Copyright 1995 Council on Foreign Relations, Inc.
Foreign Affairs

1995, Spring

LENGTH: 680 words


BYLINE: Paul Krugman is Professor of Economics, Stanford University

Paul Krugman replies:

SYNOPSIS: Defends famous criticism of Asia's miracle by restating basic criticism of input vs. productivity increases

I am glad to see that "The Myth of Asia's Miracle" stirred up so much reaction, even if some readers took offense at my deliberately provocative style. After all, my main purpose in writing the article was to shake up what I feared was becoming a closed circle of intellectual complacency whose logic went as follows: "We know that Asian-style policies work because of the rapid growth those economies have achieved, and we know that this rapid growth will continue because those economies are following the right policies." Many people said the same thing about central planning and Soviet growth circa 1960. One need not believe that Asia will recapitulate the whole sad Soviet story to find that a useful caution.

Let me make three points on the substance of the argument. First, many correspondents complained that the "growth accounting" framework is too simplistic. Surely, however, it is always a good strategy to approach any issue by seeing how much one can explain with a minimalist hypothesis; only then should one turn to more complex explanations. My hypothesis is that the tigers' growth has been driven by inputs. Part of the point behind "The Myth of Asia's Miracle" is the principle of Occam's razor, which holds that one should use the simplest of competing explanations to explain the unknown. It is also, however, a matter of self-discipline: precisely because sweeping hypotheses about policy or culture are more fun to talk about than drab accounting exercises, one needs to make a special effort to give boring explanations their due.

And the surprising thing about Asian growth is just how much the boring approaches explain. While several letters mention the World Bank study, which found somewhat more evidence of efficiency growth in East Asia than did the work of Alwyn Young or of Lawrence Lau and Jong-Il Kim, even that study does not remotely support the almost universally held view that the newly industrializing Asian nations are rapidly converging on Western levels of efficiency. Consider Ishrat Husain's useful letter, in which he compares "catchup" in efficiency as measured in total factor productivity. Which do you find more surprising: the World Bank's finding that Hong Kong, Taiwan, and Thailand have experienced some catchup, or the finding that South Korea "was essentially just keeping pace" and that Indonesia, Malaysia, and Singapore have actually fallen behind?

Given how much a minimalist story of input-driven growth -- that is, increased expenditure on capital goods and labor -- explains about Asian growth, one should be cautious about attributing long lists of additional virtues to the Asian economies. Frank Gibney writes of the "interlocking cooperation of free enterprise, government financial intervention, and a guidance-minded technocratic bureaucracy" as a key strength of Asian economies "that the managers of developed Western economies have yet to learn." But even the World Bank's numbers find no evidence of convergence on Western levels of efficiency in many developing Asian countries -- and, in particular, show little evidence of convergence in South Korea, which Gibney regards as the quintessential Asian model. (It will, by the way, be news to many people, not least Lee Kuan Yew, that Singapore is a straw man whose experience offers no lessons about Asian development.) On what basis, then, does Gibney assert that this system of "interlocking cooperation" is such a good thing?

Many Westerners believe that Asian economic growth carries obvious lessons for our own societies. Strangely, however, the content of those lessons lies in the eye of the beholder. To free marketeers, Asia shows the power of the free market; to industrial policy advocates, it shows the effectiveness of industrial policy; to the authority-minded, it shows the virtues of authoritarianism. Personally, I do not find any of these lessons obvious. The only overwhelming lesson I see in Asian growth is that one way to get a lot of output is to use a lot of inputs.