THE MIRACLE OF THE SAUSAGE-MAKERS

Economist-. Dec 9, 1995; v337n7944, pp. 33-34; UK 71-72 [2 pages]

     BANGKOK

SYNOPSIS: The Economist reviews the dispute started the by 'The Myth of Asia's Miracle. Approves of Krugman heavily.

     WITHOUT the "Asian miracle" we might never have heard of "Asian values". The
     self-confidence generated by spectacular economic growth was in part responsible for the
     attempt to list the moral, social and political ingredients in Asia's recipe for success. So when
     a bright young American economist poured cold water on Asia's boom, his critics were
     motivated by more than professional disagreement. In some parts of Asia, his analysis was
     seen as part of a western backlash against a region that had grown too big for its boots.

     Paul Krugman, professor of economics at Stanford University, acknowledges that he did not
     think up all the ideas in a now notorious article, "The myth of Asia's miracle", published in
     November 1994 in Foreign Affairs, an American journal. His contribution, he says, was "to
     find a way to catch people's attention". He certainly did. His ploy was to point out the
     similarities between contemporary western euphoria about East Asia's growth prospects and
     the anxiety in the 1950s and 1960s about the Soviet Union's apparently looming economic
     pre-eminence. He argued that the parallels are not accidental: in both cases economic growth
     was based on the mobilisation of resources rather than on increases in efficiency. For East
     Asia, the consequence is that growth is "more comprehensible and less sustainable" than
     many have believed. The comparison carries a provocative implication: that the West has no
     more to learn from Asian values than from communism, from Lee Kuan Yew than from
     Stalin.

     This touched a raw nerve and, a year later, the debate rumbles on. In Bangkok this month an
     impressive array of pan-Asian punditry gathered at a forum to tell Mr Krugman he was
     wrong. The forum was, said one of its organisers, "an ambush". But the professor was
     forearmed. The Krugman thesis is that East Asian growth is almost wholly attributable to
     increased inputs--notably of labour and capital. If you invest in more sausage machines and
     employ more sausage-makers, of course you will make more sausages. Where's the miracle?
     Growth will slow down when you run out of extra sausagermakers. And, though your second
     sausage machine may have doubled output, your third will increase it only by 50%. Unless
     you learn to make more and better sausages more efficiently, you will suffer the law of
     diminishing returns.

     In Singapore, the employed proportion of the population surged from 27% to 51% between
     1966 and 1990. Unless babies are to be drafted into the workforce, that rise is unrepeatable.
     In a similar period, Malaysia has increased investment as a share of GDP from about 20% to
     more than 40%, which must be close to the limit.

     The most straightforward argument against Mr Krugman is also the hardest to evaluate.
     Some economists say his numbers are just plain wrong. He concedes that his measure of
     efficiency, total factor productivity (TFP), is also "an index of our ignorance". Nobody really
     knows what causes it to grow. But he argues that it is possible to construct reasonably
     reliable indices of inputs. Add these up, and you find that inputs have grown no slower than
     output. TFP, therefore, has not grown at all. Mr Krugman claims that this is not really much
     disputed by professional "growth accountants".

     Other studies, however, including one by the World Bank, have produced higher TFP figures
     for East Asia, They accord with what those visiting the region after an absence of a few years
     think they see--an explosion of more efficient economic activity. Mr Krugman compares such
     anecdotal argument to the observations of 19th-century Britain by William Cobbett, a radical
     writer. Cobbett saw continued poverty and missed the industrial revolution. Contemporary
     Asia-boosters' see a miracle and miss its built-in sell-by date.

     Some critics accuse Mr Krugman of making a mistake about TFP that he says others are
     making about Asia's economic growth--projecting a past trend into the future. Noordin
     Sopiee, of Malaysia's Institute of Strategic and International Studies, claims that one of his
     country's hallmarks is an ability "to re-engineer itself". Similarly, Singapore, despite being
     scrutinised in the Foreign Affairs article, is relaxed about the analysis. Officials say that past
     increases in inputs, especially in education, will lead to future increases in TFP.

     There is a commonsense appeal to this line. As the advantages of Asian countries, notably in
     cheap labour, are eroded, international competition will force them to improve efficiency. Not
     necessarily, according to Mr Krugman. Raising efficiency is much harder than increasing
     inputs, "and there is no evidence that Asian countries know how".

     However, the differences between the two sides of the debate are not, in fact, that large. Mr
     Krugman is not arguing that the Asian boom is over, merely that it will slow down. Many in
     Asia would not quarrel with his suggestion that the average annual growth rate for China's
     economy, for example, is likely to be closer to 7% than 10% between now and 2010. On
     this assumption it will not, by that date, be larger than the United States' 2010 economy. It
     would, however, have grown from 40% the size of America's in 1994, to 82%--still an
     enormous shift in the global economic balance.

     Some Asian experts grudgingly credit Mr Krugman with drawing attention to the importance
     of efficiency. (The Singaporean and Malaysian governments may be exceptional in that all
     cabinet members are familiar with the concept of TFP.) But, more important, Mr Krugman
     may have helped to allay western fears about their miracle. This can only help ease
     protectionist pressure.

     In that sense, Mr Krugman has not so much debunked the myth as fostered it, by providing a
     single explanation for the "miracle". But he has also sounded a warning. He says the Soviet
     Union is perhaps not as good an analogy as Brazil before its debt crisis, when, from the
     mid-1960s, its economy grew 11% a year for a decade. Naming no names, Mr Krugman
     mentions some "truly impressive" Asian current-account deficits. "It would be surprising if
     there weren't one or two Brazils out there." No wonder the professor is not very popular in
     Malaysia, Indonesia, Thailand and Australia.