The Not-So-Miraculous 'Asian Miracle'

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For years, Asia’s economic "miracles’’ have preyed on the American mind. First it was Japan, then it was the East Asian "tigers,’’ and now it’s China. The Chinese economy has been in overdrive for a decade, leading the world with annual growth rates of up to 14 percent. America’s trade deficit with China hit $33.8 billion last year, while the U.S.-Japan trade gap was $59.3 billion. All of this has fed the American suspicion that inimitable "Asian values" are at work— and that the 21st century may be a long and unpleasant one for the United States. Lately, however, a number of economists have sharply questioned the conventional view of Asia’s economic successes. In the Brookings Review (Winter 1996), for example, Nicholas R. Lardy, a Senior Fellow at the Brookings Institution, points out that the lion’s share of China’s increased exports is being produced by foreign firms.

From only $320 million in 1985, barely more than one percent of total exports, the country’s exports of goods assembled from foreign components, such as machinery, electronic products, and clothing, soared to about $35 billion in 1994. China’s inefficient state-owned firms, which in 198687 accounted for more than four-fifths of export growth, in 1991–92 accounted for only one-fifth. "Reliance on foreign firms is not a problem per se," Lardy says, "but, combined with the protection provided to state-owned industries, it has inhibited productivity growth."

Veteran Asia correspondent Robert Elegant seconds Lardy, emphasizing in National Review (Nov. 27, 1995) the importance of skills and capital provided by overseas Chinese. "As was early-20thcentury Shanghai, late-20th-century coastal China is in large part a foreign creation," Elegant writes.

Unless there is a restructuring of Chinese industry, Lardy concludes, "the phenomenal growth of trade and investment is likely to slow, leaving China to lag behind the highperforming economies of East Asia."

Yet even the spectacular growth of those economies may be destined to slow down, argues Paul Krugman, an economist at Stanford University, in a controversial Foreign Affairs (Nov.–Dec. 1994) article. Like the Soviet Union of the 1950s, the East Asian "tigers" (Singapore, Hong Kong, Taiwan, and South Korea) "have achieved rapid growth in large part through an astonishing mobilization" of labor and capital. Efficiency gains, which are essential to long-term growth, have played only a minor role in the countries’ success. (Japan, says Krugman, is an exception: large gains in productivity helped fuel its early growth. But even its "miraculous" growth has slowed down.) Between 1966 and 1990, for example, Singapore’s economy grew 8.5 percent a year, three times as fast as the U.S. economy. But, Krugman says, "Singapore’s growth has been based largely on one-time changes in behavior that cannot be repeated." The employed share of the population almost doubled, from 27 to 51 percent, and education levels of ordinary workers rose. The country made "an awesome investment in physical capital: investment as a share of output rose from 11 to more than 40 percent." Singapore’s case, Krugman acknowledges, is the extreme one, but "the basic conclusion" also applies to the other "tigers": "There is startlingly little evidence of improvements in efficiency."

"Nothing could be further from the facts," asserts Frank Gibney, president of the Pacific Basin Institute, in one of several rejoinders to Krugman in Foreign Affairs (Mar.–Apr. 1995). World Bank economists calculate that one-third of the growth of "high-performing Asian economies" (which include Indonesia, Malaysia, Thailand, Japan, and the four "tigers") is due to increased productivity.

Krugman is unrepentant. Even the World Bank’s 1993 study, The East Asia Miracle, he says, "does not remotely support the almost universally held view that the newly industrializing Asian nations are rapidly converging on Western levels of efficiency." Indeed, he is quoted in the Economist (Dec. 9, 1995) as saying, raising efficiency is much harder than increasing "inputs"—"and there is no evidence that Asian countries know how." If such views have not made the professor very popular in certain Asian lands, the magazine observes, they may help allay Western fears about the Asian "miracle" and, by doing so, ease the pressure for protectionism.


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