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It has become almost a cliché to argue that the 21st century will be the Pacific Century, just as the 20th belonged to the countries on either side of the Atlantic. For the past two or three decades, growth rates on the Asian side of the Pacific have been such that the rest of the world looks to be stagnating in comparison. The facts in Table 1.4 speak for themselves and see also the first page of the article by John Page.

Table 7.1. Comparative regional growth: 1973-92

Outside the OECD, only Asia saw a meaningful improvement in per capita income between 1973 and 1992. In other areas, the output growth that did take place was shared among (and largely a result of) a rapidly increasing population, resulting in a stagnant GDP per capita. Even within the OECD, Japan?s growth rate was some 1.5% stronger than the other members. The facts seem clear enough: Asian economic performance has far outstripped that of the rest of the world for two decades.

The results are profound. In the space of thirty years Hong Kong and Singapore have gone from being exporters of low quality manufactured goods to having income levels on a par with Italy and the UK. Japan is the world?s largest shipbuilder, closely followed by Korea. China is emerging from communism and in 1993 was the second largest recipient (behind the US) of foreign direct investment. Kuala Lumpur possesses the world?s tallest building.

Consider the geographical scope of Asia. In economic terms the reference is really to East or South East Asia, a region stretching from Japan as far west as Thailand and Malaysia and as far south as Indonesia. To Western eyes, this may seem like a coherent group of countries, but there are major differences. The Catholic Philippines and a largely Protestant Korea contrast with Muslim Indonesia, communist China and Vietnam, Buddhist Thailand and mainly agnostic Japan. Singapore and Malaysia contain a rich racial mix, while Korea and Japan are very homogenous societies. All were embroiled in a regional war fifty years ago (and some more recently), for which the aggressor has shown little remorse. Important territorial disputes remain. (As recently as June 20, 1997, Philippine troops fired warning shots in order to drive Chinese fishing boats away from the contested Spratly Islands. Other islands are also the subject of regional territorial disputes including the Kuriles (involving Japan and Russia) and the Senkaku Islands (involving China, Japan and Taiwan).) Japan, Malaysia, Indonesia and Singapore have three decades or more of democracy (of sorts), while Korea, the Philippines, Taiwan and Thailand are more recent converts. The people of China and Hong Kong have little say in how their country is run. If businessmen from two countries of the region converse the language used is more likely to be English than any other (unless they are both ethnic Chinese).

Also, note briefly the effect of compound growth rates on the situation. If Africa grows at 2.6% a year it will take 27 years to double its GDP. At 2.0% the EC will take 35 years, while in contrast at 5.7% it will take Asia just over 12 years. A country growing at 10% a year (China for example) doubles output every seven years.

• Other than GDP growth what measures could be important when judging whether Asia has been a "success" in the past two decades?

In terms of basic economic indicators, at the very least, it appears that Asia is doing something right. If an "Asian Model" for development exists, then it might be possible to apply it to other developing countries across the world which have been far less successful in raising the incomes of their population. Spurred by a need to react to the break-up of the former Eastern Bloc, this idea led the World Bank to launch an examination of the features peculiar to Asian economic development, the results of which were published in 1993. The conclusions of the World Bank were that the success of Asia was mainly due to the effective operation of free market mechanisms. The role of the state had been to ensure that the market was able to function relatively freely, which prevented massive inefficiencies from developing. These conclusions were in contrast to the notion that the state had played a vital role in directing resources and promoting economic growth.

• Does the government have a role to play in assisting economic development?

Before taking these findings at face value, consider for a minute the role of the World Bank over the past fifty years. It has been promoting economic development based on reliance on the efficiencies imposed by market forces and was not an advocate of government intervention. Is there any chance that at the end of the fifth decade of its existence the World Bank would have admitted that it had been peddling quack remedies and that its medicine often killed the patient. (Note that South Korea?s "Big Push" towards industrialisation in the early 1970s was criticised by the World Bank.) For the World Bank to have admitted that the success of Asia occurred without reference to policies it advocated (or even in direct opposition to such policies) would have been gravely embarrassing and perhaps institutionally fatal.

While there are some common features, it is important to recognise that there are some major differences in the development paths of each of the Asian Tigers (Korea, Taiwan, Hong Kong and Singapore) and the Asian "Cubs" (Malaysia, Thailand, Indonesia and some of China?s coastal provinces). John Page covers the issue in detail, but a list of similarities (which do not necessarily apply in all cases) includes:

• High rates of domestic savings, foregoing consumption for investment and reducing the need for foreign borrowing.
• High rates of capital investment, from domestic and/or foreign sources.
• Stable political situation, with limited or no democracy.
• An enlightened bureaucracy, sound institutions with relatively little corruption.
• Relatively few distortions to the price mechanism.
• Policies which stressed the importance of exporting, which generated funds to buy capital goods imports.
• Rapid shift of labour from agriculture into the industrial sector.
• Land reform which helps to create a domestic market for basic consumer goods.
• Relatively high levels of education - good human capital.

• Which of the features listed above do you consider to be the most important determinants of economic development, and why?

In contrast, those countries which failed to develop significantly (notable are those in Latin America) frequently displayed opposite features from those listed above: political instability, low savings and investment rates, dependence on foreign borrowing, low education levels, no land reform and misallocation of resources due to price distortions.

Whether such similarities amount to a model or not is open to question. It seems that every country has some unique feature in its recent economic history. For example between 1946-76 South Korea received $15bn in military and economic aid and US economic grants and loans of $6bn between 1946-78 were almost as much as was received by the whole of Africa. Indonesia benefited from the oil price boom in the 1970s, while Hong Kong and Taiwan both have generally good quality labour forces based on those taking refuge from mainland China.

• Are there enough similarities to support the claim that an Asian model exists?

The role of culture in Asian development is also an area of controversy. Some argue that there is some sort of Confucian basis to society which results in wise leadership and a co-operative, long-term perspective being adopted by the population. Others see culture as being a convenient excuse for other economies which have simply failed to reproduce the economic conditions found in East Asia.

• To what extent is the Asian experience a result of social or cultural peculiarities?

Economic Catch-up

Just as it is easier to cut a golf handicap from 30 to 20, compared with the reduction from 20 to 10, there is the argument that the Asian economies were starting from such a low level of development that strong growth rates could be achieved by borrowing technology and production processes from more advanced countries and by using existing resources more effectively. Consider how Japan?s GDP growth rate slowed from 10% in the 1960s to 4.5% in the 1970s and then to 4.1% in the 1980s. In the first half of the 1990s prolonged recession meant that average growth reached only 1.3%. In the early days, Japan could grow quickly simply by copying Western ideas, but by the 1990s the need to develop its own inventions meant growth was slower.

This is the basis of a contrarian view proposed by Paul Krugman. Ever one to challenge the accepted view, Paul Krugman has argued that there is no miracle about East Asian development. In a Foreign Affairs article in November/December 1994 he claimed that Asia has been able to grow quickly purely because it used ever larger quantities of labour and capital. Increased inputs produce increased output. He also argues that diminishing marginal returns (give a farmer a threshing machine and his output might double; give him another and the increase is less dramatic) means that Asian growth will inevitably slow.

This type of growth is similar to that seen in the Soviet Union in the 1950s, which at the time had the US genuinely worried that Khrushchev?s promise to "bury" the West would be fulfilled. It is subject to diminishing returns, as it is based on increased inputs, not increased efficiency of the inputs. (The law of diminishing returns says that if you give a man a machine to help him do his work his output might double, but give him another machine and the increase

will be less: it takes ever increasing amounts of capital equipment to produce the same rise in output.)

Economic growth can be the result of two factors. The first is an increase in the amount of inputs, while the second is a result of an increase in the output per unit of input (i.e. productivity), which is generally a result of an increase in knowledge. Looking at the four Tigers, Krugman shows that all of the output growth in the past couple of decades is explained by increased inputs, and there has been no increase in the efficiency of use of the inputs. This latter factor is the source of growth in mature economies, as it involves extracting a greater amount of output from a given set of inputs. In the US for example, long term estimates are that 80% of growth is the result of technological progress, while 20% has come from investment in capital.

It is possible to quibble over the figures and over definitions, but Krugman points out that the NICs are becoming capital exporters, which indicates that domestic investment is already beginning to yield diminishing returns and better opportunities are available abroad. Krugman?s research raises some interesting questions:

• How far can Asia go before it hits the wall caused by a shortage of inputs?

• Is the Western laissez-faire system still valid as the only one which can deliver sustained growth through productivity gains?

While the use of a larger amount of inputs partly explains the success of Asia, the counter-example of Korea and India remains. In the mid-1950s both had very similar levels of per capita GDP. By the mid-1990s Korea was about to be admitted to the ranks of the OECD with per capita incomes of around $7,500, while much of India languished in poverty with an average annual income level of only $300. Some countries were able to catch-up by mobilising their resources, while others were not. Extending Krugman?s analysis, the question is that if the Asian economies did nothing special - there was no miracle - then why were other developing countries unable to emulate them.

• In any league, one member can rise only as another falls. In the immediate post-war period, countries such as Argentina and Brazil were near the top of the world per capita income league. By the 1990s they were distinctly second division. Why were they unable to build on earlier achievements?

• In general: where does growth come from in an economy?

Is there only room in the world for a limited number of Newly Industrialising Economies (NIEs)? Consider the list of similarities of the Asian economies shown above. Some are clearly independent national policy choices or the result of social circumstances. The fact that one country has high savings and investment rates, high education levels, land reform and limited price distortions does not mean that other countries are excluded from similar policies. Export led growth is more controversial, however.

Clearly, not all countries can develop by being net exporters. If OECD markets are being flooded by cheap manufactured goods from one set of developing countries then this may imply limited opportunities in those markets for other developing countries. This has been referred to as the "fallacy of composition". Whether it is a genuine problem or not is debatable. Although the experience of many Asian economies has been labelled "export-led growth", in reality strong exports of manufactured goods were accompanied by equally strong imports of primary goods (to turn into manufactures) and capital goods (to produce the goods). Note, for example, that it was only in the 1980s that Japan developed a persistent current account surplus.

Another concern is that there will be a world-wide shortage of capital if all developing countries embark on a programme of rapid development. In spite of high domestic savings rates and strong exports, many Asian economies were forced to rely on foreign borrowing to pay for some of their capital goods imports. If all countries are looking for foreign borrowing then there will not be enough capital to go around. There was a pronounced alarm among some developing countries in the early 1990s when the transition of Eastern Europe meant that there was another region fighting for its share of available world capital. Of course, there is only ever a world capital shortage in the same way that there is a world caviar shortage. That is to say, if demand threatens to outstrip supply then the price will rise until an equilibrium position is reached. In the case of capital, the price is the interest rate.

The transition of Eastern European economies may have added an extra layer to the demand for global capital, which will put upwards pressure on interest rates. However, compared to shifts in major demand sources, such as the US budget deficit, the marginal impact of Eastern Europe is limited.

• Would it be possible for twenty or thirty countries to embark on a rapid industrialisation programme which generated growth rates of 10% per annum?

• What would be the consequences of such a development?

Rather than being impressed by the Asian success, developed Western economies have been quick to call foul. They see their own markets flooded by goods from NIEs, while they have little success in exporting to those countries. According to trade theory, closing your market to foreign goods is supposed to damage the economy, but Japan and Korea do not appear to have suffered too much.

In fact there is no reason to expect trade flows between any two countries to be in balance. It is likely to be difficult for Japan to sell enough goods to Saudi Arabia to cancel out its oil import bill. There is not necessarily any reason to expect Japan to buy cars from the US, just because it sells cars to America. The basis of the theory of comparative advantage, which is at the heart of international trade, is that each country produces what is does comparatively better than others. (Take a look at the article from The Economist "The Miracle of Trade" which is part of the readings for Chapter 10 for an understandable overview of the theory.) So if Japan is relatively good at producing cars, and America relatively good at producing computers, then they should concentrate on their area of expertise and trade with each other.

The problem is that some Asian economies appear closed to most types of manufactured products. The US launched a "Structural Impediments Initiative" to try to open the Japanese market, but it faces a similar lack of access in other Asian markets. The whole issue is immensely complex, but it does appear that in certain cases a closed domestic market can be used to generate economies of scale which allow domestic firms to expand into the world market.

• Is Asia not practising fair trade - and if so, what is to stop Western economies from adopting the same methods?

• Should America be grateful if Asian economies are selling them under-priced products?

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