Prologue: Hong Kong, 1995
I can now permit myself a cigar, and a more leisurely look than I have given in a long time to the view of Hong Kong's teeming harbor that I have from my balcony. I came to Hong Kong only four years ago, but the view has already changed enormously. Thirty or forty apartment buildings have been put up along a mile-long stretch of the road just below mine. A gigantic suspension bridge is going up to the west; it will link Hong Kong's new airport to the city and to the Chinese mainland. Late at night the collection of ships in the harbor, their lights twinkling, still look like varieties of insects skimming swiftly or trundling solemnly across the black water. Yet even I can see that the insects now have far less water to move in: Land reclamation has already reduced the width of the harbor substantially and-who knows?-may one day come close to eliminating it. This is how fast Asia changes. Even now it surprises and excites me. It is going to change the world.
Anybody coming to the nerve center of Asia in, say, 2020 (thirty years after I did) would go not to Hong Kong but to Shanghai. By then Shanghai will be a city of 27 million people, richer than half of Europe's cities and many of America's. It will be the great cultural and industrial center of the Chinese world. It will also be the financial capital of East Asia. Sometime in the first decade of the twenty-first century it will displace Hong Kong as China's main financial-service center and shortly after that surpass Tokyo as the most sophisticated and open financial market in the East Asian time zone-and thus join the old-timers of London and New York as one of the indispensable big three of world finance.
Naturally, with Asia as huge as it is in size and population and as rich as it will then be, the continent will have no one "center": Asia's economic landscape in 2020 will be dominated by a couple of dozen megacities that will act as the cultural, financial, and industrial cores of often vast hinterlands. China itself will claim ten of these, including Taipei, in Taiwan, and Hong Kong, which will still serve as the banker of southern China and the biggest single intermediary between the overseas Chinese businessmen of Southeast Asia and China itself.
Northeast Asia will boast several non-Chinese megacities as well. Seoul, long since the capital of a united Korea, and Vladivostok, the capital of the Russian Far East, will vie and sometimes cooperate in the exploitation of Siberia's immense natural wealth, in the industrialization of the region where China, Russia, and Korea meet, and in the heady, early "Californiazation" of Russia's Pacific coast.
Japan will still have its great conurbations of Tokyo and Osaka, though by then they will act less as manufacturing centers than as service nodes linked to and in charge of a huge Japanese network of manufacturing ventures stretching all the way through East Asia and Southeast Asia and into the Indian subcontinent. Along the way this network will pass through the eight or so big urban centers of Southeast Asia (Manila, Jakarta, Surabaya, Saigon, Bangkok, Kuala Lumpur, Singapore, and Rangoon) and into India itself, where Bombay-the financial capital of the whole of South and Central Asia-will be the first among a half-dozen large cities that dominate the fast-growing subcontinent.
Not only Asian cities will have been been transformed: In fact, it is the gradual but relentless lifting of 2 billion rural Asians out of poverty over the years 1980-2020 that will make possible the extraordinary boom in consumption and urbanization that has already begun radically to reshape the world economy. The result of this process in Asia will not be, as it was in America, the creation of an efficient capital-intensive farm economy in the countryside. Instead, Asia's countryside will become prized for the recreation it can offer the well-off-in the same way Western Europe's countryside is valued now, only more so because Asia is even more crowded.
The best example is Bali, the mystical Indonesian island whose lush volcanic landscape and ancient mix of cultures and religions long ago started attracting visitors from all over, converting its simple farming folk into smiling fodder for the tourist industry. The religions and the cultures will survive, though as part of a modern society whose people by 2020 will no longer be servants but will instead enjoy incomes as high as those in America in 1995. The place itself will look more like Newport Beach than some timeless land, its homeowners an international mix as prosperous and diverse as those of Carmel or Provence.
I plan to take advantage of all of this. By 2020 I expect to own a house in a district of Shanghai that in imperial days was known as the French Concession (a house bought at the bottom of the market in 1997, when a combination of political worries about workers' riots throughout China and a cyclical collapse in Shanghainese property prices should scare off most outsiders). And I hope to have a weekend place in Bali.
By then I will be past seventy, so you might assume that this is of merely academic interest to me. I think not: I have been told by a palm reader in Burma that I will live for much longer than that. Like many Westerners who came to Asia when it was still mostly poor, I pay more attention to this sort of thing here than I would back home. But then I pay more attention to all sorts of things than I did before I came here. Asia makes you greedy.
An Investor's Notes
Most of you probably doubt that this book's optimistic reasoning about Asia's future is justified. I will explain in a minute what lies behind my reasoning. But suppose for now that I am right and look at the financial consequences of continued Asian success over the next quarter-century. Finance is the right place to begin, because movements in the great asset markets-currencies, commodities, stocks, bonds, and real estate-give the best reflection we have of history's strongest currents.
This is why, first, many Asian currencies will rise in value against those of the rich world. It may seem madness to think today that China's renminbi or India's rupee will rise against the dollar and Deutschemark, let alone (and I would bet even more steeply) against the Japanese yen. Yet look back instead of forward twenty-five years. In 1970, when Japan was generally thought a somewhat backward, high-inflation, and slipshod industrial competitor to the United States, it took 360 yen to buy a dollar. At the yen's mid-1995 high it took just over 80.
Short-term currency movements are hard to fathom, but in the long term a currency's relative value is a comprehensive measure of its country's economic, social, and political strength. When large gaps open and then stay open between two countries' economic growth rates, their productivity growth rates and their ability to generate enough savings to cover their investment needs, you can be sure that the currency of the country on the higher side of these equations will rise against the currency of the country on the lower side. The trend with Asia's currencies has already begun: In the years 1970-95 the Singapore dollar rose sharply against the American dollar. In 1990-95 it rose against every rich-world currency save the yen. Other Asian currencies will follow.
Asia's persistent growth rates, multiplied by its huge populations, make it easy to understand why, second, the prices of commodities like oil, cotton, wheat, and metals will rise in real terms. This will reverse a fifteen-year downward trend that began in the early 1980s and will have big consequences for world income distributions: handsomely raising prices for oil producers, for the efficient grain farmers of America, Argentina, Australia, Ukraine, and the region around Paris, and for the inventors and suppliers of better and cheaper alternatives to old commodities. Liquefied natural gas, for example, of which only Japan bought a significant share in the early 1990s, will enjoy a great boom as an alternative to oil.
Commodity prices will rise in part simply because, with the vast growth of Asian markets, the balance between global supply and demand will tilt. Once countries become very rich, their demand for commodities starts growing more slowly and, for some commodities, eventually goes into an absolute decline (which is why environmentalists should, though almost none do, campaign for the fastest economic growth possible). But countries on their way up are the world's most ravenous consumers of commodities. Exploding car ownership throughout Asia will raise world demand for oil products. Changing Asian diets-in particular the consumption of more meat (which is highly grain-intensive to produce)-will mean a fantastic increase in world demand for grain.
This will combine with shrinking supply in Asia to put even more pressure on commodity prices. China has already become a net oil importer and will permanently remain one. In the first half of the 1990s, China lost more than I percent of its farmland to the houses and factories of its rising industrial economy. As early as 1994, for the first time ever, a bowl of rice cost more in China than it did in America. These are the early signs of the unprecedented commodity-price boom that is coming as the biggest numbers in history begin rising into the middle class.
Yet commodity prices will also rise for a financial reason. Rising commodity prices foretell rising inflation. Asia's fast economic growth and its voracious demands for capital will put strong price pressures on the world's financial system.
Hence, third, the high interest rates that the world will be living with for another generation. Despite price pressures that nowadays seem more deflationary than inflationary, the rich world is enduring its highest real interest rates since the first decade of the twentieth century. The long-term rise of Asia will continue and deepen this trend.
There is much talk today about the world's chronic "capital shortage," resulting, it is suggested, from the investment needs of the big swaths of the globe that are suddenly being brought into the modern capitalist economy after having been absent from it for almost a century: China, India, the former Soviet Union, and a resurgent Latin America. Yet the true starting point of high interest rates is the world's dwindling supply of capital-that is, falling savings rates.
In the three decades after 1965 savings rates in the rich countries of Europe and North America were almost halved. Because investment and consumption have not declined (indeed, consumption rates rose), these economies have begun building up debt, both public and private. This adds up. The International Monetary Fund has calculated that each percentage-point rise in global government debt adds 14/100ths of a percentage point to long-term interest rates. Higher government borrowing has accounted for as much as four-fifths of the increase in world real interest rates between 1960 and 1995.
A new Asian card will now come into play. While savings rates were falling in the West during 1970-95, they were rising sharply in East and Southeast Asia. This put Asia's economies as a whole in the unusual position (for poor countries) of not only paying for their own heavy investments but also exporting capital to, the West to make up for the rich world's shortfall.
Asia's position will soon begin to change. As incomes rise in Asia past a certain point, savings-both public and household-begin to decline. Taiwan offers an early example. In the 1970s its gross savings rate was around 35 percent of gross domestic product (GDP); in the 1990s, 25 percent; in 1990 its government's total debt equaled 4 percent of GDP and 14 percent of public spending; by 1994 the debt had swollen to the equivalent of 13 percent of GDP and 43 percent of public spending. Throughout Asia, at the same time savings are beginning slowly to shrink, the continent's long-suppressed demands for public investment-for roads, ports, railroads, bridges, sewers, and airports-can no longer be contained.
Because of its anti-welfare mentality, Asia will not let its public finances get into as deep a mess as those of Western countries today. Nor in relative terms, at first, will the slowly growing gap between Asia's savings and investment amount to much alongside the immense government deficits run up in the West, especially the United States. Even so, the post-1995 combination in Asia of slowly falling savings, fast-rising spending on infrastructure, and the continent's growing share of the world economy will increasingly add to the already extreme pressure on capital resources. Asia will thus help keep real interest rates high worldwide for a long time to come.
This development will be connected to another worldwide reversal of fortune in which Asia should play a special role. That explains why, fourth, returns on bonds will rise relative to the returns on equities over the years 1995-2020. This seems baffling at first: For almost the whole of the twentieth century (which, remember, has enjoyed historically low real interest rates) stocks easily outperformed bonds. But it would have been a familiar state of affairs to the financiers of the late nineteenth century, the previous great occasion when vast new regions of the world economy (the Americas and Australia) were opened and built up and the demand for capital was unusually high.
Asia's particular contribution to the world's resurgent bond boom will come in the decade after 1995, when the continent's explosion of infrastructure, spending will at last introduce a huge swell of debt securities in a region that has previously relied on equities and bank loans for financing. For those who get their timing right, Asia's entry into bondage will be the investment chance of a lifetime. Those who get it wrong-that is, go in too early-will suffer the same fate as the premature investors in American and Argentinean railway bonds in the nineteenth century: defaults rather than riches.
In view of all this, it is inevitable, fifth, that real-estate prices will also rise in real terms worldwide. They will rise most in Asia, which is anyway more crowded, whose supply of property has long been artificially restricted by governments, and where a cultural preference for tangible assets had already combined as early as 1985-95 with a large pile of amassed savings to send property prices in many Asian cities soaring beyond those anywhere in the West. That is why I am planning to buy my Shanghai house in 1997.
The Economic Revolution and Its Aftermath
If the financial markets behave this way, what will their movements be reporting about Asia's changing place in the world? Their subject is, first and foremost, the continent's dazzling economic performance and its growing economic weight.
In the first third of this book (chapters 1-5) you will be reading more than enough numbers that measure the dimensions of this change and a great deal of explanation about why economies grow in general and why, in particular, the economies of East and Southeast Asia unexpectedly grew faster in the two generations after 1950 than any fairly large economies had ever grown before. Note for now that, if Asia's growth continues even at a somewhat more modest pace for the next quarter-century, the Asian economies (including Japan and India) will by 2020 be bigger than the economies of Europe and the Americas put together.
The (relatively) simple explanation of why this may happen is that, beginning first with Japan in the 1950s and spreading progressively through other East and Southeast Asian countries from the 1960s onward, China from the 1980s onward, and at last India beginning in the 1990s, Asia has been extraordinarily good at putting together the four elements that make for economic growth. Three of these elements are straightforward. First, Asia's workforce has grown fast and puts in long hours. Second, most of East Asia has been extremely good about improving the quality of its workers through education and training. Third, Asian countries have injected unusually large amounts of capital-of machines and equipment-into their economies at an early stage, something which their exceptionally high savings rates have allowed them to finance.
The fourth element of growth-productivity, or the efficiency with which the other three elements are combined-has always been much harder to understand. This is because it sums up many of the deepest influences on the workings of an economy and society: the spread and use of technology, the fit of the society's culture and values with the demands of modern economic life, the country's receptiveness to new ideas and foreign influence. Asia's productivity improved significantly over the years 1950-90, and for reasons the book will explain I think this was mainly because Asian countries were so open to the influence of new ideas of all sorts, especially those from abroad-whether brought to Asia through foreign trade, foreign investment, or foreign technology.
Not many people will instinctively agree with me that Asia has succeeded in large part because of its free-trading mentality (and done worst where that mentality was most absent). But whatever their views on that, most Westerners will probably agree that there are two big questions about Asia: Will it continue to grow as fast as it did in 1970-95, and is the rise of Asia good or bad for the West?
My guess is that, around 2000, Asia's economic growth will suddenly slow down.
In part, any such slowdown will be mere optical illusion. All countries, as they successfully develop, move in stages onto slower growth paths. As Japan matured from the 1960s to the 1990s, for instance, its average decennial growth rate fell from 8-9 percent to some 6- 7 percent to about 3-4 percent. The miracle economies of East and Southeast Asia have begun following this inevitable trajectory of declining growth. But they started growing later, and to some extent as a group; so when they slow down, also to some extent as a group, it will seem that "Asia" itself has faltered. In fact, as the familiar miracles" begin to fade, new ones-in some cases, such as Indonesia, much bigger ones-will rise to take their place.
Yet there is a more significant element in the slowdown. The biggest flaw in the success stories of modern Asia-including Japan-has been their failure to develop the transparent and objective public institutions needed to run the more sophisticated societies and economies that their fabulous economic growth is producing (see the last section of this prologue). One aspect of this failure has been the widespread dawdling in most Asian countries over building the infrastructure of a modern economy until circumstances force them to. Much of Asia will be forced into these public investments-which at first result in slower economic growth than equivalent private investments do-towards the end of the century. No country will be more affected than China, which has the continent's most woeful dearth of the physical infrastructure and the public institutions of a twenty-first-century society. As it struggles to build these things, China's growth rate in the decades 2000-2020 will be some 50 percent lower than its growth rate in 1980-2000 will have been.
The impact of all this should not be exaggerated. Early in the 1990s, Asia's growth began feeding off itself in the sense that the trade of Asian countries (including Japan) among themselves became worth more than their trade with the West. The fate of China first, and India in due course, will begin to sway the economic destiny of the whole of Asia (which is why a quarter of the book, chapters 6-9, is devoted to them alone); and as fast-starting China begins to slow down, slow-starting India will begin to speed up. The overall result will be that, while Asia as a whole will not succeed during 1995-2020 in matching its performance of the previous quarter-century and grow more than three times as fast as the West, it nonetheless will grow more than twice as fast as the West. Which still leaves the other fundamental question: Should the West be glad or scared about Asia's rise?
West Meets East
When I was writing this book, an American friend of mine in Hong Kong suggested that I call it The American Houseboy in Asia. This sums up the nightmare that many Westerners are already beginning to fear as the personal wealth being accumulated in Asia's lightly taxed societies makes it seem as though Asians will soon be the ones on top. The fear is similar to that aroused in the 1980s when suddenly rich Japanese tourists and investors began to troop self-confidently through America and Europe. Like the worries about Japan in the 1980s, the Asia-phobia of the 1990s is hugely misplaced.
The main reason is that for Western economies as a whole, and for huge numbers of Western companies and their workers, the rise in Asia of the biggest middle class in history offers unprecedented moneymaking opportunities. Asia's relatively cheap but often well-educated workforce continues to provide Western, Japanese, and better-off Asian firms with an attractive place to set up factories producing goods for sale in the rich world. But as the years go by, Asia increasingly offers something more tempting: the world's fastest-growing-and often the biggest-markets for the rich world's own products and services.
These opportunities began with light consumer goods; have moved on up the income scale with consumer durables such as refrigerators, televisions, laser-disc players, and air conditioners (and the programming that some of these devices carry, such as movies and music); and continue on to cars, houses, travel, education, and health-eventually the full range of modern middle-class consumption. But more than consumption is involved. Western makers of capital equipment and builders of factories, roads, telecommunications systems, and airports will benefit from the great spurt in Asian investment demand between 1995 and 2005.
On top of all this, Asia is becoming the main growth market for world finance as rich-world bankers fight for the right to channel flows of capital from the world's biggest untapped source of savings, and Western investors flock to the higher returns available in Asia. The details of this business and financial revolution occupy a third of the book (chapters 10-14). The summary is that in the quarter-century after 1995 Asia will account for half the worldwide sales growth in the markets for almost every product and service save the most advanced; and the Western firms that plunge into this robust current of demand will prosper mightily.
Overall, therefore, by the end of the century it will be impossible to claim honestly that the rise of Asia is doing anything but good to the economies and businesses of the West. It will, however, be adding to the damage that modern technology is inflicting on a particular class of workers in the West: the poorly educated. Not even politicians have yet brought themselves to attack the real culprit- -technology's generation of ever-faster cycles of economic destruction and creation-so the demagogues among them have begun bashing Asians and Latin Americans instead.
In the case of Asia, at least, the demagogues have an inadvertent point. Technology has already gone a long way towards affecting everyone equally no matter where they are. Among other things, this means that barriers to foreign goods, ideas, and ways of doing things are becoming ever more difficult to maintain. Asia is, numerically, a drop in the flood of change that technology is causing to gush through the West. Yet in the interaction of technology and society, Asia will prove immensely strong: It is far better equipped than America (let alone Europe) to cope with perpetually accelerating change. Economically this means that, because Asia is so competitive, its rise is increasingly adding to the force and speed with which technology has anyway been remaking Western business and society. But there is more to it than that.
Asia will accelerate the shock waves that have already begun to destroy the Western world's assumptions about public policy and social organization. Asia or no, the financial markets have already begun telling countries such as Sweden, Italy, and even America that they are not free to run up debt in perpetuity without paying higher interest rates. In part because of competition from Asia's soundly run economies for the world's savings, this point will be impressed on the West more forcefully.
The main reason the West's public finances are in trouble is a failure to come to grips with the issue of social protection: In Western Europe this has taken the form of the welfare state; in the United States the form of immense intergenerational transfers within the middle class through the Social Security and Medicare programs. The understandable aim of such systems was to create a compassionate society, one in which the government would prevent life's hazards from wantonly striking people down. The result, which started becoming clear as early as the 1960s even without the benefit of Asia's alternative example, has been not only the deterioration of public finances and the paralysis of Western democracy by interest groups but the partial breakdown of the family, of civil society, and of law and order.
More ominous still, social protection is at heart a doctrine of conservatism: It is about guarding people against the destructive effects of change, which in practice means guarding them against change, full stop, since the creative and destructive aspects of it come as a package. As the force of technology has grown, it has become apparent that the only social and political organizations capable of thriving are those based on accepting and adapting to change rather than trying to soften its blow. Countries with big, activist governments will be far less able to cope with the increasing pace of change than those whose main shock absorbers remain smaller units of government and society-particularly the family. Partly thanks to the luck of having developed later, modern Asia's societies are decidedly in the second category. This is the big challenge Asia poses to the West. If the West reacts positively to this challenge and adapts-something that America seems likelier than Europe to do-its inherent strengths will begin telling again in world economic competition. If it resists, it will falter.
You will be glimpsing aspects of the modern Asian model of society and government throughout the book, but particularly in chapter 1 and in the book's last part. The references to Asia's methods are widespread because the subject touches on so many of the qualities that have shaped modern Asia. These include a small role for government, low taxes, little provision for public welfare, the central position of the family relative both to the state and to the individual, a widespread refusal to protect individual companies or people from the blast of competition and technology, openness to the outside world, and a willingness to adapt to new markets and new ways of doing things.
For the past decade these themes have been given their fullest exposition by Lee Kuan Yew, whose words you will find scattered through the book. Mr. Lee, who was Singapore's prime minister from the time of its independence in 1959 until his retirement in 1990, has probably the most lucid and powerful intellect of any English-speaking political leader of the second half of the century. Under his stewardship Singapore has had one of the best records in all of Asia of being lifted from poverty to modern middle-class life.
I suspect that in the early twenty-first century Singapore will nonetheless begin to falter, suffering a far worse slowdown than any of its neighbors. The reason is that its people, used to so much order and authority at home, are finding themselves unable to cope with the turbulence of life and business in the more chaotic countries where Singapore's rising wages and small size are forcing it to make its investments: China, India, Indonesia, and Vietnam. It may prove one of the biggest ironies of modern Asia that Mr. Lee, who has been so eloquent an advocate of the anti-protectionist view of life and society, has left Singapore ill equipped to cope with the twenty-first century. Its citizens have grown too dependent on their government's foresight instead of their own and are too unadventurous The stern but overfond father has been too protective of his children.
While Asia has a good deal to teach the West about society, it has a lot to learn about the institutions of a modern political and economic system. Asia's worst weakness-and the only flaw that could grievously wound it-is its failure to move beyond the informal and the personal in its ways of doing business, of governing, and of handling relations between states.
That Asia, in the early stage of its development, was free of institutional constraints helped it to grow fast; one reason China zoomed ahead of India at first is that the Chinese were not burdened with the plague of bureaucrats and lawyers that the British colonial system bequeathed India. Likewise, the brilliant early success of the overseas Chinese businessmen has grown in large measure out of the personalized financing and decision-making that formed the backbone of their firms.
Yet at some point-usually around the time economic growth starts to slow down-a more transparent and rule-based system becomes a necessity. The public aspect, whether in the physical shape of a road or railway or in the institutional shape of a set of company accounts that can be read by potential investors from New York as well as Bangkok, claims more attention. It is, for example, starting to become clear that if Asia is ever to produce companies with a global reach, they will have to find some way of institutionalizing management and financial controls that are now made on a mostly personal basis.
In business the compulsion for Asians to change will be blunted by the worldwide destruction of big organizations brought about by shifts in markets and technology-blunted but not eliminated, since the pressure for transparency will rise even while the role of bureaucracy shrinks. In politics Asia will wrestle for a long time with the problem of making governments accountable without allowing them to fall into the Western democratic trap of becoming hostage to special interests. Here, too, the communications revolution will come partly-but again only partly-to the rescue by allowing most local government decisions to be taken by electronic ballot.
In the case of international relations there will not be even a partial respite from the pressure on Asia to create some multilateral framework for allowing its huge and divergent states to live in peace rather than in tense preparedness for war. Lee Kuan Yew has often pointed out that Asia has never had an indigenous balance of power, which is why it is so vital for the American armed forces to stay in East Asia. They alone can preserve the balance that, historically, Asians have never been able to maintain for themselves. If the Americans leave, it will be touch and go whether Asia can create the needed institutions of geopolitical balance in time to save its people from the fate that befell modernizing Europe in the early decades of this century.
So I believe about Asia's future. My beliefs are based on the recent past described in the pages that follow: a past that consists of probably the most amazing and beneficent revolution in history. The reasons why this revolution took place are worth knowing. Had anyone in 1950, roughly the starting point of modern Asia, foreseen even a small part of the story that follows, he would not only have been the wisest of men but, by 1995, also the richest. CHAPTER ONE
HALF THE WORLD TURNS
Asia is not going to be civilized after the methods of the West. There is too much Asia and she is too old.
In the middle of this century it seemed that Asia would not be civilized at all. Practically the whole continent spent the decades 1930-60 in a state of war, revolution, or famine; the really unlucky, countries, like China, endured all three. In 1945 Japan, the most advanced country in Asia, lay in ruins, its cities and industry flattened by the American bombing that ended the Pacific war. The Korean War began in 1950 and lasted three years, leaving behind nearly 1 million casualties and a crushed economy and society. The figures for the dead in China were staggering: 10 million Chinese killed during the war with Japan in 1937-45 and another 10 million in the civil war that both preceded and followed the Japanese occupation. China was to lose 40 million more to starvation during Mao Zedong's "Great Leap Forward" in 1958-62 and perhaps 10 million on top of that in the Cultural Revolution of 1966-75.
The casualty list grew longer in the Indochina wars of 1945-80 (which killed a lot of Frenchmen and Americans, too), in guerrilla wars between Communist rebels and non-communist governments throughout Southeast Asia, and in three wars between India and Pakistan during 1948-71. For good measure, a failed coup in Indonesia in 1965 led to a horrifying bloodbath in which hundreds of thousands of people were slaughtered simply because they were ethnic Chinese; and perhaps 1 million Cambodians, practically the whole of the 15-20 percent of the population with any education, were killed in 1975-78 under the murderous rule of a bunch of Stone Age Communists called the Khmers Rouges.
The common view was that the survivors of all this carnage had a bleak future. In 1960 each Japanese had only one-eighth the dollar income of each American-and Japan, which had been modernizing for almost a century, was the richest place in Asia. South Korea was no richer than Sudan; Taiwan, about as poor as Zaire. Incomes in China and India were barely more than a third as high as Taiwan's. Indeed, in 1960 it might not have seemed altogether insane to bet that Africa would outperform Asia over the next three decades. Observers looking at the straight lines projecting India's population against its grain output foresaw deaths from famine in the scores of millions by the late 1960s. Early in that decade Gunnar Myrdal, a Swede who eventually won a Nobel Prize in economics, was working on a morose 2,200-page book about Asia's prospects, which he found not good because among other things "the epoch of rapidly growing export markets has ended."
Yet at about this dispiriting time a process of export-led economic growth was quietly beginning that over the next thirty years produced in East Asia the fastest rise in incomes, for the biggest number of people, ever seen on earth. In Japan, which had begun growing fast in the 1950s, this took the form of a manufacturing revolution that increased the real income of each Japanese fourfold between 1960 and 1985 and shortly thereafter made Japan the richest country in the world in dollar terms.
In four places that followed in Japan's footsteps with a delay of ten to twenty years-South Korea, Taiwan, Hong Kong, and Singapore-the rise from poverty was every bit as steep, with the size of their economies doubling every eight years during 1960-85 (eight-fold in all). Four other countries-Malaysia, Thailand, China, and Indonesia-began hauling themselves out of the dumps in the late 1970s, though one of them (Indonesia) grew at a somewhat more modest pace than the spectacular 8-9 percent a year that all the rest managed. These eight economies were among the world's thirteen most successful at raising real incomes in 1965-90 and in the 1980s grew three times as fast as the rich world (excluding Japan). One measure of the human dimension of their accomplishment is that between 1970 and 1990 the number of desperately poor people in East Asia fell from 400 million to 180 million even while the population of those countries was rising by 425 million-in other words, a net rescue from actual or probable poverty of almost 650 million people, the greatest economic uplifting in history. By 1990 only 10 percent of East Asians were living in what is called absolute poverty, compared with a quarter of Latin Americans, half of black Africans, and half the people on the Indian subcontinent.
Now, with very few exceptions, the rest of Asia has begun imitating the policies that brought such astonishing improvement to East Asia. In 1986, Vietnam followed China's example and began freeing the economy while maintaining tight political control under Communist party rule. By the mid-1990s Vietnam's economic growth was approaching a double-digit rate, inflation was in single figures, and the currency, despite being called the dong, was steady against the dollar. India, which had been Asia's last significant holdout against liberalization and export-driven growth, reversed almost forty-five years of economic policy in 1991 and began to open itself to the outside world and to cut through the world's thickest remaining swaddling of red tape. By mid-decade even North Korea, the most tightly sealed country in the world, was showing some twitches of economic life as it began to experiment with Chinese-like reforms.
The first thirty years of the Asian miracle have already gone a long way towards shifting the world's balance of economic power. Asia's extremely high rates of savings-in East Asia over 30 percent of the value of economic output-has already generated probably the world's biggest pool of investable capital. A hint of its size is suggested by the official reserves held at the end of 1994 by the ten biggest Asian holders of foreign exchange. The reserves of Japan, Taiwan, Singapore, China, Hong Kong, Thailand, Malaysia, India, Indonesia, and the Philippines then added up to some $457 billion-more than 40 percent of the world total.
In the 1980s alone Asia (including Japan) increased its share of world output in dollar terms from 17 percent to 22 percent and its share of manufactured exports from 12 percent to 17 percent. If the size of the world economy is calculated on the basis of what countries actually produce and consume (the Jargon for this is "purchasing-power parity," or PPP, a useful trio of initials for later chapters in this book) rather than on what sometimes misleading exchange rates for the dollar suggest they do, Asia's weight is greater still. A calculation by the International Monetary Fund (IMF, another useful trio of initials) showed that on this basis Asia's share of economic output in 1990 was 25 percent; that of North America and Western Europe combined was 46 percent.
And, this decade, Asia has continued to lope ahead. Its momentum is so strong that, by the IMF's guess, Asia's economies taken together will be half again as big in 2000 as they were in 1993; if so, they will be getting close to representing 30 percent of world output even in nominal dollar terms and more than that in PPP terms. The IMF also reckons that, of the $7.5 trillion (in 1990 dollars) by which the world economy should grow between 1990 and 2000, half will be contributed by East Asia alone. The World Bank thinks that Asia as a whole will also account for half the growth in world trade this decade. If Asia can outstrip the rest of the world in 1995-2020 more or less as it did in 1970-95 and thus becomes a largely middle-class continent, it will then account for more of world output than all the present-day rich countries together (even putting Japan in the rich countries' column instead of Asia's) and will have transformed every business on earth and the hopes of every human for a decent life.
Oddly, many people in America and Europe do not see the rise of Asia for what it is: the greatest, and most thrilling, event of the last half of this century. Instead of rejoicing that so many people are now leading lives that are so much better than anyone dreamed possible only two generations ago, or rubbing their hands at the chances for ambitious and energetic Westerners that those better Asian lives will present, the worriers fret that the rise of Asia means the West-or, at any rate, Western jobs and wages-must fall.
For two reasons these worries are wrongheaded. The first is that Asia's growth, albeit extraordinary, must be kept in perspective. Paul Krugman, an economist at Stanford University, has pointed out that the over-whelming effect of productivity growth in poor countries is to raise wages there, not to lower them in the rich world. Even the seemingly large flows of capital in the early 1990s from rich countries to poor count for little in the rich world's economic scales. In 1993 a net $160 billion in capital went from rich countries to poor countries (some $57 billion of that to Asia). The output of the rich world-North America, Western Europe, and Japan-amounted to some $18 trillion. Their capital investment at home was $3.5 trillion (or almost seventy times what they invested in Asia); their stock of capital, $60 trillion.
By Mr. Krugman's reckoning, all the capital flows to all the poor countries since the beginning of the 1990s dragged the capital stock of the rich world below the level it would have been at had all that investment been made at home by no more than 0.5 percent, or $300 billion. That translates into a reduction in potential rich-world wages of no more than 0. 15 percent. All this compares with a homegrown diversion of capital from productive uses in the United States alone-via the budget deficits the American government has run up since 1980-of more than $3 trillion. Imports of goods from poor countries have probably had as little effect on the rich countries as their own exports of capital. America's imports from the whole of the poor world in the early 1990s amounted to only 1 percent of its gross domestic product (GDP; yet more useful initials, this time measuring the size of the economy).
These static calculations understate the dynamic effect of Asian and other poor-country growth on the West. At the margin, Asian competition is undoubtedly increasing the impact that technological change would anyway have on the West: That, after all, is one of the main aims of trade. But this is more a matter of the distribution of income within a country than it is of the distribution of income between countries, and it has to be handled at home, not abroad.
Another way of looking at the overall effect of Asia's rise, for those of a historical bent, is to recall, as we race towards the end of this century, where Asia stood at its start. By the calculations of Angus Maddison, an economic historian, in 1900, Asia (including Japan) accounted for some 32 percent of the dollar value of gross world product, almost half again as high a share as it has today; North America and Western Europe represented 55 percent, three percentage points less than they did ninety years later despite the high Japanese and other East Asian growth rates of 1960-90. Asia is unlikely to surpass its 1900 share of the dollar value of world output before 2010 and even on a PPP basis will have a struggle to make it by 2005. Even then, what is the worry for America and Europe? It would have been batty for the rich to fear Asia in the first decade of this century because it had a third of the world economy, and it will be just as batty in the first decade of the next century.
Indeed, the second (and more compelling) reason not to fear the rise of Asia is that it should be welcomed instead: for the business and other opportunities that its growth is beginning to present and for the extra wealth, and perhaps even happiness through a rearrangement of social priorities, that it is thereby going to create in the rich world.
By 2000, Asians are expected to account for 3.6 billion of the world's 6.2 billion people. Fully a billion of those Asians-not much less than the entire population of the Americas and Western Europe in 1995-will be living in households with some consumer-spending power; they will be able to buy at least basic goods such as color televisions, refrigerators, and motorbikes. Perhaps 400 million of those consumers-three times as many as in the early 1990s-will have disposable incomes at least equal to the rich-world average today; they will be buying houses, cars, holidays, health care, and education. And if all this consumer spending is to take place, immense investments in capital equipment and infrastructure will be needed to make it possible: for a start whole factories, the equipment to go in them, power plants, roads, railways, airports, ports, and telecommunications networks. The zooming growth and absolute size of Asia's middle class should therefore create some of the biggest business and financial opportunities in history.
The rise of Asia may offer the world more even than that. Since 1500, when China entered its half-millennium of decline, the West has had a monopoly of the world's most powerful current of thought: modernization, the belief that things can be changed, that human consciousness can bend destiny to its will. The totalitarian alternatives to the liberal ideas of progress-communism and fascism-were broken either by war, in the case of European fascism and Japanese nationalism, or, in communism's case, by economics. In the next couple of decades Islam may offer another challenge, though it seems bound to be plagued by the identification of so much of its fervor with anti-modernization rather than modernization.
Asia, or at least the part of Asia under China's cultural sway, might be different. Stuck for centuries in lethargy and conservatism, Asians now believe passionately in modernization-probably more than most Europeans and, to judge by the souring mood in America in the early 1990s, perhaps more than many Americans, too. Asia's civilizations are old and, even under Western colonialism, have remained intact. And, because of their outstanding economic change since 1980, the developing countries of East Asia are self-confident (in fact, too self-confident). The societies, and in many cases the politics, of East Asia are organized differently from those of the West. If Asians continue to grow rich, they could be in a position to offer the West an example of how to marry fast economic change to social stability and how to reconcile freedom with order.
Even if Asia falls short of providing such a cultural renaissance-and it will be quite an accomplishment if a rich East Asia can avoid succumbing to the same ills that afflict the rich West-it might still offer some pointers about the biggest problem of government faced by the West: one that Westerners are mostly blind to, since they assume (as China did of its own system in 1500) that there is no problem at all, only self-evident virtue. The problem is representative democracy itself, which runs the danger of ceasing to be a vehicle for delivering the services that ordinary people want from government and of becoming instead an instrument for helping strong lobbies pick taxpayers' pockets. This is a danger that developing Asia has been fairly good at avoiding.
The Lay of the Land
If you think it is impertinent for someone to have written a book about the whole of Asia, you are right. The Asia I have in mind is not the continent of the same name, but it is still so huge and so diverse in climate, culture, wealth, and behavior that a visitor to its different parts could be forgiven for thinking that they lie on different planets.
The Asia that this book is about begins just east of Iran, the last clear outpost of the Middle East, and extends in a broad curve south and east of there to the limit of the Asian landmass (see the map on pages 6-7). It includes the whole of the Indian subcontinent and the islands nearby (such as Sri Lanka), all of Southeast Asia and Indochina (including the Indonesian and Philippine archipelagoes), China and its outriggers (such as Taiwan), and the Korean peninsula. For the most part, it does not include the countries of ex-Soviet Central Asia or Russia's Far East, except as they have dealings with Asia proper (as Vladivostok and Russia's border areas with China and North Korea increasingly do). Likewise, it does not include Australia or New Zealand, even though the fate of these antipodean neighbors increasingly depends on Asia and (in Australia's case especially) they are doing their best to be accepted as Asian; even so, they are still of the West though not in it.
Japan is a special case. Too rich and too idiosyncratic to be wholly Asian, it is at the same time bound more and more to Asia by economic ties as well as by culture and geography. And it is in many ways still the model, for good and ill, of the institutional process of development that its poorer neighbors are beginning to follow. So, in this book, Japan is sometimes part of Asia but mostly-because the big question is whether developing Asia can successfully vault into modernity-it is not: Japan has already made it.
The Asia of this book has some fuzzy border regions. China's Xinjiang Province, for instance, has more in common with the tribe-based Islam of the neighboring ex-Soviet states of Central Asia than it does with the Han Chinese who are its masters. And it would be surprising if the Russian Far East were not one day severed in fact if not by lines on the map from its formal political rulers in Moscow. But what of the core of Asia?
Physically, it is dominated by the Indian subcontinent, which is around half the size of the United States, and by the adjacent vast bulk of China, slightly bigger than America and a little smaller than Canada. Even Asia's smaller fry can be large by the standards of lesser continents: Japan is as big as California or Germany, and Indonesia could accommodate most of the American West. The West would first have to be cut up, though, and then stretched out. Indonesia consists of some thirteen thousand islands strung out in an arc three thousand miles long. Distances in Asia are, in fact, one of the first surprises, and usually an unpleasant one, for a newcomer. A casual glance at a map does not usually lead the inexperienced traveler to the accurate conclusion that it will take as long to fly from Bombay to Singapore as it does to fly across America, and as long to fly on from Singapore to Tokyo as it does to fly from New York to London.
Within this huge area lives an even more unimaginably large concentration of people: 3.3 billion of them in 1995, some 58 percent of the whole world's population. They are not evenly dispersed through Asia's vastness (and, even if they were, the place would still be crowded, since it accounts for only 20 percent of the planet's dry land). California-sized Japan, much of it mountainous and little habitable, nonetheless has almost four times as many people as California. At least four large districts in Hong Kong have probably the highest population densities on earth: more than 400,000 people per square mile, compared with 53,000 in Manhattan.
This is not just a curiosity of city-states: Rural Asia is bursting with people, too. Java, the principal (though by no means the largest) island of Indonesia, has a size of around eighty thousand square miles (roughly the size of Idaho and about half the size of Britain) and a population of some 115 million (compared with 1.1 million in Idaho and 58 million in Britain, or a hundred times as concentrated as Idaho and four times as concentrated as Britain). In Java you are never out of sight of a city, town, or village. This crowding, which is another thing that often makes the newcomer to Asia squirm, has a lot to do with how Asian societies, politics, and economics work-and with the business methods and opportunities that Asia presents.
Asia is wealthy not just in people. It is a bewildering amalgam of religions, races, cultures, and languages, of rich and poor, and of the advanced and backward.
Asia's civilizations stretch back as long as four thousand years, in the case of China, and their people do not forget the past. For all their similarities, Vietnamese and Chinese have been fighting off and on for more than two thousand years, as for almost as long have Khmers (Cambodians) and Vietnamese; the antipathy of Koreans and Japanese towards each other goes back at least five hundred years. In the heart of Seoul, South Korea's glossy capital, are replicas of handsome historical buildings-temples and palaces-where explanatory placards remind modern young families on light-hearted Sunday outings how the beastly Japanese invaders burned down the original buildings four hundred years ago. America got over its grudge against the British less than a century after they had burned the White House to the ground in 1814.
There are always pretexts for a fight in Asia. The diversity of religion and language in India-which alone boasts seven major religions and twenty major languages-makes for an explosive cocktail. So does the diversity of race and religion in Southeast Asia. China, and its cultural offshoots in Japan and Korea, have mostly escaped this tension at home because their populations are so ethnically uniform. But in Southeast Asia the antagonism among Chinese, Indian, and Malay-the Malays are the main ethnic stock in Malaysia, Indonesia, and the Philippines-is intense. The hostility is strengthened, and complicated, by the fact that the Malays of Malaysia and Indonesia are Muslim (as are some of those in the Philippines): not in an implacable Middle Eastern way but still devoutly enough to make them resent even more than they would otherwise do their far richer and rather freewheeling ethnic Chinese compatriots. Fast economic growth has helped muffle the natural grinding between these groups; an economic slowdown would increase it. That the existence of racial and religious antagonism is freely acknowledged in Asia is yet another shock to the first-time Western visitor (especially Americans steeped in liberal disapproval of such atavisms); and it is yet another big gear in the at-first-baffling workings of Asian business and politics.
Modern disparities exist alongside ancient ones; especially in the matter of money. Asia is home not only to the impeccable car factories of Japan and the glimmering skyscrapers of Hong Kong but also to New Guinea tribesmen wearing penis sheaths. The annual income of the average Hong Konger, the richest of Asians outside Japan, is a hundred times that of a Nepalese or a Cambodian, who are the poorest of Asians.
The official figures for the poorest countries need to be read with a skeptical eye: Asia's black-market economies are big, even in fairly well-off places like Taiwan, and visits to supposedly miserable countrysides in Indonesia, China, and even India suggest things cannot be as awful there as the numbers say. Yet however tempered, the figures showing a wide divide between rich and poor are still daunting. Asia already contains probably the biggest concentrations of family wealth in the world, nurtured by the sort of low taxes and high secrecy that Western plutocrats can only dream about; at the same time, it has, mostly in the Indian subcontinent but in large pockets of China and Southeast Asia as well, 65 percent of the whole world's desperately poor people, 730 million Asians in all.
Wealthy societies tend to be sophisticated, and here, too, Asia's range is immense. At one extreme is Hong Kong, which by the early 1990s had evolved into probably the most finely tuned urban society on earth, with a startlingly efficient apparatus for collecting information from Asia, and even farther afield, and disseminating it through the world's most advanced service economy. Even leaving aside, at the other extreme, the small groups of tribes living in nearly Stone Age primitivism in the Irian Jaya jungle or the Himalayan foothills, large numbers of country dwellers in India and Pakistan live in conditions of feudalism unchanged for centuries; and large numbers of Chinese peasants, under arbitrary and tyrannical bureaucratic behavior that their ancient forebears would find familiar.
The gap between rich and poor and advanced and backward in Asia-among countries as well as individuals within countries-is not necessarily a problem, though it would fast become one in most places should economic growth stumble badly. It is already becoming one in China, where the relatively prosperous city dwellers of the coast increasingly find irksome the heavy-handed methods of government that grew out of the Chinese countryside. In rural China these methods may still have a point, but they do not appeal to people who are better acquainted with MTV than with planting rice. This gap, too, is crucial to understanding how Asia works.
To complete this rudely thumbnail sketch of three-fifths of mankind is table 1, on pages 38-39, which sets out some basic comparative facts about the main Asian countries today. Where they find themselves tomorrow will likely be determined by three big forces: the coexistence of old and new in Asia, how very young Asia's population is, and how ruthless its societies are.
Old and New ...
Because Asia has risen so far so fast, the old is everywhere found alongside the new. Even in today's Singapore, which is richer than half of Europe and ticks as precisely and pristinely as Frankfurt or Zurich, you still catch an unmistakable whiff of the Asia that J. G. Farrell, a British novelist, described when he wrote, speaking of Singapore just before the Japanese captured it in 1942: "There, too, when you staggered outside into the sweltering night, you would have been able to inhale that incomparable smell of incense, of warm skin, of meat cooking in coconut oil, of honey and frangipani, and hair-oil and lust and sandal-wood and heaven knows what, a perfume like the breath of life itself."
Culturally and socially, as well as sensually, the old Asia has staying power. A big reason for this is the late start, but now swift pace, of urbanization in the poor countries of Asia. In 1990 only 30 percent of the people in poor Asia lived in cities, compared with 72 percent in Latin America; even Africa, which badly lags Asia in levels of income and industrialization, was more urbanized (35 percent). So the values and habits of rural life have an unusually widespread hold on Asia, and for a transitional decade or two will be influencing the cities as well.
The overall rate of population growth peaked in East Asia and parts of Southeast Asia in the 1960s, in Indonesia in the 1970s, and in the Indian subcontinent in the 1980s. But urban growth rates reach their highest levels later: in Indonesia during the 1980s, India from 1985 to 1995, and China from 1995 to 2005. In historical terms, Asia's urbanization is happening very quickly indeed: in peak periods Asia has had 4.5-5 percent urban population growth a year, compared with 2.1 percent in European countries at their peak in the last half of the nineteenth century.
The result of fast urban growth, usually most obvious after it has begun to slacken, is the creation of gigantic metropolises, of which Asia will have a big share early next century (see below). While it is going on, however, the main consequences of fast urban growth are immense social and environmental strains and the temporary importation into enlarging cities of the ways of thinking and personal ties of the countryside. But this is a two-way street. As Richard Critchfield, an American reporter on village life, has pointed out, by the 1990s migration from farm to city in the poor world had in many places been going on long enough that the values of the cities were being transmitted back to those still left in the countryside.
The transmission belt is kinship and personal acquaintance. Throughout Asia, fresh migrants to cities tend to congregate with each other on the basis of their places of origin in the countryside and of kinship (which usually amounts to the same thing). These ties, and the habits they bring with them, can stretch a long way. As late as the 1980s, overseas Chinese businessmen in Southeast Asia were making decisions about their dealings with each other, and about investment projects in China itself, largely on the ground of which mainland villages their forebears had emigrated from a century before (see chapter 11).
It takes a fair amount of time, too, for modern goods and modern technology to change old beliefs and preferences. It has long been commonplace in the Asian countryside to see villagers in sarongs or in mud houses watching television or, in cities, to see young peasant girls in modest Muslim dress yoking microchips to circuit boards in immaculate electronics factories. This sort of contrast gives significant clues to would-be makers and marketers of consumer goods in Asia (see chapter 12), who need to be aware that, despite the large absolute size of Asia's consuming class, only a very small number of Asians have risen to such high income levels and have so distanced themselves from their traditions that they have entered the global middle class that exists in America, Europe, and to some degree Japan.
But the persistence of the past has deeper consequences than that. At a given level of income, Asians have broken with fewer traditional social norms than their Western counterparts. (Whether that will continue is one of the main topics of chapter 16.) They do not (yet, anyway) get divorced or commit crimes or break with their parents nearly as much as Westerners in similar material circumstances; even richer than-America Japan had a divorce rate in the mid-1990s that was no more than a third as high as America's. There is no sign that social decay is beginning to eat into Asia at anything like the speed with which it is attacking the West. Whereas in most of the West the rate of illegitimate births has roughly trebled since 1960, in Japan it has stayed almost exactly the same. The enduring strength of Asian families and societies despite furious economic change may be Asia's greatest asset, providing a firm base for thrift, work, educational success, and social stability. The enduring weakness of Asia's public institutions-whether political or corporate-is its greatest liability.
This may sound strange, since so much of Asia is run by authoritarians or even dictators; but their word is not really law, or rather is so only erratically. Lucian Pye, a professor of politics at the Massachusetts Institute of Technology (MIT), has pointed out that for almost all of Asia (Japan partly excepted) the gravest danger has long been not too much government power but too little to prevent disorder, banditry, or even anarchy. In the past few decades, too, Asia's worst political catastrophes, apart from war, have arisen from the breakdown of order: The Indonesian riots of 1965-66 and China's Cultural Revolution are the most obvious examples. Even when power is there to be exercised, its effect can be haphazard, especially in conditions of fevered economic modernization. China's rulers could (just) muster sufficient obedience from the army to mount an assault on the pro-democracy demonstrators in Tiananmen Square in 1989. On the more important matters of restoring the central government's finances and taming the wild demands for credit placed on the banking system in the early 1990s, the leaders in Beijing have had a hard and messy time controlling the willful behavior of China's provincial and local authorities. If, in the words of Laozi, the founder of Daoism, "governing a large state is like boiling a small fish," few Asian governments have the implements for so subtle and delicate an operation.
Among the many implications of this is that Asian nation-states will probably be even less able than their Western counterparts to control the border-smashing tides of technological change and economic integration. None of these nation-states is so fragile that a breakup of ex-Soviet proportions seems likely-not even Indonesia, which, among Asia's big three countries, was the least unified when the modern (post-1950) era began. But already it makes economic sense to think about much of Asia not in terms of countries but of regions: often border-spanning ones such as those of southern China and Hong Kong, Singapore and southern Malaysia and northern Indonesia, and the Koreas and northeast China and southeast Russia; but often, too, city-regions that are the operative economic units lie wholly within a country's borders.
Fast economic growth, long distances, and poor infrastructure have all exaggerated the influence of these internal city-regions. It used to be that a country would have only one main city; now many countries have several. Like the border-spanning regions, city-regions can shrug off much central-government control, except in matters of money supply and foreign-trade policy. But they usually generate their own financial resources and certainly strike their own deals with foreign investors. They should be much on foreign investors' minds; they are where Asian incomes are highest and distribution easiest (see chapter 12). An inkling of the business opportunities that Asia's city-regions will provide is given in table 2, which confines itself to the supercities: the 16 Asian cities that will probably have populations greater than 10 million in the year 2015 (all of which will probably be among the world's twenty-five most populous cities, up from an Asian contingent of seven in 1985).
The second influential fact for Asia's next twenty years-and the most basic reason why today's Asia is full of life, energy, and hope-is that it is full of young people. Of the 3.3 billion Asians alive in 1995, some 1.7 billion, or around 52 percent, are under the age of twenty-five. Only 35 percent of Americans and 28 percent of Germans are that young.
Over the next twenty years all these 1.7 billion, as many as two-thirds of them literate, will either be in, or will just be entering, their most productive years. One reason it performed as spectacularly as it did in 1975-95 is that the billion Asians who were then coursing through their most productive years had been educated well enough that they mostly found jobs of the right sort to harness their energies and help pull the continent's economic growth forward with them. The bigger bulge of Asians entering their productive years in 1995-2015 will be the continent's last surge of new workers into their productive years before Asia's population begins aging like that of the present-day rich world and its economy necessarily becomes more sedentary along with its middle-aged people. The 1.7 billion will present an even greater opportunity, but also a more perilous risk, than the 1 billion of 1975-95. If Asia's societies educate the class of 1995-2015 well enough and its economies present them with roughly as much chance of appropriate employment as they did the class of 1975-95, Asia will be vaulted fully and firmly into the camp of the global middle class. If they falter, it could create at best surly stagnation and at worst violence and disorder on the scale the 1950s pessimists about Asia shuddered to think about.
... and Ruthless to the Core
Whether Asia continues to thrive or begins to stagnate depends on my third and probably most controversial assertion: that East Asia has prospered over the past forty years largely because it has had small, pro-business governments which have refused to offer much public compassion for the unfortunate or improvident. This has been hard on unlucky or feckless individuals, but it has created exceptionally strong and resilient societies and economies. They are likely to stay that way if Asia's governments keep themselves small and maintain their anti-welfare mentality.
This sounds harsh, and it is. Asia's situation arose in part from historical accident. In Western Europe-and (to a lesser degree) in the United States-the Depression, the Second World War and the Cold War led governments to conclude that they must buy national cohesion through income redistribution and such social protections as guaranteed health care. During the Cold War the countries of East Asia were fighting for their lives in a more urgent sense than the West was: The very existence of many of them was directly threatened by military action (as in the cases of South Korea, Taiwan, and Singapore). Some of them (South Korea, for instance) were literally starving; and all lacked the wherewithal to finance social protections. Their only hope lay in fast economic growth, and they discovered that pro-business, free-market policies provided this. As the countries of East Asia grew from these daunting origins, their debate about the role of government gradually assumed a form that might be described as: Do we put our faith in social engineering or in engineers? Engineers won hands down.
Asia's governments are, as explained a few pages back, surprisingly weak, and even when they are not weak (as they are not in South Korea and Singapore), they are still small. The simplest and single most important measure of a government's size is how much money it spends as a share of GDP. The reason this matters so much is that it can be taken as a proxy of how many decisions are left in the hands of the people who generate national income. The Japanese government's spending as share of GDP, at only 20 percent of gross national product (GNP) in the early 1990s, has until recently been the lowest of that of any member of the rich countries' club, the Organization of Economic Cooperation and Development. (Now that Mexico already is a club member and South Korea shortly will become one, Japan has given up that honor.) Hong Kong, with a GNP per person perhaps a quarter again as large as its colonial master, Britain, has a government that spends less than half as much as a share of GNP than Britain's does. The story is similar for the other better-off Asians, for the rising Asians, and for the poor Asians (though that is par for the course for poor countries everywhere).
The single biggest explanation of the difference in these spending shares is that Asia has rejected the welfare state. By welfare, I do not mean what self-congratulatory Americans of a certain age mean when they denounce welfare. I mean all transfer payments, including the huge ones through Social Security and Medicare, that have not been paid for through funded insurance schemes, not just the scraps thrown to teenage mothers in ghettos. The nature of transfer payments is that they are paid for by taxing current income earners and giving the proceeds to those who did not earn the income. And in every country where transfer payments bulk large in government spending, their beneficiaries are overwhelmingly the middle class. This is what Asia has largely turned away from. Transfer payments in Hong Kong in the early 1990s amounted to no more than 5 percent of government spending. In America they amounted to almost half of federal-government spending, or over 10 percent of GNP.
One of my most eye-popping moments in Asia came during a conversation in Shanghai in 1993 with a high Communist party official who formally had retired but (in the usual Chinese way) was still influential in shaping government policy. I asked him how China was going to handle the socially and politically explosive problem of the wholesale firings that would be needed if state-owned factories were to become competitive. We will have to find ways of satisfying the dismissed workers, he replied, "but we must take care not to make the mistake Europe did in setting up a welfare system that promotes high unemployment."
So much for communism in Asia. If modern-day Asian governments need a motto, it probably comes from Herbert Spencer, a British intellectual of the late nineteenth century, who wrote that the ultimate result of shielding men from the effects of folly is to fill the world with fools." Asia's consistent ruthlessness in social and economic policy has ensured the absence there of the sort of protection from life's hazards that people (and often businesses) in most rich countries have come to expect. If economies are not sheltered from the ideas and methods of the outside world or from technological change, they run more efficiently. If there are few transfer payments, much more responsibility is thrown onto institutions other than government-particularly onto families. There is nothing misty-eyed about the Asian devotion to family. Parents cultivate their children's abilities, wives stay with lousy husbands, and children remain at their parents' beck and call not because of Confucian pieties but because Asians are too scared of the cruel world to break easily with the only institution that offers them protection from it if things go wrong. Since the peremptory demand of self-preservation pushes families to support those of their members too young or too old to work, they readily save more of their income.
Lower taxes and government spending give the wherewithal for these higher savings. With transfer payments suppressed, the government spending that remains is weighted towards investment: sometimes in hardware such as roads, more significantly in health and education (hence the greater faith in engineers than in social engineers.) In Hong Kong, the most radical of Asian states on these matters, such "people investments" account for half of government spending, compared with a third or less in the West.
The other side of the coin of small government is strong business. Governments making fewer decisions implies companies making more of them-particularly since the lower taxes that accompany smaller governments lead to higher profits and greater accumulations of private wealth. In much of modern Asia, notably Japan and Hong Kong, business has had a greater call on the attention and devotion of society than government has, and a bigger effect on ordinary people's lives. Small government does not mean clean government, as Japan has amply demonstrated, but it does help concentrate the energies of governors on the narrow range of topics where they have something useful to contribute.
Asians have recently been patting themselves on the back over their political, social, and economic arrangements far too enthusiastically. Some Asians seem to believe that they are leaving behind even America, let alone Europe, in the race for the future. This is wrong. America's efficiency, adaptability, and breadth of accomplishment remain unrivaled, and even the best-run and most advanced Asian countries have grave institutional problems to overcome before they can claim to be fully modern. But the Asians have a social-policy advantage which, if they preserve and build on it, will tell heavily in their favor: Their past ruthlessness has left them without the West's excruciating problem of dismantling an unaffordable welfare state that many voters nonetheless depend on. If Asian countries maintain their anti-welfare states for another generation, their abundant economic strengths will come into their own on the world stage. Those strengths, as the next chapter explains, are deep.
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