The Asian About-Face
Suddenly the region's fondest admirers don't love it anymore.
It's good, I suppose, always to be right. It's so good, in fact, that it's worth revising your past positions when they suddenly look wrong. The key to success in this endeavor, of course, is never to let on that you've changed your mind at all. For an object lesson in how to do this, look no further than what's happened to our understanding of Asia in light of its seven months of economic chaos. The meaning of the Asia crisis has been self-evident to those who believe that the free market can do no wrong. The collapse of Asian stock markets and banking systems has proven that industrial policy doesn't work, that protectionism is a route to disaster, and state control of credit allocation encourages inefficiency and corruption. In other words, what's happened in Asia is proof that until the rest of the world becomes more like us, it's bound to struggle.
Thus, Paul Craig Roberts argues in a recent issue of Business Week that "industrial policy fostered appalling investment, banking, and monetary practices," and that Asia's woes prove that Ronald Reagan was right and his critics were wrong. (Of course, everything Roberts writes purports to show that Reagan was right and his critics were wrong.) The Economist holds up Korea as an example of the inevitable failure of any economy bossed by "civil servants," while economist Rudi Dornbusch describes Korea's problems as a crisis of "statism." The op-ed pages of the Wall Street Journal, meanwhile, have wallowed in triumphalist glee, with free-marketeers dancing happily on the grave of what used to be called "the Asian miracle."
Even on its own terms this analysis is startlingly cynical. After all, until June the world's investors--which is to say the market--saw nothing but blue skies ahead for these economies. They showed their faith by shoving billions into Asian equity markets, while foreign banks contentedly handed out billions in loans. If Asia's problems are systemic and the result of these countries' statist policies, then investors' failure to recognize this earlier is a strike against the market, not for it. Still more perverse is that, even as the free-marketeers conclude that history is rendering its verdict on the Asian model of capitalism, they seem to forget that until the recent crisis they themselves took great pains to deny that such a model existed. Until Asia fell apart, supply-siders happily held it up as proof that the only recipe for economic growth was open markets and nonintervention on the part of the state. Asian economies weren't like those feeble Latin American economies, with their high tariffs, easy credit, and corruption. Instead, they were models of macroeconomic stability, market-driven pricing, and disciplined borrowing. In 1995, the Heritage Foundation released its index of economic freedom. Four of the top seven countries were Asian, including Japan and Taiwan. All the Asian countries now struggling qualified as "free."
Taiwan and Korea succeeded, the Economist explained at the start of this decade, because they had among "the least price-distorting regimes in the world." Within the World Bank and the International Monetary Fund, similar conclusions about the sources of Asian growth prevailed. The chief economist of the World Bank's East Asian desk authored a 1993 book downplaying the presence of industrial policy in the region, while a concluded that "rapid growth in each economy was primarily due to the application of a set of common, market-friendly economic policies." Just last year economist called the East Asian economies "highly market oriented, with a long period of relatively free trade ... and limited distortions from government regulations," while arguing that most East Asian countries did not rely on industrial policy at all. The market-friendly interpretation of Asia's success was intended to counter the thesis--offered by the Japanese, by U.S. protectionists, and by certain neo-institutionalist economists--that trade barriers, subsidized credit, and strong state support for export-driven industries had been essential to the development of Asian economies.
U p till now, everyone--right and left--has been anxious to claim the Asian example for their own for one reason: Since World War II, the Asian tigers are the only examples of successful, sustained development over many decades. (Well, OK, Mauritius and Botswana have done well, too.) If they achieved that success through targeted subsidies and controlled credit, that certainly puts a crimp in free-market theorists' plans for Latin America and Africa. Alternatively, if they've done so through free trade and low government spending, then Milton Friedman can applaud.
That certain of these countries--most notably Korea, Japan, and Taiwan--relied heavily on market-distorting devices is indisputable. That these countries grew at historically rapid rates for more than two decades is also indisputable. But the conclusion that the one led to the other is not indisputable. It may very well be wrong. Similarly, while Hong Kong and Singapore have been remarkably open, free-market countries, the fact that this is responsible for their rapid growth is hardly indisputable, either.
T he problem is that, as economist Alwyn Young has pointed out (in a thesis popularized by Slate's own Paul Krugman), while Asia's growth rates in total production have been incredibly high, its growth rates in worker productivity have, Japan aside, been surprisingly low. In the postwar years, all the Asian tigers have enjoyed enormously high savings rates, rapid increases in the percentage of people participating in the work force, excellent education, and enormous investments in physical capital. In other words, they've done a brilliant job of mobilizing resources, but not a brilliant job of mobilizing resources efficiently. But you can mobilize resources under very different regimes, and just how the Asian tigers did it turns out to be hard to answer within the confines of an industrial-policy-vs.-free-market argument. (Click for some examples of the complexity.)
What's appalling is not that supply-siders once argued that the tigers were proof of the free market's virtues. There was a reasonable--if hardly decisive--case to be made for that point. What's appalling is rather that now that their heroes have stumbled, they have disowned them so utterly. The irony is that, if anything, Asia is much more integrated into the global marketplace today than it was 10 or even five years ago. After all, it was foreign capitalists, and not Asian governments, who lent all those now-floundering companies $500 billion in the last five years. (For more on that point click.)
But what Asia's newfound critics once loved, they now despise. One can only imagine the "heads I win, tails you lose" contortions these thinkers would have offered for America's woes in 1929. And while the comparison may be a bit facile, it helps illuminate the crucial point about revisionist interpretations of Asia, which is that they fail to recognize that one can believe in the virtues of the market while still understanding that markets sometimes fail.
James Surowiecki writes the financial column at The New Yorker.