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After World War II, the countries of East Asia established two basic types of economic systems. The Communist regimes of China, Mongolia, and North Korea relied on central planning by the government to set production goals and to distribute goods among their citizens. In contrast, the governments of first Japan and then Taiwan and South Korea established state-aided market economies with the assistance and support of the United States and Europe. In this type of economic system, market forces, such as supply and demand and competition for customers, determine many economic decisions. However, the government intervenes strategically, especially in the financial sector, to make sure that certain economic sectors develop in a healthy fashion. Investment in the country by foreigners is also limited so that the government can retain more control over the direction of the economy and so that economic development benefits domestic interests. In the cases of Japan, South Korea, and Taiwan, government intervention was designed to enable export-led growth. This economic development strategy relies heavily on the production of manufactured goods destined for sale abroad—in this case primarily to North America and Europe—while limiting imports for local consumers.

More recently, the differences among East Asian countries have diminished as China and Mongolia have set aside strict central planning and adopted many aspects of state-aided market economies and export-led growth. China in particular relies heavily on exports of its manufactured goods to North America and Europe.

Throughout the nineteenth century, the economies of Japan, Korea, and Taiwan were minuscule compared with China’s. During the twentieth century, though, all three grew tremendously, in part because of ideas that originated in Japan.

Japan Rises from the Ashes Japan’s recovery after its crippling defeat at the end of World War II is one of the most remarkable tales in modern history. Except for Kyoto, which was spared because of its historical and architectural significance, all of Japan’s major cities were destroyed by the United States. Most notably, the United States bombed Hiroshima and Nagasaki with nuclear weapons, and leveled Tokyo with incendiary bombs. 205. SURVIVORS RECALL THE NUCLEAR BOMBING OF HIROSHIMA

Key to Japan’s rapid recovery was its state-aided market economy, in which the government guided private investors in creating new manufacturing industries. The overall strategy was one of export-led economic growth, with the Japanese government negotiating trade agreements with the United States and Europe. These and other deals ensured that large and wealthy foreign markets would be willing to import Japanese manufactured goods. South Korea, Taiwan, countries in Southeast Asia, and eventually China and many other parts of the developing world have imitated Japan’s model of a state-aided and export-oriented economy. Also central to Japan’s recovery, but less imitated abroad, were arrangements between the government, major corporations, and labor unions that guaranteed lifetime employment by a single company for most workers in return for relatively modest pay.

The government-engineered trade and labor arrangements produced explosive economic growth of 10 percent or more annually between 1950 and the 1970s. The leading sectors were export-oriented automobile and electronics manufacturing. Japanese brand names such as Sony, Panasonic, Nikon, and Toyota became household words in North America and Europe. Products made by these companies sold at much higher volumes than would have been possible in the then relatively small Japanese and nearby Asian economies. Although growth slowed considerably during the 1990s and again beginning in 2007, Japan’s postwar “economic miracle” continues to have an immense worldwide impact as a model, and Japan remains a significant actor in the world economy. Japan purchases resources from all parts of the world for its industries and domestic use. These purchases and investments in various local economies create jobs for millions of people around the globe.

Productivity Innovations in Japan Over the years, Japan has made two major innovations in manufacturing that have boosted its productivity and been diffused to other industrial economies, changing the spatial arrangements of industries. The just-in-time system clusters together companies that are part of the same production process so that they can deliver parts to each other when they are needed (Figure 9.15). For example, factories that make automobile parts are clustered around the final assembly plant, delivering parts literally minutes before they will be used. This saves money by making production more efficient and reducing the need for warehouses.

A related innovation is the kaizen system of continuous improvement in manufacturing and business management. In this system, production lines are constantly surveyed for errors, which helps ensure that fewer defective parts are produced. Production lines are also constantly adjusted and improved to save time and energy. Both the just-in-time and the kaizen systems have been imitated by companies around the world and have been taken overseas by Japanese companies that invest abroad. For example, Toyota uses kaizen and just-in-time in all of its U.S. plants.

After World War II, economic development on East Asia’s mainland proceeded on a dramatically different course than it did in Japan. Communist economic systems transformed poverty-ridden China, Mongolia, and North Korea. Private property was abolished, and the state took full control of the economy, loosely following the example of the Soviet centrally planned economy (see Chapter 5). These sweeping changes transformed life for the poor majority but ultimately proved less resilient and successful than was hoped.

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By design, most people in the communist economies could not consume more than the bare necessities. On the other hand, the policy—called the iron rice bowl in China—of guaranteeing nearly everyone a job for life, sufficient food, basic health care, and housing was better than what they had before. One drawback was that overall productivity remained low.

The Commune System When the Communist Party first came to power in China in 1949, its top priority was to make monumental improvements in both agricultural and industrial production. The Communist governments in North Korea and Mongolia held similar goals, though these countries had much smaller populations and resource bases to work with.

In the years following World War II, an aggressive agricultural reform program joined small landholders together into cooperatives so that they could pool their labor and resources to increase production. In time, the cooperatives became full-scale communes, with an average of 1600 households each. The communes, at least in theory, took care of all aspects of life. They provided health care and education, and built rural industries to supply such items as simple clothing, fertilizers, small machinery, and eventually even tractors. The rural communes also had to fulfill the ambitious expectations that the leaders in Beijing had for better flood control, expanded irrigation systems, and especially, more food production.

The Chinese commune system met with several difficulties. Rural food shortages developed because farmers had too little time to farm. They were required to spend much of their time building roads, levees, terraces, and drainage ditches, or working in the new rural industries. Local Communist Party administrators often compounded the problem by overstating harvests in their communes to impress their superiors in Beijing. The leaders in Beijing responded by requiring larger food shipments to the cities, which caused even greater food shortages in the countryside.

Although the Chinese agricultural communes were inefficient and created devastating food scarcities during the Great Leap Forward, they did eventually result in a stable food supply that kept Chinese people well fed.

In North Korea, the Communists have pushed military strength at the expense of broader economic development. Agriculture has been so neglected that production is precarious, with food aid from its immediate neighbors or the United States a yearly necessity and famine a constant threat. In recent years, North Korea has used rocket launchings, nuclear tests, and even the threat of war to intimidate its neighbors, and it is selling its military technology abroad to pay for its food imports. Intermittently, the U.S. government suspends food aid to encourage more peaceful policies from the North Korean leadership, but with limited results.

In Mongolia, Communist policy followed the Soviet model of collectivization, though it was tailored to Mongolia’s economy, which at the time was largely one of herding and agriculture. There were minimal changes to the nomadic pastoralist way of life, but the role of mining and industry was emphasized, and the herding and forestry contributions to GDP declined to less than 20 percent.

Focus on Heavy Industry The Communist leadership in China, North Korea, and Mongolia believed that investment in heavy industry would dramatically raise living standards. Massive investments were made in the mining of coal and other minerals and in the production of iron and steel. Especially in China, heavy machinery was produced to build roads, railways, dams, and other infrastructure improvements that leaders hoped would increase overall economic productivity. However, much as in India (see Chapter 8), the vast majority of the population remained impoverished agricultural laborers who received little benefit from industries that created jobs mainly in urban areas. Not enough attention was paid to producing consumer goods (such as cheap pots, pans, hand tools, and other household items) that would have driven modest internal economic growth and improved living standards for the rural poor. Even in the urban areas, growth remained sluggish because, as also was the case in the Soviet command economy, small miscalculations by bureaucrats resulted in massive shortages and production bottlenecks that constrained economic growth.

Struggles with Regional Disparity For centuries, China’s interior west has been poorer and more rural than its coastal east. The interior west has been locked into agricultural and herding economies, while the economies of the east have benefited from trade and industry in even the most restricted times. The first effort to address regional disparities, right after the revolution, was an economic policy that focused on a combination of investment from the central government and the development of regional self-sufficiency. Each region was encouraged to develop as an independent entity with both agricultural and industrial sectors that would create jobs and produce food and basic necessities. This policy did little to lessen regional disparities and in fact constrained economic growth by inhibiting trade between regions.

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In the 1980s, China’s leaders enacted economic reforms that changed the country’s economy in five ways. First, building on Communist-era methods of financial control but also integrating strategies pursued in Japan, China used the state-owned banking system to direct investment into export-oriented manufacturing industries. Second, at the local level, economic decision making was decentralized and given the name responsibility system. Under the responsibility system, farmers now could make household-level decisions, subject to the approval of the commune, about how to use land and which crops to grow. Third, the reforms allowed existing and newly established businesses to sell their produce and goods in competitive markets. Fourth, regional specialization, rather than regional self-sufficiency, was encouraged in order to take advantage of regional variations in climate, natural resources, and location, and thereby encourage national economic integration. In practice, this has meant that coastal urban areas focus on export-oriented manufacturing and advanced service production, while resource-based industries and production for domestic consumption are fostered in the interior provinces. Finally, the government allowed foreign direct investment in Chinese export-oriented enterprises and the sale of foreign products in China.

This five-part shift dramatically improved the efficiency with which food and goods were produced and distributed. On the other hand, regional disparities have widened and on the provincial level, rural–urban disparities are sometimes extreme (Figure 9.16). Indeed, the floating population discussed at the beginning of this chapter is a direct consequence of this spatially uneven development.

China’s economic reforms have transformed not only China’s economy but also the economies of wider East Asia and indeed the whole world. Today China is the world’s largest producer of manufactured goods, supplying consumers across the globe. Of the other Communist-led countries, Mongolia has participated in this revolution only moderately, mainly as a raw material exporter, and North Korea has not participated at all.

East Asia’s Role as Mega-Financier As U.S. debt has mounted in recent decades (up to U.S.$12.1 trillion by 2013), so has concern about the fact that China and Japan now own much of this debt. China owns about 10 percent of U.S. debt, and Japan 9 percent (Figure 9.17); many people are worried that either country could destabilize the U.S. economy by selling or refusing to buy more U.S. debt. However, such an event is highly unlikely. Both countries’ ownership of U.S. debt is a side effect of their huge trade relationship with the United States, which leaves them with large amounts of dollars. These amounts are large enough that, worldwide, the only relatively stable investment available that China and Japan can buy in sufficient quantities with all their dollars is U.S. debt. Moreover, dumping their vast holdings of U.S. debt and therefore destabilizing the U.S. economy would mean that both China and Japan would not be able to sell as many of their goods to consumers in the United States, which would destabilize their own economies. Hence China and Japan have strong incentives to continue buying U.S. government debt.

East Asians are able to use their reserves to finance development elsewhere in the world, thereby securing privileged trade deals. In recent years, China’s lending to developing countries has outpaced even that of the World Bank. Often these loans are made in return for guarantees that the recipient country will supply China with needed industrial materials, especially fossil fuels.