Asia's Reemergence

Steven Radelet and Jeffrey Sachs

From Foreign Affairs, November/ December 1997

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Summary:  The West accounts for a disproportionate share of world income because it has already passed through capitalist development. Now that Asia is becoming capitalist, it will return to the center of the world economy, where it was in the early nineteenth century. Current currency crises are only blips on the screen. Asia's miracle transpired not because of shrewd industrial policy or great leaps forward but because countries attracted foreign investment and moved up the development ladder one rung at a time. But ahead lies the challenge, particularly for India and China, of establishing modern governments.

Steven Radelet is an Institute Associate at the Harvard Institute for International Development. Jeffrey Sachs is the Director of HIID and Galen L. Stone Professor of International Trade at Harvard University.

CAPITALISM LEAVES ITS WESTERN ENCLAVE

Beginning in the early 1500s, for more than four centuries now, the West has been ascendant in the world economy. With but 14 percent of the world's population in 1820, Western Europe and four colonial offshoots of Great Britain (Australia, Canada, New Zealand, and the United States) had already achieved around 25 percent of world income. By 1950, after a century and a half of Western industrialization, their income share had soared to 56 percent, while their population share hovered around 17 percent. Asia, with 66 percent of the world's population, had a meager 19 percent of world income, compared with 58 percent in 1820. In 1950, however, one of the great changes of modern history began, with the rapid growth of many Asian economies. By 1992, fueled by high growth rates, Asia's share of world income had risen to 33 percent. This tidal shift is likely to continue, with Asia reemerging by the early 21st century as the world's center of economic activity.

Asia's sudden ascent has become something of a Rorschach test for the economics profession and the foreign policy community. For some, Asia's rapid growth is an economic miracle that calls for a reevaluation of Western economic strategies. For others, such as the MIT economist Paul Krugman, writing in the November/December 1994 Foreign Affairs, the rapid growth has looked hollow. Not only has there been no miracle, but there was reason to believe that Asian growth might display weaknesses similar to those of the period of rapid Soviet growth in the 1950s and 1960s. These doubts seemed to find support in the sudden, sharp currency crises that gripped several high-flying Southeast Asian economies (especially Indonesia, Malaysia, the Philippines, and Thailand) in mid-1997. Even money managers formerly enamored of the region decried underlying institutional weaknesses, including corruption, nepotism, populist policies, and insufficient banking regulation.

The Southeast Asian currency crises of 1997 are not a sign of the end of Asian growth but rather a recurring -- if difficult to predict -- pattern of financial instability that often accompanies rapid economic growth. Just as Indonesia, Malaysia, and Korea rapidly recovered from financial crises in the 1970s and 1980s, so the Asian economies are likely to resume rapid growth within two to three years. In the long term, growth will continue because most of Asia has adopted capitalism as the organizing basis of economic life and become deeply integrated into the global economy. This has been true for more than a century in Japan, since the Meiji Restoration of 1868. Korea and Taiwan adopted essentially capitalist development strategies in the 1960s, while most of Southeast Asia made similar choices in the 1970s. Even China in recent years can be considered to have adopted an essentially capitalist development model, despite continued Communist Party rule and a state sector that still employs around 18 percent of the labor force. India began turning away from a milder version of socialism in the early 1990s, though Indian domestic ...

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