Seize the Moment (29 page)

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During my 1953 trip, two of my most discouraging stops were in Taipei and Seoul. Both appeared to be economic basket cases, capitals of countries artificially divided by the pull and tug of the cold war, saddled with massive expenditures for national defense, and preoccupied with short-term survival rather than long-term prosperity. Hong Kong and Singapore, still British colonies, seemed to face equally dim futures. By avoiding the economic dead end of communism and embracing the market, however, these countries turned the corner. Within thirty-five years, they moved from the periphery of the underdeveloped world to the threshold of entering the developed world.

After the Communist victory in China's civil war in 1949, Taiwan stood on the brink of collapse. Its industrial and agricultural output was less than half of that of 1937. In 1949, its per capita income was $50, roughly the same as the Communist mainland. Taiwan today has become one of the
world's most dynamic economies, with annual real growth averaging over 9 percent over the past three decades. It possesses $73 billion in foreign exchange reserves, the world's fourth largest after the United States, Germany, and Japan. The 21 million Chinese in Taiwan export $14 billion more a year than do the 1.1 billion Chinese on the mainland. Taiwan's per capita income is $6,335, more than nineteen times higher than that of the People's Republic of China across the Straits of Formosa.

With its territory overrun three times by Communist armies in the Korean War, South Korea emerged as an economic wasteland, with a per capita income of $50 in 1953. Despite allocating over 5 percent of its GNP to national defense over the past forty years, it has grown from an economic pygmy of the 1960s to a potential economic giant of the 1990s. In 1989, South Korea's per capita income reached $4,600, nearly four times that of its Communist counterpart to the north. This success—which has been fueled by a 20 percent annual growth rate in exports over the past quarter of a century—not only raised the ire of protectionists in the United States, but also piqued the interest of leaders in Moscow and Beijing, who distanced themselves from their longtime North Korean Communist allies to gain economic benefit from their former South Korean capitalist enemies.

Even though it lives in the shadow of the People's Republic of China, Hong Kong has maintained a consistent policy of free-market economics over the past four decades. Despite its tenuous existence as a British protectorate six thousand miles from London, Hong Kong's main problem has not been an exodus of emigrants but a tide of immigrants. Its economy had an annual growth rate of 6.3 percent in 1989, yielding a per capita income of $10,350. We must insist that Beijing build upon this success when Britain returns this territory in
1997. Hong Kong could then serve as a catalyst for the prosperity of one-fifth of the world's people.

Under the leadership of Prime Minister Lee Kuan Yew, Singapore has catapulted itself into the ranks of the world's fastest-growing economies. While exploiting its geographic position to serve as a major transshipment point for East Asian trade, it has also made its own economic mark. With a territory of 225 square miles—one-fifth the size of the smallest U.S. state, Rhode Island—and a GNP of $24 billion, Singapore is mile for mile the most economically dynamic country in the world. Over the past quarter of a century, its economy has grown at an annual rate of 7 percent, pushing its per capita income to $10,450 in 1989. With little territory and even fewer natural resources, growth could have come only through developing its human resources. As Lee once said, “This place will survive only if it has got the will to make the grade. It's got nothing else but will and work.”

The four Asian tigers succeeded because their governments adopted policies that unleashed the creative potential of their people. Though this appears mundane at first glance, anyone who has studied the underdeveloped world knows that most of its governments have spent enormous time and resources sapping the energies of their peoples. The leaders of the Asian tigers understood that the most basic human motivation—the desire to better the condition of one's self and family—is the mainspring of economic growth. People, regardless of their education and background, have responded to such basic economic incentives from the dawn of time in every corner of the world.

The first correct move of the successful developing countries was to ignore the advice of Western academics who, like snake oil salesmen, pushed development strategies based on import substitution and statism. Advocates of import substitution
believed that economic contact with the industrialized world hindered development. They therefore urged high tariffs, prohibitive barriers to multinational investment, major subsidies to favored industries, and rigid self-reliance through the elimination of imports wherever possible. Domestically, their premise was that economic development was unnatural and that governments had to adopt comprehensive programs to compel their people to produce. They insisted that the state not only had to provide the needed infrastructure, but also had to fashion industrial strategies and to mobilize—through coercion if necessary—an apathetic people. As one prominent Western development theorist wrote, “The special advisers to underdeveloped countries who have taken the time and trouble to acquaint themselves with the problem, no matter who they are . . . all recommend central planning as the first condition of progress.”

Ne Win, Burma's longtime dictator, epitomized this approach. When I met with him in 1985, I asked why he did not follow China's example of providing economic incentives for his people to produce, particularly since Burma was the poorest nation in Asia. He replied candidly, “The Chinese people are different. They respond to positive incentives. The Burmese people are lazy. They will only respond to negative incentives.” Not surprisingly, Burma's economy atrophied during his rule.

The Asian tigers rejected this theory. They understood that there were five keys to successful development:

Base development on the foundation of competitive markets
. Free-market institutions—private property and floating prices—create the incentives for people to produce. Only through the right to own private property can an iron link be forged between work and reward. And only market-based prices can provide the indispensable signals to consumers
and producers that drive an economy toward greater efficiency. Yet in much of the underdeveloped world, governments have continually undermined confidence in the sanctity of property by nationalizing entire industries and have systematically meddled with free prices through controls and subsidies.

A hint of condescending racism exists in the views of development academics who depict the people of the underdeveloped world as torpid, unenterprising, and shortsighted. Though some of these countries have low literacy rates, their peoples have always responded when presented with incentives to produce. It has been the peculiar genius of many of their leaders to contrive elaborate ways to give them incentives not to produce. No psychological difference exists between the Chinese on the mainland and those in Taiwan, Hong Kong, and Singapore. The poverty of the former and the prosperity of the latter results from a difference not in talent but in incentives. Deng Xiaoping understood this. While he is still a committed Marxist, his economic reforms gave millions of Chinese incentives to work their way out of poverty rather than insisting on doctrinaire socialism, which guarantees everyone an equal share of poverty.

Facing stiff economic competition is the key to becoming a stiff economic competitor. Those who argue that developing countries should protect their “infant” industries with tariffs until they mature as world-class producers fail to realize that unless they face international competition, these firms will never learn to walk on their own. While many underdeveloped countries hunkered down behind protectionist walls and erected domestic cartels and monopolies, the Asian tigers threw themselves in the fray of the world market and also maintained a competitive environment domestically.

Some say that Japan's international success supports the need for protectionist development strategies. That argument captures only half the picture. While Japan has maintained high tariff barriers, its producers faced a highly competitive domestic market. Few American cars were permitted to slip into Japan in the 1950s and 1960s. But the competition between domestic producers—Nissan, Honda, Toyota, Mitsubishi, and others—was intense, thereby priming Japanese automobile companies for their expansion abroad.

Invest in human capital
. The leaders of the Asian tigers understood that the critical component of development was human capital. Although its abundance in land and natural resources significantly helped the development of the United States, the key was the enterprising nature of its people and the value they placed on education. The same has been true among the four successful developing countries. Each has invested a high proportion of its GNP in education—as high as 4.4 percent in Singapore—and has encouraged its people to study abroad. All four have literacy rates far above the underdeveloped world's average, with Taiwan and South Korea even matching Western standards.

Keep the economic burden of government low
. Though many today scoff at the theories of supply-side economics, they have refocused attention on an important truth: the more you tax something, the less you will get of it. If government imposes high taxes on the fruits of work—incomes and profits—there will be less economic activity just as surely as night follows day. While many countries in the underdeveloped world raised taxes to try to capture more revenue, the successful developing nations in East Asia understood that low taxes produce high growth, which eventually generates more government revenue even at lower tax rates. Governments in unsuccessful developing countries have sought to
carve out for themselves a bigger piece of the pie, while the successful ones have focused on increasing the size of the pie.

Taxes are not the only problem. In much of the underdeveloped world, there is an almost cultish worship of state intervention in the economy. The state reserves monopoly industries for itself, controls all imports and exports, maintains an iron grip on new businesses through the licensing of commercial and industrial activities, restricts the mobility of labor and capital, enforces wage and price controls, and subsidizes enterprises and sectors in accordance with an overall plan or at the behest of certain interest groups. In none of the Asian tigers did such idiocy infect the thinking of economic policymakers.

This has been particularly true in the area of investment. It is almost a cliché to criticize developing countries for their senseless investments in economic white elephants. Steel plants, government airlines, six-lane superhighways leading nowhere, and newly built capital cities—all status symbols of development—have been the focus of billions of dollars of state-directed spending. While such “industrial strategies” continue to seduce Western academics and liberal pundits, virtually all of those resources were wasted. Anyone who has spent time discussing economics with government bureaucrats in the underdeveloped world knows that they are the last people on earth who should control national investment. The contrast with the policies of the Asian tigers—where investment remained under the control of the private sector—could not be more stark. When their governments did intervene in the economy, the purpose has been to strengthen—not to weaken or displace—the private economy.

Create conditions to attract foreign investment
. While much of the underdeveloped world handed the West's multinational corporations their walking papers, the successful
developing countries were rolling out the red carpet for them. They understood that foreign investment meant new jobs and that by attracting such investment they were not losing control of their economic destiny but were creating the prospects for a better economic future. They never cavalierly nationalized foreign firms, as many underdeveloped countries did in the 1960s and 1970s, but rather let these companies profit according to the dictates of the market. While the Asian tigers ascended the economic ladder, the others dropped into economic sinkholes. In Africa, only the Ivory Coast under President Félix Houphouët-Boigny followed this lesson and welcomed foreign investment.

Make exports the engine of economic growth
. Since few countries in the underdeveloped world have sufficient size to fully exploit economies of scale with modern production techniques, they can succeed only through exports to the world market. Since the early 1960s, all of the successful developing countries of East Asia adopted some kind of export-oriented strategy. In 1990, their total export revenues accounted for 60 percent of their aggregate GNP. Exports made up 34 percent of GNP in South Korea and 55 percent in Taiwan. With their role as transshipment points for regional trade, those figures were even higher for Hong Kong and Singapore, reaching 135 percent and 191 percent, respectively.

These lessons—the keys to the success of the Asian tigers—should not be startling. In a contest that pits a strategy based on state control and intervention in every aspect of economic life against one based on free markets, private initiative, and competition, the latter will always prevail. The collapse of the Soviet economy proved this point dramatically. Many observers explain the success of the four Asian tigers as a product of East Asia's Confucian heritage, with its
emphasis on a strong work ethic. While culture does affect economic performance, the decisions of their leaders to unleash market forces represent the real secret to their success. Not only do their policies have little to do with the philosophies of East Asia, they are also not unique to Asia. If other countries free the mainsprings of the market, they will enjoy the same success as the Asian tigers.

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