How Real is the Asian Economic Miracle; M. Skousen

by Mark Skousen "Singapore grew through a mobilization of resources that would have done Stalin proud." -Paul Krugman, "The Myth of Asia's Miracle," Foreign Affairs (November/December, 1994) T he postwar Asian economic miracle has come as a great shock to the eco nomics profession. In my review of the top-ten textbooks (Economics on Trial, Ir win, 1993),few economists tell the wonders of Japanese prosperity and none reveals the secrets of the Four Tigers (Hong Kong, Singapore, Korea, and Taiwan) or the newly industrialized economies (Indonesia, Ma laysia, and Thailand). A desperate, starving, shattered Japan of 1945 was one of the poorest countries on earth. There were no skyscrapers, no wealthy banks, no automobile and electron ics industries. Yet within a single human lifespan, Japan has become an economic superpower, ranking second behind the United States among the world's richest nations.

Hong Kong has faced gigantic problems: six million people jammed into 400 square Dr. Skousen is an economist at Rollins College, Department ofEconomics, Winter Park, Florida 32789, and editor ofForecasts & Strategies, one of the largest investment newsletters in the country. For more information about his news letter and books, contact Phillips Publishing Inc. at (800) 777-5005. miles, with no oil or other natural resources, most of its water and food imported, and its trading partners thousands of miles away. Yet this small British colony has broken the vicious cycle of poverty and become the second most prosperous country in the Pa cific Basin. Since 1965,the 23 economies of East Asia have grown faster than all other regions of the world. The high-performing Asian econ omies have experienced extremely rapid growth and rising incomes. The proportion of people living in absolute poverty has dropped sharply. Life expectancy has in creased from 56 years in 1960 to 71 years in 1990.1 The Cause of the Miracle Why have American economists ignored until recently these economic success sto ries? Perhaps because the Asian develop ment model does not fit neatly into the Keynesian framework and policy prescrip tions, which favor high levels of consump tion, debt, and government spending. In almost all of the rapidly growing economies in East Asia, the degree of government taxation and central planning has been rel atively low, savings rates excessively high by Keynesian standards, government bud gets normally in surplus, and the welfare state relatively small. As the World Bank concluded in its 1993 study, "the rapid growth in each economy was primarily due 527 528 THE FREEMAN • JULY 1996 to the application of a set of common, market-friendly economic policies, leading to both higher accumulation and better al location of resources. ,,2 Krugman's Challenge Now along comes Professor Paul Krug man to throw water on the whole idea of an Asian miracle. Krugman, who recently moved from MIT to Stanford University, is the darling of the establishment media and is referred repeatedly as a brilliant wunderkind, the next Nobel Prize winner, and according to The Economist, "the most celebrated economist of his generation."

According to Krugman, there is nothing miraculous about Asian economic growth. It is deja vu, a reminder of the incredible growth rates of the Soviet Union in a by gone era (1920-1990). Krugman sees "sur prising similarities" between East Asia and the former Soviet Union. Both engaged in an "extraordinary mobilization of re sources. " In the case of the Soviet Union, Krugman notes, "Stalinist planners had moved millions of workers from farms to cities, pushed millions of women into the labor force and millions of men into longer hours, pursued massive programs of educa tion, and above all plowed an ever-growing proportion of the country's industrial output back into the construction of new facto ries. ,,3 According to Krugman, East Asian lead ers have been just as authoritarian, pushing more of the population to work, upgrading educational standards, and making an awe some investment in physical capital. In short, East Asia is just like the Soviet Union, "growth achieved purely through mobilization of resources. "

Moreover, like the Soviet Union, growth in East Asia is likely to diminish, due to limits on labor and capital. Krugman states, "it is likely that growth in East Asia will continue to outpace growth in the West for the next decade and beyond. But it will not do so at the pace of recent years. ,,4 Asia is subject to the law of diminishing returns. The Tyranny of Numbers I have serious reservations about Krug man's ivory-tower analysis of the Asian miracle. First, his comparison to the Soviet Union is attention-getting, but fundamen tally flawed. The Soviet Union was primar ily a command economy, the Asian nations free economies. The Stalinists engaged in grim industrialization and militarization at the expense of the Soviet standard ofliving. In this sense, Soviet growth statistics were largely fictitious. As Soviet expert Marshall Goldman stated in the early 1980s, "This system keeps producing steel and basic machine tools, when what is wanted is food, consumer goods, and more modern technol ogy."s On the other hand, the Asians mobilized resources by producing an increasingly so phisticated range of products demanded by international markets, and thereby in creased dramatically their own standard of living.

The Lessons of Asia Finally, Krugman misses the bigger pic ture. The real question is: Why have so few developing countries outside the Asian re gion been able to produce their own mira cles? And what can industrial nations such as the United States and Europe learn from the Asian miracle? The answer is clear. The Asian economies have grown rapidly for a number of reasons. First, they are largely market-friendly, avoiding wage-price controls and excessive regulation of business. Second, they en courage macroeconomic stability (avoiding high levels of inflation and budget deficits), limit government activism, and discourage social welfare schemes. Third, they offer stable and secure financial and legal sys tems. Fourth, they promote high levels of saving and capital investment rather than high consumption spending. Fifth, many East Asian nations offer tax holidays for export-oriented businesses and impose few (ifany) taxes on investments. Sixth, they are HOW REAL IS THE ASIAN ECONOMIC MIRACLE? 529 open to global technology and foreign cap ital.

Granted, many East Asian countries limit civil liberties, engage in industrial planning, and restrict imports, but overall the degree of government intervention is relatively low. Many developing countries in Latin America and Africa are adopting many free market reforms and creating their own mir acles. The industrial nations could regain their traditional growth rates by adopting a large dose of supply-side economics, cutting taxes on business and investment, privatiz ing Social Security, promoting better edu cation and training, streamlining regulations on business and employment, and eliminating the federal deficit. As Ludwig von Mises concludes, "it is one of the foremost tasks of good government to remove all obstacles that hinder the accumulation and invest ment in new capital.,,6 D 1. For an excellent survey of the region, see The East Asian Miracle (The World Bank, 1993). 2. Ibid., p. vi.

3. Paul Krugman, "The Myth of Asia's Miracle," Pop Internationalism (MIT Press, 1996), p. 173. Originally pub lished in Foreign Affairs (Nov.lDec., 1994). 4. Ibid., p. 184. 5. Marshall Goldman, USSR in Crisis: The Failure of an Economic System (New York: W. W. Norton, 1983), p. 2. 6. Ludwig von Mises, "Capital Supply and American Prosperity," Planning for Freedom, 4th ed. (South Holland, Ill.: Libertarian Press, 1980), p. 214. I highly recommend this talk on economic development, given by Mises in 1952. 0 Customer Service 1-800-600-3633 Home educators have a tough job. What to teach, how to teach, what curriculum to use. Home School Times Magazine provides home educators with valuable infonnation that assists them in their home school, and encourages them on to educational success! Home School Times MagazineA Christian Family Magazine For the Horne School Lifestyle Each Issue Contains: (]reat Literature History Physical Science C~reation Science Geography 3 Pages o.f Resources A C'omplete Unit ,5'tudy And Much More!

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