Crisis management and the diversity of capitalism: fiscal stimulus packages and the East Asian (neo-)developmental state

Abstract

This paper contributes to the understanding of East Asian capitalism by investigating the political economy of crisis management in Japan, Korea and China during the global economic crisis. Reacting to the global shock of the economic crisis that began in 2008, East Asian capitalism has remained a distinct state-led model that differs substantially from the liberal, neo-corporatist or welfare state varieties of capitalism in the West. More specifically, this paper studies the fiscal stimulus packages implemented by East Asian countries to address the global financial crisis from 2008 to 2010. We find that East Asian fiscal stimulus packages were comparatively large and supply-side-oriented. Unlike in the West, where a (short-lived) revival of demand-side-oriented Keynesian strategies stimulating consumption could be observed, East Asian countries reinforced industrial policies and supported investment and international competitiveness. We argue that the East Asian variety of crisis management can largely be explained by a path-dependent transformation of the East Asian developmental state into a neo-developmental competition state.

Keywords:

• comparative political economy
• international political economy
• developmental state
• fiscal policies
• varieties of capitalism
• East Asia

Acknowledgments

I would like to thank the participants of the 24th annual meeting of SASE at MIT that provided valuable ideas for developing this project. Special thanks to Sigurt Vitols and the whole MEG team at the WZB in Berlin for their support and their feedback on earlier versions of this paper. Finally, I want to thank two anonymous reviewers at Economy and Society for their very helpful reviews and comments.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. Fiscal stimulus packages are the discretionary fiscal measures taken by governments in reaction to the global economic crisis from 2008 to 2010 (OECD, 2010d). Fiscal stimulus packages do not include monetary stimuli such as low-interest credits to banks or other central bank measures, such as quantitative easing.

2. The importance of timeliness (‘frontloading’) biases classical theories towards consumption-oriented spending because it can be phased in rapidly and has a clear time-span during which programmes such as ‘cash for clunkers’ operate.

3. This estimate is based on similar assessments from different studies (see for example Cova et al., 2010, p. 2; IMF, 2009, p. 10; Zhang & Zhang, 2011, p. 314).

4. Most of the earthquake reconstruction funds would likely have been spent even without the global economic crisis and were simply rebranded as fiscal stimulus, but even without them infrastructure remains a substantial part of the stimulus.

5. Japan recommitted itself to ODA and increased its net disbursement from a low amount of US$7.7 billion in 2007 to US$10.6 billion in 2010. Korea nearly doubled its ODA from US$696 million to US$1.3 billion during the same period (OECD, 2011a).

6. There are exceptions such as the United Kingdom and Ireland that are typically considered liberal market economies but have comparatively small stimuli (United Kingdom) or even experience strong contraction (Ireland). These specific reactions can be explained by the particularly severe crisis in the financial sector of these countries. Governments were thus forced to concentrate government funds on bailing out banks, leaving little room for general stimulus measures.

7. In their study exploring fiscal policy from 1980 to 2002, Amable and Azizi (2011) reach a different conclusion. They claim that it is not LMEs but non-liberal economies that have more countercyclical fiscal policies. However, these authors do not distinguish between different types of non-liberal economies in Europe and Asia. From the evidence in this paper, it appears that it is not the distinction between liberal and non-liberal economies that is the important factor for the size of a fiscal stimulus package but the role of the welfare state.

8. A simple linear regression analysis of 27 OECD countries (excluding Iceland, Ireland and Hungary) and China shows that a 1-percentage-point higher level of initial social spending as a percentage of GDP is correlated with a 0.25-percentage-point lower fiscal stimulus as a percentage of GDP (std. err. 0.62, significant at 1 per cent level, R-squared 0.39) (Kalinowski, 2013).

9. The study by Amable and Azizi examines a different time period (1980–2002) than that which is investigated in this paper and addresses discretionary fiscal policies in general, whereas the current paper focuses only on fiscal stimulus packages.

10. Stubbs elaborates in the following way: ‘Overall, then, the Great Recession has moved the mix of structures and policies in the major East Asian economies – Japan, South Korea, Taiwan, Singapore, Malaysia, Thailand, and China – away from the structures and policies promoted by the neo-liberal coalitions and back towards those advocated by the developmental state coalitions. Bureaucratic capacity has been expanded to allow for increased government intervention to guide economies and policies have been introduced that facilitate economic growth through sustaining import-substitution industries and aiding export industries in a variety of ways. Yet just as the developmental state coalition remained strong even after the neo-liberal coalition was able to gain increasing influence in the late 1980s and into the 1990s, so the neo-liberal coalition still has considerable influence despite the almost instinctive developmental state impulses that have been unleashed by the Great Recession’ (Stubbs, 2011, p. 162).

11. US government spending remains substantially higher compared with the early 1980s because of the increased government spending as a result of Reaganomics during the 1980s.

12. Industrial policies are often equated with ‘picking winners’ in the literature (Rodrik, 2004; Stiglitz, 1996), but in the case of East Asia industrial policies were often structured such that the government would select a company, provide it with resources and protection and monitor it to attempt to guarantee success.

13. SMEs account for approximately 78 per cent of employment in Japan, 70 per cent in China and 69 per cent in Korea (Harvie & Lee, 2002, p. 6).

Additional information

Notes on contributors

Thomas Kalinowski

Thomas Kalinowski is an Associate Professor of Political Science at the Graduate School of International Studies, Ewha Womans University in Seoul, Korea. He is teaching International Political Economy, Comparative Political Economy, International Organizations and Development. After receiving his PhD from Freie Universität Berlin in 2004, he was a lecturer at Humboldt University Berlin, a postdoctoral fellow at the University of California in Berkeley and a visiting assistant professor at Brown University, Providence. Recent publications include works on financial crisis, financial regulation and bank reform, the IMF, the global role of East Asia, the diversity of capitalism, and the transformation of the East Asian developmental state. Currently Professor Kalinowski is working on a book about the international regulation of finance.