Sridhar Vembu

Sridhar Vembu



1/ I hugely respect East Asia's achievement in lifting people from poverty. There is a lot to learn from the experience of Japan, South Korea, Taiwan and later China. In this thread, I will outline what I respectfully disagree about the East Asian model (respectfully stressed!)

2/ I will use Japan as my example because it is the quintessential East Asian success story. South Korea, Taiwan and later China were all influenced heavily by Japan's development experience. I have been a student of Japanese industry/society for 25 years, starting in 1995.

3/ As post world war 2 Japan became an export powerhouse, Japanese industry acquired sophisticated technological capabilities. To this day, there are many critical industries (smart phone camera sensors would be one example) where Japanese companies rule the world.

4/ When Japan went from poverty to be a leading industrial power, they let export surpluses pile up. Why is that a problem? Isn't too much of a good thing a better thing? Such massive export surpluses have two issues, a) financial and b) real economy. Financial first.

5/ Financially, export surpluses become "reserve assets" at the central bank, as exporters exhange their (primarily) dollar earnings for domestic currency. Such swelling reserves at the central bank, through the money (credit!) multiplier effect, create a domestic credit boom.

6/ The result is that Japanese domestic bank assets (and liabilities!) become swollen and they became the largest banks by assets in the world by 1990 (Chinese major banks occupy that role today, through the same mechanism). The massive credit boom distorts the domestic economy.

7/ The Japanese domestic credit boom (swollen reserves from export surpluses, multiplied 10x) resulted in a massive real estate bubble in the late 1980s, so big that it was said the Imperial Palace grounds in Tokyo was worth more than the entire land in the state of California!

8/ Japanese companies realized that real estate speculation and financial engineering (known as zaitech) were more profitable than their main line of business. That was the setting for the Japanese bust in the 1990s. Japan has still not recovered fully from that bust!

9/ Now the real economy effect of piling up export surpluses. Japan then (and broader East Asia now) developed what I call "over-employment" - my term for an obsessive focus on putting everyone to work. The trouble is no one has any time for kids and that destroys demographics.

10/ Japanese invented the concept of "karoshi" (death due the overwork) and South Koreans work even harder. Recently Jack Ma of Alibaba exhorted the Chinese to work even harder, export more! That leaves no time for kids. South Korea now has the lowest birthrate in the world.

11/ That's the real economic consequence of piling up export surpluses, leading to "over-employment" and overwork. East Asia has worked hard to deliver fine products for the rest of the world, piling up paper claims on the rest of the world, with no kids to enjoy that wealth.

12/ Japan has a lot of old people that die alone, a tragedy. Those massive export surpluses aren't worth it. That brings up the notion of balance, the foundation of spiritual economics. India must produce more and export enough to balance trade, but no point being obsessive

13/ India must keep that balance - we want growth and material prosperity, but it cannot become an obsession where we overwork people and don't have a holistic enjoyment of life. East Asia, I am afraid, has gone too far and works it's people too hard. India should not.

14/ In concrete terms, we must end the economists' obsession with labour force participation - all work doesn't have to be "GDP creating work" or worse "export surplus piling up work". At a company level, I ended the culture of extreme work hours in our Japan office years ago.

15/ I am happy to say that after hearing my lectures on this culture of overwork (and alcohol!), many of our young Japanese employees chose to get married and have had children. It has been a happier company in Japan since and without such an emphasis on alcohol to be happy.

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