Recent Papers & Speeches

"The Present Political Crisis - Asian Perspectives"
At the Special Gathering to commemorate the 50th Anniversary of the Mont Pelerin Society, April 1997

It is a great honor and privilege for me to have been invited to this special gathering commemorating the fiftieth anniversary of the Mont Pelerin Society, and to be given the opportunity to talk at the first session on " The Present Political Crisis "from an Asian perspective.

I firmly believe that a society based on human liberty and the market system can guarantee sustainable growth and long-term development for mankind. The world's unparalleled economic and political progress during the half century since World War Two - far surpassing any figures recorded in the previous hundred years - is proof enough of my position.

At the start, the members of the Mont Pelerin Society carried on an intellectual battle against the ideology and system of communism, later extending the battle front to the ideology and system of the extreme welfare state within the free world. The history of the second half of the twentieth century has ultimately proved the correctness of this stand.

The Cold War ended when the ideology and political-economic systems of communism were defeated by the ideology and political-economic systems of liberalism. The marketization of the economy is proceeding even in countries such as China, North Korea, and Cuba, which retain a Communist political regime.

The excessive welfare state within the Western camp has also become a thing of the past. In the 1980's, as almost all thinking people recognize, Reaganomics in the Unites States and Thatcherism in Britain created the foundation for the prosperity of these two economies by emphasizing deregulation and lower direct taxed, and by relying on the supply side to enliven the economy. Australia and New Zealand have also brought their economies back to life through courageous deregulation policies. The Scandinavian countries also seem to be moving away from the extreme welfare state towards a system that places more emphasis on self-responsibility, and on the freedom to choose.
In the second half of the twentieth century, economies that seemed for a while to have achieved eye-catching growth have not managed to sustain growth unless they were rooted in the free market. Socialist economic planning, which seemed ideally suited to mass production and mass consumption, has not survived into an era of diversification, powered by semi-conductor technology and demanding small-lot production across a wide range of items.
The welfare state, which is an enlarged, uniform system of social guarantees carried out by the state, gave birth to inefficient, big government that oppressed the private market economy and the individual's freedom of choice. Such government is no longer able to cope with mounting fiscal deficits and an increasing burden on taxpayers, and has been forced to change direction towards market-oriented systems.

2.
Amidst these worldwide historical phenomena, we have witnessed one encouraging experience. I refer to what is called the "miracle" of economic development.
The first time the word "miracle" was used in an economic sense after World War Two was in reference to the postwar recovery of Japan and Germany and to their subsequent high economic growth. These two countries, defeated in World War Two, managed through their recovery to catch up in terms of industrialization with the victors of that war. From the 1970's, the currencies of these two countries were repeatedly revalued vis-a-vis the erstwhile victors. Today, the per-capita GDP of Japan and Germany surpasses, in dollar terms, those of the United States, Britain and France.
Needless to say, these two countries are neither socialist economies nor extreme welfare states. They rely basically on the private market economy, and the scale of their governments is relatively small. In that sense, we can say that their economic systems are close to the ideals of the Mont Pelerin Society.
However, with regard to Japan, a somewhat more careful analysis is in order.
Immediately after its defeat in World War Two, Japan carried out two major reforms-the dissolution of the zaibatsu and the redistribution of land. The zaibatsu dissolution ended oligopoly and greatly promoted competition. Land reform ended landlordism. The resulting large increase in the number of independent self-reliant farmers led to a more equal distribution of income and wealth, and to the growth of a huge domestic market. This in turn sparked a fierce battle among manufacturers to win market-share, causing them to make efforts to increase their productivity as well as to penetrate world markets. In that sense, it was free competition within the domestic market that became the principle for the development of the Japanese economy.
But Japan took a long time to open up this enormous domestic market economy. At first, the Japanese Government protected its domestic market from foreign competition, allowing only domestic manufacturers to compete fiercely within it. And as domestic manufacturers grew to the point where they could compete overseas, they were unleashed one by one on the international market.
The late Professor Yasusuke Murakami of Tokyo University dubbed this strategy "Developmentalism." (See Yasusuke Murakami, An Anticlassical Political-Economic Analysis, Stanford University Press, 1996.) It had the following characteristics:
First, its purpose was to catch up with the level of industrialization in the Western front-runner countries.
Second, political dictatorship or authoritarianism led industrialization that was based fundamentally on the market economy.
Third, this was achieved by means of an "iron triangle" formed by bureaucrats, politicians and businessmen.
Bureaucrats kept the domestic market closed, while importing technology and systems from overseas industrialized countries, then conveying these to the private sector through regulations and market intervention, and thus promoting industrialization.
Politicians, operating under the prevailing structure of one-party rule by Liberal Democrats, endorsed and protected the system as a whole.
Businessmen, while supporting politicians financially, raised productivity under the protected, closed system. When an enterprise had acquired sufficient strength, it was allowed to try its wings in overseas markets.
This Japanese strategy, known as "developmentalism," was effective as long as Japan was still in the catching-up phase, and globalization of the world economy had not proceeded very far. Today, however, the catching-up phase is over, and the task is no longer to import technology and systems from overseas, but rather to develop Japan's own technology and systems. In this environment, "developmentalism" has turned into shackles, since excessive bureaucratic regulation and interference hamper the free innovation that gives birth to new technologies and systems.
Furthermore, the "iron triangle" of politicians, bureaucrats and businessmen means, in domestic terms, a coalition of minority vested interest groups, which does not reflect the major interests of the Japanese people as a whole. This coalition of minor groups is designed to channel profits and advantages to the coalition partners, and has thus become a hotbed of corruption, a far cry from what a true democracy should be.
In international terms, this strategy constitutes unfair protectionism designed only to promote the prosperity of one's own country.
Today, Japan is trying to move away from the develpmentalist system it has relied on for fifty years, towards individual freedom of choice and innovative political, economic and social systems. There is a growing feeling among the people that unless the iron triangle is broke, there can be no real, systemic reform. In the general election of October 1996, all political parties responded to this feeling by making "administrative reform" their slogan. The current Hashimoto government talks of structural reform in six fields - the economy, the fiscal regime, politics, the administration, social security, and education. How the government proceeds and what the feasibility of specific items may be , no one yet knows. The task will not be easy, for there will be stubborn resistance from vested interest groups, based on fifty years under the developmentlist system.

2.
the history of the Japanese experience is of great interest, when compared to the economic development, also dubbed "miraculous", of the East Asian countries since the 1980s. The average growth rate of Asian NIEs in 1986-90 was 9.6%, and those of Asian NIEs and ASEAN countries in 1991-95 were 7.0% and 7.1% respectively. China and Vietnam have also achieved remarkably high growth.
The remarkable growth history of the East Asian economies since the 1980s was triggered by the growing current account deficit of the United States and the steep decline of the U.S. dollar resulting from Reaganomics. The East Asian economies depended heavily on the economies of the forerunner countries of Europe and North America, even after they ceased to be colonies and achieved independence as the result of World War II in this region, China and ASEAN countries like Malaysia, Indonesia, Thailand and the Philippines exported raw materials to resource-poor Japan and the Asian NIEs (such as South Korea, Taiwan, Hong Kong and Singapore), while Japan and the Asian NIEs processed these materials and exported finished manufactured goods to the forerunner markets of Europe and America. It used to be said in those days that when the United States sneezed, Japan and the Asian NIEs would catch sold, while China and the ASEAN countries would catch pneumonia. Because the East Asian region had such a vertical trade structure, the growth of the U>S. current account deficit under Reaganomics in the first half of the 1980s meant an expansion of the U.S. market as the final market for East Asian exports and thus contributed greatly to the development of the East Asian regional economy.
However, the decline of the U.S. dollar relative to the currencies of Japan and the Asian NIEs after the Plaza accord or 1985, and the shrinkage of the U.S. current account deficit, dramatically changed the trade structure of the East Asian region. In order to remain competitive with U.S. manufacturers, manufacturers in Japan and the Asian NIEs moved their factories to china, Vietnam and the ASEAN countries, whose currencies had not risen relative to the U.S. dollar. Japanese and NIEs manufacturers exported their goods to Europe and the United States directly from these new factories abroad, and also imported them back into their own domestic markets. The direct investment and transfer of technology resulting from this shift in manufacturing operations became the stimulus for a rapid increase in the industrialization of China, Vietnam and the ASEAN countries. At the same time, horizontal trade in finished goods, the export of capital, and technology transfers within the East Asian region all expanded, so that East Asian economies we able to develop spontaneously, without depending on the markets of the Western forerunner countries. This was the reason for the growth "miracle" of the East Asian economies today.
The pattern of development in these countries - Asian NIEs, ASEAN countries, or even China and Vietnam - is more or less similar to the path Japan had trod. They have more or less exhibited the same three features of developmentalism to which I have referred.
These countries have market economies, or are rapidly developing into market economies. But their markets are not sufficiently open, because of government regulation and intervention, which are typical of the catching-up phase of industrialization. They have the same iron triangle of politicians, bureaucrats and businessmen that Japan has. While in form they are parliamentary democracies, in fact they have been controlled by various forms of authoritarianism or even dictatorship. In South Korea and Taiwan, military dictatorships were in power for many years, while Singapore, Malaysia, Indonesia and the Philippines have been under the rule of specific individuals. In Thailand, the monarchy plays a unique role, but for many years the country was ruled essentially by the military. Hong Kong is under colonial administration, and China and Vietanam are ruled by the Communist Party.
As long as these countries remain in the catching-up phase of industrialization, they will probably obtain reasonably satisfactory results. But although this system can mobilize idle resources and commit them to the production process, thus promoting economic growth, as Paul Krugman pointed out, it is probably unable to carry out technical innovation in such a way as to raise total factor productivity. (See Paul Krugman, "The Myth of Asia's Miracle," Foreign Affairs. November/December 1994.) These countries are likely to fail in the same way that socialist planned economies and the welfare state failed. For developmental dictatorships or authoritarian states find it difficult to promote the kind of innovation that is based on human liberty and the freedom to choose.
Japan's struggle for political, economic and social reforms can serve as a reverse mirror, as a teacher of what not to do. It is my hope that the countries of Ease Asian will rapidly begin the process of building political, economic and social systems based on the liberty that undergirds modern civilization. Asia has its own traditional culture. Just as the dignity of all individuals must be respected so must the cultures of all nations be respected.
But the world community, while recognizing the distinctiveness of each other's cultures, needs to share a civilization based on the dignity of individuals. Political, economic and social systems based on human liberty should be part of that shared civilization. The "miracle" of East Asia's phenomenal economic growth will become a true miracle only when the countries of this region truly understand the concepts of human liberty and free market economy transmitted by Western civilization and make them part of their own culture. Only then will they be able to contribute to world civilization through a process of sustained development. Can they do this? Ease Asian politics stands at an historic crossroads.

�œback

�œTOP PAGE