Razeen Sally is Associate Professor at the Lee Kuan Yew School of Public Policy and Chairman of the Institute of Policy Studies, the main economic-policy think tank in his native Sri Lanka. His research and teaching focuses on global trade policy and Asia in the world economy. He has also written on the history of economic ideas, especially the theory of commercial policy.
David Austin: What do people mean when they say the "Asian economic miracle"? What does that mean?
Razeen Sally: Yeah. It's basically the spectacular economic growth that much of Asia has had since the 1950s and its catch-up growth. So we have countries that started dirt poor, some of them destroyed during the war, like Japan and then Korea during the Korean War. And they've risen, some of them, as Lee Kuan Yew put it in his memoirs From Third World to First, like Singapore, like South Korea, like Japan, others from dirt poor to somewhat less poor like India and Vietnam more recently.
And some of them from dirt poor to middle income countries - China, Malaysia, Thailand - for example. So that's the Asian economic miracle over a period of, I'd say 50 to 60 years.
David Austin: Do you think it's right to call it a miracle or since you said its catch-up growth, is this something that was bound to happen one way or another?
Razeen Sally: It's neither a miracle in terms of something that's just happened out of the blue, it's not been pre-ordained, not automatic. It has been man-made, so it's a result of good conditions.
And I think I would point to two main enabling conditions. One is that governments in countries that have had this kind of miracle growth as it were, have got the basics right. The World Bank did a big report on the East Asian miracle in 1993, studying the East Asian tigers and their soundbite for it was getting the basics right.
What does that mean? Firstly, you need political stability, otherwise nothing beneficial happens. Secondly, you need reasonable fiscal and monetary stability. You need to be open to international trade, so trade becomes an engine of growth. You need to roll out your hard infrastructure, roads, ports, railways, airports. You need to improve education starting with primary and secondary education.
So those are the basics. And these countries got them more or less right. The second enabling condition is to really have a propitious set of external conditions. So you need regional and global peace, more or less, and you need a stable and open world economy with the free flow of goods services, people to some extent, and capital.
So I think those were the main enabling conditions for this Asian economic miracle.
David Austin: And you mentioned that that report was in 1993. After the 1997 Asian economic crisis was that re-evaluated at all?
Razeen Sally: Sure. It was re-evaluated straight after the report came out. There were some so-called revisionists who argued that the report didn't give nearly enough attention to successful industrial policies.
In Japan and South Korea, Taiwan in particular, where governments targeted particular sectors for global success, created national champions. That's contested, you know, we can have a pretty nuanced argument about that. I think it's getting the basics right. That was the most important, even after the Asian crisis.
The fact was, the Asian crisis, which was severe for some countries in East Asia, they took pretty bitter medicine, and they recovered pretty quickly and got back on track within a matter of two plus years.
David Austin: When you were talking about the poor Asian countries, the middle income Asian countries and the rich Asian countries, does that rank them to the degree that they got those basics right?
Razeen Sally: Yes. So all of them need to get the basics right. But once you get beyond a certain stage, it gets much more complicated. So I make this distinction between poor, middle and rich Asia really to differentiate Asia, because Asia is just so huge, diverse, and complicated.
It's impossible to make a simple generalisation about the whole of Asia, but I think one can make some middle range generalisations about different parts of Asia at different levels of development. And each has different sets of challenges.
David Austin: Would you like to talk about the kind of different sets of challenges?
Razeen Sally: Sure. It's simplest to start with "poor" Asia. So, what are we talking about? The World Bank defines these countries as having per capita income of between zero and, $4,000 per capita a year, if it's between zero and 1000, they're really very poor. Those are the least developed countries. There are only three left in Asia, which is a testament of this economic miracle and that's Afghanistan, Nepal, and North Korea.
There are others. The World Bank categorises them, perhaps somewhat misleadingly as lower middle income. They're still poor, with incomes per capita anywhere between $1,000 and $4,000 that have gone out of being dirt poor. They are less poor, but as I said, they're still poor.
Here we're talking of quite a big bunch of Asia. So it's India, Pakistan, Bangladesh, the poorer countries of ASEAN: Indonesia, Philippines, Vietnam, Cambodia, Laos, Myanmar. I think the lessons from the Asian economic miracle really hold very strongly for them. They've got huge catch up growth potential because they're poor — an economist once talked about the advantages of backwardness —they have that.
So they have people, poor people, land, capital shovel-ready as it were. And if they get some basics right, the ones I mentioned, they can potentially grow anywhere between 6 and 10% a year. If you're growing at 6% plus a year because of compound growth, that essentially means almost doubling living standards in a decade.
Right. So that's the potential. And those are the challenges for the poorest countries or the poor countries in Asia.
David Austin: I see what you mean because when you listed that larger group of what you said are called "lower middle income" but are actually still poor, that's such a wide variety of countries. I mean, comparing India and Bangladesh and Myanmar and Indonesia, they all have such different economies, different makeups, in a way it's odd to group them together
Razeen Sally: Yes. I mean the one common thing they have is that they have they're within a band of per capita incomes.
Yes, lots of differences. They have different histories, different colonial legacies, different political systems, [and] different factor endowments. Some are resource-rich, some are rich in abundant labour, and so on. Yet I think one can still extract some commonalities.
They all have this catch-up growth, potential. They all need to get the basics right. Now, politically the challenges are difficult for all of them, maybe more difficult for some than others, but we see a kind of trajectory. You know, Bangladesh specialising in garments, for example, with huge development success, given where it was in the 1970s, is following in the footsteps of what the East Asian miracle economies did a few decades earlier.
They need to diversify out of garments. Vietnam is following in the footsteps of China. China is following in the footsteps of the Northeast Asian miracle economies, and so on.
David Austin: Should we, talk about the richer Asian countries then?
Razeen Sally: Sure. The middle income ones, this is where it gets more complicated because, now here, we're talking of countries with per capita incomes of between $4,000 and $12,000 per capita, according to the World Bank.
And in Asia, it's basically three [countries]. It's huge China. It's Thailand in the middle. And then much smaller Malaysia. Now what's happening with all three, again, very different countries and economies and societies and political systems.
But what they have in common is that they're all coming closer to exhausting this catch-up growth, so they're coming to that frontier. They are ageing societies. So fewer younger people to put into work. They're wasting a lot of capital. It's becoming much less efficient. Land is scarcer, which means in order to deliver not the kind of growth rates they had in the past, because that's impossible, but lower growth, but much better quality growth, they need to improve the efficiency with which they use their resources, their land, their labour and capital.
In other words, they need to put much more emphasis on improving productivity growth.
They are switching though, they have to switch to a different phase of growth, which is much more productivity-based, or shall we say innovation-based. It's a question of moving from imitation to innovation as it were.
Now that brings with it a new set of more complicated challenges. They have to get the basics right. Because if they get the basics wrong, they'll just be stuck. But in addition to that, they need to do some certain things, difficult things, which they didn't need to do during that catch-up growth.
[For] example, China. What China did very successfully between 1978 and until fairly recently, 10% rates of growth per year for those three plus decades, was to get some of those basics right but still amidst a lot of corruption, weak rule of law, and of course an authoritarian political system.
So that's possible, but when you want to move to more productivity-based growth, you really need to improve the quality of your institutions, meaning the rule of law, it can't be very arbitrary and selective, clamping down on corruption. Improving things like bankruptcy procedures, accountancy procedures, the quality of your public administration, your regulatory agencies. Now, those are actually much more difficult to do. They're also politically more difficult. They get closer to the heart of political systems, which is why we talk of this so-called middle income trap.
There's plenty of evidence that shows that countries that would get the basics right make a big leap and quicker than ever before, but then they get stuck because they're simply not able politically and institutionally to make those more difficult reforms for productivity growth.
David Austin: Everything you've described has been what the story of China has been as portrayed in the news and everything recently, that juncture that China has been at for a while now. They have exhausted a lot of that catch-up growth. They are trying to redirect their economy to higher value added things, but then along comes the trade war at the same time.
And then I was also going to ask you about how you would rate President Xi's anti-corruption drive that has been also in the news. Do you think it's successful or is it a window dressing? How would you rate it?
Razeen Sally: Okay, so let's focus on China. And I think this gets us beyond the economics into political economy and the heart of the political system. And let's not beat around the bush here. The dilemma is this: To get to this new phase of growth - lower but better quality growth - China needs to reform the kind of things it avoided before, because it was too politically sensitive.
Now in the past, what it did was liberalise its product markets like Apple electronic devices. You can do that without endangering your political system. But as the leadership admitted, it's in the report for the third plenum in 2012, for China to get out of this middle income trap and become rich, more than upper middle income, it needs to reform its land, labour and capital markets. In other words, its factor markets.
This is a whole different ball game because it means giving individuals, farmers for example, property rights to the land they till. It means liberalising, opening up the capital system, banking, insurance securities, it means liberalising the labour market, which means eventually getting rid of the hukou system.
Now all of those things are different compared with opening up the market to Apple or GM or GE because you're talking now of trampling on vested interests at the heart of the system, which go directly to the heart of the Party state, all the way to the members of the standing committee of the Politburo and the family networks around them. So surprise, surprise in the last seven years since the third plenum, we have seen hardly any reforms.
We've seen some baby steps, but if anything, we've seen a movement in the opposite direction. Because even though I think especially the technocrats in Beijing realise that these reforms are needed, they're proving to be politically very difficult, perhaps impossible and not in the interests of the Communist Party and the state apparatus around it.
So that's the key dilemma. Let's get a bit closer now to core politics and talk about the political system directly. And I think we have a kind of $64,000 question here. You can do catch-up growth under a variety of political systems, including hard authoritarianism. China has shown that, South Korea showed it before. Chile showed it under General Pinochet.
Now, when we get to more innovation-based growth at the frontier so far, that's been the monopoly, as it were, of liberal democracies with, shall we say, open plural societies. And in Asia, we're talking in the first instance of Australia and New Zealand, but we're also talking of Japan, South Korea and Taiwan. South Korea and Taiwan, of course, having made the transition to democracy.
Hong Kong and Singapore are difficult to classify, but they are not Chinese-style hard authoritarianism, they're hybrids.
Now, the big question is whether China can actually make that transition, cross that bridge to being an advanced innovation-based economy with an authoritarian political system. And here you have a divide between optimists and pessimists. The optimists, including some in Singapore, say yes, China, not only can, but will do this combination of Mao and markets or Xi and markets, if you like. And indeed it can do it better than the West because you can have centralised strategic direction.
The pessimists, James Robinson and Daron Acemoglu in their two recent books, for example, say no. With this kind of system, you will effectively block the kind of reforms needed, as I said has been happening in China recently.
And if China doesn't actually liberalise, it doesn't mean it needs a carbon copy of the West, but liberal political reforms, including more democracy, including more individual rights and a move to a genuinely open society with free people doing innovative things, China is going to fail. It'll just get stuck.
Where do I stand? I stand more with the pessimists. I'm much more skeptical than many in Asia about the viability of China's political economic model in the medium term, domestically, and about China's ability to lead in Asia and elsewhere as well. And I have perhaps more faith in the resilience of liberal democracies with open societies than many others have.
David Austin: If you're pessimistic that it's not going to work, that they're not going to make the reforms, what do you foresee happening?
Do you think there will be unrest? Do you think that there will be able to just be stagnation and just kind of a long drawn out malaise? What would you predict what's going to happen?
Razeen Sally: The answer is, I don't know. So I can't make a sure-fire prediction. I mean, it could be any of the above on that menu.
China, of course, has a history of convulsions. There are trigger points when things just break down and that leads to internal disorder and chaos. In the past, it didn't make much difference to the rest of the world because China was sealed off. Now, of course it's different because China is so integrated and matters so much economically to the rest of the world.
So if that sort of thing happens in the future, it will have systemic repercussions. And there are commentators out there, Robert Kaplan is a good recent example, who make a sort of prediction that authoritarianism in China and illiberal democracy in Russia, will not succeed in providing a superior model to the West in the future, but will implode. And that implosion will spill over the border, given the importance of both and particularly the importance of China, much more so than Russia.
I really don't know. I think that's a scenario, but I'm not in the business of painting what I consider to be a Panglossian scenario of China with that combination of Mao or Xi with markets.
David Austin: Well, is there anything that you want to, to leave us on? As far as looking ahead?
Razeen Sally: Well, looking ahead, since you asked the question, I will trespass on geopolitical territory.
David Austin: Please do.
Razeen Sally: Because I think, having some understanding of where we were, where we are and where we might be heading geopolitically is really important to understanding where we might be going economically.
So meaning the security order, the big questions of war and peace, we had a Pax Americana in Asia. We still have to some extent, which provided the enabling conditions for the Asian economic miracle in economic terms and security terms, America being the balancing power in the region. It seems that that order is shifting much faster than most of us anticipated even a few years ago, particularly in terms of the power shift involving the US and China.
I think that it leaves us with maybe three scenarios, geopolitical scenarios, but each of them have an economic corollary.
So the first is continued US leadership, a kind of adjusted "Pax Americana", which of course would be more multi-polar. It would have to involve China and India and others, but it would be still essentially a rules-based system to keep the economic order open and stable and to keep the US here, both in terms of the Naval presence and also with its military alliances with some countries. That's probably the best prospect for the kind of economic order I would like to see, which is why I think the United States remains the indispensable nation if one wants that kind of scenario to materialise.
The second scenario is a power shift to a "Pax Sinica" in which we will see a very different kind of leadership to what we've seen in the past. It will be much more hardcore mercantilist not just in terms of military projections, especially the PLA Navy, but if you look at what China has been doing so far to extend its power, it's not been really about multilateral rules. Like Ulysses tying your hands behind the mast, so you don't want to head onto the rocks due to the wail of the sirens, but it's about arbitrary power. Infrastructure projects, very much behind closed doors, deals negotiated, having bilateral relations with dependent countries in a kind of 21st century version of the old tributary system. I'm half Sri Lankan. I see that in Sri Lanka, that also means co-opting local political and business elites. So a big role for the states and more constricted role for markets, power relations that are more bilateralised, transactional, less rules-based.
Now that has implications for all of us everywhere in Asia, including Singapore.
The third scenario is neither of the above, but we have a vacuum and the vacuum scenario has again, I mean, I suppose the optimist would say that you will have regional cooperation filling that vacuum, starting with ASEAN. I find that a bit too optimistic because the problem with that kind of multipolar cooperation without a leader is that you have lots of free riders, and it's difficult to organise the cooperation to provide the requisite public goods. The more maligned scenario is that because of that vacuum, we have powers clashing with each other, ending up with more conflict and even a war system. You have hardcore realists like Professor John Mearsheimer in the US who make that kind of prediction.
So that's my fear about a power vacuum in the region.
David Austin: Thank you very much for joining us. I really appreciate that. Thank you.
(Photo credit: zhang kaiyv)