The Myth of Asia's Miracle: Who's Laughing Now?

Back in the early 1990s when I began my career in Hong Kong as a research analyst, Paul Krugman attended an investment conference and set more than a few bankers' jaws dropping when he suggested that, no, Asia's phenomenal growth (this is even before China got rolling)  was really nothing special, original or unique. If fact, growth was bound to slow down just as it had everywhere else in the world because economic efficiency and inputs have limits. I remember that most people ignored Krugman, even laughed at this idea - until the 1997 Asian financial crisis hit.

Twenty years later what is most interesting about Krugman's original 1994 article in Foreign Affairs - "The Myth of Asia's Miracle" - (see here) is how relevant it is today when viewing the long-term development trajectory of China, or even the recent euphoria around Japan's resurgent "Abenomics."

What Krugman said was this: Asia was particularly good at mobilizing resources or "inputs" (human, capital, technology) to get the superb "outputs" (growth), but that both would inevitably slow over time.  There are only so many people who can move off farms and into factories. Educational attainment and productivity are correlated closely, but not infinitely. There is a limit to how much technology will improve productivity at dramatic rates. Diminishing returns from government investment will eventually set in. And a country's collective delayed gratification (saving, sacrificing) gives way to consuming for today.   

In fact, Krugman was not introducing anything particularly new. This is textbook macroeconomics. In the context of China today, anyone can see where a few major speed limits (ie. mobilizing economic inputs) are found:

  • Investment as a share of GDP is unsustainable and unproductive (see this article at the IMF)
  • Labor cost pressures impact export competitiveness
  • Urbanization and high density pollution have costs as well as gains
  • College graduates, educational attainment and human capital productivity are facing challenges (see here)

This is not to deny the geopolitically profound impact that Asian and Chinese economic growth has had, and will continue to have on the rest of the world. Nobody is making the argument that China's shift to a more consumption based economy - a model more in line with the developed world and certainly nothing unique - will not yield more tremendous growth in future. The economic numbers are only saying that China, despite all of its size and "displacement" impact, is not miraculous and that staggeringly high-growth rates may never return.

Here are a couple of charts to contemplate for (1) Asia in perspective and (2) China today.