The rise of East Asia and an epochal threat to American freedoms

By Eamonn Fingleton

(This article appears in the January-February 2022 issue of The American Conservative. To read it in pdf form,  please click here.)

In April 1998 Sony Corporation chairman Norio Ohga made world headlines with this comment: “The Japanese economy is on the verge of collapsing.”

In reality nothing in Sony’s own experience supported such an assessment. On the contrary, Sony’s business actually boomed right through the 1990s. More generally Japanese industrial corporations continued strongly to gain share from American rivals. Yet they all talked as if Japan was a hopeless basket case.

Even the president of Toyota Motor Hiroshi Okuda joined in, suggesting Japan could cause a “world-wide financial crash.” This despite the fact that Toyota’s sales soared fully 95 percent in the 1990s. Between 1989 and 2019, moreover, Toyota went from little more than one-quarter of General Motors’s revenues to nearly twice as large.

As for Sony’s Ohga, his talk was even more puzzling. In the quarterly accounting  period of his remark, Sony’s sales  in the Japanese market actually increased by 14.7 per cent. The wider picture  was also  impressive: measured against 1989 (the last year of Japan’s 1980s boom), Sony’s profits in 1998 were up fully 131 percent! As if that wasn’t enough, the 1990s counted as the decade when  Sony finally buried such once formidable American rivals as Motorola, RCA, and Zenith.

This is cognitive dissonance on a vast scale. So what was really going on? In truth Japan’s alleged economic disaster of the 1990s was a fake funk:  Japanese leaders just pretended their economy was collapsing. There was method in their madness: they desperately wanted  Washington to cut Tokyo some slack in trade negotiations. This was at a time when Americans had never been more incandescent with rage about Japan’s closed markets. The gambit worked in spades. Not only did Washington back off trying to open Japan but it has never subsequently tried any further market opening efforts.

I have explained more about Japan’s 1990s fake funk in a New York Times commentary. (

For now let’s note that the issue of Japan’s true performance is of first order historic importance because of its implications for (1) the rise of China, and (2) for the coming triumph of authoritarianism around the world. Both China and Japan  operate essentially the same authoritarian — and almost universally misunderstood and underestimated — economic model. Let’s call this the Confucian model.

China runs about twenty years behind Japan, as is obvious in, for instance, the global car industry. This means it has a lot of technologically easy catchup growth ahead of it. Combine this with the fact that China boasts four times America’s population (and eleven times Japan’s) and it is hard to exaggerate how dominant Beijing will be by 2050.

Invented in the desperately poor circumstances of early-1950s Japan (and thus a  memorable  instance of necessity playing mother to invention!), the Confucian model has long been powerfully shaping economic outcomes in South Korea and Taiwan as well as, of course, in China and Japan.

The model’s key function is to force-feed  the  growth process. Admittedly in the case of Japan,  growth lately has been lower than it was in the 1980s. But this reflects factors external to the model: in particular, as economists like Paul Krugman and William Cline have pointed out, Japan’s growth has been greatly curtailed by a uniquely jolting demographic switchback (the echo of a major effort begun in 1948 to reduce the population).

Of course, those in the West who cling to the belief  that the model failed Japan see little reason to worry about a rising China.

On the other hand, for those who realize that the model greatly alleviated Japan’s uniquely difficult demographic problems, it is clear that the Confucian model presents a devastating challenge to the United States. Japan never lost its mojo in recent decades and the prospect is that China will not either.

We will discuss some of the Confucian model’s key features  in a moment. First though let’s note that  this model is fundamentally incompatible with America’s hopes for a global rollout of free markets. There are two immediate problems:

1. The Confucian model is not only protectionist but is unalterably so. Other aspects of the model cannot work without a protected home market.

2. The Confucian model features a complex lattice-work 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 (these latter are known  as chaebols in South  Korea,  qiye jituans in China, and  quangxi jituans in Taiwan).  As we will see,  such structures are undoubtedly on balance helpful in improving East Asian productivity.

Let’s be clear: 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, however, top officials throughout the region claim the right to overrule market forces almost at will. Moreover they often use cartels and keiretsus as power vectors that help them reach deeply into the system’s  internal workings. “Undesirable elements” quickly discover there is nowhere to hide.

A key difference is in how corporate executives see their responsibilities. Whereas in the United States they focus on profits almost to the exclusion of everything else, in East Asia worker productivity gets priority.

To understand the Confucian system the best starting point is its savings strategy. If a nation’s savers save more, corporations can invest more. If corporations invest more, workers can produce more. Equipped with the most advanced production machinery (robots, for instance, 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.

For an economy to keep growing, savers must keep  saving. This is where the Confucian model really comes into its own again. 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.

This, however, does not fit the facts. In former times when East Asian nations seemed  more Confucian than they are today, they were often notably weak savers. Japan’s savings rate remained low well into the 1950s. Singapore,South Korea, and China followed a similar pattern, with low savings rates as late as the 1960s, 1970s, and 1980s respectively.

In reality it is only when East Asian nations begin to adopt other aspects of the Confucian model — in particular the model’s aggressively mercantilist trade policy — that their savings rates take off.

Behind all this is a policy virtually unheard of in latter day America: suppressed consumption. By discouraging consumption, top officials ensure that an economy’s savings rate is strongly stimulated.

To anyone tutored in modern American economic thought, the idea of suppressing consumption may seem to be bordering 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 former times. Soon  after Pearl Harbor, the United States began  tightly suppressing  consumption. The program started with rubber tires and in April 1942, rationing was extended to cars, sugar, typewriters, and gasoline. By the end of the war, the program also included 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 it is equally effective. For a start East Asian governments restrict the import of key consumer products. Another important strategy is to minimize consumer credit. Mortgage finance  is largely or totally unavailable in many parts of the region. Credit cards are also hard to come by. This  point is often missed  because American correspondents tend to  conflate debit cards with credit cards. According to Fitch Ratings recently, fewer than 30 percent of Chinese adults had at least one credit card, compared to 79 percent in the United States.

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.

According to the Australia-based statistical website, of the ten nations with the world’s most  expensive city-center housing  recently, six were in East Asia. In descending order they were Hong Kong, Singapore, South Korea, Japan, Taiwan, and China.

One further point needs to be noted: much of East Asia’s saving takes the form of corporate profits. Certain special corporations make huge profits through  oligopolistic control of, for instance, urban land.

Now let’s consider the Confucian model’s approach to employment. This is perhaps the area where the East Asian model diverges most obviously from American capitalism.

As a matter of employer 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 rather settled system of long-term employment.

Orthodox American economists regard East Asia’s no-layoffs policy as “inefficient.” But the region’s passionately patriotic government officials see things differently: any calculation of the benefits to society from American-style hire-and-fire should, they believe, be netted for the cost to the public purse of unemployment benefit.

The psychological advantages that accrue to employers from a no-layoffs policy are a lot more beneficial than is understood in modern America. For a start East Asian workforces feature a far greater degree of long-term accountability. They are also impressively long 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. By contrast American employers have to worry that any workers they train may be quickly  hired away by rival employers.

In recessions, East Asian employers beat the bushes to find other work for their workers. They will even go to the extent of inventing “busywork” but generally things don’t get that bad and even in a recession East Asian corporations rarely run out of useful work to do.

Moreover the degree to which  East Asian corporations can cut export prices and still come out ahead is greater than Americans typically understand. A key point  is that  there is a big  difference in the way that labor costs necessarily must be accounted for.  In the terminology of the accounting profession, wage costs count  as a fixed cost for East Asian employers, whereas they are a variable one for American employers. This has crucial implications because so long as variable costs are covered, East Asian corporations can keep discounting their prices. Hence in large part the reason why in a recession  East Asian corporations can quote almost preternaturally low prices.

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 they may 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.

All that said, even East Asian corporations hardly emerge unscathed from a global recession. In withstanding the strains, however, they 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 real revival in industrial investment in the United States?  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 that 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 U.S. 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. Remember that these nations’ top priority is not financial but rather industrial and they therefore 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.

Let’s briefly consider some other features of the Confucian system.  Perhaps the most troublesome from an American point of view is cartels.

The one thing every American  first-year economics student seems to know is that cartels are bad! They not only cheat  consumers but featherbed inefficient industrial processes. Or so orthodox American thinkers vociferously proclaim.

In East Asia the view is  different. East Asian cartels are quasi-regulated institutions answerable at all times to the national interest. Yes, members of such cartels fix prices but, no, they don’t necessarily 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 this diverts executive attention away from the weightier matter of delivering ever higher quality at ever lower production cost. The problem of gimmicky pricing incidentally can be particularly acute in the most capital-intensive industries, which are precisely the industries with the best prospects of creating well-paid rank-and-file jobs going forward.

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  East Asian-style cartels: they reduce the cost of  research and development. This is because they divide up  research projects among cartel members and thus minimize 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.

Much, much could be said but already it should be clear that the United States desperately needs to take a closer look at the Confucian model. 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 but on closer  examination the Confucian system’s superior wealth-creating capabilities are evident almost right 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.

Eamonn Fingleton is the author of In the Jaws of the Dragon: America’s Fate in the Coming Era of Chinese Hegemony (New York: St. Martin’s Press, 2008).

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