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History Table of Contents
1997 Summer Conference
 
Summer Conference 1997
Canada and the Asia-Pacific Promise: Hope, Hype and Reality
The Strategic Centre of the World:
Economic Dynamism and the Search for Stability in East Asia

Johan Saravanamuttu,
Visiting Professor of ASEAN and International Studies,
Centre for International Studies, University of Toronto

I want to speak to you about the so-called "East Asian miracle," with particular focus on the countries of the Southeast Asian Nations (ASEAN), which have been touted as the most recent new kids on the block of "tiger" economies following after the newly industrializing countries (NICs) of South Korea, Taiwan, Hong Kong and Singapore, with the lead economy of Japan heading the way earlier in the pattern of flying geese.

A more recent goose of the flock is China.

My presentation will be in three parts. I will:

  • Try to present the basic points of the Krugman thesis. Paul Krugman is an American economist, who has tried to puncture the thesis of the East Asian miracle.
     
  • Discuss recent events in the last month or so in the ASEAN countries, which has brought about a de facto devaluation of some ASEAN currencies and forced Thailand, in particular, to seek credit from the International Monetary Fund (IMF) — something which it has not done for umpteen years. And that doesn't mean a vindication of the Krugman thesis that the East Asian economies are only paper tigers.
     
  • And offer some views about the rights of East Asia, seen from the vantage point of contemporary East Asian development and regional politics and political economy and try to raise some issues as to how this may affect the trajectory of economic growth and political development in the next millennium.

The East Asian "miracle" has occurred in a de facto sense, if we simply took a cursory glance at the stunning economic growth and performance of East Asian economies in the last few decades or so. These countries have been doubling their per capita incomes every 10 years, when it took Britain and the United States 50 or 60 years to do so.

Asia, the United States and Europe now account each for about a quarter of the world output, but some upbeat assessments of the present trajectory put it that East Asia, or at least Asia in general, will produce at least half the world's output as we move into the next millennium.

This is the hype's position, the hype perspective.

And Paul Krugman has called this a case of "pop internationalism."

Krugman, who makes little reference only to a [1993] World Bank study by the same title, the "East Asian Miracle," has made the following points and let me try very quickly to summarize them.

It's not too far-fetched, says Krugman, to compare the East Asian economies with the Soviet Union of the 1960s, which registered phenomenal growth because of the massive and accelerated injection of inputs of capital and labour.

So, the so-called East Asian miracle from that perspective is premised on "perspiration not inspiration."

Mere additions of inputs of labour and capital do not augment, per se, "total factor productivity" and growth rates will decline over time even as inputs continue to pile up, says Krugman.

Singapore is a typical of an Asian tiger and has close parallels, believe it or not, with the Soviet model; development has been driven by inputs of capital and labour, rather than by increases in productivity. Krugman actually cites the work of several economists, including Alwyn Young. So the thesis, rather, is not Krugman's, but Young's actually, about Singapore's development being premised on input.

The Japanese slowdown in the 1980s and early 1990s partially substantiates the thesis of Krugman and hyped predictions of Japan as the new "superstate" — Herman Kahn, remember, and as "Number One," Ezra Vogel, more recently — overtaking the U.S. economy have been shown to be ingenuous.

In addition, Krugman, also offered three propositions he said have been proven to be false about the East Asia miracle:

  • That there has been a major diffusion of world technology in progress and Western nations are losing their advantage vis-a-vis the Asian economies.
     
  • The world's economic centre of gravity will shift to the Asian nations of the Western Pacific. (That's also a false assumption).
     
  • Asian successes demonstrate the superiority of Asian economies, which offer fewer civil liberties and more planning than is evident in the West.

These are the three major propositions which Krugman also says fuel that notion of the Asian miracle.?Of course, there have been several critiques of the Krugman thesis. Some economists have shown that Krugman's use of statistics, his data and his assumptions have been based on false premises.

Second — I cannot go into details here — it's quite clear many economists have argued that the Soviet analogy is somewhat over-stretched. By no stretch of the imagination can one say that the Singapore economy is like that of the Soviet Union of the 1960s.

Then, of course, there have been more studies that have been done with stronger databases, such as the World Bank study of 1993, which shows that the basic premises on which East Asian growth has been moving along [citing] such factors as high savings and investment, exposure to market conditions, high levels of human capital formation, flexible labour markets are all conditions that never existed in the Soviet system.

I'm more inclined to believe there is a middle ground between these two positions. One that argues that the Asian miracle is totally a myth and the other one that sees it as, indeed, a miracle with no end.

I suspect the truth about East Asia lies in between and there's certainly been genuine growth and economic fundamentals in the Asian economies, indeed, in place, but there is much more room for improvement, especially of economic efficiency and technological productivity once the double digit or near-double digit development rates begin to simmer down.

So, I'll leave it at that and suggest to you that there's indeed phenomenal growth in Southeast Asia and East Asia in general, but one has to be somewhat aware of some of the realities of the situation.

Let's talk a bit about what's happened in mid-1997 and how this might, or might not, be a vindication of the Krugman thesis.

Developments in mid-1997 in the ASEAN countries, in particular, seemingly raised the spectre of the Krugman thesis. Because of speculative pressure on several ASEAN currencies, especially the Thai Baht, both the Baht and Peso of the Philippines, suffered a de facto devaluation of about 10 per cent or eight per cent, respectively. The Taiwan [devaluation] is said to be even higher, maybe 15 per cent. The Thai situation is particularly bad, as the government had on July 28 approached the IMF for a standby line of credit; something which it has not done in a long, long time.?The main reason for this currency crisis, as most enlightened commentators will tell you, is that ASEAN countries — and Thailand, in particular — have been running large current account deficits for many years, because of their large imports of foreign capital.

However, currencies like the Malaysian Ringgit, Singapore Dollar and Indonesian Rupiah have remained fairly stable throughout this crisis.

Despite the stability of some of these currencies, the Malaysian Prime Minister, Dr. Mahathir Mohamad, has gone on the attack and charged that the Asian currencies have suffered at the hands of "rogue speculators," and named George Soros, the American financier, as the person responsible for launching such an assault on the ASEAN economies because of ASEAN's decision to admit Myanmar (Burma) into the regional organization.

Of course, this caused a tremendous stir in the international press, etc. Soros denied this and the London-based Economist has dubbed Mahathir's accusation as a case of "economic illiteracy" at the top. I think that's a little unfair. I believe that perhaps Mahathir was stating the case, somewhat like our speaker last night (Ross Munro).

We do know there were speculators that were very active in the currency market, but whether a single man could actually bring down a whole economy is, I think, a very moot point.

The lesson of the episode is not that the Krugman thesis is valid, but rather that there are many more variables and factors that account for economic performance than the Krugman thesis would suggest.

The currency crisis has shown the vulnerability of the ASEAN economies; as economies which are highly exposed to external factors.

The highly export-oriented ASEAN economies, which had a collective external current account deficit of $30 billion, despite their high savings and reserves, are subject to the vicissitudes of the international financial forces.

It has been suggested that the financial policies and exchange rates policies should be — and could be — modified to better cope with instances of "overheating" and currency problems, such as was the case with Thailand. I think this will be handled in the next months and years.

What then is the reality and the future of East Asia from my vantage point as an East Asian?

The reality of the situation in East Asia, as far as I can see as a political scientist, is that economic growth has come to stay and will continue into the next century, hiccups and all.

Let me close my presentation by touching on what I consider to be some of the most important realities of the East Asian political-social-economic situation and present several broad propositions of what this would mean for the region and globally as we head into the next millennium.

First, the phenomenal development of the East Asian region augurs well for the future of the region and for the globe, as a whole, by the sheer fact that it will contribute to a growing world output and economy. But there is a downside of an accelerated depletion of natural resources and unprecedented levels of environmental degradation.

East Asian growth will raise thorny questions now and in the future for sustainable development, not only in East Asia but for the globe as a whole.

Second, the rise of new East Asian middle classes will mean the acceleration to unprecedented levels of consumption and, thereby, also levels of economic growth and strains on the quality of life in the region as a whole.

With the rise of middle class demands there will be demands on the development of better infrastructure, better conditions for living, such as housing, which is going to be a major question in the future.

The rise of the new middle classes will also mean that social and political conditions of East Asia will not remain static, but political instability could ensue if the middle class forces are not harnessed or integrated meaningfully into social and political life.

We've had a period of rapid economic modernization and development. In the future I see this translating into political development and political liberalization. And this will put a great strain on the political frameworks or the political institutions of East Asia.

These socio-economic developments will put a huge strain on existing political and social frameworks which mediate social and political discourse. The trend to develop political frameworks based on "Asian values" will probably be pursued as the pressures for democratization and participation in the political process accelerates. I see this as a trend that is continuing, rather than decreasing the Asian values issue.

Economic rationalization and market-driven development based on the predominant neo-liberal paradigm of the West may not lead to political liberalization a la the West, but rather to variants of political conservatism which do not put value on civil liberties and liberal-democratic values and practices.

Finally, the imperative to engage East Asian civil societies into the political processes, so as to alleviate some of these conditions I mention, will be resisted by the political elites, who are going to be bent on economic development and consumption for the masses who will themselves be easily subjected to the hegemony of communitarian ideologies propagated by the ruling elites.

If I have presented a gloomy socio-political scenario for East Asia, my purpose is to provoke you into imagining more positive scenarios which could come about by the socio-political and economic interaction of East Asia with Canada and the West.