Paper for VSUES symposium on APEC, Vladivostok, September 2009
By Gregory Clark

Origins of APEC

Begins: In the 1960’s the Japanese rightwing had a problem.

The leftwing was arguing strongly that Japan’s postwar economy badly needed access to the markets and raw materials of China, North Korea and the Soviet Union if it was to survive (in prewar years it had depended heavily on China and the Korean peninsula for both).

This meant that Japan could not afford to go along with the Cold War strategies that said it had to see these nations as enemies.

Professor Kojima Kiyoshi of Hitotsubashi University had an answer – his 1967 concept of a Pacific Free Trade Area (PAFTA).

The concept said in effect that Japan’s economy did not have to rely on these communist nations to the west. It could and should rely on the much more reliable raw materials suppliers and markets to the east, in the Pacific – specifically the US, Canada, Australia and New Zealand.

As a member of Kojima’s seminar at the time, I was marginally involved with the concept. But even at the time it seemed to me that PAFTA had flaws.

A free trade area including nations like Canada, Australia and New Zealand would automatically see demands for the dismantling of Japan’s agricultural protectionism. If Japan's farming lobby was opposed there could be no progress.

Kojima’s answer seemed to be that the US and others would overlook that problem. They would realise the Cold War merits of encouraging Japan to look to the Pacific rather than to Asia. They would be willing to give Japan a free ride in agriculture – something unlikely even then and even more so today.

Another problem for me was the fact that multilateral free trade schemes between nations with different economic levels and needs inevitably cause problems. It is one reason why the WTO is in such a mess, and why the EU still finds it so hard to function properly.

If freer trade is seen as desirable, then the bilateral FTA’s which we see today make much more sense.

A further flaw was that the US, even then, had global ambitions. It was not going to tie its economy to one small area of the globe, just for the sake of Japan.

Already it was trying to link up in some way with the emerging EU.

Years later while insisting on the right to dominate APEC, it was working to create NAFTA and other Latin American trade blocs clearly aimed to protect Latin American markets from Asian trade inroads.

Finally, there was the fact that PAFTA, in turning its back on communist Asia, also had to exclude non-communist Asia.

True, at the time non-communist Asia did not amount to very much. But could Japan really afford to ignore the nations on its doorstep? .

PAFTA becomes PAFTAD

For these and other reasons, PAFTA died an early death. But Kojima was not about to give up.

He repackaged the idea as some kind of Pacific Vision for the new Japan and sold it to enough politicians and bureaucrats to keep it alive.

For many Japanese, including even some progressives, the idea of a postwar Japan making a fresh start looking out towards the advanced Westernized nations of the Pacific rather than having to look backwards to the dark impoverished Asia which had caused Japan such trouble in the past, was attractive.

It was a postwar version of Fukuzawa Yukichi’s Meiji era concept of datsuA, nyuO (leave Asia, enter Europe).

Kojima moved quickly to have PAFTA replaced by PAFTAD –where academics could discuss at length something called Pacific Trade and Development, even if their governments were reluctant to talk about PAFTA free trade area plans.

PAFTAD was soon supplemented by PBCC (an equivalent discussion forum for businessmen) and the quasi-official PECC (Pacific Economic Cooperation Council) where both the academics and the businessmen could come together for more discussions, this time with bureaucratic and political endorsement.

Meanwhile Japan’s Gaimusho was toying with various schemes that would see the non-communist Asian nations brought together in some vague way – ASPAC, MEDSEA.

In the event, they all foundered on vagueness and Asian suspicion of Japanese leadership intentions.

At this point official Japan, with Kojima still at the helm, began to push for something that would allow the wreckage of ASPAC and MEDSEA, together with the floundering PAFTAD, PBCC and PECC , all to be amalgamated into some entity enjoying full government backing.

It was to be called APEC. And that would be in 1989.

The Birth of APEC

Kojima’s fingerprints were heavy on the original APEC design.

For example, to retain his original Pacific Basin concept, APEC would include selected Latin Americans – Mexico, Chile, Peru.

Their relevance to Asian trade and development seemed minimal. Indeed, Asian manufacturing interests were, and remain, antagonistic to Latin American interests.

(In Peru recently I came across an excellent brand of Made In Peru shirts - Baronet. But the company was being pushed out of business by shirt imports from China. Could Peru without a textile industry have the viable economy needed to absorb its massive unemployment?

(APEC should have tried more to look at this kind of problem. Simply espousing free trade does little to solve the problem of China with its heavily undervalued currency being able to dominate markets for many manufactured goods.)

Meanwhile, the Asian communist nations close to Japan had to be kept on the sidelines for as long as possible, even as the distant Latinos had to be included.

And with Taiwan favored over China at the start, the anti-communist agenda also managed to survive for a while, even if today the organisation has finally had to bow to realities, with most of communist Asia and now Russia accepted as members.

Australia to the Rescue

There remained the problem of APEC sponsorship.

Tokyo was anxious not to repeat its ASPAC experience where Asian suspicions of Japan had caused so much trouble. It did not want to appear to be too pushy with the alternative APEC scheme.

So it turned to Australia to take the lead.

Then Prime Minister, Bob Hawke was easily persuaded to be the front-runner.

Meanwhile, the Canberra bureaucrats were delighted to discover an organizational link with the Asian economies — without themselves having to go out and do the hard work needed to build real economic bridges into Asia.

(This curious Australian reluctance physically to get involved with Asia, despite the constant talk about Australia being a part of Asia, is curious.)

(For example, the Europeans send hundreds of young people to Japan each year to be trained so they can work at the grassroots of the Europe-Japan relationship. Ireland alone sends several dozen.)

(Australia sends none.)

Australia's businessmen, academics and journalists spoke profusely about the golden opportunities for Australian trade links into Asia that would flow from APEC.

In fact they were to get most of those opportunities later...but from the China that Australia was still going out of is way to antagonise, and that APEC had originally been intended to exclude.

(In 1971 it was left to me single-handedly to organize Australian participation in China’s pingpong diplomacy. Canberra was strongly opposed.)

The Future

China and Japan are clearly destined to dominate the APEC of the future. But they will do so in very different ways.

Japan’s economy clearly has problems – declining population, poor economic policies and weak political leadership especially. But it is too early to assume it will be dominated by a rising China and play a declining role in the rest of Asia.

It retains several important advantages. One is its still large domestic market able to absorb the added-value imports required by its still high per-capita income population. Another is the cultural bias to perfectionism and quality in manufacturing - the monozukui bunka (literally the culture of making things) of deserved fame. In the service industries it is also exporting to Asia it is helped by this perfectionist bias.

But its manufacturing superiority is crippled by an over-valued currency. It is sad to visit Chinese and other Asian stores and see products with famous Japanese brand-names being pushed aside in price competition with rising Chinese, Korean and Taiwanese brand-names.

There is an answer to this problem, and one that will solve many other problems in the Japanese economy – a massive increase in domestic demand, increasing imports and reducing the pressure to export.

The chronic lack of consumer demand has long been a serious problem for Japan. In the past Japanese consumers, like those elsewhere, spent heavily on basic goods – TVs, washing machines etc. This sustained Japan’s famous high-growth period through to 1973. But having satisfied basic needs Japan’s consumers, even rich consumers, and unlike consumers in most other advanced economies, did not turn to the next list of consumer demands – status symbols and leisure. For good cultural reasons status in Japanese society depends on the work place rather than the accumulation and display of personal possessions. Work place emphasis also cuts spending on leisure. This leads to the chronic lack of consumer demand, which in turn has forced reliance on foreign demand via exports.

Another result is the enormous accumulation of personal financial assets – 1500 trillion yen, with an estimated half in the form of liquid or semi-liquid savings, and with much held by conservative elderly people who did well in previous land and share booms or ease of tax evasion in the past.

Fortunately, and I repeat fortunately, government has borrowed these savings and spent them. Otherwise chronic lack of consumer demand would long ago have forced Japan into a serious deflationary spiral. In the past the lack of private demand was compensated for by foreign demand and government spending. But excessive exports led to the self-destructive yen appreciation.

Another factor was the constant mini-booms in land and shares. But since the collapse of the Bubble economy that outlet has been closed. Japan has had to rely on government spending to fill the gap.

Incredibly, post-Bubble Japan has seen two periods – 1996-98 and 2001-07 – when governments have set out to CUT their spending. Needless to say, both periods threw the economy into serious decline.

The main excuse for these policies was the increase in official debt – now put at over 800 trillion yen or 170 percent of GNP. But the result of these policies was also to INCREASE the debt, via the fall in tax revenues caused by the economic decline. Today’s Japan is still grappling with that dilemma, even if overcoming the current global economic crisis gives government no choice but to expand spending.

Japan’s Dilemma

There are answers to this dilemma. One is that spending to date while increasing official debt has also usefully absorbed excess savings, which is why, contrary to all predictions, interest rates have not risen and the price of JGBs have not fallen.

But this still leaves the problem of debt service. Here one answer is for Japan to take the advice of several senior US economists which says the government can issue either currency or debt which does not have to be serviced – something allowed in situations where there is little fear of uncontrollable inflation. Here firm control over the traditionally conservative central bank would be needed.

But the ultimate answer is to find ways to expand domestic demand, in part by breaking the cultural bias against strong consumer spending. Here there are several possibilities – cleaning up the pensions system, abolishing indirect taxes that harm consumption, tax breaks that increase consumption, infrastructure spending with strong flow-on effects etc.

I leave it to those interested to continue discussion on ways this can be done. But a warning. One of Japan’s many cultural quirks is a strong bias against large-scale infrastructure spending, and not just because of the problems of waste and corruption. Without that spending Japan’s economy will remain severely crippled.

China

Meanwhile I see almost no obstacle to China’s continued progress. It is only a matter of time before the Chinese consumer, like the Japanese consumer of the sixties and seventies, begins to want to spend heavily. High savings will finance the investment needed to produce for that consumption. Heavy infrastructure spending will increase greatly overall productivity of the economy. Growth rates even exceeding those of Japan in the sixties and seventies seem inevitable.

Even better, Chinese economic planners, like Japan’s of the past, will continue with the simple basic Keynesian policies that sustained Japan’s progress in the past, and even in the immediate post-Bubble years. China is unlikely to turn to the foolish supply-sider policies of the US/UK which did so much to kill Japan’s economic miracle after 1996.

Gregory Clark
Akita International University
Japan.