THE MIRACLE OF THE SAUSAGE-MAKERS
Economist-. Dec 9, 1995; v337n7944, pp. 33-34; UK 71-72 [2 pages]
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
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
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
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.