Since the mid-1980s, Western academics and policymakers have regarded
the "tiger" economies of East Asia as an interesting intellectual
laboratory for debating theories about the causes of economic growth.
Advocates of laissez-faire economic policies have pointed to the
region's prolonged export boom as a triumph of market-led growth.
Advocates of interventionist policies have regarded the successes of
South Korea and Singapore as a vindication of government industrial
targeting, inspired in part by Japan's postwar economic take-off.

In the mid-1990s, however, Asia experienced a growth slump that has
called into question both its export dependence and its traditional
development formula of achieving growth through high levels of
domestic savings and investment. In 1996, in particular, there was
such a sharp deterioration in the corporate profitability and stock
market performance of Thailand and South Korea that many analysts now
regard their economies as structurally flawed, not just cyclically
depressed. The experience of 1996 suggests that Asian governments and
business leaders will have to make a number of microeconomic
adjustments in both public and private sectors if the region is to
regain the economic vitality apparent during the late 1980s and early
1990s. In all likelihood, the tiger economies will do so.

If East Asia can enter the new century with its business confidence
restored, the debate about the region's future will probably shift
from today's obsession with conventional economic issues, such as
corporate profitability and current account deficits, to the
geopolitical implications of a region accounting for over half of the
world's population and nearly a third of its economic output. Indeed,
if things go reasonably well, the twenty-first century will be the
first period since the Industrial Revolution in which Asia's share of
world output is likely to correlate roughly with its population size.
That, obviously, has major geopolitical as well as economic
implications, and they are ones that are likely to confront us sooner
rather than later. In the early stages of the Industrial Revolution,
it took Britain and the United States fifty to sixty years to double
their per capita incomes. The countries of East Asia have been
doubling theirs every ten years. Japan currently accounts for about
8.0 percent of world output and developing Asia for another 24.4
percent. The United States accounts for about 21.3 percent and the
European Union for another 20.7 percent.

Where will these ratios stand in ten to fifteen years? That depends
in large part on how those who run East Asia's expanding economies
manage their way out of the recent doldrums. And that, in turn,
depends on how we and they understand the reasons for their successes
and recent difficulties. Before we can say much about the future,
therefore, a brief revisiting of the debate over the "Asian miracle"
is in order.

How Did It Happen?

Paul Krugman has suggested that the Asian economic take-off of recent
decades was similar in many ways to the large rise in Russian
economic output that occurred during the two decades after the Second
World War. According to Krugman, the countries of East Asia had such
high investment rates that no one should have been surprised that
they enjoyed high rates of output growth. The Asian miracle, he
maintains, was the "result of perspiration, not inspiration";
practically all of the growth in Asian output can be explained by the
growth of factor-inputs such as capital and labor. The so-called
"residual for technical progress" has been close to zero in
Singapore, and only 1.7 percent per annum in Korea, 2.1 percent in
Taiwan, and 2.3 percent in Hong Kong--compared to growth rates of
8-10 percent in all four countries.

Many pundits have found the Krugman thesis reassuring because it
suggests that Asia has not experienced an economic miracle by
pioneering some new formula for growth, that what has happened there
does not, after all, negate the universality of basic classical
economic analysis. Perhaps so, but there are still several serious
problems with the Krugman thesis as a practical guide to
understanding Asia's economic future.

First, there is no detailed consensus among economists about how to
account for economic growth. While Krugman distinguishes generally
between perspiration and inspiration in the growth process, others
contend more specifically that the critical issue is the quality of
the investment and the secondary impact that it has on wages, human
capital, and other factors of production. In this respect, IMF
economists have tested many of the statistical assumptions in the
research that Krugman cites and have concluded that it was wrong.
Michael Sarel, for example, reports that the growth of total factor
productivity in many East Asian countries was much higher than the
data quoted by Krugman.

Second, East Asian countries did not pursue a Soviet-style economic
program to maximize output solely through the creation of new
productive capacity. They promoted a high level of savings and
investment while exposing most of their industry to global market
forces. As a result, they allocated resources in response to world
price signals, not the bureaucratic directives of state planners. It
is true that some countries, such as the Republic of Korea, rigged
their credit allocation policies to favor certain industrial sectors
and large capital intensive enterprises over small ones, but the
focus was still on export-led growth.

In addition to using world prices to allocate resources within their
economies, the East Asian countries have heavily emphasized
investment in critical public goods such as primary education.
Singapore, Hong Kong, Taiwan, and South Korea introduced universal
primary education in the 1960s; Thailand, Malaysia, and Indonesia
soon followed. Korea increased its average schooling period from 3.3
years in 1960 to 9.4 years in 1992, and in this same period Singapore
advanced from 2.9 years to 7 years, Taiwan from 3.2 years to 7.2
years, and Indonesia from 1.1 years to 4.1 years. (The major
education laggards have been Thailand and India.) One major challenge
for Asia during the late 1990s will be to follow up with greater
investment in high school and university education. Thailand, for
example, already has severe shortages of skilled labor because it has
not invested adequate money in secondary schooling.

If one accepts the premise that a high level of savings and wise
investment strategies are essential prerequisites of economic growth,
the economic outlook for Asia still appears to be promising. On the
basis of official data, savings rates are high: China's is 44.8
percent, Indonesia's 37.3 percent, Korea's 38.0 percent, Thailand's
36.9 percent, Malaysia's 32.9 percent, and Singapore's 52.3 percent.
In addition, some countries can draw upon the large wealth of their
overseas Chinese communities, whose collective net worth according to
some estimates exceeds $500 billion. The low savings countries in the
region are the Philippines (15.6 percent), Pakistan (15.0 percent),
and India (18.5 percent).

If educational levels keep pace, Asia's high level of investment
should continue to promote rapid income growth by boosting ratios of
capital to labor and increasing the overall technological
sophistication of the economy. Research and development spending has
risen sharply during recent years and many Asian companies have
strong links to the American university system as well as to the
multinational companies that are leading the way in the development
of new technology. Singapore produces almost one-half of the world's
computer disk drives, while Taiwan and Korea have become important
factors in global semi-conductor production. Asia's export mix is
rapidly becoming as capital intensive as the output mix of more
mature industrial countries, and stands to play a more creative role
in the world economy's technology "food chain."

The recent debate about the origins of East Asia's economic success
has made it clear that, indeed, there was no East Asian economic
"miracle" after the 1960s. Nothing that has occurred contradicts the
classical textbooks, or obviously owes anything to some ineffable
Asian cultural qualities. But at the same time, the success that the
region has enjoyed encompasses far more than gross levels of
investment: It was essentially the result of good public policy,
demographic trends, as well as some luck. Governments pursued
policies designed to maximize private savings and investment while
providing important public goods such as universal education.
Declining birth rates and maturing populations helped promote higher
savings rates. And in those countries where there was more
bureaucratic intervention in the process of investment decision
making, governments were fortunate to be constrained from making
large mistakes by a heavy emphasis on export success and limited
fiscal tolerance for losers.

East Asia's rate of economic growth should continue to run at levels
at least two to three times above the Organization for Economic
Cooperation and Development (OECD) average for some time. There will
be cyclical corrections in response to slower growth of the world
economy or to domestic monetary adjustments to contain inflationary
pressures, but the basic trend of output growth should remain in the
6-9 percent range for the major ASEAN countries and China; Korea and
Taiwan are likely to achieve rates in the 5-7 percent range. India
should enjoy a growth rate of 4-6 percent through a mixture of
population expansion and steady growth of domestic spending, but if
Indian politicians could agree on a more radical economic (and
educational) reform program, the country could achieve a growth rate
of 8-10 percent.