The miracle trap

Over the holidays, I read an interview in which a leading global intellectual spoke in glowing terms of the great miracle by which hundreds of millions of Chinese, Indians and other Asians have been and are being lifted out of poverty by the superior economic policies of their governments.

This is by now an oft repeated tale. We are told again and again how China has enjoyed three decades of economic growth in excess of 10 percent annually and how India and now others are decoupling from the west and establishing their own independent growth dynamic. Indeed, in the interview I read, the intellectual being interviewed contrasted in a negative way the present crises of the EU and of the U.S. fiscal cliff with the on-going growth phenomena in Asia. He particularly emphasized that Asia will soon surpass Europe and America as the center and most dynamic part of the world economy.

We are all aware, of course, of these trends and we all easily use and accept the language of miracles and wonders. Yet, as I read the interview, it occurred to me that we may well be greatly overstating what is happening and even misinterpreting the true significance of events.

What I mean is this. These economic "miracles" have now been occurring with regularity and for some time. First there was Germany’s "Wirtschaft Wunder" recovery from war time devastation. Then there was the Japanese economic "miracle" proclaimed in 1964 in a cover story by the Economist. There followed the "miracles" of the Asian Tigers (South Korea, Taiwan, Hong Kong, Singapore, Thailand, Malaysia) in the 1970s and 1980s. These all had pretty much the same ingredients and the formula was largely same in all cases. Domestic consumption was suppressed while savings and investment were strongly promoted. Investment was channeled into mass production industries characterized by economies of scale and rapid increases in productivity. To justify such large production facilities and investments,  exports were emphasized and currencies were kept undervalued in order to assure trade surpluses. In the cases of Germany, Japan, Korea, and Taiwan, U.S. aid was initially important as was U.S. military procurement. In all cases, a relatively open U.S. market and the readiness of the United States to accumulate current account deficits was of critical importance.

Given this history and the ready availability of the ingredients, I wonder if the surprising part is not so much the existence of the current Chinese, Indian, and other Asian "miracles" as their rather late development.  I mean, if Japan could have a miracle in 1964 and Korea and Taiwan could have miracles in the 1970s-80s, why couldn’t China, India, and others have done the same?

The answer is that they could have. But they were locked into ideological and other political mindsets and commitments that prevented them from easily taking what seemed the obviously most potentially successful course. Over the past twenty-thirty years, in response to necessity and new, pragmatic leadership they have gotten on their present course. The question now is whether they can stay on course and change course in accord with changing circumstances generated by their own success.

The truth is that all the old miracles tended to become unsustainable. They resulted in over-investment, excess capacity, trade frictions, and declining growth rates. Some countries like Singapore managed to adjust and change course in line with changing circumstances, others like Japan have not been able so easily to do so.

That will be the test for China, India, Brazil, Indonesia, and other current miracle countries. Will they be able to sustain growth as the conditions of their initial success change? That will be the real miracle story.