Date: Sat, 13 Nov 1993 22:24:54 -0500 Reply-To: "ccf-editor@ifcss.org !YANG Chang-Qing" Sender: China-Net From: "ccf-editor@ifcss.org !YANG Chang-Qing" Subject: CCF (#9316, Weekend Edition): Asia Survey (I) To: Multiple recipients of list CHINA-NT ==+==+==+== C h i n e s e C o m m u n i t y F o r u m ==+==+==+=== Sunday, November 14, 1993 (Issue No. 9316) Weekend Edition: Asia Survey (I) +=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+= Chinese Community Forum (CCF) is a journal published on China-Net. CCF is dedicated to the discussion and debate on the issues related to the Chinese community. The opinions expressed here do not necessarily represent the views of the Editorial Board of CCF. Contributions to the discussions and suggestions of new topics are very much appreciated. +=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+= Table of Contents Author | # of Lines ============================================================================ ASIA SURVEY: A BILLION CONSUMERS (Part I)...........The Economist.......669 1. A Billion Consumer..............................................166 2. Why It Happened.................................................232 3. The Sustainment Doctrine........................................153 4. Measuring Up The Giants.........................................118 ===========***==========***==========**==========***==========***=========== From The Editor ---------------------------------------------------------------------------- CCF is pleased to introduce to you a new session: Weekend Edition. The scope of this edition is to bring our readers wide range of Chinese community related readings, from politics to economic development, from cultural life to sports analysis. In the Weekend Editions of this and next weeks, readers will be introduced to a series of articles carried on the journal "The Economist" regarding to the economic development in Asia during the last quarter century. The rapid economic growth in Asia, led by Japan, followed by South Korea, Singapore, Hong Kong, Taiwan, Thailand, Malaysia and most importantly, China, has astonished the world, rich and poor alike. How did this happen? Why did it happen? What consequences will it bring to the entire human being? Will this rapid boom sustain? What lessons can one learn from this? Hope our readers can get your own answers to these questions after reading this Asia Survey. ---------------------------------------------------------------------------- 1. A Billion Consumers...................................................166 ---------------------------------------------------------------------------- IT IS now likelier than not that the most momentous public event in the lifetime of anybody reading this survey will turn out to have been the modernisation of Asia. Many Americans and even more Western Europeans cannot believe this is true but they are scared that it might be, thinking that if Asia rises the West--or at least its jobs and wages--must fall. In fact, the whole world has reason to be thrilled by the prospect of a middle-class Asia-and not only because any decent person should blush to argue against a process of economic development so beneficent that in 1970- 90 it reduced the number of desperately poor people in East Asia from 400m to 180m even while the population of those countries was growing by two- thirds. The momentum of Asia's economic growth is so strong that, by the IMF's guess, of the $75 trillion (in 1990 dollars) by which gross world product should be bigger in 2000 than it was in 1990, half will be contributed by East Asia. The World Bank thinks that between now and 2000 Asia as a whole will also account for half of the growth in world trade. By 2000, Asians--by which this survey means people living on the Asian continent (including Japan) east of Iran but outside the ex-Soviet Union-- are expected to account for 3.5 billion of the world's 6.2 billion people. On conservative assumptions, fully 1 billion of those Asians--not much less than the entire populations of North America, South America and the European Community today--will be living in households with some consumer-spending power (meaning they can buy at least basic goods such as colour televisions, refrigerators and motorbikes). Perhaps 400m of these consumers--three times as many as now--will have disposable incomes at least equal to the rich-world average today; they will be spending their money on houses, cars, holidays, health care and education. And if all this consumer spending is to take place, immense investments in infrastructure will be needed to make it possible: power plants, roads and airports among other things. The rocket-like growth and absolute size of Asia's middle class should therefore create some of the biggest business and financial opportunities in history, and far-sighted western firms and their workers stand to profit immensely from this. The rise of Asia has the potential to do more even than that. Since 1500, when China entered its half-millennium of decline, Western Europe and America have had a monopoly of the world's most powerful current of thought: modernisation, the belief that things can be changed, that human consciousness can bend destiny to its will. The totalitarian alternatives dished up in the l9th and 20th centuries were broken either by war (in the case of European fascism and Japanese super-nationalism) or economics (in the case of communism). In the next couple of decades Islam may offer another challenge, though it seems bound to be plagued by the identification of so much of its fervour with anti-modernisation rather than modernisation. Asia, or at least the part of Asia under China's cultural sway, might be different. As even a glancing acquaintance makes clear, Asia's civilisations are both ancient and, even in poverty, have remained self- confident. Asians also now believe passionately in modernisation. If they become rich too, they could be in a position to offer the West an example of how to marry economic change to social stability and reconcile freedom with order. Even if Asia proves unable to provide such a cultural renaissance, it might offer some pointers about the biggest problem of government faced by the West--one that westerners are mostly blind to, since they assume (as China did of its own system in 1500) that there is no problem at all, only self evident virtue. The problem is western democracy itself, which runs the danger of ceasing to be a vehicle for delivering the services that ordinary people want from government, and of becoming instead an instrument for helping strong lobbies pick tax payers' pockets. This is a danger that developing Asia has been fairly good at avoiding. RAGS TO RICHES Anyone handed the preceding paragraphs 30 or so years ago (and many people now) would immediately have concluded that their author was a lunatic. Asia then seemed destined for endless suffering. Much of the world's misery in the quarter-century or so after the second world war was concentrated in Asia. India and Pakistan fought three wars in those years. Korea, already poor, was flattened by its civil war in the early 1950s. Indochina, and especially Vietnam, fought war after war, internecine and with the French and the Americans. Indonesia went through a horrifying blood bath in the mid 1960s, with hundreds of thousands of people killed because they were ethnic Chinese. There were guerrilla insurrections in Thailand, Malaysia, Burma and the Philippines. In China, Mao Zedong loosed the Red Guards in the mid-1960s to carry out one of the most murderous abolitions of law and order ever seen--until the Khmers Rouges took away that distinction by killing 15-20% of Cambodia's population, especially the educated part, in the mid-1970s. Those were just the big political problems. Asia's economies around 1960 looked to be faring no better. That year Japan, the richest country in Asia and one that had been modernising for nearly a century, had a GDP per head of $380, one-eighth of America's. South Korea's GDP per head in 1962 was $110, about the same as Sudan, Taiwan's $160 (roughly Zaire's). Asia's giants were even worse off. China's GDP per head in 1962 was $60 (the world's eleventh-lowest), India's a bit less. There seemed more reason to believe things would get worse in Asia than to think they would get better. Thanks to Mao's "Great Leap Forward" in 1958-60 between 30m and 50m Chinese starved to death: the higher figure equals the death toll of the second world war. Observers looking at the straight lines projecting India's population growth against its grain output foresaw deaths in the hundreds of millions in the 1960s. Early in that decade Gunnar Myrdal, a Swede later awarded a Nobel prize in economics, was working on a morose 2,200-page book about Asia's prospects, which he found not good because among other things "the epoch of rapidly growing export markets has ended". Around the time that Asia was being sadly written off by sympathetic westerners, a process of export-led growth was quietly beginning that over the next 30 years produced in East Asia the fastest rise in incomes, for the biggest number of people, ever seen on earth. In Japan, which had begun growing fast in the early 1950s, this took the form of a manufacturing revolution that increased real income per head four-fold between 1960 and 1985 and shortly thereafter made the Japanese in dollar terms the richest people in the world. In four places that have followed in Japan's footsteps with about a ten-year delay--South Korea, Taiwan, Hong Kong and Singapore--the rise from poverty was every bit as steep, with real GDPS doubling every eight years during 1960-85 (around eight-fold in all). In four other countries-- Malaysia, Thailand, Indonesia and China--economic growth has been comparable, but it began only in the late 1970s and thus has so far worked only about a quarter of the magic that compound growth of 8-9% a year for 30 years is capable of. These eight economies were among the world's 13 most successful poor countries at raising real incomes in 1965-90, and in the 1980s grew three times as fast as the rich world (excluding Japan). China excepted, these eight have followed Japan in performing a feat never before seen: they have combined fast growth in the early stages of take-off with an increase rather than a decline in income equality. But if some Asians have been doing things right, many others have been doing them wrong. Some also-rans of 1960 have since become worse failures: North Korea, Vietnam, Myanmar, the Philippines and--by far the most painful because the biggest--the Indian subcontinent. In 1950 all these places save India were the richest parts of non-Japanese Asia. All save North Korea have started to change the wrong policies they have pursued since. Some of Asia's worst performers in 1960-90 therefore now have the chance to be among Asia's (and the world's) fastest-growing economies in the next 15 years. In this they could well be joined by the quickly Asianising Russian Far East and perhaps even by parts of ex-Soviet Central Asia. Part of this survey is about whether those left behind in the first 30-40 years of modern Asia's rise--especially India--will in fact now begin to duplicate East Asia's achievement. The bigger part is about whether those that have started to do well but not yet gone all the way--most of the East Asian nine save Japan, but most colossally China and Indonesia--can continue to grow fast until they break through into OCED-like income levels (something that Hong Kong and Singapore have already done, their per capita GDPS now exceeding those of at least six of the OECD'S 24 members). Asia's numbers are so huge that, even including a relative failure like India (which in the 1980s grew three times as fast as Latin America and Africa even if only half as fast as China), Asia including Japan increased its share of world dollar GDP in the 1980s from 17% to 22% and its share of the world's manufactured exports from 12% to 17%. By the IMF'S latest calculations of GDP based on what countries actually produce and consume rather than on what sometimes misleading exchange rates for the dollar suggest they do, Asia (including Japan) commands a quarter of gross world product, and without Japan still nearly a fifth. If Asia can continue for the next 20 years to out strip the rest of the world as it has done for the past 20 and thus becomes a largely middle- class continent, it will by then account for more output than the OECD (even putting Japan in the OECD'S column rather Asia's) and will have transformed every business on earth, and the hopes of every human for a decent life. Because if the Asia that many clucking westerners in 1960 assumed was doomed can pull it off, why can't everyone else? ---------------------------------------------------------------------------- 2. Why It Happened.......................................................232 ---------------------------------------------------------------------------- ECONOMIC growth is about as poorly understood as the human mind (with which, in fact, it is intimately linked, see below). Nobody has a convincing explanation of why China, which had until 1500 been the world's richest economy, then faltered. Nor of why, suddenly, in 1820 the West entered what Angus Maddison, an economic historian, calls "the capitalist epoch": a 170-year period in which real GDP rose by 2.7% a year and real per capita incomes by 1.6% a year, multiplying output seventy-fold and per capita incomes fourteen-fold when in the four centuries before this era the West managed income growth only one-eighth as fast despite considerable technological advance. On a more modest scale, there have been spurts of growth for a decade or two that produced no break through to sustained modernisation: Russia, the Austro-Hungarian empire and parts of Latin America suffered this fate around the turn of the past century. Then there is modern East Asia. One statistical burrowing has found that, in general, a country's economic performance in one decade predicts nothing about how well or how poorly it will do in the following ten years. Yet for 30 years, decade in and decade out, eight poor East Asian countries (nine if rich Japan is included) have been among the dozen best-performing economies in the world--a geographical concentration of success so extraordinary that the World Bank guesses there is only one chance in ten thousand that it happened at random. Then why did it happen? THE ELEMENTS OF GROWTH The simple answer is that these countries consistently did a better job of injecting into their economies the four elements that contribute to economic growth: These are labour, physical capital, human capital, and an indefinable something that goes by various names but basically means the efficiency with which labour and the two kinds of capital are combined. * LABOUR. The least interesting input, though with the most predictable result, is the quantity of labour. This can be affected by, say, a decline in working hours or an increase in the share of women who go to work instead of staying at home. It is mainly accounted for by the difference each year between how many people enter the work force at age 18 or so and how many leave it at 60 or so. Beginning around 1950, the whole of the poor world enjoyed a swift fall in death rates. Alone among poor countries, East Asia also then experienced a swift fall in birth rates. The advantage of this is not, as population-control enthusiasts assume, that the fewer people the better. Indeed, having a big bulge of young people entering their most productive years at the right time can give a nice boost to an already rising economy (and conversely, as the rich world is likely to learn early next century, having too few entering the work force can drag down a slowing economy). But a swift deceleration in a poor country's fertility rate starts a virtuous circle in which household savings rise, allowing spending on machines and basic education to increase; both of these make that bulge far more productive when it eventually reaches working age. * PHYSICAL CAPITAL. The Asian successes have been phenomenally good at accumulating capital. In a world of highly imperfect capital markets--which despite recent advances this world still is--a country's piling up of physical capital (machinery, buildings and bridges) depends mainly on how much it saves and then invests itself. In the mid-1960s the poor East Asian countries were saving only about 16% of GDP, less than Latin America. By the early 1990s East Asia excluding Japan was saving more than 36% of GDP, four times as much as the Indian subcontinent and Africa, and twice as much as Latin America. Thanks to that sudden fall in the fertility rate, to unregulated labour markets and to pro-business governments, it was possible simultaneously to pay scarce workers rapidly rising real wages even while exploiting them--in the sense of paying them less than their marginal productivity--and to leave the surplus in the hands of business for investment. East Asia has been investing almost as much as it saves: 35% now, up from 20% in 1965. The startling figure, however, is how high a proportion of this investment is private rather than public. The private share in East Asia has been about two thirds--which in turn is almost two-thirds higher than the private share in other countries with similar incomes. Not all government investment is wasteful; indeed, the right sorts of public capital spending not only produce good returns themselves but as a by-product raise returns to private investment too. But the odds are that an Asian-style split will impose more market discipline on both kinds of investment than the 50-50 split in the rest of the world does. That is especially so because the developing Asian economies--most interestingly China now--have been pioneers at finding ways to create incentives for private firms, especially foreign ones, to build infrastructure. * HUMAN CAPITAL. For economic productivity, the quantity of labour matters far less than its quality. East Asia has been unusually canny in the early stages of industrialisation by pouring educational resources into primary and secondary education rather than higher education. It has been even cannier by educating girls as extensively as boys. The Asians have not invested more public money in education than other developing countries have. In 1989 the average for East Asia was 3.7% of GDP compared with 3.6% for all developing countries. But, whereas in Latin America and the Indian subcontinent spending was lavished on universities, in East Asia it has gone to teaching the basics to all children. The extreme contrast is provided by South Korea and Venezuela: in 1985 the Koreans spent 10% of their education budget on universities, the Venezuelans 43%. Early on in a country's climb up the income tree, a Korea-like ratio has two advantages. It increases the productivity of the mass of the work force, which is what counts in a country whose comparative advantage will temporarily be in light manufacturing. Second, it does more than any thing else to promote income equality, consumer spending power and broad support for high growth and pro-business policies; the well-off are, after all, everywhere over-represented at university level, so why pile on public resources there? Japan took this sensible reasoning to a ruthless and effective extreme. Early education was made public, universal and undifferentiated. At each succeeding step of the academic ladder, the public part of education was shrunk in size and made more elite--until, at university level, it is tiny. One consequence is a brutally meritocratic selection that populates the public universities with a higher share of poor children than get access to university education in, say, Venezuela or Brazil, while leaving the well-off who could not make the grade to fend for themselves in the large number of private universities. Another consequence is to cause parents, including poor ones, to dig into their own pockets to pay for private tutoring outside school hours, since the rewards of meritocratic success later on are so great. Encouragingly, the same process has begun in China, where even peasant families find it worth their while to buy books for their children to use in the spartan classrooms provided by the state. The other accomplishment of the East Asians was to start early in the process of development to give young girls the same education as young boys. The first advantage of this was that it helped produce the swift decline in fertility rates mentioned above: the world over, when girls get more education they have fewer babies. Second, it gave a big boost to the teaching that mothers were able to give at home to their children, both before and after the children started school. This sort of home instruction seems to have a significant role in the extremely high (by international standards) test scores that East Asian children produce. The awkwardness nobody wants to discuss is that the two countries, Japan and South Korea, that educated their girls the most thoroughly and then most systematically excluded them from the work force--thus focusing young mothers' skilled energies almost exclusively on their children--are the two countries that seem to have had the highest-performing next generation. * THAT CERTAIN SOMETHING. A cruel but simple comparison shows why the build- up of labour and the two kinds of capital does not in itself explain East Asia's fast growth. In the quarter-century or so after 1960s, the Soviet Union and the East Asian economies had just about the same record of accumulating physical and human capital. But while East Asia was using this capital to generate the best economic performance in history, the Soviet Union was sliding into an economic collapse so comprehensive that in the end its factories produced not goods but bads: finished products less valuable than the raw materials they were made from. One measure of the efficiency with which capital and labour are combined is called "total factor productivity" (TFP). Calculations of TFP are notoriously imprecise: they amount to seeing what is left over after the other things (like extra physical capital) are subtracted, and can embarrassingly offer anything between 0% and 70% of the statistical explanation for economic growth (and, in Soviet-like cases of economic contraction, for more than all of negative growth). But TFP can still give a rough idea of how well-tuned an economic engine is. In rich countries TFP accounts for about half of economic growth. By the World Bank's calculations, around a third of East Asia's growth is from TFP (an average that masks such extremes as Hong Kong's 56% and Malaysia's 13%). This average is extremely high by poor-country standards: only about 10% of poor countries out side East Asia have TFP rates as high. Even if Latin America and Africa had invested as much in machines and people as East Asia (which they did not), their underlying rate of TFP growth in 1960-85 would have been 1%, compared with 4% for East Asia. And East Asia's productivity bug is spreading. Even the Fast Asian latecomers (Malaysia, Indonesia and now spectacularly China), whose early growth depended on high rates of investment, are coming to depend more and more on productivity improvements to keep their growth rates up. THE IDEA OF IDEAS Ever since it became clear in the 1960s that Japan was on its way to amazing success, a cacophonous debate has been growing about whether the East Asians have got where they are today by being apt pupils of the free- market school or instead exceptionally clever at bringing government intervention to bear on markets. A just-published World Bank report, from which most of the facts in the preceding section were drawn, picks its way between these two lines of thought. It gives most credit to the East Asian economies for pursuing free-market pricing of labour, capital and goods, and for maintaining macroeconomic stability through low inflation, stable and positive real interest rates and stable exchange rates. But the Bank also concludes that, judiciously done, some kinds of government dabbling-- allocating credit, for example--can speed up growth. That sounds fair, though those who believe in government intervention tend to think it does the most good by raising TFP growth and therefore have some explaining to do about Hong Kong, which has Asia's highest rates of TFP growth and the world's least interventionist government. What the Bank report does not say--but a later, doubtless unpopular, article in this survey will say--is that any body who hopes East Asian-style government intervention will help an economy should also hope that the government is not a democracy. For now, note what all of Asia's successes have in common and all its failures lack. This is being open to foreign influences. The point about this is not export-led growth, important though that has been for many of Asia's successes. But some (like China) whose economies are large in relation to exports have nonetheless been extremely receptive to foreign investment. Others (like Japan) have been hostile to foreign investment but excellent at listening to market signals from their export forays and at buying foreign technology licences. Taiwan has let in foreign direct investment often only on condition of technology transfer, and its thousands of returning entrepreneurs bring Silicon Valley-learned business practices and technology with them. Conversely, India has been one of the world's most closed economies. It shows. It has one of Asia's worst productivity records. The significance of all this is an idea of Paul Romer, an economist at the University of California at Berkeley, about the role of ideas in generating economic growth. Ideas are not human capital, the level of which can be thought of as a sign of how well a country is capable of putting ideas into practice. Ideas are the world's pool of existing knowledge--the most efficient sequence, in an example of Mr. Romer's, for sewing 20 pieces of cloth together to make a shirt--and of new knowledge that people tinkering with the processes on an assembly line or with a string of symbols like this sentence are about to come up with. This idea of ideas is another way of getting at what TFP is trying to measure. The main reason the rich world is rich--and why half or more of its economic growth comes from productivity increases--is because it is rich in ideas it knows how to apply. From a poor country's point of view, the great thing about ideas is that, once they exist anywhere, any body can acquire and use them (sometimes for a price but usually not for much of one). These days you not only do not have to reinvent the wheel, you can find out how to make the car and then improve on the car-making process yourself. And the widest range of contacts with the best foreign sources is the way to rise fastest to rich-world levels. However important all their other sensible policies have been to the success of the East Asians the key--for them and for all of Asia's future--is that they had open minds. ---------------------------------------------------------------------------- 3. The Sustainment Doctrine..............................................153 ---------------------------------------------------------------------------- GROWTH alone does not make for modernisation. As Joseph Schumpeter, an Austrian economist, put it, "Add successively as many mail coaches as you like, you will never get a railway thereby." To join the rich world means to acquire the ability to grow indefinitely--not by doing more of the same but by moving continuously into ever higher value-added production. Nobody doubts that Japan has made it. It would take a catastrophic reversal to keep Hong Kong, Singapore, Taiwan or South Korea from joining Japan in the ranks of developed countries (indeed, each of these is already richer than at least one member of the OECD and is growing faster than any of them). But a crush of Asians, say half the world's population, is still in the queue. NOT IN YOUR SIZE Some people are beginning to murmur that the very number of aspiring Asians will make it impossible for them to squeeze through the door. The murmurs will become louder if China and Indonesia continue to grow fast, and will become shouts if India looks like joining them. By 2000, these three countries will among them be home to about 40% of mankind. The sceptics who think that this many people cannot quickly industrialise--and the western environmentalists who undoubtedly will be shrieking that they must not be allowed to industrialise--have a point, but it is about prices not possibilities. An example from China shows why. Vaclav Smil, a Canadian professor, has calculated how much extra productive capacity (or how many extra imports) China will need by 2000 if it is to achieve a modest 2% annual growth this decade in per capita consumption of some basic commodities. In fact, China's annual growth in consumption of most of these things was faster than 2% in the 1980s; and the 120m additional Chinese Mr. Smil postulates for 2000 will probably be more like 180m. So the following paragraph probably understates matters. On Mr. Smil's assumptions, China in 2000 will need an increment of primary energy production equal to the 1990 output of India and Brazil combined. It will need extra coal equal to the output of present-day India and South Africa combined, extra electricity equal to Brazil's present output, extra steel equal to Italy's, extra cement and nitrogen equal to Japan's, extra grain equal to all of Africa's. China will need extra water equal to Mexico's consumption in 1990. It will be belching an extra America's-worth of particulate emissions into the air, and a (West) Germany's-worth of sulphur dioxide emissions. Any inference from this that China's growth must grind to a halt is merely 1970s Club-of-Rome pessimism about world resources writ one-fifth as large (though there seems sure to be a darkening of the industrial pall now hanging over China, which on bad winter days in northern Chinese cities can produce air quality anywhere between six and 20 times worse than maximum recommended or actual levels in the West, a fact that already worries most of China's neighbours rather a lot). But the figures for China's growing appetite for industrial and agricultural inputs do suggest that prices first within China and then outside it will shift considerably. Depending on how quickly world supply can respond, China-led and possibly all-Asia-led demand for many commodities that industrialising countries tend to wolf down may send their prices up very fast at some points this decade. KEEPING THE BALL ROLLING That China and the rest of Asia are capable of following Japan and the smaller East Asians into perpetual economic growth does not necessarily mean they will. Some of the elements for continued success are certainly there. Savings and investment rates in Asia have been rising, not sinking, in recent years. More important, as the successful Asian countries reach more advanced levels they will be able to take advantage of a surprisingly sophisticated stock of human capital. In 1990 six Asian countries (including Japan, China and India) together produced more than 500,000 university graduates in science and engineering, compared with America's 170,000. China alone graduated 128,000 engineers, twice as many as America. A lot of American graduates are Asians anyway, many of whom eventually return home. Asian enrolment in American universities, 80% of it non- Japanese, is now over 200,000, up from 20,000 in 1975, and three-quarters are studying science or engineering. The Japanese expect 100,000 of their own university places to be occupied by other Asians in 2000. Yet however handsome its future endowments of capital and labour, Asia will not thrive unless it masters the trick of sustained and cost- conscious productivity growth. Chart 3, which shows changes in unit labour costs in a few Asian countries in recent years, suggests that many of them are already performing the trick--most spectacularly China, where unit labour costs have been falling by 12% a year even while real wages have been rising. [Note: The chart showed that the unite labour costs in China, on the average, had drop 11.7% in 1991 compare to that of 1985; Hong Kong increased 0.9; Malaysia: 3.0; Thailand: 3.7; Singapore 5.4 and Philippines: 11.1. Sorry that I am unable to reproduce the chart for CCF. --cq.] Asian countries vary a lot in their apparent capacity to keep productivity growth going. Thailand, for example, grew impressively fast during the 1980s by playing on its low-wage advantage, but it has invested relatively little in education. The most transitory competitive advantage in the world today is low wages (already, Hong Kong factory owners in China's next-door Guangdong province are complaining and thinking about moving to cheaper interior provinces). So Thailand faces trouble, whereas Malaysia, which grew slower than Thailand in the 1980s but invested much more in education, should be about to push ahead. Other shiftings of gear may be coming. Singapore has invested heavily in both physical and human capital but has been (even in its own eyes) disturbingly mediocre at productivity growth. Vietnam, by contrast, which has had probably negative TFP growth but boasts one of the best educated populations in South-East Asia (and, in 1992, thanks to sound- money policies, the world's strongest currency against the dollar) can expect a big productivity boom once the outside world begins investing in and buying from Vietnam. Overall, however, how fast Asia can continue to grow will be mainly decided by two things. The first is Asian politics, the subject of a later article. The other is the fate of Asia's trade with the West. The rich world's demand for Asian manufactures has given an enormous boost to East Asia and could do even more. But trade by Asians among themselves has been growing so fast (see chart 4 [Note: The Chart showed that the intra-Asian trade increased from $11.8bn in 1980 to $18.1bn in 1992.--cq.]) that it now exceeds Asia's trade with America, and is strong enough to have offset the West's recently sluggish demand. This has had a few arresting results. There is little doubt, for example, that China's big purchases of Japanese steel and South Korean cars in 1992-93 kept those industries from crashing. Some in Asia have begun speculating that their continent (including Japan, of course) can shrug off a long stretch of sluggish western growth, or even a rise in western protectionism. That is as yet improbable even in narrow financial terms. Much of intra-Asian trade is in sub-units of products for which the final demand is in the West. Hong Kong proves the point. Its economy has become so integrated with China's that perhaps a quarter of Hong Kong's currency is circulating in China, and China is home to three-quarters of the manufacturing workers employed by Hong Kong firms. China is by far Hong Kong's biggest trading partner. Yet according to a calculation by GT Management (Asia), a Hong Kong fund-management firm, as late as 1991 more than half of Hong Kong's trade depended in the end on demand in the United States because most of Hong Kong's China trade involved processing for re-exports to America. The case is even stronger for Asia as a whole. More significantly, Asians (save, in some cases, the Japanese) can not yet transfer to each other the best technology and ideas the world has to offer. A shrinkage of world trade, especially if it is brought on by more western protectionism, would cut the flow to Asia of ideas, technology and practices from the West. That would pose the biggest single threat to sustained productivity growth in Asia. Even so, the odds now are that this would slow Asia but not stop it. As Lee Kuan Yew, Singapore's former prime minister, points out, Asia has built up too much momentum: "The technology is available, the capital is available, the markets will be created. It will take a much longer time if they cannot hitch a ride on the American market or the European market, but they are still going to get there." How Asia gets there will, with apologies to Indonesia's 190m people, be mostly influenced by what happens next with China's 1.2 billion people and India's 900m. ---------------------------------------------------------------------------- 4. Measuring Up The Giants...............................................118 ---------------------------------------------------------------------------- FROM 1950 to the late 1970s China and India pursued similar wrong- headed policies of self-sufficiency, import substitution and government control of the economy--though China, whose government was more brutal, was better at generating investible surpluses in the countryside, creating full employment there and equalising incomes by chopping off landlords' heads. This gave China better social indicators than India (see tables) but did little to lay the groundwork for self-perpetuating economic growth. China's growth before 1979 came entirely from investing more in capital and education, not at all from improved efficiency. The Indians for their part were so inefficient that TFP growth in manufacturing from 1960 to 1985 was negative by 0.4% a year. =========================================================================== Chinese Lessons --------------------------------------------------------------------------- GDP per Life expectancy Under-five Adult literacy School en- head, $ at birth mortality* rate, % rolment, % ---------- --------------- ------------ ---------------- ------------ 1965 1991 1960 1990 1960 1989 1970 1990 1970 1987 --------------------------------------------------------------------------- India 90 330 47 58 282 145 34 48 49 66 China 85 370 43 69 203 43 na 73 66 83 --------------------------------------------------------------------------- Source: World Bank *per thousand =========================================================================== After China switched in 1978 to a policy of gradually introducing market mechanisms and rather quickly introducing foreign firms to its economy, efficiency shot up. TFP growth in agriculture was negative from 1955 to 1978, then exploded in the next half-decade by 6% a year. In the Chinese economy as a whole TFP growth in the first decade of reform was 3- 4% a year (by comparison France, which had the rich world's fastest productivity growth in the quarter century after 1960, managed a yearly rate of 1.7%). India's much more cautious reforms of the early 1980s caused its economic efficiency to perk up a little, but it was only in 1991 that India snapped the straps on its Fabian-socialist straitjacket and acknowledged that free markets and free trade were the right way forward. Now an interesting race has begun. China's and India's strengths and weaknesses are mirror images of each other. At its disposal China has the immense financial and managerial resources of over seas Chinese businessmen --in Hong Kong, Taiwan, South-East Asia and even North America; India has its "non-resident Indians", but too often they are lawyers and doctors who have neither the skills nor the inclination to invest back home. Self confident China and its self-promoting regional politicians suck in foreign investment; still-defensive Indian bureaucrats use their considerable blocking powers to thwart government policy and keep foreigners out. China has savings (and investment) rates of around 35% of GDP, compared with Indian rates only two-thirds as much. China's rulers still run enough of a police state that they can break any factory-floor militancy and keep wage rises below productivity increases. India's public sector unions are so strong that they continue to ensure that their lazy members command two or three times the country's average manufacturing wage. On the other hand, India has the outlines of a modern financial system, with stock markets boasting 6,000 listed companies, and companies and banks that have at least rudimentary balance sheets. China has barely the idea of a financial system. India has courts, and lawyers, who know at least in theory that not all commercial disputes are before them because a foreigner has done wrong; China does not. India has a government so successfully committed to macroeconomic stabilisation that within two years of the start of its reforms inflation was reduced to single figures and the currency made convertible. China has lost the macroeconomic conservatism that used to distinguish it: it now runs huge fiscal deficits and its ability to control the money supply is in doubt. China also runs multiple foreign-exchange rates for its inconvertible currency, though it promises to make the yuan convertible in the mid-1990s. India is starting out far behind China; not only did it begin reforming almost 13 years after the Chinese, even before that it had lagged China in creating the first essential condition for industrialisation, full employment in the countryside. India's backwardness could now prove an advantage because, as China itself showed in its first half-decade of reform, explosive productivity growth can be expected when an economy's restraints are first released. But India has yet to show that its political system is capable of taking on the privileged interests--mainly rich farmers and public-sector workers--that oppose reform. China's political problem is the opposite. It can handle the only real enemies of reform--workers in the state-owned industrial enterprises --by a combination of bribes and skull-cracking. The trouble for China's leadership is the "friends" of reform throughout the country, the provincial and local leaders who think reform means freedom from all economic controls direct or indirect. The difficulty is compounded by China's strategy of letting some places, mainly along the coast, have more economic freedom than others. Sensible though this policy is--1.2 billion people in a continent-sized country cannot all be lifted up at once--it runs the risk of creating internal antagonisms, especially when poorer provinces are enjoying national inflation rates but not coastal growth rates. Weighing all this up, it seems likely that China will grow considerably faster than India for the next decade, though with far more hair-raising lurches in both its politics and its economic performance. China's great strength is its deep and pervasive commitment to economic growth as the supreme aim of national policy. Its great weakness is the primitive institutional tools available to it for executing the aim; the question is whether the thirst for growth is so strong that it will lead China to create the institutions that will eventually be needed to satisfy it. India is the opposite. If it can become as fervent as China is about economic growth and put aside such distractions as xenophobia, suspicion of business and religious warfare, India has the institutional skeleton on which, after 2000, it might begin to add economic muscle faster than China then can. Big foreign investors are going to have to make up their own minds about where to put their emphasis. Not because China and India cannot both do well--indeed for most big companies both of them will be must markets-- but because the two giants are extraordinarily difficult and utterly different markets that few companies will have the managerial resources to tackle simultaneously. And thanks to an imminent change in the way Asian economic growth is generated, working out how to tackle Asia is about to become many businessmen's most urgent job. (To Be Continued) (FWD by: & a CND reader from The Economist, 10/30/1993) +=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=++ + Executive Editors: Changqing Yang Executive Moderator: Tong Sheng + +--------------------------------------------------------------------------+ + For subscription: mail "SUB CHINA-NT Your-First-Name Your-Last-Name" + + to LISTSERV@UGA (bitnet) or listserv@uga.cc.uga.edu (internet) + + For back issues of CCF: + + anonymous ftp to cnd.org[132.249.229.100]:pub/community/CCF + + For contribution and inquiry: mail to ccf-editor@ifcss.org + +=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=++