All Commentary
Monday, July 1, 1996

How Real Is the Asian Economic Miracle?

Free-Market Reforms Spur Economic Growth

“Singapore grew through a mobilization of resources that would have done Stalin proud.”

—Paul Krugman,

“The Myth of Asia’s Miracle,”

Foreign Affairs

(November/December, 1994)

The post-war Asian economic miracle has come as a great shock to the economics profession. In my review of the top-ten textbooks (Economics on Trial, Irwin, 1993), few economists tell the wonders of Japanese prosperity and none reveals the secrets of the Four Tigers (Hong Kong, Singapore, Korea, and Taiwan) or the newly industrialized economies (Indonesia, Malaysia, and Thailand).

A desperate, starving, shattered Japan of 1945 was one of the poorest countries on earth. There were no skyscrapers, no wealthy banks, no automobile and electronics industries. Yet within a single human lifespan, Japan has become an economic superpower, ranking second behind the United States among the world’s richest nations.

Hong Kong has faced gigantic problems: six million people jammed into 400 square miles, with no oil or other natural resources, most of its water and food imported, and its trading partners thousands of miles away. Yet this small British colony has broken the vicious cycle of poverty and become the second most prosperous country in the Pacific Basin.

Since 1965, the 23 economies of East Asia have grown faster than all other regions of the world. The high-performing Asian economies have experienced extremely rapid growth and rising incomes. The proportion of people living in absolute poverty has dropped sharply. Life expectancy has increased from 56 years in 1960 to 71 years in 1990.[1]

The Cause of the Miracle

Why have American economists ignored until recently these economic success stories? Perhaps because the Asian development model does not fit neatly into the Keynesian framework and policy prescriptions, which favor high levels of consumption, debt, and government spending. In almost all of the rapidly growing economies in East Asia, the degree of government taxation and central planning has been relatively low, savings rates excessively high by Keynesian standards, government budgets normally in surplus, and the welfare state relatively small. As the World Bank concluded in its 1993 study, “the rapid growth in each economy was primarily due to the application of a set of common, market-friendly economic policies, leading to both higher accumulation and better allocation of resources.”[2]

Krugman’s Challenge

Now along comes Professor Paul Krugman to throw water on the whole idea of an Asian miracle. Krugman, who recently moved from MIT to Stanford University, is the darling of the establishment media and is referred repeatedly as a brilliant wunderkind, the next Nobel Prize winner, and according to The Economist, “the most celebrated economist of his generation.”

According to Krugman, there is nothing miraculous about Asian economic growth. It is déja vu, a reminder of the incredible growth rates of the Soviet Union in a bygone era (1920-1990). Krugman sees “surprising similarities” between East Asia and the former Soviet Union. Both engaged in an “extraordinary mobilization of resources.” In the case of the Soviet Union, Krugman notes, “Stalinist planners had moved millions of workers from farms to cities, pushed millions of women into the labor force and millions of men into longer hours, pursued massive programs of education, and above all plowed an ever-growing proportion of the country’s industrial output back into the construction of new factories.”[3]

According to Krugman, East Asian leaders have been just as authoritarian, pushing more of the population to work, upgrading educational standards, and making an awesome investment in physical capital. In short, East Asia is just like the Soviet Union, “growth achieved purely through mobilization of resources.”

Moreover, like the Soviet Union, growth in East Asia is likely to diminish, due to limits on labor and capital. Krugman states, “it is likely that growth in East Asia will continue to outpace growth in the West for the next decade and beyond. But it will not do so at the pace of recent years.”[4] Asia is subject to the law of diminishing returns.

The Tyranny of Numbers

I have serious reservations about Krugman’s ivory-tower analysis of the Asian miracle. First, his comparison to the Soviet Union is attention-getting, but fundamentally flawed. The Soviet Union was primarily a command economy, the Asian nations free economies. The Stalinists engaged in grim industrialization and militarization at the expense of the Soviet standard of living. In this sense, Soviet growth statistics were largely fictitious. As Soviet expert Marshall Goldman stated in the early 1980s, “This system keeps producing steel and basic machine tools, when what is wanted is food, consumer goods, and more modern technology.”[5]

On the other hand, the Asians mobilized resources by producing an increasingly sophisticated range of products demanded by international markets, and thereby increased dramatically their own standard of living.

The Lessons of Asia

Finally, Krugman misses the bigger picture. The real question is: Why have so few developing countries outside the Asian region been able to produce their own miracles? And what can industrial nations such as the United States and Europe learn from the Asian miracle?

The answer is clear. The Asian economies have grown rapidly for a number of reasons. First, they are largely market-friendly, avoiding wage-price controls and excessive regulation of business. Second, they encourage macroeconomic stability (avoiding high levels of inflation and budget deficits), limit government activism, and discourage social welfare schemes. Third, they offer stable and secure financial and legal systems. Fourth, they promote high levels of saving and capital investment rather than high consumption spending. Fifth, many East Asian nations offer tax holidays for export-oriented businesses and impose few (if any) taxes on investments. Sixth, they are open to global technology and foreign capital.

Granted, many East Asian countries limit civil liberties, engage in industrial planning, and restrict imports, but overall the degree of government intervention is relatively low.

Many developing countries in Latin America and Africa are adopting many free-market reforms and creating their own miracles. The industrial nations could regain their traditional growth rates by adopting a large dose of supply-side economics, cutting taxes on business and investment, privatizing Social Security, promoting better education and training, streamlining regulations on business and employment, and eliminating the federal deficit. As Ludwig von Mises concludes, “it is one of the foremost tasks of good government to remove all obstacles that hinder the accumulation and investment in new capital.”[6]

1. For an excellent survey of the region, see The East Asian Miracle (The World Bank, 1993).

2. Ibid., p. vi.

3. Paul Krugman, “The Myth of Asia’s Miracle,” Pop Internationalism (MIT Press, 1996), p. 173. Originally published in Foreign Affairs (Nov./Dec., 1994).

4. Ibid., p. 184.

5. Marshall Goldman, USSR in Crisis: The Failure of an Economic System (New York: W. W. Norton, 1983), p. 2.

6. Ludwig von Mises, “Capital Supply and American Prosperity,” Planning for Freedom, 4th ed. (South Holland, Ill.: Libertarian Press, 1980), p. 214. I highly recommend this talk on economic development, given by Mises in 1952.

  • Mark Skousen is a Presidential Fellow at Chapman University, editor of Forecasts & Strategies, and author of over 25 books. He is the former president of FEE and now produces FreedomFest, billed as the world's largest gathering of free minds. Based on his work “The Structure of Production” (NYU Press, 1990), the federal government now publishes a broader, more accurate measure of the economy, Gross Output (GO), every quarter along with GDP.