The Myth of Asia's Miracle Author(s): Paul Krugman Reviewed work(s): Source: Foreign Affairs, Vol. 73, No.

6 (Nov. - Dec., 1994), pp. 62-78 Published by: Council on Foreign Relations Stable URL: http://www.jstor.org/stable/20046929 . Accessed: 10/10/2012 14:26
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The

Myth

of Asia's Paul Krugman

Miracle

A CAUTIONARY

FABLE

ONCEUPONa

opinion leaders found themselves both impressed and frightened by the extraordinary growth rates achieved a set of Eastern economies. those economies were still by Although poorer and smaller they had transformed

time, Western

substantially with which

than those of theWest, the speed themselves from peasant societies to achieve into industrial powerhouses, their continuing ability rates several times higher than the advanced nations, and growth or even surpass American their increasing ability to challenge and in certain areas seemed to call into question the European technology not only ofWestern dominance power but ofWestern ideology. The or leaders of those nations did not share our faith in free markets civil liberties. They unlimited asserted with self increasing that their system was superior: societies confidence that accepted to limit and were willing strong, even authoritarian governments in the interest of the common good, take charge individual liberties of their economies, and sacrifice short-run consumer interests for the sake of long-run growth would eventually societies of the West. And chaotic ingly outperform a growing the increas minority of

agreed. between Western and Eastern economic gap performance issue. The Democrats became a political eventually recaptured the White under the leadership of a young, energetic new presi House The
Paul most theAge Krugman recent book ofDiminished is Professor is Peddling of Economics Prosperity: at Stanford University. His Sense and Nonsense in

Western

intellectuals

Economic

Expectations.

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Asia'sMiracle TheMyth of
dent who pledged to "get the country moving again '?a pledge to him and his closest advisers, meant accelerating Americas nomic to meet the Eastern challenge. growth The time, of course, was the early 1960s. The ident was John E Kennedy. The technological that, eco

dynamic young pres feats that so alarmed were those of the

theWest were the launch of Sputnik and the early Soviet lead in
space. And the rapidly growing Eastern and its satellite nations. Soviet Union While economies

economies was the subject of the growth of communist articles in the 1950s, some innumerable alarmist books and polemical looked seriously at the roots of that growth were economists who a most pop putting together picture that differed substantially from rates were ular assumptions. Communist certainly impressive, growth

but not magical. The rapid growth in output could be fully explained
in inputs: expansion increases in of employment, by rapid growth in physical capi investment education levels, and, above all, massive tal. Once those inputs were taken into account, the growth in output was to put it differently, the big surprise about unsurprising?or, it posed no mystery. Soviet growth was that when closely examined two crucial This economic First, most analysis had implications. of the speculation about the superiority of the communist system? including accelerate economies could painlessly some aspects of that growth by borrowing was based off base. Rapid Soviet economic system?was growth on one attribute: the to save, to sacrifice current entirely willingness the popular their own thatWestern The communist view

for the sake of future production. consumption no hint of a free lunch. example offered

the economic countries' growth Second, analysis of communist some future limits to their industrial other implied expansion?in a naive words, projection of their past growth rates into implied that was to the future their real prospects. Eco likely greatly overstate on on growth that is based expansion of inputs, rather than growth in output per unit of input, is inevitably subject to diminish to ing returns. It was simply not possible for the Soviet economies sustain the rates of growth of labor force participation, average edu cation levels, and above all the physical capital stock that had pre nomic
FOREIGN AFF'AIRS November/December 1994

[63]

Paul Krugman vailed in previous years. Communist growth would predictably slow

down, perhaps drastically. the growth of Warsaw Can there really be any parallel between Pact nations in the 1950s and the spectacular Asian growth that now some levels, of course, the paral policy intellectuals? At preoccupies in the 1990s does not look much like the lel is far-fetched: Singapore in the 1950s, and Singapore's Lee Kuan Yew bears little Soviet Union resemblance Stalin. Yet Pacific Rim over Soviet to the U.S.S.R.'s Nikita Khrushchev research the results of recent economic growth and less to Joseph into the sources of

debate give the few people who recall the great a strong sense of d?j? vu. Now, as then, the con growth conven trast between popular hype and realistic prospects, between remains so great that sensible eco and hard numbers, tional wisdom

it does get aired, not only widely ignored, but when analysis is as it is usually dismissed grossly implausible. about Asia's boom deserves to have some cold enthusiasm Popular West water thrown on it. Rapid Asian growth is less of amodel for the than many writers claim, and the future prospects for that growth are more limited than almost anyone now imagines. Any such assault on almost universally held beliefs must, of course, overcome a barrier of a account of the Soviet disguised incredulity. This article began with of 30 years ago to try to gain a hearing for the propo growth debate an old error. We have been here sition that we may be revisiting is that so few before. The problem with this literary device, however, the Soviet and terrifying now remember how impressive people to once seemed. Before turning performance empire's economic Asian then, it may be useful to review an important but growth, of economic history. largely forgotten piece nomic

'we will

bury

you'

of the Soviet empire, strewn with the wreckage in aworld the it is hard for most people to realize that there was a time when Soviet economy, far from being a byword for the failure of socialism, Khrushchev when of the world?that was one of the wonders "We will bury his shoe on the U.N. podium and declared, pounded Living [64] FOREIGN AFFAIRS Volume73No.6

s Asia Miracle TheMyth of

was an economic rather than amilitary boast. It is therefore a you," it shock to browse through, say, issues o? Foreign Affairs from the mid 1950s through the early 1960s and discover that at least one article a

year dealt with the implications of growing Soviet industrialmight.

a 1957 article by Calvin B. criticized officiai Hoover.1 Like many Western economists, Hoover the true growth rate. Soviet statistics, arguing that they exaggerated he concluded that Soviet claims of astonishing achieve Nonetheless, a rate of ment were their economy was achieving fully justified: as as that attained by any important capitalistic growth "twice high over any considerable number of years [and] three times as country Illustrative of the tone of discussion was as the average annual rate of increase in the United States." He high was state" concluded that it probable that "a collectivism authoritarian was at achieving economic growth than free-market inherently better that the Soviet economy might democracies and projected outstrip at the time. On the contrary, the general image of Soviet central planning was that itmight consumer be brutal, and might not do a very good job of providing was very effective at industrial growth. In goods, but that it promoting with supporting argu a view shared his readers. ment, confident expressing by economists Yet many Soviet growth were gradually studying to a very different conclusion. Although coming they did not dispute the fact of past Soviet growth, they offered a new interpretation of the a reconsideration one that nature of that of future growth, implied
1 Hoover's dinary tone?critical of Soviet typical data but nonetheless the fact of extraor accepting of the time (see, for exam

that of the United States by the early 1970s. These views were not considered outlandish

i960 Wassily Leontief described the Soviet economy as being "directed

determined ruthless he was skill"?and did sowithout

achievement?was

of much

of the commentary

ple, a series of articles in The Atlantic Monthly by Edward Crankshaw, beginning with "Soviet Industry" in the November 1955 issue). Anxiety about the political implications of Soviet growth reached its high-water mark in 1959, the year Khrushchev visited America. Newsweek took Khrushchev s boasts seriously enough towarn that the Soviet Union might well be "on the high road to economic domination of the world." And in late that year, cia Director Allen hearings held by the Joint Economic Committee Dulles warned, "If the Soviet industrial growth rate persists at eight or nine percent per
annum be over the next decade, as is forecast, the gap between our two economies ... will dangerously narrowed."

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THE BETTMANN ARCHIVE

The Soviet miracle:perspiration, not inspiration Soviet prospects. To understand this reinterpretation, it is necessary to make a brief detour into economic to discuss a theory seemingly abstruse, but in fact intensely practical, concept: growth accounting.

ACCOUNTING It is A tautology

FOR THE SOVIET SLOWDOWN

that economic represents the sum expansion of two sources of growth. On one side are increases in "inputs": in the education level of workers, and in the growth in employment, stock of physical capital (machines, buildings, roads, and so on). On are increases in the output per unit of the other side input; such or better economic increases may result from better management pol run are icy, but in the long primarily due to increases in knowledge. by calculating us how much

The basic idea of growth accounting is to give life to this formula

measures of both. The can then tell explicit accounting as of growth is due to each input?say, capital opposed to labor?and how much is due to increased efficiency. We all do a primitive form of growth accounting every time we talk [66] FOREIGN AFFAIRS Volume73N0.6

s Asia Miracle TheMyth of

in so doing we are implicitly distinguishing about labor productivity; the part of overall national growth due to the growth in the between to an increase in the value of goods supply of labor and the part due the average worker. Increases in labor productivity, how always caused by the increased efficiency of workers. one of a number of inputs; workers may produce more, or have more are better they managed technological A man but simply because they have better machinery. knowledge, with a bulldozer can dig a ditch faster than one with only a shovel, but he is not more efficient; he just has more capital to work with. The is to produce an index that combines aim of growth accounting all to measure the rate of growth of national measurable inputs and estimate what income relative to that index?to is known as "total produced by ever, are not Labor is only not because factor productivity."2 So far this may seem like a purely academic exercise. As soon as one one starts to think in terms of however, growth accounting, arrives at a crucial insight about the process of economic growth: sus tained growth in a nation's per capita income can only occur if there is a rise in output per unit of input? an increase in the increases in inputs, without Mere efficiency with inmore which those inputs are used?investing and infra machinery run into structure?must returns; input-driven growth is diminishing

inevitably limited.
How, then, have today's advanced nations been able to achieve sus in per capita income over the past 150 years? The tained growth
2 At that the an index first, creating to add is, trying together cost of the new machine of all inputs may noncomparable he uses. How seem items does like like one comparing the hours determine apples a worker the returns. and oranges, in and puts for the

answer The economists' components? earns an hour, worker each $15 give person-hour on average earns $10,000 that costs $100,000 difFerent return), assume in the country. then

3To see why,

that

give

each

such machine

weight

average in the index a of $15; if amachine weight in rate of each year (a 10 percent profits of $10,000; and so on.

is to use market

weights If the

lets consider a hypothetical

has a stationary etc., some machinery, make up

example. To keep matters

and amount labor of force, capital so that

simple, let's
all increases

the country investment in Let us finally

population raise the arbitrary

numbers.

Specifically,

in the per worker let us assume that

initially each worker

is equipped with
of

$10,000 worth of equipment; that each worker

and that earns capital annual initially profits earns a 40 percent (Cont'd.) of $4,000.

and services worth produces goods rate of return, that is, each $10,000

$10,000; machinery

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Paul Krugman is that technological advances have led to a continual increase in total factor productivity?a continual rise in national income for a famous estimate, mit Professor Robert Solow each unit of input. In concluded that technological progress has accounted for 80 percent of rise in U.S. per capita income, with the long-term increased invest ment in capital explaining only the remaining 20 percent. to study the econ economists When began growth of the Soviet Of course, omy, they did so using the tools of growth accounting. was it hard to piece Soviet data posed some, problems. Not only a together usable estimates of output and input (Raymond Powell, Yale professor, wrote that the job "inmany ways resembled an archae were as well. In a difficulties philosophical ological dig"), but there one could measure socialist economy hardly input using capital were forced to returns based on market returns, so researchers impute those when in market economies the efforts began, at similar levels of development. researchers were pretty sure about what Still, they answer

would find. Just as capitalist growth had been based on growth inboth
inputs capita source of the main and efficiency, with efficiency rising per to find that Soviet growth income, rapid they expected was they actually found
now, Suppose, 20 of percent that this

reflected both rapid input growth and rapid growth in efficiency.

But what that Soviet growth was
20

based on

that

(Cont'd.) is, uses

its income

invests country consistently to add to its stock. capital

percent How

rapidly

of its output, will the

economy of by

grow? a 40 that is, At by $2,000. an 8 rate of percent growth. rate of return, that will increase

20 Initially, very fast indeed. In the first year, the capital stock per worker will rise by
percent output $10,000, $800: percent

But this high rate of growth will not be sustainable. Consider the situation of the econ omy by the time that capital perworker has doubled to $20,000. First, output per worker
will not have increased in the same proportion, because capital stock is only one input.

Even with
return, also

the additions to capital stock up to that point achieving a 40 percent rate of

to $14,000. is And the rate of return increased will have per worker output only to a construc to 30 or even 25 percent. added to bulldozer certain (One decline-say are on-site, a to can make the time a dozen difference tion By productivity. huge project one more may of those factors means not make The combination that much diff?rence.)

that if the investment share of output is the same, the growth ratewill sharply decline.
Taking rate of return, us $2,800; at a 30 percent raise this will at a 25 rate a rate of 6 percent; is, generate percent output only growth by only $840, to accumu a rate of continues As capital itwill generate of return 5 percent. only growth to decline. will continue the rate of late, the rate of return and hence growth 20 percent of $14,000 that gives

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of story. The rate of efficiency growth was rapid growth in inputs?end was well below the rates achieved in not only unspectacular, it Western some estimates, itwas economies. Indeed, by virtually nonexistent.4 resources were The immense Soviet efforts to mobilize economic news. Stalinist of workers from hardly planners had moved millions farms to cities, pushed millions of women into the labor force and millions of men into longer hours, pursued massive programs of edu an of the cation, and above all plowed ever-growing proportion of new facto country's industrial output back into the construction ries. Still, the big surprise was that once one had taken the effects of these more or less measurable inputs into account, there was nothing most was its left to explain. The shocking thing about Soviet growth crucial conclusions. First, over market economies claims about the superiority turned out to be based on a If the Soviet economy had a misapprehension. itwas its ability to mobilize resources, not its ability special strength, to use them It was obvious to everyone that the Soviet efficiently. in i960 was much Union less efficient than the United States. The was that it showed no surprise signs of closing the gap. Second, because input-driven growth is an inherently limited process, Soviet growth was virtually certain to slow down. Long before the slow ing of Soviet growth became obvious, itwas predicted on the basis of did not predict the implosion of the (Economists growth accounting. Soviet economy a generation later, but that is awhole different problem.) It's an interesting tale about the story and a useful cautionary of past trends. But is it relevant to the dangers of naive extrapolation modern world? implied of planned comprehensibility. This comprehensibility two

PAPER

TIGERS

fi rst, At it is hard to see anything in common between the Asian success stories of recent years and the Soviet Union of three decades
4 This work was
U.S.S.R.," Scientific

summarized by Raymond
December 1968.

Powell,

"Economic Growth

in the

American,

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[69]

Paul Krugman it is safe to say that the typical business traveler to, say, in one of that city's gleaming ensconced hotels, never Singapore, even thinks of any to its roach-infested in counterparts parallel can the slick exuberance How Moscow. of the Asian boom be com pared with the Soviet Union's grim drive to industrialize? ago. Indeed, yet there are surprising similarities. The newly industrializing countries of Asia, like the Soviet Union of the 1950s, have achieved in large part through an astonishing of mobilization rapid growth resources. Once one accounts for the role of rapidly growing inputs in one finds little left to these countries' growth, explain. Asian growth, in its high-growth like that of the Soviet Union era, seems to be And driven by extraordinary growth than by gains in efficiency.5 in inputs like labor and capital rather

in particular, the case of Singapore. Between Consider, 1966 and 1990, the Singaporean economy grew a remarkable 8.5 percent per three times as fast as the United annum, States; per capita income rate, roughly doubling every decade. This grew at a 6.6 percent seems to be a kind of economic miracle. achievement But the mir rather than inspi acle turns out to have been based on perspiration a mobilization ration: Singapore of resources that grew through share of the popula would have done Stalin proud. The employed to 51 percent. The educational tion surged from 27 standards ofthat in 1966 more while than work force were dramatically upgraded: at all, by 1990 two-thirds half the workers had no formal education education. Above had completed all, the country had secondary as a an awesome in physical investment made capital: investment
5 There have been a number of recent efforts to the sources of

quantify

rapid

growth

in the Pacific Rim. Key readings include two papers by Professor Lawrence Lau of Stanford University and his associate Jong-Il Kim, "The Sources of Growth of the East Industrialized Countries," Journal of the Japanese and International Asian Newly Economies, 1994, and "The Role of Human Capital in the Economic Growth of the East Asian Newly Industrialized Countries," mimeo, Stanford University, 1993; and three papers by Professor Alwyn Young, a rising star in growth economics, "ATale of Two and Technical Change in Hong Kong and Singapore," Cities: Factor Accumulation
NBER Macroeconomics Contrarian View," Annual European Press; 1992, mit Economic Review "Lessons Papers from and the East Asian May Nies: 1994; A and Proceedings,

the Statistical Realities of the East Asian "The Tyranny of Numbers: Confronting Growth Experience," nber Working Paper No. 4680, March 1994.

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account going through ing, these numbers should make it obvious that Singapore's growth has cannot be been based largely on one-time changes in behavior that the percentage of people employed repeated. Over the past generation it cannot double again. A half-educated work has almost doubled; share of output Even without rose from 11 to more than 40 percent.6 the formal exercise of growth

force has been replaced by one inwhich the bulk of workers has high
it is unlikely that a generation from now most Sin school diplomas; share of 40 percent is gaporeans will have Ph.D.s. And an investment a share of 70 percent would be ridicu amazingly high by any standard; conclude that Singapore is unlikely to lous. So one can immediately achieve future growth rates comparable to those of the past. But it is only when one actually does the quantitative accounting that the astonishing result emerges: all of Singapore's growth can be is no sign at all of explained by increases in measured inputs. There efficiency. In this sense, the growth of Lee Kuan Yew's Sin twin of the growth of Stalin's Soviet Union? gapore is an economic of resources. Of course, growth achieved purely through mobilization more prosperous ever was? than the U.S.S.R. today is far Singapore even at its is closer years?because peak in the Brezhnev Singapore still below, the efficiency of Western economies. The to, though point, however, is that Singapore's economy has always been relatively efficient; it just used to be starved of capital and educated workers. case is extreme. Other the most admittedly Singapore's rapidly East Asian economies have not increased their labor force par growing as much, made such dramatic in educational ticipation improvements or raised investment rates as far.Nonetheless, the basic con levels, quite same: there is clusion is the startlingly little evidence of improvements in efficiency. Kim and Lau conclude of the four Asian "tigers" that "the that there has been no technical progress during the post hypothesis war period cannot be rejected for the four East Asian newly industrial ized countries." Young, more poetically, notes that once one allows for increased
6These figures are taken from Young, ibid. Although foreign corporations have an important role in played Singapore's economy, the great bulk of investment in Sin as in all of the newly industrialized East Asian economies, has been financed out gapore,
of domestic savings.

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Paul Krugman of the rapid growth of inputs, the productivity performance to the "tigers" falls "from the heights of Olympus plains of Thessaly." runs so counter to conventional wisdom This conclusion that it is difficult for the economists who have reached it to get a extremely as 1982 a Harvard student, Yuan Tsao, hearing. As early graduate on Sin found little evidence of efficiency growth in her dissertation as gapore, but her work was, as Young puts it, "ignored or dismissed Kim and Lau presented unbelievable." When their work at a 1992 inTaipei, it received amore respectful hearing, but had lit conference tle immediate tried to make the case for impact But when Young at the 1993 of the European Eco meetings input-driven Asian growth a stone wall of disbelief. nomic Association, he was met with In Young's most recent paper there is an evident tone of exaspera to the conventional wisdom in tion with this insistence on clinging the teeth of the evidence. He titles the paper "The Tyranny of Num to believe that you may not want which he means this, bers"?by but there's just no way around the data. He begins with an buster, in a deadpan, Sergeant Friday, "Just the ironic introduction, written facts, ma'am" style: "This is a fairly boring and tedious paper, and is so. This paper no new of the intentionally interpretations provides to interest the historian, derives no new theo East Asian experience their

retical implications of the forces behind the East Asian

to motivate

growth

the theorist, and draws no new policy implica process to intervention tions from the subtleties of East Asian government its energies excite the policy activist. Instead, this paper concentrates on a careful patterns of output analysis of the historical providing in the newly and productivity growth growth, factor accumulation, countries of East Asia." industrializing Of course, he is being most of the conventional nations in the world undermines His conclusion disingenuous. wisdom about the future role of Asian in international economy and, as a consequence,

that politics. But readers will have noticed that the statistical analysis on the on Asian puts such a different interpretation growth focuses name to whom the small countries "newly "tigers," the relatively was first But what about the large countries" applied. industrializing about Japan and China? countries? What FOREIGN AFFAIRS-Volume73N0.6

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THE GREAT JAPANESE GROWTH SLOWDOWN

Many

to the view that the destiny of lies with the Pacific Rim are likely to counter the world economy about East Asian growth prospects with the example of skepticism after all, is a country that started out poor and has now Japan. Here, doubt that other industrial power. Why become the second-largest Asian nations can do the same? There are two answers to that question. First, while many authors common that denominator of an "Asian system"?a have written success stories?the statistical evidence tells underlies all of the Asian who story. Japan's growth in the 1950s and 1960s does not resem ble Singapore's growth in the 1970s and 1980s. Japan, unlike the East rates of seems to have grown both Asian input through high "tigers," fast and through high rates of efficiency growth. Today's growth on U.S. are nowhere near efficiency converging growth economies but Japan is staging an unmistakable levels, catch-up. technological has indeed been while historical Second, performance Japan's now lies well in the the era of miraculous remarkable, Japanese growth to grow faster than the other years Japan still manages past. Most advanced nations, but that gap in growth rates is now far smaller than a different it used The growth slowdown has been oddly the vast polemical literature on Japan and its role in the absent from of that literature seems stuck in a time warp, world economy. Much as if were still the miracle econ with authors writing growth Japan the severe recession that omy of the 1960s and early 1970s. Granted, has gripped Japan since 1991will end soon if it has not done so already, and the Japanese economy will probably stage a vigorous short-term is that even a full recovery will only recovery. The point, however, reach a level that is far below what many sensible observers predicted
20 years ago.

people

are committed

to be, and is shrinking. story of the great Japanese

as be useful to compare Japan's growth prospects they 20 years ago and as was still now. In 1973 appeared they appear Japan a smaller and poorer economy than the United States. substantially Its per capita gdp was only 55 percent of America's, while its overall It may
FOREIGN AFFAIRSNovember/December 1994

Paul Krugman large. But the rapid growth of the Japanese a dramatic the previous economy clearly portended change. Over decade Japan's real gdp had grown at a torrid 8.9 percent annually, with per capita output growing at a y.y percent rate. Amer Although ican growth had been high by its own historical standards, at 3.9 percent (2.7 percent per capita) itwas not in the same league. Clearly, the Japanese were rapidly gaining on us. In fact, a straightforward projection of these trends implied that a not far in the future. At the major reversal of positions lay growth rate only 27 percent of 1963-73, Japan would overtake the United States in real per capita income by 1985, and total Japanese output would exceed that of the gdp was as

At the time, people took such trend projections United States by 1998!
very seriously indeed. One need only look at the titles of such influen or Ezra tial books asHerman Kahns The Emerging]ap??ese Superstate asNumber One to remember that Japan appeared, to Vbgel's Japan many observers, to be well on itsway to global economic dominance. at least not so far. con it has not happened, Well, Japan has indeed tinued to rise in the economic rankings, but at a far more modest pace In 1992 Japan's per capita income than those projections suggested. was still States', and its overall output only 83 percent of the United was reason was that level. The only 42 percent of the American to 1992 was far slower than in the years: growth from 1973 high-growth gdp grew ^.y percent annually, and gdp per capita grew only 3 only a States also experienced percent per year. The United growth slow down after 1973, but itwas not nearly as drastic. If one projects those post-1973 growth rates into the future, one still a far less dramatic one. sees a relative Japanese rise, but Following that of the trends, Japans per capita income will outstrip 1973-92 United until States the year in 2002; its overall output does not exceed America's this probably overestimates 2047. Even Japanese economists believe that their country's prospects. Japanese generally rate of of potential the rate that it will be able to output, growth is now no sustain once it has taken up the slack left by the recession, more than three percent. And that rate is achieved a very only through rate of investment, nearly twice as high a share of gdp as in the high one takes into account the United States. When growing evidence for FOREIGN AFFAIRS-Volume N0.6 73

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at least a modest of U.S. productivity acceleration growth in the last that Japanese few years, one ends up with the probable conclusion on that of the United States at a snail's pace, if at efficiency is gaining that per capita income in Japan all, and there is the distinct possibility In other words, Japan is not quite may never overtake that inAmerica. as an as is sometimes overwhelming example of economic prowess case common Japan's experience has much less in thought, and in any with that of other Asian nations than is generally imagined.

THE

CHINA

SYNDROME

For

the

skeptic,

the case of China

poses much

greater

difficulties a major eco

aboutAsian destiny than that of Japan.Although China is still a very

poor country, nomic power levels. And impressive its population if it achieves unlike is so huge that itwill become even a fraction of Western has in recent productivity

China, Japan, rates of economic growth. What

years posted truly about its future prospects?

Accounting

for Chinas boom is difficult for both practical and

reasons. The we know that philosophical practical problem is that while China is growing very rapidly, the quality of the numbers is extremely statistics on foreign poor. It was recently revealed that official Chinese investment have been overstated by as much as a factor of six. The rea son was that the government offers tax and regulatory incentives to for an incentive for domestic to eign investors, providing entrepreneurs invent fictitious foreign partners or towork through foreign fronts. This in any other statistic that emanates episode hardly inspires confidence from that dynamic but awesomely corrupt society. The philosophical is that it is unclear what year to use as problem a baseline. If one measures Chinese growth from the point at which itmade a decisive turn toward the market, say 1978, there is little ques tion that there has been dramatic in efficiency aswell as improvement rapid growth in inputs. But it is hardly surprising that amajor recov ery in economic efficiency occurred as the country emerged from the chaos of Mao Zedong's later years. If one instead measures growth from before the Cultural Revolution, the picture looks more say 1964, like the East Asian modest "tigers": only growth in efficiency, with
FOREIGN AFFAIRSNovember/December 1994

Paul Krugman most seems growth driven by inputs. This calculation, however, also down the buoyant performance unfair: one is weighing of Chinese the leaden performance with of Chinese socialism. capitalism we should simply split the difference: guess that some, but Perhaps turn toward the market repre not all, of the efficiency gains since the sent a one-time recovery, while the rest represent a sustainable trend. Even a modest slowing in China's

growth will change the geopo Bank estimates that the Chi litical outlook substantially. The World nese economy is currently about 40 percent as large as that of the to grow at United States. Suppose that the U.S. economy continues can continue to grow at 10 percent 2.5 percent each year. If China 2010 its economy will be a third ours. annually, by the year larger than a more realistic 7 percent, its gdp will But if Chinese growth is only substantial shift of the world's than many economic now people center of gravity, but imagine. itwill

be only 82 percent of that of the United States. There will still be a

be far less drastic

THE

MYSTERY

THAT

WASN'T

The

extraordinary

record

of economic

growth

countries of East Asia has powerfully industrializing about both economic wisdom conventional policy and geopolitics. writers on the global economy now take it for Many, perhaps most, three that the success of these economies demonstrates granted in First, there is a major diffusion of world technology propositions. nations are losing their traditional advantage. progress, andWestern Second, the world's economic center of gravity will inevitably shift to in what is perhaps a the Asian nations of the western Pacific. Third, of the superiority demonstrate we in the more fewer civil liberties and planning than to accept. West have been willing are called into All three conclusions question by the simple obser record of East Asian vation that the remarkable growth has been so economic matched growth, rapid that Asian by input growth ceases to be amystery. incredibly, first the assertion that the advanced countries are losing Consider minority economies view, with Asian successes

in the newly influenced the

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recent tracts on the their technological advantage. A heavy majority of now that technology world economy have taken it as self-evident and that newly flows across borders, industrializing increasingly of more estab nations are increasingly able to match the productivity lished economies. Many writers warn that this diffusion of technol as to the ogy will place huge strains onWestern society capital flows theWest's and imports from those nations undermine Third World industrial There even if its conceptual problems with this scenario initial premise is right.7 But in any case, while technology may have diffused within particular industries, the available evidence provides no for the view that overall world technologi absolutely justification cal gaps are vanishing. On the contrary, Kim and Lau find "no appar ent convergence the technologies" of the newly industrial between ized nations and the established industrial powers; Young finds that are no the rates in the growth of efficiency in the East Asian "tigers" higher than those in many advanced nations. in technology absence of any dramatic The convergence helps a in spite of a great deal of what would otherwise be puzzle: explain rhetoric about North-South actual capital flows to movement, capital in the 1990s have so far been very small?and countries developing not East Asia. Indeed, they have primarily gone to Latin America, several of the East Asian "tigers" have recently become significant exporters of capital. This behavior would be extremely odd if these still pay wages well below advanced-country economies, which levels, were It is, however, rapidly achieving advanced-country productivity. reasonable if growth in East Asia has been primarily input perfectly to driven, and if the capital piling up there is beginning yield dimin returns. ishing is indeed running into diminishing returns, the conventional wisdom about an Asian-centered world however, to overstate It would be a mistake economy needs some rethinking. this case: barring a catastrophic it is likely that political upheaval,
7 See Paul Krugman, "Does Third World Harvard Business Review, July 1994. Growth Hurt First World

base. are severe

If growth

in East Asia

Prosperity?"

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1994

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Paul Krugman to outpace for growth in East Asia will continue growth in theWest next decade and beyond. But itwill not do so at the pace of recent the of the year 2010, current projections of years. From the perspective recent trends may well from Asian look supremacy extrapolated as as almost of Soviet forecasts industrial silly i96os-vintage did from the perspective of the Brezhnev years. supremacy the realities of East Asian suggest that we may Finally, growth some common to lessons. It has become have to unlearn popular success demonstrates assert that East Asian economic the fallacy of our traditional laissez-faire to economic approach policy and that the shows the effectiveness of sophisticated growth of these economies and selective industrial such as Authors protectionism. policies have asserted that the nations of that region have James Fallows a common "Asian system," whose lessons we ignore at our evolved and policies of the various peril. The extremely diverse institutions Asian let alone Japan, cannot really countries, newly industrialized success reflects be called a common system. But in any case, ifAsian those benefits the benefits of strategic trade and industrial policies, rate of in an unusual and impressive should surely be manifested no sign of such growth in the efficiency of the economy. And there is efficiency growth. exceptional The newly industrializing received a reward for their that is no more theory would is simply deferred countries of the Pacific Rim have of resources economic

extraordinary mobilization than what the most boringly conventional lead us to expect. If there is a secret to Asian

the willingness gratification, isfaction for future gain. a hard answer to accept, for those American That's especially the dreary task of reducing deficits policy intellectuals who recoil from is not a dismal and raising the national savings rate. But economics like it that way; it is because in the end science because the economists we must submit to the tyranny not just of the numbers, but of the logic they express.?

it growth, to sacrifice current sat

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