The Myth of Asia's Miracle

Paul Krugman

From Foreign Affairs, November/December 1994

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Summary:  Pundits point to the awesome growth of East Asia's economies and fret that the West cannot compete. But there is nothing miraculous about the successes of Asia's "tigers." Their rise was fueled by mobilizing resources - increasing inputs of machinery, infrastructure, and education - just like that of the now-derided Soviet economy. Indeed, Singapore's boom is the virtual economic twin of Stalin's U.S.S.R. The growth rates of the newly industrialized countries of East Asia will also slow down. The lesson here for Western policymakers is that sustained growth requires efficiency gains, which come from making painful choices.

Paul Krugman is Professor of Economics at Stanford University. His most recent book is Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations.

A CAUTIONARY FABLE

Once upon a time, Western opinion leaders found themselves both impressed and frightened by the extraordinary growth rates achieved by a set of Eastern economies. Although those economies were still substantially poorer and smaller than those of the West, the speed with which they had transformed themselves from peasant societies into industrial powerhouses, their continuing ability to achieve growth rates several times higher than the advanced nations, and their increasing ability to challenge or even surpass American and European technology in certain areas seemed to call into question the dominance not only of Western power but of Western ideology. The leaders of those nations did not share our faith in free markets or unlimited civil liberties. They asserted with increasing self-confidence that their system was superior: societies that accepted strong, even authoritarian governments and were willing to limit individual liberties in the interest of the common good, take charge of their economies, and sacrifice short-run consumer interests for the sake of long-run growth would eventually outperform the increasingly chaotic societies of the West. And a growing minority of Western intellectuals agreed.

The gap between Western and Eastern economic performance eventually became a political issue. The Democrats recaptured the White House under the leadership of a young, energetic new president who pledged to "get the country moving again" - a pledge that, to him and his closest advisers, meant accelerating America's economic growth to meet the Eastern challenge.

The time, of course, was the early 1960s. The dynamic young president was John F. Kennedy. The technological feats that so alarmed the West were the launch of Sputnik and the early Soviet lead in space. And the rapidly growing Eastern economies were those of the Soviet Union and its satellite nations.

While the growth of communist economies was the subject of innumerable alarmist books and polemical articles in the 1950s, some economists who looked seriously at the roots of that growth were putting together a picture that differed substantially from most popular assumptions. Communist growth rates were certainly impressive, but not magical. The rapid growth in output could be fully explained by rapid growth in inputs: expansion of employment, increases in education levels, and, above all, massive investment in physical capital. Once those inputs were taken into account, the growth in output was unsurprising - or, to put it differently, the big surprise about Soviet growth was that when closely examined it posed no mystery.

This economic analysis had two crucial implications. First, most of the speculation about the superiority of the communist system - including the popular view that Western economies could painlessly accelerate their own growth by borrowing some aspects of that system - was off base. Rapid Soviet economic growth was based entirely on one attribute: the willingness to save, to sacrifice current consumption for the sake of future production. The communist example offered no hint of a free lunch.

Second, the economic analysis of communist countries' growth implied some future limits to their industrial ...

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