(specialized) tasks almost always enhances competency and output per
worker. This is especially the case when competitors are contiguous and
transportation costs are accordingly low. The Tigers, confronting tighter labor
markets and rising wages, have been losing their early competitive advantage
in labor-intensive goods to lower-cost competitors in Asia, Latin
America, and most recently, Eastern Europe. Fortunately, education was an
early priority in the Tigers' drive toward competitiveness. East Asia has
thus been able to move toward more complex products: semiconductors,
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computers, and the wide array of high-technology goods that yield high
value-added in the international marketplace. Capital and more sophisticated
labor forces have vaulted a number of Tigers to developed-economy incomes
and status.
But are those gains at the expense of the rest of the world, particularly,
as is alleged, the United States and Europe? The answer is no. Trade expansion
is not a zero-sum game. In fact, global exports and imports have been
rising significantly faster than world GDP for more than half a century This
occurred in the case of the Tigers because high tariffs and numerous other
barriers to trade induced wide and persistent differences between costs, especially
labor costs, of manufacturing. As barriers came down in the wake
of global trade negotiations and major improvements in transport and communications
technologies, manufacturing shifted to East Asia and Latin
America, raising their real incomes. At the same time, the United States
and other developed countries increasingly specialized in conceptual products
and intellectual services that are valued highly in the marketplace. In
the United States, for example, value-added in finance and insurance rose
from 3.0 percent of GDP in 1953 to 7.8 percent in 2006, while in manufacturing
it fell significantly over the same years. In chapter 25, I'll address
the causes and implications to the United States of this dramatic
shift.
Production shifts, such as the transfer of some U.S. textiles and apparel
manufacturing abroad, have freed resources to engage in the output of
products and services world consumers value more highly. The net result
has been increased real incomes, on average, for both U.S. workers and, for
example, those in East Asia. The "net," of course, obscures the trauma of job
loss suffered by American textile and apparel workers.
The economies of East Asia have come a long way from their humble
roots of a half century ago. But can they continue to advance, especially at
the pace of recent years? Will the region's progress again be curtailed by a
financial crisis, such as the one that was so devastating in 1997? Such a crisis
is unlikely, at least in a similar form. Since 1997, the Asian Tigers have
dramatically remedied their shortfall of foreign-exchange reserves. More
important, they have unlocked their exchange rates from the dollar, which
has eliminated much of the short-horizon "carry-trade" investments whose
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unwinding, in the context of inadequate reserves, set off the crisis.* Thus,
unexpected economic shocks should be more easily absorbed than a decade
ago.
But can trade and standards of living continue to increase indefinitely?
Yes. That is the gift of competitive free markets and the irreversible accumulation
of technology. The volume of cross-border trade has few national
limits.+ Luxembourg's exports, for example, were 177 percent of GDP in
2006, and its imports, 149 percent. Nonetheless, after the major opening up
of world markets, especially following the demise of the Soviet Union,
many barriers and inefficiencies have already been removed. In a sense,
most of the low-hanging fruit of trade openings has already been picked.
Certainly the inability to complete the Doha round of trade negotiations in
2006 should give us all pause regarding the future pace of global enhancement
of the world's living standards. The rate of decline in trade barriers is
almost surely going to slow as we reach the point of intractable political resistance
to further lowering. This suggests that the growth of export-oriented
economies, such as those of East Asia, is not likely to be as rapid as
that of the last six decades.
Eventually, the convergence, or at least the reduction, of risk-adjusted
spreads of costs among competitors of internationally traded goods—
manufactures and commodities—will diminish the effectiveness of export-
oriented growth strategies. And while service-export-oriented growth
policies are very visible—for example, India exporting call-center and computer
services to the United States, the process known in the United States
as outsourcing—such markets are still very small.
One impediment to ever-rising export shares of China and the Tigers
is their rising costs of production. In one of the great ironies of the postwar
years, Vietnam is now being sought as the next production platform for expanding
market-based—read capitalist—trade. Under the U.S.-Vietnam
Bilateral Trade Agreement of 2001, Vietnamese exports to the United
*With fixed exchange rates against the dollar, U.S. dollars were borrowed to finance investment
in higher-yielding loans to East Asian borrowers. With exchange rates floating, the perceived
risk of such transactions rose sharply.
tFor any country, exports less imports cannot be greater than GDP less inventory change, and
for the world as a whole, exports equal imports. But there is no limit to gross flows.
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States increased eightfold, from $1.1 billion in 2001 to $9.3 billion in 2006.
U.S. exports to Vietnam more than doubled.
U.S. history after World War II chronicles two military defeats in our
war to contain Communism. The first was the rapid retreat of U.S. forces in
the face of masses of Chinese military crossing the Yalu River into North
Korea in the winter of 1950; the second, our humiliation in abandoning
South Vietnam in 1975. We may have lost the battles, but not the war. Both
Communist China and Communist Vietnam have been struggling to loosen
their central-planning straitjackets for the economic freedom of capitalism,
while trying not to say out loud what they are doing. In 2006, America's
Merrill Lynch, following Citigroup a year earlier, obtained the right to buy,
sell, and market Vietnamese shares on Ho Chi Minh City's fledgling stock
exchange. When Bill Gates, the world's richest capitalist, visited Hanoi, he
was greeted by Vietnam's top Communist Party leaders and mobbed in
admiration. Will miracles never cease? Ideas do matter. Indeed America's
capitalistic ideas appeared mightier than our sword.
P
P
erhaps more than any of the other major countries addressed in this
book, India symbolizes most powerfully both the productiveness of
market capitalism and the stagnation of socialism. India is fast becoming
two entities: a rising kernel of world-class modernity within a historic culture
that has been for the most part stagnating for generations.
This kernel of modernity appears to have largely leapfrogged the
twentieth-century labor-intensive manufacturing-for-export model em
braced by China and the rest of East Asia. India has focused instead on
twenty-first-century high-tech global services, the most rapidly growing
segment of world economic activity. The spark of modernity has triggered
advances in the whole Indian service sector, including trade, tourism, and
tourism-related construction. The pickup in real GDP growth from 3.5
percent between 1950 and 1980 to 9 percent in 2006 has been truly re
markable. These advances have elevated more than 250 million people out
of the extreme subsistence poverty incomes of less than $1 per day.
Yet India's per capita GDP, which was at parity with China's in the
early 1990s, is now only two-fifths that of China. In fact, at $730 per per
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son, it is below the per capita GDP of Cote d'lvoire and Lesotho. The reason
for India's failure to follow China off the lower rungs of developing
nations over the past fifteen years is an idea.
When Britain declared Indian independence in 1947, it withdrew all
aspects of British governing, but left behind a concept that captivated India's
elite: Fabian socialism. Jawaharlal Nehru, a disciple of the revered
Mahatma Gandhi and Indian prime minister for sixteen years following independence,
was firmly attracted by the rationality of the Fabians, and he
perceived market competition as economically destructive. Because of him,
socialism has retained a firm grip on Indian economic policy long after it
was abandoned by Britain.
Nehru was entranced by central planning as the rational extension of
human beings acting in concert to produce material well-being for the
many rather than the few. As prime minister, he initially focused on state
ownership of strategic industries, mainly electric power and heavy industry,
while imposing significant controls on all else, administered by a cadre of
knowledgeable, ostensibly benevolent government officials.
Soon these ubiquitous controls, the "license raj" as they came to be
called, had infiltrated virtually all Indian economic activity. You needed a
license, permit, or stamp for seemingly every conceivable economic action.
Thus constrained, India settled into a placid rate of growth that came to be
known derisively as the "Hindu 3 percent." The bureaucracy did not know
what to do. Its "scientific" system was supposed to elevate growth. It didn't.
Yet to abolish controls would be to abandon the egalitarian principles of
Fabian socialism.
Since the plethora of licenses, permits, and stamps didn't seem to help
the economy (in fact, they were stifling it), what decisions the bureaucracy
made on granting permits soon lost all higher purpose and became arbitrary.
But as I noted in describing the Chinese Communist Party's pyramid of authority,
discretion is power. Even the most principled Indian civil servants
were reluctant to cede it, and the less principled had something to sell. No
wonder India was (and is) rated poorly in every measure of corruption.
Thus, a bureaucracy encompassing most every segment of the Indian
economy was in firm control and ceded power only reluctantly. That reluctance
was reinforced and supported by India's powerful and entrenched la
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bor unions, and particularly by the communist parties that have always
been prominent in Indian politics. Socialism not only is a form of economic
organization but also, because of its fundamental premise of collective
ownership, has profoundly important cultural implications, most of which
have been embraced by a majority of Indians.
India is impressively the world's largest democracy. Democracy elects
people who represent the population, and in India's case it, as it should, has
continued to favor significantly those who believe in the collective principles
of socialism. The notion that government intellectuals, driven by the
good of society overall, can far better determine the appropriate allocation
of resources than can "erratic" free-market forces dies hard in India.
In June 1991, an old-line functionary, P. V. Narasimha Rao of the leftist
Congress Party, became prime minister. The economy was teetering on the
edge of collapse, reflecting more than four decades of de facto central planning.
Now, as it was becoming evident that India was suffering from the
same failed paradigm that had blighted Eastern Europe, a major change was
in the offing. To everyone's surprise, Rao broke with long-standing tradition
and, as a balance-of-payments crisis loomed, moved to eliminate aspects of
the deadening hand of controls. He appointed Manmohan Singh finance
minister.
Singh, a market-oriented economist, was able to tear a modest hole in
the regimented economy—he initiated liberalizing steps in a wide range of
areas—and demonstrated once again that a little economic freedom and
competition can exert extraordinary leverage on economic growth. The anticapitalist
voices were temporarily stilled by the gravity of the crisis, which
created a window of opportunity for deregulation. Market capitalism was
able to gain a foothold and demonstrate its effectiveness.
Much of recent global economic history is the story of the centrally
planned states of Eastern Europe and China adopting market competition
and being rewarded with a rapid increase in economic growth. India's is not
quite that story. To be sure, Singh introduced much reform, but in many
critical areas he was constrained by the enduring socialist inclinations of his
governmental coalition. Even today, firms with more than one hundred
employees with few exceptions cannot fire anyone without government
permission.
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The reforms initiated by Singh in 1991 are still unfolding. Somewhat
lowered tariff barriers have freed entrepreneurs to participate in international
competitive markets.* Both exports and imports of goods have risen
sharply relative to nominal GDP, and net software exports went up from
$5.8 billion in 2001 to $22.3 billion in 2006. Of course, Indian exporters
still have to contend with red tape at home, but for them property-rights
protection and price and cost determination are now largely beyond the
bureaucracy's reach.+
The liberalizations of Singh, combined with the fall in global communications
costs, educated Indians' English-language skills, and low wages, propelled
India into the forefront of internationally outsourced business services:
call centers, software engineering, insurance claim processing, mortgage
lending, accounting, X-ray scan evaluations, and an ever-widening spread of
