic market.
Mergers and acquisitions
From 1993 to 2010, Chinese companies have been involved as either an acquiror or
acquired company in 25,284 mergers and acquisitions with a total known value of
US$969 billion.[144] The number and value of deals hit a new record in 2010. The
number of deals that happened in 2010 has been 3,640 which is an increase of 17%
compared to 2009. The value of deals in 2010 was US$196 billion which is an increase of
25% compared to the year before.


Economy of Japan
The economy of Japan is the third largest economy in the world by nominal GDP and is
the world's second largest developed economy. According to the International
Monetary Fund, the country's per capita GDP (PPP) was at $34,739 or the 25th highest
in 2011. Japan is a member of Group of Eight. Japanese economy can be forecasted by
Quarterly Tankan survey of business sentiment by the Bank of Japan.
Japan is the world's 3rd largest automobile manufacturing country, has the largest
electronics goods industry, and is often ranked among the world's most innovative
countries leading several measures of global patent filings. Facing increasing
competition from China and South Korea, manufacturing in Japan today now focuses
primarily on high-tech and precision goods, such as optical equipment, hybrid cars, and
robotics.
Japan is the world's largest creditor nation,generally running an annual trade surplus
and having a considerable net international investment surplus. As of 2010, Japan
possesses 13.7% of the world's private financial assets (the 2nd largest in the world) at
an estimated $14.6 trillion. As of 2011, 68 of the Fortune 500 companies are based in
Japan.
Economic indicators
Current account balance 2006
Net international investment position: 266,223 billion
Industrial Production Growth Rate: 7.5% (2010)
Investment (gross fixed): 20.3% of GDP (2010 )
Household income or consumption by percentage share:
Lowest 10%: 4.8%
Highest 10%: 21.7% (1993)
Agriculture Products: rice, sugar beets, vegetables, fruit, pork, poultry, dairy products,
eggs, fish
Exports Commodities: machinery and equipment, motor vehicles, semiconductors,
chemicals
Imports Commodities: machinery and equipment, fuels, foodstuffs, chemicals, textiles,
raw materials (2001)
Exchange rates: Japanese Yen per US$1
88.67 (2010), 93.57 (2009), 103.58 (2008), 117.99 (2007), 116.18 (2006), 109.690016
(2005), 115.933 (2003), 125.388 (2002), 121.529 (2001), 105.16 (January 2000), 113.91
(1999), 130.91 (1998), 120.99 (1997), 108.78 (1996), 94.06 (1995)