What Asia Can Really Teach America

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What Asia Can Really Teach America

By Michael Schuman





For the past 40 years, Americans have looked at Asia's phenomenal economic growth and asked, What are they doing right, and what are we doing wrong? Today the question rings louder than ever. As Asia surges out of the Great Recession, experts are searching furiously for the secrets of the region's resilience, those nuggets of Eastern wisdom that could rejuvenate a tired and confused U.S. economy.



Don't get your hopes up. Asia can surely provide lessons for the West, but Americans often take the wrong lessons from Asia's growth stories — and we seem to be doing it again now.



That's because many people mistakenly believe that Asia offers a superior political-economic model for meeting the modern world's economic challenges. That perception, however, is based on the incorrect notion that Asia's success is the product of intrusive governments. In the 1980s, when Japan was Asia's rising giant, some said its state-led economic system, in which bureaucrats "picked winners" by targeting industries for special support, was better than the more laissez-faire practices of the West. Today, pundits see China's "state capitalism" as the contender for global dominance. The heavier hand of the Chinese government, this thinking goes, acts as a source of strength in hard times while firmly guiding the nation into the industries of the future. China's vibrancy has even led Americans to question the viability of the very tenets of democracy. "It is intellectually and politically unsettling to realize that, if the West cannot quickly straighten out its systems of government, only politically unreformed states like China will be able to make the decisions that a nation needs to survive in today's high-speed, hi-tech, increasingly globalized world," scholar Orville Schell recently wrote.



Sure, the authoritarian rulers in Beijing can sometimes implement policies more efficiently than the argumentative democrats of the West. That's exactly why Beijing's recession-busting stimulus plan proved more effective than Washington's. With no political debate to get in the way, China's bureaucrats splashed money everywhere to toss up shiny new infrastructure. The slumping economy needs more credit? Well, that's easy — if you own the banks. Just open a spigot and watch the money flow. China's government can also push ahead on important long-term projects with greater speed. While health care reform in the U.S. languishes in Congress, China is building an extensive health care system to cover nearly all of its 1.3 billion people.

But there are few things more annoying than pundits in the democratic U.S., who are firmly protected by the Bill of Rights, waxing poetic about the virtues of dictatorships. What they're forgetting is the frightening downside to China's authoritarian state capitalism, and not just in terms of human rights. China's stimulus program might have produced growth, but it could very well have undermined the health of the banking system. The Chinese economy is riddled with excess capacity, inefficient state enterprises and asset bubbles.



More important, the idea that the state made China rich is simply not true. China only started growing when the overbearing government got out of the way and allowed private enterprise, both Chinese and foreign, to thrive. The same is true in India. Across Asia, in fact, the primary engine of growth has always been the market, not the state. All rapid-growth Asian economies — including China's — succeeded by latching onto the expanding forces of globalization, through free trade and free flows of capital. South Korea, Taiwan and Singapore may have had active bureaucrats, but the true source of their economic growth was exports manufactured by private companies and sold to the consumers of the world. Asia's growth story is more a testament to the dangers of state meddling than its virtues. Just look at Japan, which has been suffering for 20 years from the damage caused by too much bureaucratic interference.



Widen your perspective: take into account what's happening in Asia outside of China, and the message from the East looks starkly different. The problem with today's analysis of Asia is that it is far too focused on China. China is not Asia. In fact, in many ways, it is the exception (albeit a big one). Asia's other giant outperformer — India — is a quite fractious democracy. Only one significant economy — Vietnam — is following China's lead. Just about everywhere else, policymakers are rejecting the China model. The severity of the financial crisis hasn't caused political leaders to look to China's success and roll back democracy or copy China's state capitalism. In fact, they are heading in just the opposite direction. The Presidents of South Korea and Taiwan believe deregulation is crucial for the future of their economies. In Japan, newly installed Prime Minister Yukio Hatoyama has wisely made weakening the power of the bureaucracy — not expanding it — one of his primary policy goals. Asia has also become a leader in promoting free trade, as a proliferation of free-trade associations (FTAs) continues to push back the power of the state. India, another country fingered as a state capitalist, inked landmark FTAs last year with South Korea and the 10-member Association of Southeast Asian Nations (ASEAN).



Even in China, autocratic state capitalism has an uncertain future. The story of Asia's economic boom tells us that democracies tend to follow wealth. Asians have demanded more political rights with their expanded economic opportunity. That's what happened in Taiwan, South Korea and Indonesia, all dictatorships turned stable democracies. China believes it can build a full-fledged market economy while leaving its politics unchanged. So far it has. But as China gets richer, can its ruling class survive the forces that undermined autocratic regimes elsewhere in Asia?



The same can be asked about the state role in its economy. The evidence from Asia shows that its economies became more market-driven as they became more advanced. That's been true in China as well. Despite all the talk of state capitalism, Beijing's leaders continue to liberalize the economy. In January, a free-trade agreement between China and ASEAN came into full effect, creating a free-trade zone with more potential customers than NAFTA. China's State Council also approved the very capitalist practices of short selling of stocks and futures trading. The big question about China-style state capitalism is not whether other nations should mimic it to compete in a changing world economy. The real issue is whether China's state capitalism can withstand the pressures imposed by a changing world economy.



Asia's economic strength is not a result of some ancient Chinese secret or a special economic model that Americans must copy to survive. It owes to simple, old-fashioned, free enterprise, the kind Americans love to love. The "democratic capitalism" being questioned in the U.S. is finding new roots in a rising Asia. If Americans want to learn the correct lessons from Asia, they can ironically find them right at home.