From @ubvm.cc.buffalo.edu:owner-china-nt@UGA.CC.UGA.EDU Sat Nov 20 22:09:01 1993 Reply-To: YANG Chang-Qing Sender: China-Net Subject: CCF #9319 (Weekend Edition: Asia Survey, Part II) Comments: To: china-nt@uga.cc.uga.edu 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 21, 1993 (Issue No. 9319) Weekend Edition: Asia Survey (II) +=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+= 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 II)..........The Economist.......674 5. Buyers And Builders.............................................287 6. Paying The Piper................................................130 7. The Dilemma Of Democracy........................................183 8. Hope Racing Fear................................................ 74 ===========***==========***==========**==========***==========***=========== From The Editor ---------------------------------------------------------------------------- In this issue of Weekend Edition, CCF carries the second half of the Asia Survey from The Economist (10/30/93). In the second half you will find some intriguing questions for the future of Asia's continuing development. You will find the author's view on how democracy works. Especially, you will find that hope is high, is racing fears. ---------------------------------------------------------------------------- 5. Buyers And Builders...................................................283 ---------------------------------------------------------------------------- SOME people say that the coming industrialisation of Asia will end in a trade war with the West. The rich world, after all, is not about to start buying from the Chinese alone ten times the volume of exports it took from Japan when the Japanese had per capita incomes like present-day China's. The pessimists would have a point if the next phase of Asia's industrialisation were going to look like the first phase. It will not. For reasons mentioned before, exports will remain an indispensable ingredient for the success of up-and-coming Asians. But the shift of the main focus of growth from some islands and a peninsula on the periphery of Asia to densely populated behemoths on the continent itself will change both the sources of growth and the way foreign businessmen need to think about it. In China, India and Indonesia there is going to be little of the artificial repression of consumer demand that Japan and South Korea resorted to in their early development. Asia as a whole is now rich enough to be on the edge of an enormous consumer boom. That, together with a construction boom, is likely to be the main driving force of the Asian economies in the next few years. It would be pretty foolish of the rich world, though certainly not past it, to start a trade war against countries whose rising import hunger should provide the West (particularly America) with a quarter or more of its total economic growth in the next few years. Consumer demand has begun growing in poor Asia well before the widespread urbanisation of the continent that full industrialisation is going to bring. The technology of distribution, the density of Asia's rural populations and the underestimates of rural purchasing power in official statistics all make for rural consumer markets far bigger and more accessible than most people would guess. It is possible these days to wander into valleys in Indonesia's remote Irian Jaya and find stone-age tribesmen, wearing nothing but penis sheaths, peering at packages of Panadol on display in the village shop. Even in rural India 80% of villagers now watch television, though mostly communally. Hindustan Lever, in India was one of the first consumer- products companies to realise a decade ago that soap powder packaged in one- ounce sachets instead of one-kilo boxes could profitably be sold in rural Asian markets. In densely populated Asia these markets can be a salesman's dream. Java, Indonesia's main island, has 115m people and a population density of nearly 800 per square kilometre, compared with Britain's 240 and Japan's 330. Java may be technically rural, but distribution costs there are at city levels. One Indonesian food group has no trouble earning an operating margin of 20% on the 450m packets of instant noodles it sells each month, most of them to rural food stalls. Yet it is in the cities that the big new Asian consumer markets will be found. Some of these cities do not exist yet. Asia's population densities are such that industrialisation will have to be carried out through a different sort of urbanisation than has happened in the rest of the world. Many quarter-industrialised Asian countries already have one or more cities of at least 10m. If these cities grew to capture Latin America- like concentrations of their countries' populations they would have numbers on the order of 50m, which seems improbable. If China, in particular, industrialises successfully, it is likely to do so through growing its "township and village enterprises" into world-class companies. Located today mostly in suburbs, they will in the future gather around them whole cities. It can happen fast. Shenzhen, China's "special economic zone" next to Hong Kong, was farm land 15 years ago. Today it is a city of 3m. Asian cities and their surroundings--rather than the Asian nation- states that sometimes contain these city regions and sometimes share them with other Asian countries ought to be the focus of anybody trying to do business in Asia. One reason is that only the foolhardy think of "cracking China", as distinct from Beijing, Shanghai, Dalian, Tianjin and other markets bite-sized enough that they can actually be swallowed. The second reason is that national boundaries in Asia tend to make for weak economic barriers. The biggest proof of this is the past decade's intense economic and financial intertwining among the ethnic Chinese businessmen of Hong Kong (formally a British colony), Taiwan (formally at war with China) and South-East Asia (independent countries usually with anti-Chinese politics) and of all of them with China itself, or rather the province or even the county that an overseas billionaire's great-grandpa emigrated from. This network is of such strength and depth that even the World Bank has now recognised it, making a guess that the "Chinese Economic Area", in which it politely but inaccurately adds to China itself only Hong Kong and Taiwan (sweeping under the carpet certain ethnic-Chinese dominated cities in South-East Asia), will in 2002 have a nominal GDP of $2.5 trillion or, adjusted for purchasing power, $9.8 trillion, a little bigger than America's is likely to be by then. The industrial and financial assets that will then be owned by the overseas Chinese network are incalculable but will be gigantic: at least close to Japan's assets, and probably bigger. The other main investors in developing Asia will be America and Japan. Companies in both countries have sharply redirected their foreign direct-investment flows to Asia. Between 1989 and 1992 American FDI in Asia rose by 120%, more than twice the rate of increase for the rest of the world. The reorientation is perfectly understandable. A survey of Japanese multinationals, for example, found that 80% of their investments in Asia had become profitable within two years, compared with 20% of those in America. SUPER-HAVES, HAVE-SOMES AND NEAR-HAVES Anybody concentrating on, say, the 15 biggest cities in Asia outside Japan is seeing an eye-popping expansion of sales. The shops along Shanghai's main retail street, Nanjing Road, are open 12 hours a day, almost every day of the year. Jardine Fleming, a Hong Kong stockbroker, reckons that on an average day 1.5m people come to Nanjing Road and spend a total of $50m buying things there. Bandai, a Japanese toy maker, says Japanese parents spend 30,000 yens ($300) on toys for each of their children each year; it thinks the Chinese who buy toys spend l0,000 yens, and expects its Chinese business to be bigger than its Japanese business within ten years. How can such things happen when Chinese incomes, on the most generous assumption, are no more than one-twentieth as big as American or Japanese incomes? Chart 8 gives the main answer. It is based on an analysis by GT Management (Asia) of car sales in Malaysia, though the pattern of demand for any consumer good looks the same. Few households with incomes below a given level buy cars, but large numbers of households suddenly do so when their incomes surpass that level. Because incomes are unequally distributed, both between regions and between households, a smallish increase in average per capita income can lead to much larger increases in the number of households, in particular places, with incomes above the threshold for buying the good in question. In the Malaysian car example, a 40% rise in incomes between 1987 and 1991 was accompanied by a 290% rise in car sales, mostly in Kuala Lumpur, the capital. In industry after industry over the next few years, there will be a sequence of explosions of consumer demand in city after Asian city. What will these explosions add up to altogether? It depends on the business, on the pattern of income growth and on consumer tastes. In private, Motorola, an American telecoms company has guessed that by 1997 China alone will account for half of world demand for electronic pagers. Carrier, an American maker of air conditioners whose sales in Asia have tripled since 1986 to about $1 billion now, thinks that by 2000 Asia may account for half its sales, up from 5% in 1970. Carrier is focusing its efforts on 10-15 Asian "mega-cities". In 2000 Delhi and Bangkok alone could be buying more of Carrier's products than all of Europe. Yes, but it's hotter in Asia. What about something everybody likes, cars? Kenneth Courtis, Deutsche Bank's chief economist in Tokyo, reckons that non-Japanese Asia will account for two-thirds of the worldwide increase in car sales this decade. He expects 12-16 car factories to be built in Asia in the 1990s, each with an average annual capacity of 200,000 cars. He reckons ten of these factories will be Japanese. Japanese firms sold 27,000 cars in China last year. Mr. Courtis reckons that, by 1997, the Japanese will be selling 550,000 there. Michael Morris, with Pacific Kim Consulting Group in Singapore, has come up with probably the most useful way to think about Asian consumer markets. Ten years ago the poorer Asian countries generally had a thin layer of "haves" and a thick one of "have-nots". The haves included both an extremely rich elite--superstar overseas Chinese businessmen, corrupt politicians' and generals' families and so on--and a "non-middle-class": the more modest members of the overseas Chinese business tribe and senior bureaucrats, who had middle-class incomes but lacked middle-class ideas. They consumed either traditional items or, rarely, joined the true elite in buying frivolities like cognac and Mercedes cars. The have-nots, just off the farm, perhaps bought soap but that was about it. Nor did they usually expect that after a few years they would be buying more than that. Asia's stupendous economic growth in the 1980s changed all this. Something resembling a western pattern has emerged. Now there are, at the top, the "super-haves", the old elite plus those who made it big in the 1980s. These people, with annual household incomes above $30,000 in today's dollars, may account for 7m-8m of non-Japanese Asia's households today; Mr. Morris expects the number at least to double by 2000 (in terms of income in constant dollars). The second group, 'have-somes", with household incomes above $18,000, have more typical middle-class tastes and hopes: they want to buy houses, cars and consumer durables. With 14m-15m households now, they could amount to 75m in 2000. By then there will also be at least 150m "near-have" households: regularly buying shampoo and even televisions, and with every expectation of moving up from there. Assuming four people per household, you thus have Asia's 1 billion consumers in 2000 and its embryonic (see later article) middle class. Appealing to them will take large resources and a lot of skill. Mr. Morris thinks American and European retailers could have a big advantage over the Japanese because the new Asian consumers will be cost-conscious, looking for good value rather than a fancy brand. But Asia's cultural variety has to be mastered. India already has a half-dozen dialect-based satellite television channels. The Chinese are a distinct audience and so are the Malays. Some westerners have an early grasp of what is needed. Shortly after buying a majority stake in Star TV, a Hong Kong-based pan-Asian satellite network, Rupert Murdoch announced that it would be split into separate divisions for Chinese, Indian and Indonesian operations. BRICKS, MORTAR AND FIBRE-OPTICS Reaching the consumers is going to be hard, because the roads, airports, ports, telephone lines and power plants needed to support the next burst of industrial growth and consumer spending are not there. The process of building them should provide the second great Asian business opportunity of the next few years. It is impossible to get a consistent or credible answer to the question of how much Asia is likely to spend in all on capital investment and infrastructure between now and 2000. HG Asia, a Hong Kong stockbroker, guesses that East Asia excluding Japan and China will have spent about $900 billion in current dollars on infrastructure between 1992 and 2000. Japan's Long-Term Credit Bank has guessed that non-Japanese Asia will spend $1 trillion on transport alone in the coming decade. Many of the proposed projects will, of course, never make it out of bureaucrats' briefing books, let alone off engineers' drawing boards. Taiwan has at last admitted that its much-trumpeted $300 billion-plus development programme for 1991-96 will end up having spent no such sum, at least not in those five years-- understandably, since each year's spending at that rate would have amounted to around a third of the island's GDP in 1990. Yet even cautious estimates of what Asia is likely to spend on capital formation are staggering. In 1990 the capital spending of East Asian governments as a share of GDP was nearly 5%. That is already more than twice the share in Europe or America but now may well double. Recall that throughout the early chapters of the East Asian success stories, the public share of total capital investment was, at about a third, unusually low. It feels instinctively right to anyone who has sat for hours in Bangkok traffic jams, tried to book a seat on a flight into China, or tried to get electricity or a telephone line installed almost anywhere in poor Asia that public investment should now rise. The change will shift world demand for all sorts of capital goods and services. Les McCraw, the head of Fluor Daniel, a Californian firm that specialises in building large refineries, chemical plants and consumer- goods factories, says that of the $15 billion of back orders Fluor had in the middle of this year 40% were for projects outside America. Mr. McCraw expects his order book five years from now to be 60% non-American. Some 80% of Fluor's growth will come from outside the United States, and of that Asia will account for well over half--or in other words roughly half of the company's total growth in orders. Or have a look at Table 9, from Hong Kong's Political and Economic Risk Consultancy, on Asia's demand for telephone switching capacity in 1992 -97. Asia is going to be installing the equivalent of Japan's entire present switching capacity and of two-fifths of America's. China will be adding as many lines as America does in these years, and India more than Japan does. As a whole Asia's purchases should equal those of the OECD excluding Germany. The story is similar in electricity-generating equipment, for which Asia will be accounting for more than a third of world demand. By one calculation Asia must add some 160,000 megawatts of capacity between now and 1998--or more than three times Japan's present capacity--simply to keep from falling even further behind demand than it already is. China alone, already the world's fourth biggest generator of electricity, plans to add 15,000 megawatts of capacity every year for a decade, and India 6,000 MW every year in 1992-97. =========================================================================== DON'T RING US --------------------------------------------------------------------------- Asian telecommunications 1992 1997 forecast --------------------- -------------------------------- Lines Lines per Lines Lines per m 100 people m 100 people --------------------------------------------------------------------------- Australia 8.3 49.0 9.6 55.0 China 12.0 l.0 30.0 2.4 Hong Kong 2.8 47.0 3.9 64.0 India 5.0 0.6 17.0 2.0 Indonesia 1.5 0.8 6.5 3.3 Malaysia 2.1 11.0 4.9 24.0 New Zealand 1.5 43.0 1.7 49.0 Pakistan 1.0 0.8 1.6 1.3 Philippines 0.8 1.3 1.8 2.7 Singapore 1.1 41.0 1.6 56.0 South Korea 16.0 35.0 21.0 45.0 Taiwan 7.0 35.0 9.2 45.0 Thailand l.5 2.7 4.5 9.0 Total Asia/ 60.6 2.3 113.3 4.2 Pacific ============================================================================ Then there are Asian airports, ten already begun with another ten likely to follow before the decade is out, and aircraft. This year China is expected to account for almost a sixth of the world's purchases of passenger aircraft. All told, aircraft makers expect Asia to buy l,000 passenger aircraft, spending $40 billion-50 billion, between now and 1998. One thing to watch will be how extensively and intelligently Asia relies on private companies to build and operate infrastructure. India has been urging western companies to come in and build power plants, but recalcitrant bureaucrats have so far managed to strangle the idea with red tape. This summer Thailand sowed doubts in investors' minds by apparently trying to back out of the terms of a toll-road contract with a Japanese-led consortium. China, however, gets full marks from Gordon Wu, a Hong Kong developer who is building roads, bridges and power plants on the mainland in exchange for the right to develop adjacent land. A more intriguing question is how Asia's infrastructure, and indeed the next stage of its whole industrial push, is going to be financed. --------------------------------------------------------------------------- 6. Paying The Piper.....................................................130 --------------------------------------------------------------------------- FOR all the breath taking changes in Asia over the past 30 years, the continent's financial systems have remained mostly backward. That is about to be reversed. Asia cannot pay in the old way for the investments that will be required in its next round of growth. Rich foreigners will probably be willing to make up the difference, but they will need a much revised set of Asian financial instruments and institutions if they are to pitch in as much as they would like. With a few exceptions such as Hong Kong and Thailand, where banking and finance have been much freer, Asian finance has been of a pattern. High savings rates (sometimes encouraged or even forced by the government) bring a quick financial "deepening"--meaning that the ratio of the broad money supply to GDP rises rapidly to rich-country levels. An overwhelming portion of the savings at first, and even much of it later on, is kept in bank deposits that yield the saver a small but usually positive rate of return. The government often owns or heavily regulates the banks. Lending rates are controlled along with deposit rates, in part to keep spreads narrow and thus ensure that as much of the savings as possible goes into investment. Loan-rate regulation also works to deliver mildly negative real interest rates to corporate borrowers favoured by the government, such as exporters. The government intervenes in lending decisions in other ways too. It sets up development banks to make loans to favoured industries or companies, or for social purposes like housing. In the case of deposits under its own banks' control, the government can simply order development loans to be made. In the early days of Japan's industrialisation, for example, as much as 20-40% of household savings passed through the postal savings system--the world's biggest deposit-taking institution--and into bodies whose express purpose was to make development loans in line with government policy. The banks' influence on the running of big industrial firms has been enhanced by the fact that most outside finance for these firms has come from bank loans rather than capital markets. In the East Asian countries for which figures are available, in 1970-90 debt and equity issues each provided on average less than 10% of total financing for industrial firms, compared with 40-50% from bank loans. There is plenty of dispute about whether and to what degree this system has helped Asia's growth, but it is in any event beginning to crack under several kinds of strain. In the more advanced economies, Japan and South Korea in particular, the toll on bank balance sheets and economic efficiency is becoming too high, and foreign pressure for a more open system is increasing (Korea, for example, wants to join the OECD in 1996 and will have to drop its capital controls and exchange-rate manipulation to get into the club). In less developed places the imperative of change is even stronger. China and India have even more extreme versions of the Japanese system, with more government control and far worse bank balance sheets. If the two giants do not radically change their methods of banking and finance, they risk wrecking their whole economic reform programmes. Most significant of all, however, is the likelihood that developing Asia will no longer be able to finance its growth on its own. For at least a decade Asia's investment rates, high though they were, have normally been exceeded by its savings rates. The Hong Kong office of CS First Boston, an investment bank, calculates that in 1987-92 the non-Japanese countries of East Asia saved a total of $95 billion more than they invested. CS First Boston guesses that essential infrastructure spending in 1993-98 will be so huge that these same countries will be investing $150 billion more than they save (and probably running a current account deficit in that range as well). Where will Asia get the capital inflows it needs? SHANGHAI, HO One source will undoubtedly be increased foreign direct investment, which is being actively sought throughout Asia and especially by China. Another is loans, both from governments and multilateral lenders and from banks. Western bankers will be only too happy to oblige. Consumer banking in Asia is extremely profitable, with wide spreads and low rates of default. Bankers are prepared to help out governments that will let them get a toe hold in domestic markets that could be huge. China has already let more than 30 foreign banks set up offices and will be expecting good terms when it needs to raise money for itself or its many industrial and financial arms. Yet it is through securities that most foreign money will be making its way to Asia. On both the supply and demand side the scope for expansion is enormous. At the end of March 1992 the non-Japanese countries of East Asia between them had outstanding a paltry $26.7 billion in international securities. Corporate bond issues are minimal. Asian equity markets are much bigger, but with the non-Japanese Asian share of gross world product likely to exceed 20% on a purchasing power basis by 2000. Asia's present 9% of world stock market capitalisation implies that Asian markets will explode in size at some point. In 1984 total Asian stock market capitalisation excluding Japan, China and India was $130 billion. In September this year the same Asian markets had a capitalisation of $1 trillion, a nominal increase of more than 25% a year. Between 1987 and 1992 Asia's share of world market capitalisation doubled. Using a couple of different methods, the Hong Kong office of Morgan Stanley, an investment bank, has projected non-Japanese Asian stock market capitalisation of between $3.3 trillion and $5.5 trillion by 2000. At the least, the odds are good that non-Japanese Asian stock markets by then will be bigger than Japan's market. Foreigners will be fuelling much of the expansion. Returns on Asian stock markets are high, though naturally they are riskier: between January 1988 and August 1992 Asian markets had an annualised monthly dollar return of more than l5.5%, compared with just over 12% for American stocks. A portfolio allocation of 60% American stocks and 40% Asian stocks would have brought annual returns 1.5 percentage points (or 12.5%) higher than an all-American portfolio at no increase in risk. But what will foreigners be able to buy? Of the $770 billion-worth of Asian stocks listed on the markets in June this year, only $255 billion was up for grabs by foreign investors. The pool of investible securities will be deepening. A lot more Asian corporate bonds will be issued in coming years. Privatisation of state companies could add enormously to available shares. One Jakarta fund manager reckons that the capitalisation of Indonesian state companies is around $100 billion; in June the capitalisation of the whole of the Jakarta exchange was $25 billion. The head of one American brokerage shrugs off the problem of Asia's financial depth. He expects the number of $1 billion plus Asian industrial firms to jump from 80 or so now to 200 in 2000 (in constant dollars). That, he says, will provide an ample flow of issues. And where will they be traded? All over Asia, and presumably in New York and Tokyo too. Yet a stock market does not make for a financial centre--as Taipei demonstrated in the late 1980s, when a casino-like market made it the world's busiest stock exchange on many days but did not even begin to turn it into a regional financial centre, let alone an international one. Seoul thinks it will replace Hong Kong as the region's second centre after Tokyo. With its continuing build-up of foreign bankers and brokers (and history in mind), some western brokers bet that another place will in the end outstrip them all, even Tokyo: Shanghai. That possibility, and many of the other economic ones considered in this survey, depends on how stable Asian politics proves to be. --------------------------------------------------------------------------- 7. The Dilemma Of Democracy.............................................183 --------------------------------------------------------------------------- KIPLING wrote that "Asia is not going to be civilised after the methods of the West. There is too much Asia and she is too old." It seems so thus far. But it is hard to see how Asians can develop any long-lasting immunity to the havoc that the economics and technologies of modernisation seem to work on politics and society. The first way Asia might go wrong is by succumbing to ethnic or religious strife of the kind that has ravaged ex-Yugoslavia and may do the same to the ex-Soviet Union. Asia's ethnic conflicts are ancient and deep, but all save one are not very worrying just now. The least worrying is the antagonism in South-East Asia between Chinese and Muslim. A generation ago Malays rioted against Chinese in Malaysia, and hundreds of thousands of Chinese were killed in Indonesia. But Islam in East Asia has historically been a more flexible creed than in its Middle Eastern cradle, and fast economic growth over the past 20 years has softened the edges further. Islamic identity is important in Malaysia (especially for anybody marketing there), but the new generation of Malay politicians is every bit as committed to economic growth as the Chinese are. In the first couple of decades of its bumiputra (or discriminatory pro-Malay) economic policy, the Malaysian government kept ethnic Chinese and Indians out of university places; so they emigrated. Malaysia has now quietly begun letting them slip into science and engineering places in local universities because the economy needs them. There are no complaints from the new generation of Malay businessmen, who have begun looking to the market rather than political patronage for contracts. Indonesia, though farther behind, is not much different: there, too, the Muslim establishment does not question the iron rule of economic modernisation. The worrying place on this score is India, but because of Hindus not Muslims. The Hindu-nationalist Bharatiya Janata Party came close to winning the previous general election, in 1991, and may well win the next one. The BJP has a rational wing that expresses anti-corruption, anti- sectarian and pro-business views. But the BJP is under the not-so-hidden spell of militant Hindu groups that are for business so long as it is Indian rather than foreign, and for anti-sectarianism so long as that means being anti-Muslim. These groups are proto-fascist. Hindus and Muslims are too mixed in India for a partition to be feasible, and many Muslims think that Hindu self-interest would lead a BJP government to cut off its lunatic fringe. Maybe, if it can. But why should racially charged questions like this be swaying governments in democratic India, when in racially charged Malaysia the rather undemocratic government is encouragingly being swayed ever more by economics? THE DOLLAR-BILL GAME It might be because of a flaw in democracy. This subject is taboo in the West, for an understandable reason: the only alternative to democracy in any westerner's memory is a horrible dictatorship that loots the country and brings war. In modern Asia it is as often as not the democrats who have looted and the authoritarians who have brought peace, prosperity and equality. Something called the dollar-bill game helps explain why. Suppose there is a dollar bill and three people who by majority vote can split it among themselves. The logical answer is equal shares for each. But it makes sense for A to say to B, since they have a majority between them, "I'll split it with you 50-50 and C gets nothing." C then says to B, "Look, I'll give you 55, and I'll take 45." A pipes up to C, "Well, I'll take 52 and give you 48 if you make the deal with me instead." C boldly says to B: "You're in danger of getting nothing, but I'm willing to give you 30 if you'll vote with me." It turns out that the game has no stable solution. In fact, the only thing the players can ever agree on is that there should be more than just one dollar at play. This is the world of special interest democratic politics. The problem is hardly unique to democracies, but it is becoming endemic in them. The political secret of Asia's success stories is to have made their governments fairly impervious to the kind of plea for favours-- which economists call "rent-seeking"--that modern democratic governments find it impossible to resist. This puts a new light on the sometime success of Asian industrial policies. In democracies, government interventions create lobbies that politicians have trouble antagonising; and once a dollar passes into the public domain, it is almost never taken away. Successful Asian governments did indeed grant favours. But if results (in the form of better competitiveness in the world economy) were not then forthcoming, the favours were ruthlessly retracted. In the late 1970s South Korea began a disastrous programme to build a heavy chemical industry; when it did not work, the policy was reversed and the industry had to make its own way. In an effort to move its economy up-market, Singapore decreed in the early 1980s that wages should suddenly go up fast. When the economy collapsed, the wage rises went with it. The Asian approach is not only more efficient, it has proven more egalitarian: it is the rare lobby in a democracy that wins government benefits for the poor rather than the privileged. These days you hear top advisers to China's "Communist" government say, "We must be careful to avoid the sort of generous social-welfare programmes that have led to such high unemployment in Europe." This anti- entitlement attitude points to the great political accomplishment of much of modern Asia: to have in power authoritarians whose monomaniacal aim is to make their countries' economies grow meaning to serve the whole nation's interest. Authoritarians without this aim are worse than elected politicians. With it they have consistently proved the better rulers in poor Asia. This is why many of these apparently unlovely regimes have been more stable than they looked, and may well remain so--provided they keep delivering the economic goods. UNDER THE SURFACE Yet as Asian countries move towards rich-world income levels, their appetite for multi-party politics seems to grow. In 1992 pro-democracy rioters took to Bangkok's streets and won the overthrow of a military regime. In 1993 South Korea got a new, democratically-elected president who began a thorough house-cleaning of the government; Japan changed government for the first time in two generations; and Taiwan's long-ruling party began cracking apart. These events may indeed herald a shift in Asia towards a more western form of politics. But they may instead mark merely a further softening of what some call Asia's "soft authoritarianism", or a further pluralisation of what others call Asia's "authoritarian pluralism". This process has been going on for a long time, mostly in cultural and social life. It is easy to forget that Taiwan and South Korea were under fairly harsh martial law until less than ten years ago, or that the degree of personal though not political freedom has expanded enormously in China's cities over the past decade. It is also easy to forget that the forms of democracy can exist without the content. Indian and Pakistani elections have not noticeably disturbed the ancient grip of powerful landlords on rural life in those countries; and one Indian snorts that the "rule of law" does not mean much in a country where the Supreme Court alone has a backlog of 1m cases that at present rates will take 325 years to clear. One who thinks Asia is not about to go the western way politically-- and has had the opportunity of close observation from running his own rich but extremely orderly city-state--is Singapore's Mr. Lee. About Japan's change of government he says: I do not see them becoming a fractious, contentious society like America, always debating and knocking each other down. That is not in their culture. They want growth and they want to get on with life. They are not interested in ideology as such, or in the theory of good government. They just know a good government and want a good government. Americans believe that out of contention, out of the clash of different ideas and ideals, you get good government. That view is not shared in Asia. And the reason it is not shared, in Mr. Lee's opinion, is that Asia's societies are still far from becoming middle class in the western sense. Technology now makes it possible to raise incomes very fast to rich-world levels: 30 or 40 years, compared with the 100 years it took for a country starting to modernise early last century. But it takes as long as ever to train a whole society to modernity, to educate people "until they are capable of critical judgment, absorbing information from the written word and applying a critical eye to it." South Korea, Taiwan and Singapore, Mr. Lee reckons, will need another 30 years (if they are lucky) to get to that stage. China, with 300m-400m semi-literate people, India (at least as many) and Indonesia could take 90 years. Yet well before then the socially corrosive effects of national wealth--the rise of unbridled individualism and the decline of the family-- will have had plenty of time to be felt. On this prospect, Asia's wisest old authoritarian can offer one hope plus the policy idea of staying away from the welfare state: If we follow the West in our social relations and family structures, we will be in deep trouble. In the West the Christian religion used to instil fear of punishment in hell or reward in heaven. Science and technology have eliminated that fear. So the controlling mechanism has gone awry. I am hoping that because Asian moral control is based on what is good in a secular this-world not a spiritual after- world, we will not lose our moral bearings. That's the first point. The second point is we should not substitute the state for the parents or the family. If you bring a child into the world in the West, the state caters for him. That's dangerous. If you bring a child into Asia, that's your personal responsibility. As long as our society remains structured in this traditional way, we will be different. We will not allow muggers to clonk you on the head and grab your belongings and leave you dying or dead on the streets. And when you are ill you will not be abandoned because your family are required by culture to look after you or suffer shame. Good luck. --------------------------------------------------------------------------- 8. Hope Racing Fear......................................................74 --------------------------------------------------------------------------- A CENTURY ago the world was in the middle of a 43-year-long Atlantic-centred golden age in which incomes rose faster than ever before and trade and investment flows reached shares of gross world product so high that they were not regained until the 1980s. The European countries that grew to greatness during this age, and benefited the most from it, put an end to it with two catastrophic wars that ruined two generations and took another two generations to recover from. There is a big danger that the Pacific-centred golden age on which the world is launched could end in equally awful Asian wars a couple of decades hence. The short-term threat of North Korea and its would-be nuclear bomb can probably be side-stepped, though it is unlikely that South Korea will get its wish and absorb the North gradually rather than after an East German-like collapse. After that the obvious threats to the peace in Asia disappear. The slower-acting but more unsettling possibilities include a revived and newly expansionist Russia and, in 20-30 years, the rise of India and especially China to great-power status. No countries with remotely their populations have ever burst on to the world stage, so it is hard to imagine what their doing so would mean. The danger would in one sense be much reduced if both China and India broke up into smaller pieces, but the civil wars that such a process would entail could cause even more instability in Asia than the existence of two well-armed, ambitious and self-confident giants in the neighbourhood. What seems likelier than a break-up of either China or India, and would help rather than harm both them and their neighbours, is a substantial devolution of power to smaller units within each state. China is already studying America's federal system as a possible model. Over the past 40 years the world's welfare has been significantly increased whenever the minds and energies of Asian leaders have been focused like a laser beam on economic growth, and scarily reduced when they have not been. Two conditions must be met if the happier state of affairs is to continue to prevail. The first is up to the West as a whole, and should come as no news to it. To borrow another formulation of Mr. Lee's, delivered to the American Congress in 1985, the most enduring lesson of history is that ambitious, growing countries can expand either by grabbing territory, people and resources, or by trading with other countries. The alternative to free trade is not just poverty, it is war. The second condition is up to the United States. For as far as the eye can see, the only credible way of maintaining a stable balance of power in Asia is for America to hold the scales. The United States is the only country with the power, the interests, the military means and the trust of enough of the concerned parties to be capable of doing this. It would require a line of thinking that Americans are uncomfortable with--that their country should act rather coldly, as Britain did in l9th century Europe, to back first one Asian country and then another to make sure none got too much stronger than the others. Why should America put itself out? For its own sake as much as Asia's. A superpower that cannot bother to guarantee the continuation of peace in a peaceful region that will probably be driving a significant share of its future economic growth is not much of a superpower. Nor is it perceptive about what will make for its long-term economic strength, which is competition and interaction with the most dynamic part of the world. If things go roughly right, a process has begun which will lead to Asia slowly absorbing--along with technology, management methods and goods --many of the values of the West. The West too will be learning from Asia --for instance, about the virtues of small pro-business governments and cheap but effective schools--and changing some of its ways. The most important early lesson from the new Asia ought to have a familiar ring in the West. Asia's successes have come through hard work, optimism, openness, a passion to learn, a willingness to change and a conviction that there are no free rides. These methods are not a threat to the West. They are what made the West in the first place. [Note from The Economist: This survey has drawn on the thoughts of many people, expressed sometimes in conversation and sometimes in published form. Among the published sources, the following books have been especially helpful: the World Bank, "The East Asian Miracle"; Estelle James and Gail Benjamin, "Public Policy and Private Education in Japan"; and Vaclav Smil, "China's Environmental Crisis". Reprints Reprints of this survey are available at US$3.50 each, plus tax in CA, DC, IL, MA, NJ, NY, VA, and GST in Canada. For classroom use or quantities over 25, please telephone for discount information. Please send your order with payment by cheque or money order to The Economist Newspaper Group, Inc., Reprints Department, 111 W 57th St., New York, NY 10019. Telephone (212) 541-5730. 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