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THE POLITICAL ECONOMY OF EAST ASIA

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THE POLITICAL ECONOMY OF EAST ASIA

STRIVING FOR WEALTH AND POWER

Ming Wan George Mason University

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Library of Congress Cataloging-in-Publication Data

Wan, Ming The Political economy of East Asia : striving for wealth and power / by Ming Wan. p. cm. Includes bibliographical references and index. ISBN 978-1-933116-91-4 (alk. paper) 1. East Asia—Economic policy. 2. East Asia—Commercial policy. 3. East Asia—Foreign economic relations. I. Title.

HC460.5.W3476 2008 330.95—dc22 2007033250

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http://www.cqpress.com
For Maggie

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CONTENTS

Tables, Figures, and Maps

Preface

PART I: INTRODUCTION

1. Introduction What Is East Asia? The Political Economy Approach

Defining Political Economy Institutions Comparative Political Economy and International Political Economy The State and the Market Economic Growth Versus Political Regime Power of Ideas

Design of the Book Suggested Readings Notes

2. The East Asian National Systems of Political Economy The Political Economy Systems of East Asia: An Overview The Japanese System of Political Economy

The Embedded Mercantilism Structural Reform

The Political Economy Systems of the Asian Tigers South Korea Taiwan Singapore

The Political Economy Systems of Southeast Asia Malaysia Thailand Indonesia The Philippines Burma/Myanmar

The Transitional Political Economies China Vietnam North Korea Cambodia

Conclusion Suggested Readings Notes

PART II: THE RISE AND FALL OF EAST ASIA

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3. The Chinese World Order World Orders

International Order The Chinese World Order

Political Economy of East Asian Trade Comparative Political Economy

China Korea Japan Southeast Asia

Beyond European Models of World History Eurocentric Models of World History New Scholarship on World History

Why Did the West Rise? Conclusion Suggested Readings Notes

4. Modern Imperialism Western Imperialism

Imperialism History of Western Domination in East Asia East Asian Responses to Western Domination Legacies of Western Colonialism

Japanese Imperialism Japanese Response to Western Imperialism History of Japanese Imperialism Legacies of Japanese Imperialism

Conclusion Suggested Readings Notes

5. The East Asian Miracle Postwar Transformation of East Asian Political Economy

Rapid Economic Growth with Equity Was There a Miracle? Structural Change March to Capitalism

Explaining the East Asian Miracle Neoclassical Economics The Developmental State Approach The East Asian Challenge What Exactly Explains the East Asian Miracle?

A Regional Perspective of East Asian Political Economy Flying Geese Formation Regional Integration and Learning

The United States and East Asian Political Economy The U.S. Hegemony Managing Rivals The United States and East Asian Regionalism

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The Political Economy of Growth Conclusion Suggested Readings Notes

6. The Asian Financial Crisis Tracing the Crisis Explaining the Crisis Speculative Capital Unsustainable Economic Policies Crony Capitalism

Managing the Crisis The Consequences of the Crisis The Political Economy of the Crisis Conclusion Suggested Readings Notes

PART III: ISSUES OF EAST ASIAN POLITICAL ECONOMY

7. The Political Economy of East Asian Production The “Factory” of the World East Asian Industrialization Foreign Direct Investment in East Asia The Investors of the World

Regionalization of Production The East Asian State and Production Picking the Winners Foreign Direct Investment Policies

East Asian Companies Domestic Political Economy of Production Conclusion Suggested Readings Notes

8. The Political Economy of East Asian Trade Trade Patterns in East Asia Rapid Expansion in Trade Structural Change in Trade Surplus with the World Greater Regional Trade Interdependence

East Asian Trade Strategies Import Substitution Export Promotion Trade Liberalization

Facing the World Managing Trade Disputes Global Rules, Asian Plays

East Asian Trade Regionalism Domestic Political Economy of Trade Conclusion

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Suggested Readings Notes

9. The Political Economy of East Asian Finance East Asian Finance East Asian Capital Accumulation East Asian Banking Shallow Financial Markets

East Asian Financial Policies Mobilizing Domestic Capital Financial Liberalization

East Asia in Global Finance Cross-Border Capital Flows Global Saving Glut

East Asian Financial Regionalism East Asian Political Economy of Finance Conclusion Suggested Readings Notes

10. The Political Economy of East Asian Monetary Relations East Asian Exchange Rate Policy Exchange Rate Policies East Asian Exchange Rate Policies Through the Early 1970s From the Early 1970s to the 1997 Financial Crisis Postcrisis East Asian Exchange Rate Regimes

East Asia in the Global Monetary System International Monetary Regime East Asia and the Bretton Woods System The Dollar Standard

East Asian Regional Monetary System Monetary Union A Yen Bloc The Yuan’s Arrival

East Asian Political Economy of Money Conclusion Suggested Readings Notes

11. The Political Economy of East Asian Regionalism Defining Regionalization and Regionalism East Asian Regionalization East Asian Regionalism Open Regionalism The New East Asian Regionalism “East Asia Plus” Versus “East Asia Minus” Regionalism

Theories of Regionalism Economic Theories of Regionalism Political Economy Theories of Regionalism

Political Economy of Regionalism Conclusion

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Suggested Readings Notes

Index

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TABLES, FIGURES, AND MAPS

Tables 2.1 Economic Change and Political Change in East Asia 3.1 Economic Development, Asia and the West, 1–2001 3.2 Shares of World GDP, 1–2001 3.3 International Comparison of GDP per Capita, 1–2001 5.1 Growth in the Global Economy, 1965–1990 5.2 East Asia’s GDP Annual Growth Rates, 1990–2005 5.3 Structural Change of East Asian Economy 6.1 External Financing of Indonesia, Malaysia, the Philippines, South Korea, and Thailand,

1994–1998 6.2 Maturity Distribution of Lending to East Asian Countries 6.3 IMF-Orchestrated Packages for Thailand, Indonesia, and South Korea 7.1 Foreign Direct Investment (FDI) in East Asia 7.2 Foreign Direct Investment (FDI) as a Percentage of Gross Fixed Capital Formation 7.3 Foreign Direct Investment (FDI) Stocks as a Percentage of Gross Domestic Product 7.4 Asia and Global Brands 8.1 East Asian Export Shares of World Imports 8.2 Leading Exporters and Importers in World Merchandise Trade, 2005 8.3 Lowering Tariffs in East Asia 9.1 East Asian Gross Domestic Savings 9.2 East Asian Gross Fixed Capital Formation 9.3 East Asian Savings-Investment Gap 9.4 East Asian Nonperforming Loans 9.5 Market Capitalization of Listed Companies 9.6 Asian Local Currency Bond Markets 9.7 East Asian Current Account Balances 10.1 East Asian Exchange Rates 10.2 East Asian Foreign Reserves, Including Gold

Figures 5.1 East Asia’s GDP Annual Growth Rates, 1961–2005 5.2 East Asia’s GDP per Capita Annual Growth Rates, 1961–2005 6.1 Decline in East Asian Currencies 6.2 GDP Growth for East Asian Economies Affected by the Crisis, 1990–2004 6.3 Growth Rates of East Asian Merchandise Exports, 1991–1996 8.1 East Asian Expansion in Merchandise Exports, 1960–2005 8.2 East Asian Merchandise Trade as Share of GDP, 1960–2005 8.3 Growth Rates of East Asian Merchandise Exports, 1961–2005 8.4 Manufactured Exports as Shares of Merchandise Exports, 1962–2005 8.5 High-Technology Exports as Shares of Manufactured Exports for East Asia, 1988–2005 8.6 Merchandise Trade Balances for East Asia, 1960–2006 8.7 Merchandise Trade Balances for the United States, 1960–2006

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8.8 East Asian Merchandise Trade Balances as Shares of U.S. Trade Deficit, 1976–2006 9.1 Gross Domestic Savings as Shares of GDP, 1965–2005 9.2 Gross Fixed Capital Formation as Shares of GDP, 1965–2005 9.3 Current Account Balances, 1970–2005 10.1 Dollar-Yen Exchange Rates, 1950–2006 10.2 Real Effective Exchange Rate Index for Japan, China, and the United States, 1975–

2005 10.3 Yen-Dollar Exchange Rates, 1981–1998

Maps 1.1 East Asian Countries and Their Political Economy Classification 3.1 Eurasia and the Silk Road, 100 BC 4.1 Western Imperialism in East Asia to 1910 4.2 China in the Qing Dynasty, 1644–1911 4.3 Japanese Expansion in Asia, 1895–1941

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I

PREFACE

have written this book not only because the political economy of East Asia is a fascinating subject but also because I was unable to find a textbook that matched the way I approached

the subject in my teaching. There certainly are good works on East Asian political economy, but they tend to be highly specialized; most of the textbooks that exist are comparative studies of the political economy of individual countries in the region. By contrast, although I have introduced comparisons of individual countries in my teaching, I have tended to organize my lectures on East Asian political economy around issues of trade, production, finance, and money, as well as the economic miracle and the financial crisis. Students interested in East Asia need to be introduced to the political economy of these issues because East Asia has become an economic center on par with North America and Europe. To understand East Asian politics, we need to avoid studying East Asian countries in isolation. Rather, we need to understand how regional economic forces have shaped political developments and vice versa. An international political economy approach also allows the introduction of exciting theories in this vibrant subfield. The book you hold in your hands takes this approach.

I had expected this book to be difficult to write, but it turned out to be even more daunting than I had anticipated once I began serious work on it. Such a project demands far more expertise in a broader range of issues than I was prepared for, despite the fact that I’ve been teaching and researching in this area for more than ten years. Exploring East Asian political economy is like wandering around a massive palace: you open one door only to find several others leading to yet more rooms, each containing scholars actively debating each other. I ended up learning much about the field, particularly those subjects I had not committed much time to previously.

At times I felt discouraged about my ability to write a book that would do sufficient justice to what has happened to East Asia’s political economy and to the cumulative scholarship in the field. I found that the only way I could move forward was to tell myself that this book was all along meant to be an introduction to East Asian political economy rather than the final word on the subject, an impossible task in any case. So, very much like a professor taking students on a field trip, I’ve tried to explain a little bit of everything while highlighting the most important issues and ideas in order to give readers a strong overarching sense of the field. I’ve developed some common themes that run throughout the book as well —the importance of understanding how and why the region’s national political economic institutions evolved the way they have, and the interplay among domestic, regional, and other foreign sources of influence—in an effort to help readers tie the material together. I’m confident that students who find a room particularly fascinating can always go back to learn more.

I know from experience that many students are unfamiliar with East Asian history, let alone its political economy. To address this, the book begins with two chapters that lay the foundation for later material: Chapter 1 outlines the political economic approach, while Chapter 2 looks at each country’s national political economy and discusses how these institutions have evolved. The second part of the text then takes a look at the political economic history of the region, with particular emphasis on the effects of an earlier Chinese

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world order, and then under the influence of Western and Japanese imperialism. I cover recent issues as well, focusing in particular on the East Asian miracle and the region’s subsequent financial crisis and reform and recovery efforts. With this theoretical and historical context in mind, the third part of the book looks in turn at issues of production, trade, and finance; lastly, it examines the regional interplay of all of those instruments.

Though the book discusses each of the fifteen countries in the region—Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, North Korea, the Philippines, Singapore, South Korea, Taiwan, Thailand, and Vietnam—readers may notice that there is, in general, more attention paid to China and Japan than to some of the others. My choices here necessarily reflect my own background as well as the relative availability of scholarship. There is simply far more material on Northeast Asia, particularly China and Japan. Throughout, I have nonetheless sought a balanced discussion in the book as well as one that is attentive to the region as a whole. In any case, I recognize and assume that instructors will choose to emphasize some countries or some issues rather than others and may wish to assign additional readings. For this purpose, I have supplied an extensive list of suggested reading materials at the end of each chapter.

ACKNOWLEDGMENTS

I want to thank Charisse Kiino of CQ Press for making this book possible. Charisse approached me several years ago with the idea of writing a textbook for CQ Press. Once I was ready to write, she supported the project and gave detailed suggestions. My thanks also go to Elise Frasier of CQ Press for helping develop the book project, to Elaine Dunn for her careful copyediting of the manuscript, and to Talia Greenberg for handling the book’s production. Last but not least, I am grateful for the constructive comments from the reviewers of the book proposal and the complete manuscript, including Donald Crone, Scripps College; Joseph Fewsmith, Boston University; Kathryn Ibata-Arens, DePaul University; Timothy Lamperis, St. Louis University; Anne T. Sloan, Middle Tennessee State University; Hong Ying Wang, Syracuse University; and Ka Zeng, University of Arkansas; as well as a handful of other anonymous reviewers.

I have taught GOVT 433: East Asian Political Economy at George Mason University for the past decade. The enthusiasm of my students for the political economy of an incredibly important and complex region and their frustration at times with the reading materials were the main motivations for this book. I have class-tested some of the materials in the book over the years.

Undoubtedly, it takes a family to write a book. My wife, Anne, was as supportive of this book as she was of other research projects of mine. Her intelligence and patience have made my writing possible. The book is dedicated to our daughter Maggie, who came along while I was writing this book and has brought as much joy to our life as her big sister.

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THE POLITICAL ECONOMY OF EAST ASIA

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E

CHAPTER 1

Introduction

ast Asia is important for students of world politics. For scholars of international political economy (IPE) who study the interaction of power and wealth in the international

system, East Asia is a force to reckon with in the global economy. It comprises Japan and China, two of the largest economies in the world, and dynamic economies such as South Korea, Taiwan, Singapore, and Malaysia. East Asia now engages in almost 30 percent more trade than the United States, Canada, and Mexico combined—the three countries in the North American Free Trade Agreement (NAFTA)—while trailing the twenty-five-member European Union (EU) by less than half.1 East Asian economies have taken turns leading the world in speed of economic growth: Japan in the 1960s; Taiwan, South Korea, Hong Kong, and Singapore in the 1970s; the Association of Southeast Asian Nations (ASEAN) in the 1980s; and China since the early 1990s. Collectively, East Asia grew faster than any other region in the world prior to the Asian financial crisis in 1997–1998. Despite the financial crisis, East Asia remains a dynamic economic region paced by China’s high growth. From a historical perspective, Asia’s postwar rise is on par with the rise of Europe and the rise of the United States. With a recent turn of IPE toward the interaction of domestic and international politics in research focus, East Asia offers ample and diverse experience of how domestic politics helps shape the policies in production, trade, exchange rates, and development and how the global market forces and international institutions in turn affect East Asian domestic politics.

East Asia is also important for students of comparative political economy and historical sociology, who study the formation and consequences of institutions from a comparative and historical perspective. East Asia had a unique set of political and economic institutions historically. East Asian institutions of political economy have evolved, converging in some areas and diverging in others between themselves and from other regions in a global context. Thus, the East Asian experience serves as a corrective to a Eurocentric bias in how people normally understand the evolution of global political economy. To begin with, political economy—often defined as the study of interaction between the state and the market—has been informed mainly by the European experience of state formation and capitalist expansion. Recent scholarship on the origin of East Asian political economy rejects the simplistic notion that the region’s modern transformation was defined by Western pressure and Asian response and suggests a more complex picture of Westerners also adapting to preexisting commercial networks and political entities in East Asia. As East Asia and Europe interacted in a wider global market, studies of East Asian IPE shed light on what was unique and universal in both regions. Moreover, studies of the Asian economic miracle and the Asian financial crisis have highlighted the central role of the state in shaping the market, for good or ill.

Students of East Asia should be familiar with the political economy approach. To

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understand East Asia, one needs to understand the economic driver of the region in the past and present. Current scholarship of East Asia still has a politics-in-command bias, not sufficiently taking into consideration the underlying and transformative power of economic forces, particularly in the past few decades.

East Asia is a diverse and complex region, with deep historical and cultural roots and varied political, economic, and social practices. East Asian studies are thus necessarily and rightly interdisciplinary. But this interdisciplinary nature does not mean that textbooks have to be interdisciplinary. A “little bit of everything” approach may cover much ground and provide abundant useful information, but it will not help students grasp the basic dynamic of the region. While one may enter the field of East Asian studies from any discipline, this book considers a political economy approach particularly attractive. After all, many recent students are attracted to Asian studies because of the economic dynamism of the region. Moreover, political economy offers an elegant way to deal with complex issues in a way that connects with studies of other regions, and it provides analytical tools to study the interaction of domestic and international politics and to study supranational economic interactions.

Ultimately, the book portrays the ongoing drama of East Asian states striving for wealth and power given domestic and international constraints and opportunities. Their successes or failures have been a principal force shaping modern East Asian history. The book thus adopts an evolutionary and regional perspective on East Asian political economy. East Asia has experienced profound transformations. Some countries in the region have changed far more than Western nations in a few decades, from empire to communism to state capitalism. What happens at crucial junctures affects the institutions formed, which in turn affect economic performance.

The East Asian drama plays out, often differently, in the arenas of production, trade, finance, and exchange rates. Thus, unlike most other texts on East Asian political economy, which are essentially comparisons of the political economy of major individual countries in the region, the second part of this book focuses on economic issues, using an organizing scheme typical of an IPE textbook.

WHAT IS EAST ASIA?

East Asia is defined in the book as a region that stretches from Japan to Myanmar, as shown in Map 1.1. It includes Northeast Asia and Southeast Asia. Northeast Asia can be divided into mainland (China and the two Koreas) and maritime regions (Japan and Taiwan). Similarly, Southeast Asia can be divided into mainland (Myanmar, Thailand, Laos, Vietnam, and Cambodia) and archipelago (Malaysia, Singapore, Indonesia, Brunei, and the Philippines).

From a political economy perspective, East Asia may be divided into four groups. Japan is a first-rank mature market democracy. Then there is a second group of newly industrialized economies, namely South Korea, Taiwan, Singapore, and Hong Kong. The third group includes the early ASEAN countries minus Singapore. The fourth group comprises the socialist countries in transition, namely China, Vietnam, North Korea, Cambodia, and Laos. Myanmar, which follows its own style of socialism, belongs to this group.

One cannot avoid being arbitrary in deciding which countries should be included in a region. A regional subsystem may be determined by dozens of attributes such as proximity, pattern of interaction, and recognition.2 For East Asia, one may argue that India, Australia, or Russia should be included for historical, economic, or geographical reasons. Some would also argue that the United States should be included as well, given its security presence and economic significance in the region. Another major challenge to an artificial region is the boundary problem, as students of international relations have long recognized. In fact, some

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scholars show that the frontier is where the action is.

MAP 1.1 East Asian Countries and Their Political Economy Classifications

I consider East Asia a distinct region spanning from Japan to Myanmar for the following reasons. First, East Asia has been characterized by a high degree of interdependence and dense transactions between countries in a region over several dimensions.3 Second, people generally recognize East Asia as a distinct region. Third, we cannot cover too many countries.

This book discusses the United States, a key player in the region. The U.S. military presence underlies the economic structure in East Asia. The United States is the largest final market for East Asian exports and is the main source of technology and investment capital. The United States remains the dominant player in international financial institutions such as the World Bank and the International Monetary Fund. But the United States is not an East Asian country. Rather, it is a North American and Pacific country that has a global presence. Conversely, even though Japan has considerable influence in Latin America, it would be absurd to call the country Latin American. In short, we will see East Asia as a distinct economic region, with the United States or other players included where and when they are relevant. It is necessary, in fact, because East Asia is part of a global political economy.

Although the book is about East Asia, we need to put it in a comparative, global perspective. East Asia is best understood in comparison with other regions, thus the book brings in other regions when it is necessary. In discussions of traditional East Asian political economy, the reference is the West. I compare East Asia with the West for the simple fact that the rise of the West was important for the evolution of East Asian political economy. At the same time, nomadic peoples bordering China were important for the nature of the Chinese system of political economy. In the imperialist stage, the East Asian response is briefly compared with that of other non-Western regions. The key is state capacities, and adaptability, to deal with the external stimuli. The chapter on the East Asian miracle contrasts East Asia with Latin America. Less discussed comparisons can also be made with South Asian nations and the Soviet Union/Russia and Eastern Europe.

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THE POLITICAL ECONOMY APPROACH

The main purpose of the book is to highlight a few important issues rather than trying to cover all angles in a balanced fashion. Chapter 3 puts an emphasis on China as the principal shaping force of the traditional East Asian world order and does not give as much attention to Japan, Korea, Vietnam, and other Southeast Asian nations or to diverse experiences within China. The chapter contrasts East Asia with the West but does not discuss other regions such as the Islamic world, South Asia, or Africa. Chapter 4 emphasizes the order-creating experience of the West and Japan but does not give detailed attention to resistance to these imperialist endeavors. Chapter 5 focuses mainly on the successful economies in East Asia but not on failed states such as Myanmar and North Korea. Chapter 6 examines the crisis states without looking more closely at the economies that escaped the crisis.

Aside from the focus on the issues discussed above, the book follows a loosely defined political economy approach as an organizing framework to expose students to some of the prevailing political economy questions set in the context of East Asia. The book will present answers to these questions to varying degrees, depending on the necessary space constraint and the depth of research in certain areas.

Defining Political Economy

Scholars define political economy differently.4 Classical economists like Adam Smith and John Stuart Mill treated political economy as a science to increase the wealth of nations. However, Alfred Marshall removed politics from the discipline of economics in his 1890 book Principles of Economics. Now the term political economy has reemerged for economics and has become a mainstay for political science. For neoclassical economists, political economy means either the study of the market (failure or success) or the application of economic approach to studies of politics. Political economy basically means applying the standard economic methodology, that is, human behavior explained by individuals’ rational choices under constraint and scarcity, to politics. For some other political scientists, particularly in IPE, political economy means the interaction of politics and economics, which can be studied using a wide range of methodologies.5 That is what the term political economy means in this book.

Political economy has become important for comparative politics, international relations, and historical sociology, all of which are important for studies of East Asia. In the following section, I will illustrate the common interest in institutions and then differentiate them to clarify where this book is located in the intellectual landscape.

Institutions

For some scholars, a rationalist approach to institutions serves as a synthesis of international politics, comparative politics, and American politics, the principal subfields of political science in that they all study actor-based institutions in situations of strategic interaction. For international relations (IR) scholars, breaking the state into specific institutions and looking at international institutions mean that the findings and tools from American and comparative politics can be translated into the field of IR.6

Institutions help us understand human behavior. This is important for studies of political economy because the market and the state are institutions. Politics and economics are distinct areas of human activities. Politics is fundamentally about participation, justice, and authoritative distribution of resources, involving rights and duties. Economics deals with efficiency and wealth creation. But the institutions of the state and the market, which are central to the political and economic aspects, take on the dual nature of politics and economics. The market is political in that it provides freedoms to individuals in employment,

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residency, and consumption while also limiting choices. The market both makes things equal through the mechanism of competition and makes things less equal because of concentration of property holding. The market both contributes to societal order by satisfying individuals who have freedom of choice and making individuals more interdependent in a specialized society and disrupts societal order by eroding traditional values and structures. The state is also an economic institution in that it needs to be efficient in using resources and to promote economic growth for public interest.7

There are three basic ways to study institutions.8 First, the rational choice approach focuses on the consequences of institutions and views institutions as “rules, procedures, norms, or conventions designed self-consciously to determine ‘who has the power to do what when.’”9 By contrast, historical institutionalism focuses on the origin of institutions and path dependence. Here institutions refer to “the formal or informal procedures, routines, norms and conventions embedded in the organization structure of the polity to political economy.… In general, historical institutionalists associate institutions with organizations and the rules or conventions promulgated by formal organizations.”10 A third approach is sociological and includes cultural practices of symbols and morality in the definition of institutions.11

This book uses the insight of rational choice theory to allow a coherent story of East Asian political economy. There are limits, however. Political economy takes place in time and space. Thus, it also uses historical institutionalism. By contrast, the book does not deal with cultures and traditions. This is not to deny or undermine the importance of cultures and traditions.12 In fact, when most people think about East Asia, they often think about cultures and traditions first. That is precisely the reason why this book avoids discussion of cultures. Students of East Asia are not short on studies of symbols, cultures, and traditions from other sources.

Rational choice approach. The rational choice approach assumes that individuals are goal- oriented, rational actors who seek to maximize gains and minimize losses in a strategic environment. However, individually rational behavior may lead to a collective action problem in that everyone has incentives to exploit others, resulting in lack of cooperation. Institutions exist because they overcome the collective action problem by creating a situation in which cooperation is self-enforcing.13

The rational choice approach is powerful for studies of East Asian political economy for several reasons. First, the approach is appealing in that individuals’ choices matter and one cannot simply blame structural reasons for failures. Whatever policies a government adopts, individuals will rationally behave in such a way that often contradicts the original purpose of the policies. This is particularly the case when we discuss economic policies and when the market forces have expanded in East Asia. To have the intended results, the government policy has to be credible. Second, the West has arisen thanks to institutions such as property rights. Countries that have effective institutions to coordinate politics and economy succeed while those that do not have effective institutions perform poorly. Third, the rational choice theory explains the presence or absence of cooperation to achieve collective action for East Asian nations and East Asia as a whole. For functional areas such as trade, foreign investment, and monetary policy, the best approach is to use international regime, a standard analytical framework for studying international political economy. The focus of this literature is on how institutions help actors achieve cooperation by overcoming the collective action problem.

Historical institutionalism. The rational choice institutionalist discussion of institutions emphasizes the functionality of institutions to explain why these institutions exist in the first place. But the rational choice approach does not offer a sufficient discussion of the historical

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origins of the institutions. An alternative explanation has been offered, which emphasizes that the institutions we have are profoundly historical.14 Some economic historians have shown convincingly how timing and sequencing explain which technologies come to be selected and that the most efficient technology does not necessarily get chosen.15 This approach focuses on path dependence, an explanation that emphasizes a logical sequence of stages of antecedent conditions, critical juncture, structural persistence, reactive sequence, and outcome. Antecedent conditions offer different options for actors; actors choose a policy option against alternatives; the choice creates institutions produced and reproduced over time; and actors react to the institutions, which lead to the final resolution.16

As an example of path dependence, a deteriorating economy caused by the Cultural Revolution (1966–1976) forced China to select a different path in a critical juncture in the late 1970s. During a highly unsettled time, Deng Xiaoping selected economic reform and opening China to the outside world without any accompanying democratic reform. While the dire situation demanded drastic policies, one can imagine if alternative strategies were adopted, as evidenced by fierce policy debates in China at the time. In the Soviet Union, Mikhail Gorbachev later chose a different path, of political reform first, whereas in North Korea, the government has dragged its feet in economic reform despite dire economic situations.

Deng’s choice became institutionalized over time and thus became harder to reverse. Can China go back to the socialist planned economy adopted a few years after the People’s Republic of China was established in 1949? Although some people wanted that in the 1980s, it is out of the question now. Chinese citizens largely reacted positively to reform, which reinforced it. At the same time, there were at least two related reactive sequences. One was when the citizens demanded political reform to resolve tensions arising from the economic reform. There was an opportunity for this type of political reform in the late 1980s, which was crushed in the 1989 Tiananmen Square incident. It is harder for another Tiananmen-like movement to occur now because rational actors have chosen to avoid politics and to concentrate instead on personal welfare and career, which has put most elites in the progovernment camp. Thus, political reform has become harder because elites now have a greater vested interest in stability.

The other reaction sequence comes from the many “losers” of the reform. Since they have few channels to vent, they have increasingly chosen to use often violent protests against corrupt officials. These protests lead to repression. The central government has interpreted these protests as a reason not to introduce political reform although they are willing to make marginal changes. At the same time, growing societal resentment means that leaders with populist tendencies like Chinese President Hu Jintao have sought to use societal sentiments as weapons against political rivals. The story of China’s reform does not stop within the Chinese borders. The Chinese reform made it possible for other socialist countries to do the same, with both its promises and its limitations.

We need to look at the dynamics of East Asian political economy, where different national systems of political economies exist. Japan, for example, shares both similarities and differences with other advanced capitalist countries.17 This raises the question of how different national institutions originated and evolved historically. While adopting a path- dependence approach, one should not ignore politics as the driver of institutional change. Institutional change does not happen automatically.18

Power and political institutions. The rational choice approach does not have to exclude power because the practices of rent seeking and agenda control allow power exercise, but new institutionalism, borrowed from the discipline of economics, focuses on voluntary exchanges creating institutions for cooperation.19 However, the systems of political economy

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do not benefit all; some benefit whereas others do not.20 By contrast, historical institutionalism gives a prominent role to power and asymmetrical relations. To be more specific, institutions distribute power unevenly among groups.21

The history of East Asian political economy illustrates the centrality of power in how the system has evolved. Institutions have often evolved to serve the purposes of the powerful, although established institutions also serve the interests of the weak. At the same time, we should not adopt a simplistic, deterministic model of power to explain everything. Power can serve as the motive for acquiring wealth (rich nation, strong army) and has served as a means for achieving wealth at crucial junctures of East Asian history. The West prevailed over East Asian nations not based on competitive prices but based on superior military power to control the trade ports and routes. Japan’s rising power was integral to its rising economic power.

The modern states did not emerge from the state of nature. Rather, they evolved in an intense political environment of external threat and internal power politics. In particular, military competition was an important driver for economic and political institutions in medieval and early Europe.22 Similarly, East Asian political economy has not been separated from security, although the book separates the two analytically and leaves a detailed discussion of East Asian security to other texts.

Comparative Political Economy and International Political Economy

The boundary between comparative and international politics has lost much meaning for many IR scholars.23 For students of regional affairs in particular, it is difficult to differentiate international political economy (IPE), comparative political economy (CPE), and history. They deal with similar questions, namely how power and wealth relate to each other and how economic development and political development interact, and they often use similar analytical tools. One superficial difference is that a CPE book focuses more on country comparisons, whereas a typical IPE text has separate chapters on issues such as trade, exchange rates, and foreign investment.24

This book addresses readers of both CPE and IPE. While the book does not attempt an impossible neat division of labor, it is more consistent with CPE in the first five substantive chapters. Chapter 2 compares East Asian national systems of political economy. The next four chapters focus on how the state and the market have interacted in East Asia and how that is related to the different paths and performances of East Asian nations. But IR scholars should also be interested in the origin and evolution of the regional international system. In the last part of the book I focus on important issues of IPE, namely production, trade, finance, and exchange rates. At the same time, most chapters include a section about how politics and economics influence each other in a particular issue.