The Internet Revolution, the "McLuhan" Stage of Catch-Up, and Institutional Reforms in Asia

By Ozawa, Seiji; Castello, Sergio et al. | Journal of Economic Issues, June 2001 | Go to article overview

The Internet Revolution, the "McLuhan" Stage of Catch-Up, and Institutional Reforms in Asia


Ozawa, Seiji, Castello, Sergio, Phillips, Ronnie J., Journal of Economic Issues


The Asian crisis of the late 1990s altered the fortunes of those stricken countries overnight, turning the much-ballyhooed economic miracle into chaos. Japan too became (and still is) trapped in a banking crisis of its own making after the bubble of 1987-1990. A supposedly distinctive East Asian, or Japanese, model of economic growth suddenly lost its luster, and the American model of free-market capitalism came to triumph. The Asian economies were then compelled to reform their regulatory and institutional structures by adopting more market-oriented approaches. Those that had to depend on bailouts from the IMF were forced to accept a wide-ranging reform program as obligatory conditions for the rescue loans.

The themes of this paper are (1) that the Asian crises were the inevitable outcomes of the dirigiste development policies the Asian economies pursued in their successful catch-up growth, (2) that such an institutional regime, however, finally met its match in the form of free-market global capitalism, especially in terms of unbridled capital flows, and (3) that East Asia's present trend of deregulation and marketization is all the more pushed by the institutional requirements of the Internet revolution as the region struggles to catch up in the digital age.

Into the "McLuhan" Stage of Growth

Any successfully developing economy climbs a ladder of growth. Until the arrival of a New Economy, all the advanced economies had, in the past, trodden a path of industrial structural transformation from the "Heckscher-Ohlin" labor-intensive industries (typified by textiles) to the "nondifferentiated Smithian" scale-driven industries (steel, basic chemicals, and heavy machinery), to the "differentiated Smithian" assembly-based industries (automobiles and electric/electronics goods), and finally to the "Schumpeterian" R&D-intensive industries (specialty chips, biotechnology, and new materials) (Ozawa 1992). This conceptualization of stages-based process of industrialization is in line with a "leading sector" theory of growth a la Joseph Schumpeter, which envisages a sequence of stages in each of which breakthrough innovations (new technologies) create a certain new dominant industry as the main engine of growth.

This stage-demarcated sequence of growth can be clearly seen in the history of industrial capitalism. Great Britain was the first country that introduced the Industrial Revolution and quickly moved from textiles to steel and heavy machinery. Continental Europe and the United States then followed in Britain's footsteps by borrowing from the latter, a process which Clarence Ayres (1952) called "cultural borrowing"--that is, borrowing of an industrial culture from the more advanced. Japan, too, joined the Western powers in this game of cultural borrowing, quickly going through the Hecksher-Ohlin ("textiles") and nondifferentiated Smithian stages (steel) in the pre-World War II period. It then successfully climbed the ladder to the differentiated Smithian (automobiles) in the postwar period and most recently to the Schumpeterian (specialty microchips) stage. And Japan's success has prompted other East Asian countries to follow the Japanese model of growth. In this respect, what the World Bank (1993) called the " East Asian miracle" is nothing but the successful outcome of "cultural borrowing" in industrial technology. Where each East Asian economy is situated in terms of its borrowing and catching-up efforts is illustrated in figure 1.

Japan is the first Asian economy that has gone through the four stages of growth and is now on the threshold of a brand-new stage, which can be identified as the "McLuhan" stage (named after the media guru, Marshall McLuhan) led--and driven--by the information technology (IT) revolution (Ozawa 2000). If we accept the notion of a New Economy, this brand new industrial structure has so far been most successfully introduced in the United States.

The Asian NIEs (Hong Kong, Singapore, Taiwan, and South Korea) have swiftly caught up with Japan, although they are still somewhat behind the latter in R&D-intensive Schumpeterian industries. …

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