Asia Rising - Part 5

CHINA’S GREAT REVERSAL


The story of China’s rise seems, on the surface, quite different. A communist and closed regime undertakes an efficient, massive, and rapid embrace of the global economy—and sends its country into overdrive. It appears to be a far cry from the common understanding that democracy promotes growth because it imposes constraints on rulers and reassures private entrepreneurs of the safety of their assets and fruits of their labor. The idea that China grew because of its one-party rule stems from a mistaken focus on a single snapshot in time at the expense of an understanding of shifting trends. China did not take off because it was authoritarian. Rather, it took off because the liberal political reforms of the 1980s made the country less authoritarian. Like India, when China reversed its political reforms and saw governance worsen in the 1990s, citizens’ well-being declined. Household income growth slowed, especially in the rural areas; inequality rose to an alarming level; and the gains of economic growth accruing to ordinary people fell sharply. China even underperformed in its traditional areas of strength: education and health. Adult illiteracy rose. Immunizations fell. The country’s GDP might have been booming, but it was also hazardous to your health.



The real Chinese miracle began back in the 1980s—when Chinese politics was most liberal. Personal income growth outpaced GDP growth; the labor share of GDP was rising; and income distribution initially improved. China accomplished far more in poverty reduction in the 1980s without any of the factors (such as foreign direct investment) now viewed as essential elements of the China model. In four short years (1980–84), China lifted more of its rural population out of poverty than in the 15 years from 1990 to 2005 combined. If India became less democratic under Indira Gandhi, China became less authoritarian under the troika rule of Deng Xiaoping, Hu Yaobang, and Zhao Ziyang in the 1980s. Therein lies the key insight into China’s economic takeoff.

One of the first acts by the reformist leaders was to signal an improving environment for private property. In marked contrast to today’s massive land grabs, the Chinese government in 1979 returned confiscated bank deposits, bonds, gold, and private homes to those former “capitalists” the regime had persecuted. The number of people affected by this policy was not large, around 700,000. But symbolism mattered for a country still reeling from the Cultural Revolution. There were also other symbolic acts designed to elicit the confidence of private entrepreneurs in the new political environment of a post-Mao era. In 1979, two vice premiers visited and personally congratulated an entrepreneur who was granted the first license to operate a private restaurant in Beijing. As early as 1981, a Communist Party document signaled a willingness to recruit its members from the private sector, a well-publicized gesture. The widely held view that the party only began to recruit capitalists late in the Jiang Zemin era is simply incorrect.

The reformist leaders also began to embark on meaningful political changes. As scholar Minxin Pei has noted, every single important political reform—such as the mandatory retirement of government officials, the strengthening of the National People’s Congress, legal reforms, experiments in rural self-government, and loosening control of civil society groups—was instituted in the 1980s. The Chinese media became freer in the early reform era. The timing here is critical. This “directional liberalism” of China’s politics either preceded or accompanied China’s economic growth. It was not a result of economic success.

This liberalism mattered the most for growth in rural China, where the majority of Chinese citizens live. Private access to capital eased in the 1980s. Private entrepreneurship and even some privatization became widespread, especially in poorer parts of the country that needed them most. Of 12 million rural businesses classified as township and village enterprises, 10 million were completely private. The change in direction of China’s politics was sufficiently credible to encourage millions of entrepreneurs to go into business for themselves.

But in the 1990s, the Chinese state completely reversed the gradualist political reforms that the leadership began in the 1980s. This assessment comes from a well-placed insider, Wu Min, a professor at the Party School under the Shanxi Provincial Party Committee. In a 2007 article, Wu revealed that the political reform program adopted at the 13th Party Congress in 1987 implemented some substantial changes. The congress abolished the party committees in many government agencies and explicitly delineated the functions of the party and the state. After 1989, there was no progress on the political reform front, especially in reducing and streamlining the power of the Communist Party.

The political reforms of the 1980s were designed to enhance the accountability of the government by creating some checks and balances over the power of the party and by fostering intraparty democracy. Wu cites one specific measure in the 1990s to derail the reforms of the 1980s. According to Wu, in the 1990s China instituted explicit provisions prohibiting the National People’s Congress (NPC) from conducting evaluations of officials in the executive branch and the courts. Wu comments, “This is obviously a step backward.”

Just how far did this step set back China? How about nearly 30 years? Consider China’s track record when it comes to industrial fatalities. In 1979, in the aftermath of the capsizing of an oil rig that resulted in 72 deaths, the NPC held hearings at which officials in the Ministry of Petroleum Industry were called to testify. The minister was determined to have been negligent and was sacked. But since the mid-1990s, there have been hundreds of explosions and industrial accidents in China’s coal mines. Thousands of people have lost their lives. No hearings have been held, and not a single official at the rank of minister or provincial governor has ever been held explicitly responsible.

Like Indira Gandhi in the 1970s and 1980s, the Chinese state greatly centralized its economic management in the 1990s. It was another reversal from the promising reforms of a decade earlier, the gist of which was delegating decision-making to those best informed about local situations. In 1994, the central government increased substantially the shares of tax revenues going to the central coffers and abolished one of the most innovative Chinese reforms—fiscal federalism. A less well-known development in the 1990s was that the Chinese state centralized the budgetary and other functions of villages. So, even though people were voting in village elections, the officials elected exercised very little power.

The economic consequences of these reversals were substantial. The 1990s saw depressed growth in household incomes relative to GDP, which means that the average Chinese person was losing ground. The employee share of GDP —the income going to the general population—peaked in 1990, at 53.5 percent. By 2002, it had declined to 45 percent of GDP. At 45 percent, the Chinese economy in 2002 was benefiting its people less than it was in 1978, when its employee share of GDP stood at 48 percent. Similarly threatening for the poorest Chinese is a development that has garnered almost no attention: The country is backsliding on literacy. On April 2, 2007, the state-run China Daily published an article with an unusually frank title, “The ghost of illiteracy returns to haunt the country.” It reported that the number of illiterate Chinese adults increased by 30 million between 2000 and 2005. In 2005, there were 115.7 million illiterate Chinese adults, compared with 85 million in 2000. The roots of the problem began in the 1990s. Consider how literacy is defined—the ability to identify 1,500 Chinese characters by the age of 7 to 9. An adult reaching into the illiterate group by 2005 received all his or her primary education in the mid-1990s. In addition, immunization rates against DPT and measles—rising throughout the 1980s—began to decline in the 1990s. In time, China will pay dearly for these colossal failures.

In the 1990s, the nature of China’s growth was fundamentally altered. In the 1980s, growth was broad-based and positive for the poor; since then, the percentage of people benefiting from growth has narrowed, and social performance has deteriorated. The impact of this great reversal is strongest in the silent and less visible rural areas of China.

THE WAY TO REFORM

Of course, understanding the origins of India’s and China’s separate paths to development is just half the story. What’s more telling is how these two countries enacted and reacted to reforms—and what that says about the relationship between political liberalization and economic growth.

After the Soviet collapse, Chinese political elites converged on the view that China avoided the same fate because China had not reformed its politics. The truth is precisely the opposite. The single most important reason why China survived the 1989 Tiananmen crisis is because its rural population was content. In the 1980s, rural China experienced the most radical economic and political reforms. It was reform that saved the Chinese Communist Party.

Political reforms contributed to Indian growth as well. Take the media. During the long Gandhi era, though the print media were free, the government controlled the TV stations—a more important source of information for a country with high illiteracy. The privatization of the stations in the 1990s not only enriched the quality of entertainment for the average Indian but also added transparency to Indian politics. Many corruption and bribery scandals were first exposed on TV, the effects of the exposures being magnified by the vivid images of politicians receiving cash in shady hotel rooms. That is the right way to fight corruption.

As China tightened its political grip on rural affairs in the wake of the Soviet collapse, India moved in the opposite direction. In 1992, India amended its constitution to strengthen a reform with long and deep implications—village self-government. This panchayati raj phenomenon promises to transform an urban-centered, elitist system to one that is Tocquevillian in character and is empowering women along the way. The auxiliary institutions of Indian democracy, so atrophied under Indira Gandhi, have been renewed. World Bank indicators show a notable improvement in key areas of Indian governance during the period of high growth since the mid-1990s.

In fact, India leads China in a number of important areas of reform. Throughout the 1990s, India reduced state controls on the banking sector, allowed the entry of private domestic and foreign banks, and abolished government interference in setting the equity pricing of initial public offerings on the stock exchange. China is nowhere near India in terms of pace and depth of financial reforms.

Would democracy galvanize opposition to reforms? Many progressive reformers in China hold this view, but this is a hypothesis long on fear and short on facts. Consider the following fact about Indian politics: All the reforms have been carried out by a coalition of multiple parties rather than by a single-majority ruling party. This is true of the Congress Party in the early 1990s, the Bharatiya Janata Party between 1998 and 2004, and the Congress Party today.

What about building infrastructure? Even liberals in India sometimes wish for a dose of authoritarianism here. A powerful government in China is able to sidestep all the political and legal complications and build world-class railroads, highways, water systems, and other networks overnight. Surely, authoritarianism has an edge when it comes to public works projects. But no. Building infrastructure has followed—not preceded—Chinese growth. In 1988, China had roughly 91 miles of expressway. That did not begin to change until the late 1990s, when the country poured massive resources into infrastructure. Only in the past eight to 10 years could the country claim to have infrastructure rivaling that of developed countries.

Many foreign investors think that infrastructure explains the different pace of growth between China and India. No such evidence exists. In the 1980s, India started with some infrastructural advantages over China. It had a longer system of railways, for example. Although we can debate today which country is performing better, there is no doubt that China outperformed India in the 1980s. It was reforms and social investments that propelled Chinese growth, not fancy airports and skyscrapers.

One justification for building those massive infrastructure networks is to attract FDI. For years, Western economists and business analysts have chided India for not following China’s lead in this area. But that criticism puts the cart before the horse. Like infrastructure, FDI follows GDP growth rather than precedes it. In the 1980s, China received very little FDI, and yet the country grew faster and more virtuously than its later growth. FDI is a result of growth, and the first order of the policy business is how to grow the economy—not how to attract FDI. As long as India can grow in the 8 to 9 percent range, even without superior infrastructure, it can easily triple or even quadruple its FDI inflows from its current level of $7 billion a year. Growth can self-finance the infrastructure truly needed for business and economic development.

China has built critical networks, such as power stations and transportation links, but since the mid-1990s, unconstrained by public voice, media scrutiny, and private land rights, Chinese leaders have wasted massive resources on urban skyscrapers that have no economic benefits. Many of them are government buildings and are extraordinarily expensive, costing more than $100 million in some cases. And the financial costs of these projects do not even begin to approach their opportunity costs—those investments in education and health China has failed to make. That a country constructed nearly 3,000 skyscrapers in Shanghai and added 30 million illiterate Chinese during the same decade is truly remarkable.

The economic dividends of political reform don’t appear overnight, which skews the timeline and confuses the cause. But by using nearly every metric, political liberalization has spurred rather than stunted growth in both China and India.

After a long hiatus, China’s leadership has rhetorically returned to a vision of the 1980s—that political reforms should be a priority. Rural China has begun to recover from the neglect of the 1990s, and rural income has grown the fastest since 1989. All this is good news. But consolidating these achievements will require a more substantial undoing of the illiberal policies of the 1990s. How India managed to emerge from its own long shadow of illiberalism offers some valuable lessons. In the past, China taught India the importance of social investments and economic opening. It is time for today’s China to take a page from India—and from the China of the 1980s—that political reforms are not antithetical to growth. They are the keys to a healthier and more sustainable foundation for the future.

p/s photos: Natalie Tong Si Wing

Asia Rising - Part 4

"America Is Losing Influence in Asia."

Definitely not. Bogged down in Iraq and Afghanistan and mired in a deep recession, the United States certainly looks like a superpower in decline. Its influence in Asia has apparently receded as well, with the formerly mighty dollar in less demand than the Chinese yuan and the North Korean regime openly flaunting Washington's will. But it is premature to declare the end of U.S. geopolitical preeminence in Asia. In all likelihood, the self-correcting mechanisms in its political and economic systems will enable the United States to recover from its current setbacks.

America's leadership in Asia derives from many sources, not just its military or economic heft. Like beauty, a country's geopolitical influence is often in the eye of the beholder. Although some view the United States' declining influence in Asia as a fact, many Asians think otherwise. Sixty-nine percent of Chinese, 75 percent of Indonesians, 76 percent of South Koreans, and 79 percent of Japanese in the Chicago Council's surveys said that U.S. influence in Asia had risen over the past decade.

Another, perhaps more important, reason for the enduring American preeminence in Asia is that most countries in the region welcome Washington as the guarantor of Asia's peace. Asian elites from New Delhi to Tokyo continue to count on Uncle Sam to keep a watchful eye on Beijing.

Whether it's over blown or not, Asia is poised to increase its geopolitical and economic influence rapidly in the decades to come. It has already become one of the pillars of the international order. But in thinking about Asia's future, let's not get ahead of ourselves. Its economic ascent is not written in the stars. And given the cultural differences and history of intense rivalry among the region's countries, Asia is unlikely to achieve any degree of regional political unity and evolve into an EU-like entity in our lifetime. Henry Kissinger once famously asked, "Who do I call if I want to call Europe?" We can ask the same question about Asia.

All told, Asia's rise should present more opportunities than threats. The region's growth not only has lifted hundreds of millions out of poverty, but also will increase demand for Western products. Its internal fissures will allow the United States to check the geopolitical influence of potential rivals such as China and Russia with manageable costs and risks. And hopefully, Asia's rise will provide the competitive pressures urgently needed for Westerners to get their own houses in order—without succumbing to hype or hysteria.

"The Next Asian Miracle"

Democracies are peaceful, representative—and terrible at boosting an economy. Or at least that’s the conventional wisdom in Asia, where for years growth in India’s sprawling democracy has been humbled by China’s efficient, state-led boom. But India’s newfound economic success flips that notion on its head. Could it be that democracy is good for growth after all? If so, China better watch its back.

Consider the experiences of the following two Asian countries. In 1990, Country A had a per capita GDP of $317; Country B’s stood at $461. By 2006, Country A, though 31 percent poorer than Country B only 16 years earlier, had caught up: It enjoyed a per capita GDP of $634, compared with Country B’s $635. So, if you had to guess, which of these two Asian countries would you assume is a democracy?

You might be tempted to conclude that the better-performing country is authoritarian China and the laggard is democratic India. In reality, the faster-growing country is India, and the laggard is the occasionally autocratic Pakistan. This fact certainly belies the commonly held notion that—especially among Asian countries—authoritarian states have an advantage in growing an economy compared with their democratic counterparts, who are forced to reckon with such pesky trappings as labor standards and political compromises.

But surely, the familiar China-India comparison would support an authoritarian edge, right? The conclusion seems so obvious: China is authoritarian, and it has grown faster; India is democratic, and it has grown more slowly. For years, Indians have defended their democracy with a sheepish apology—“Yes, our growth rate is terrible, but low growth rates are an acceptable price to pay to govern a democracy as large and as diverse as India.”

There is no need to apologize now. India has ended the infamous 2 to 3 percent annual “Hindu rate” of growth and begun its own economic takeoff. Recent Indian success is not only impressive in terms of its speed—growing at the “East Asian rate” of 8 to 9 percent a year—but also in terms of its depth and breadth. The Indian miracle is no longer confined to the much vaunted information-technology sector; its manufacturing is taking off. Even the historically lackluster agricultural sector is beginning to grow.

So where does this leave the “authoritarian edge” that China’s economy has supposedly enjoyed for years? The emerging Indian miracle should debunk—hopefully permanently—the entirely specious notion that democracy is bad for growth. And the emerging Indian miracle holds substantial implications for China’s political future. As Chinese political elites mark the 30th anniversary of economic reforms this year, they should reflect on the Indian experience deeply and absorb the real reason behind their own miracle.

The idea that there is a trade-off between economics and politics is ingrained in the minds of many policymakers and business executives in Asia, as well as the West. But that idea has never been systematically proven. If India, with its noisy, chaotic, and lumbering political arrangements, can grow, then no other poor country must face a Faustian choice between growth and democracy. A deeper look at the two countries shows that they have succeeded and failed at different times for remarkably similar reasons. Their economies performed when their politics turned liberal; their performances faltered when their politics slid backward. Now, as many poor countries grapple with similar political and economic choices, we must understand this dynamic. It is high time to get the China-India story right.

INDIA’S UNTOLD HISTORY

That story doesn’t begin in 2008. It’s a horse race that goes back decades, and one that tells us much about the relationship between democracy and growth, governance and prosperity. From an economic perspective, it is not the static state of a political system that matters, but how it has evolved. The growth India enjoys today sped up in the 1990s as the country privatized TV stations, introduced political decentralization, and improved governance. And contrary to the conventional wisdom, India stagnated historically not because it was a democracy, but because, in the 1970s and 1980s, it was less democratic than it appeared. To understand just what is happening in India’s economy today—and how it relates to the country’s political system—we must travel as far back as the 1950s.

Many scholars blame India’s first prime minister, Jawaharlal Nehru, for adopting a development strategy that caused India to stagnate from 1950 to 1990. But this view is unfair to Nehru, and it shifts the blame from the real culprit—Indira Gandhi, Nehru’s daughter and prime minister during much of the period from 1966 to 1984. Nehru’s commanding-heights approach was the reigning ideology in many developing countries, some of which, like South Korea, were quite successful. The issue is not how harmful Nehru’s economic policies were, but why India intensified and persisted in this model when it was clearly not working. To answer this question we have to understand the lasting damage that Indira Gandhi inflicted on Indian democracy.

Patronage became her electoral strategy as she undermined a vital institution in a functioning democracy—the party system. Gandhi weakened the Congress Party, once a proud catalyst of the independence movement, by sidestepping many of its well-established procedures, reducing its grass-roots reach in the states, and appointing party officials rather than allowing rank-and-file members to elect them. The shriveling of the Congress Party meant that Gandhi had to use other means to get reelected: crushing political opposition, pandering to special interests, or offering political handouts.

Or cancellations of elections altogether. Indira Gandhi imposed emergency rule in June 1975 and cancelled the general election scheduled for the following year. It was no isolated event. As early as 1970, she postponed or cancelled Congress Party elections. In addition, she moved very far to replace federalism with her own centralized rule. One telling statistic, as shown by political scientists Amal Ray and John Kincaid, is that between 1966 and 1976 the Gandhi government invoked Article 356 of the constitution—which empowers the federal government to take over the functions of state governments in emergency situations—36 times. The government of Nehru and his successor (1950–65) resorted to this measure only nine times. From 1980 to 1984, she invoked this power an additional 13 times. The misuse of the extraordinary power vested in the executive damaged an important institution of Indian democracy.

The cumulative effect of Gandhi’s actions is that the Indian political system, though still retaining some essential features of a democracy, became unaccountable, corrupt, and unhinged from the normal bench marks voters use to assess their leaders. In a functioning democracy, voters punish those politicians who fail to deliver at the ballot box. Not in India. Both the 1967 and 1971 reelections of the Congress Party followed a decline of per capita GDP the year before. It was not democracy that failed India; it was India that failed democracy.

The economic consequences of this period of illiberalism were long lasting. Because Gandhi’s political fortunes depended on patronage, she felt no compulsion to invest in real drivers of economic growth—education and health. The ratio of teachers to primary-school students throughout the long Gandhi years stubbornly hovered around 2 percent. After her rule, in 1985, only 18 percent of Indian children were immunized against diphtheria, pertussis, and tetanus (DPT), and only 1 percent were immunized against measles. Even today, India is still paying for her neglect. The low level of human capital remains the single largest obstacle to that country’s developmental prospects.

The good news is that India is shedding this harmful legacy. As Indian politics became more open and accountable, the post-Gandhi governments began to put welfare of the people at the top of the policy agenda. For example, the adult literacy rate increased from 49 percent in 1990 to 61 percent in 2006. In due time, these social investments will translate into real dividends.

p/s photos: Huang Sheng Yi

Asia Rising - Part Three

"Dictatorship Has Given Asia an Advantage."

No. Autocracies, mainly in East Asia, may seem to have made their countries prosperous. The so-called dragon economies of South Korea, Taiwan, Singapore, Indonesia under Suharto, and now China experienced their fastest growth under nondemocratic regimes. Frequent comparisons between China and India appear to support the view that a one-party state unencumbered by messy competitive politics can deliver economic goods better than a multiparty system tied down by too much democracy.

But Asia also has had many autocracies that have impoverished their countries-consider the tragic list of Burma, Pakistan, North Korea, Laos, Cambodia under the murderous Khmer Rouge, and the Philippines under Ferdinand Marcos. Even China is a mixed example. Before the Middle Kingdom emerged from self-imposed isolation and totalitarian rule in 1976, its economic growth was subpar. China under Mao also had the dubious distinction of producing the world's worst famine.

Even when you look at autocracies credited with economic success, you find two interesting facts. First, their economic performance improved when they became less brutal and allowed greater personal and economic freedoms. Second, the keys to their successes were sensible economic policies, such as conservative macroeconomic management, infrastructural investment, promotion of savings, and pushing exports. Dictatorship really has no magic formula for economic development.

Comparing a one-party state like China with a democracy such as India is not an easy intellectual exercise. Obviously, India has many weaknesses: widespread poverty, poor infrastructure, and minimal social services. China appears to have done much better in these areas. But appearances can be deceiving. Dictatorships are good at concealing the problems they create while democracy is good at advertising its defects.

So the autocratic advantage in Asia is, at best, an optical illusion.

"China Will Dominate Asia."

Not likely. China is on course to overtake Japan as the world's second-largest economy this year. As the regional economic hub, China is now driving Asia's economic integration. Beijing's diplomatic influence is expanding as well, supposedly thanks to its newfound soft power. Even China's once antiquated military has acquired a full plethora of new weapons systems and significantly improved its ability to project force.

Although it is true that China will become Asia's strongest country by any measure, its rise has inherent limits. China is unlikely to dominate Asia in the sense that it replaces the United States as the region's peacekeeper and decisively influences other countries' foreign policies. Its economic growth is also by no means guaranteed. Restive secession-minded minorities (Tibetans and Uighurs) inhabit strategically important areas that constitute almost 30 percent of Chinese territory. Taiwan, which is unlikely to return to China's fold anytime soon, ties down substantial Chinese military resources. The ruling Chinese Communist Party, which views perpetuating its one-party state as more important than overseas expansionism, is not likely to be seduced by delusions of imperial grandeur.

China has formidable neighbors in Russia, India, and Japan that will fiercely resist any Chinese attempts to become the regional hegemon. Even Southeast Asia, where China appears to have reaped the most geopolitical gains in recent years, has been reluctant to fall into China's orbit completely. Nor would the United States simply capitulate in the face of a Chinese juggernaut.

For complex reasons, China's rise has inspired fear and unease, not enthusiasm, among Asians. Only 10 percent of Japanese, 21 percent of South Koreans, and 27 percent of Indonesians surveyed by the Chicago Council on Global Affairs said they would be comfortable with China being the future leader of Asia.

So much for China's charm offensive.

p/s photos: Michelle Yip Shuen

Asia Rising - Part Two

"Asian Capitalism Is More Dynamic."

Hardly. With the United States brought low by Wall Street and the European economy enfeebled by its welfare state and inflexible labor market, most Asian economies appear in great shape. It is tempting to say that Asia's unique brand of capitalism, by seamlessly weaving together strategic state intervention, corporate long-term thinking, and insuppressible popular desire for material betterment, will outcompete either the greed-devastated U.S. model or the hidebound European variant.

But though Asian economies-with the notable exception of Japan-are among the fastest-growing in the world today, there's little real evidence to suggest that their apparent dynamism comes from a mysteriously successful form of Asian capitalism. The truth is more mundane: The region's dynamism owes a great deal to its strong fundamentals (high savings, urbanization, and demographics) and the benefits of free trade, market reforms, and economic integration. Asia's relative backwardness is a blessing in one sense: Asian countries have to grow faster because they're starting from a much lower base.

Asian capitalism does have three unique features, but they do not necessarily confer competitive advantages. First, Asian states intervene more in the economy through industrial policy, infrastructural investment, and export promotion. But whether that has made Asian capitalism more dynamic remains an unresolved puzzle. The World Bank's classic 1993 study of the region, "The East Asian Miracle," could not find evidence that strategic intervention by the state is responsible for East Asia's success. Second, two types of companies-family-controlled conglomerates and giant, state-owned enterprises-dominate Asia's business landscape. Although such corporate ownership structures enable Asia's largest companies to avoid the short-termism of most American firms, they also shield them from shareholders and market pressures, making Asian firms less accountable, less transparent, and less innovative.

Finally, Asia's high savings rates, by providing a huge pool of indigenous capital, undeniably fuel the region's economic growth. But pity Asia's savers. Most of them save because their governments provide inadequate social safety nets. Government policies in Asia penalize savers through financial repression (by keeping deposit rates low and paying household savers measly returns on their savings) and reward producers by subsidizing capital (typically through low bank lending rates). Even export promotion, ostensibly an Asian virtue, seems overrated. Asian central banks have invested most of their massive export surpluses in low-yielding, dollar-dominated assets that will lose much of their value due to the long-term inflationary pressures generated by U.S. fiscal and monetary policies.

"Asia Will Lead the World in Innovation."

Not in our lifetime. If you look only at the growing number of U.S. patents awarded to Asian inventors, the United States appears to have a dramatically receding edge in innovation. South Korean inventors, for example, received 8,731 U.S. patents in 2008-compared with 13 in 1978. In 2008, close to 37,000 U.S. patents went to Japanese inventors. The trend seems sufficiently alarming that one study ranked the United States eighth in terms of innovation, behind Singapore, South Korea, and Switzerland.

Reports of the death of America's technological leadership are, to paraphrase Mark Twain, greatly exaggerated. Although Asia's advanced economies, such as Japan and South Korea, are closing the gap, the United States' lead remains huge. In 2008, American inventors were awarded 92,000 U.S. patents, twice the combined total given to South Korean and Japanese inventors. Asia's two giants, China and India, still lag far behind

Asia is pouring money into higher education. But Asian universities will not become the world's leading centers of learning and research anytime soon. None of the world's top 10 universities is located in Asia, and only the University of Tokyo ranks among the world's top 20. In the last 30 years, only eight Asians, seven of them Japanese, have won a Nobel Prize in the sciences. The region's hierarchical culture, centralized bureaucracy, weak private universities, and emphasis on rote learning and test-taking will continue to hobble its efforts to clone the United States' finest research institutions.

Even Asia's much-touted numerical advantage is less than it seems. China supposedly graduates 600,000 engineering majors each year, India another 350,000. The United States trails with only 70,000 engineering graduates annually. Although these numbers suggest an Asian edge in generating brainpower, they are thoroughly misleading. Half of China's engineering graduates and two thirds of India's have associate degrees. Once quality is factored in, Asia's lead disappears altogether. A much-cited 2005 McKinsey Global Institute study reports that human resource managers in multinational companies consider only 10 percent of Chinese engineers and 25 percent of Indian engineers as even "employable," compared with 81 percent of American engineers.

p/s photos: Nancy Wu Ding Yan

Asia Rising - Part One

The esteemed Foreign Policy magazine has been putting out great perspectives on the rise of Asia, both as an economic power and militarily, albeit the latter is much more fragmented. The first part looks at the realistic predictions of China or India as economic powers in their own right. While growth rates and population strength have been often cited, its still a long way off.

Asia is nowhere near closing its economic and military gap with the West. The region produces roughly 30 percent of global economic output, but because of its huge population, its per capita gdp is only $5,800, compared with $48,000 in the United States. Asian countries are furiously upgrading their militaries, but their combined military spending in 2008 was still only a third that of the United States. Even at current torrid rates of growth, it will take the average Asian 77 years to reach the income of the average American. The Chinese need 47 years. For Indians, the figure is 123 years. And Asia's combined military budget won't equal that of the United States for 72 years.

In any case, it is meaningless to talk about Asia as a single entity of power, now or in the future. Far more likely is that the fast ascent of one regional player will be greeted with alarm by its closest neighbors. Asian history is replete with examples of competition for power and even military conflict among its big players. China and Japan have fought repeatedly over Korea; the Soviet Union teamed up with India and Vietnam to check China, while China supported Pakistan to counterbalance India. Already, China's recent rise has pushed Japan and India closer together. If Asia is becoming the world's center of geopolitical gravity, it's a murky middle indeed.

Those who think Asia's gains in hard power will inevitably lead to its geopolitical dominance might also want to look at another crucial ingredient of clout: ideas. Pax Americana was made possible not only by the overwhelming economic and military might of the United States but also by a set of visionary ideas: free trade, Wilsonian liberalism, and multilateral institutions. Although Asia today may have the world's most dynamic economies, it does not seem to play an equally inspiring role as a thought leader. The big idea animating Asians now is empowerment; Asians rightly feel proud that they are making a new industrial revolution. But self-confidence is not an ideology, and the much-touted Asian model of development does not seem to be an exportable product.

"Asia's Rise Is Unstoppable."

Don't bet on it. Asia's recent track record might seem to guarantee its economic superpower status. Goldman Sachs, for instance, expects that China will surpass the United States in economic output in 2027 and India will catch up by 2050.

Given Asia's relatively low per capita income, its growth rate will indeed outpace the West's for the foreseeable future. But the region faces enormous demographic hurdles in the decades ahead. More than 20 percent of Asians will be elderly by 2050. Aging is a principal cause of Japan's stagnation. China's elderly population will soar in the middle of the next decade. Its savings rate will fall while healthcare and pension costs explode. India is a lone exception to these trends-any one of which could help stall the region's growth.

Environmental and natural resource constraints could also prove crippling. Pollution is worsening Asia's shortage of fresh water while air pollution exacts a terrible toll on health (it kills almost 400,000 people each year in China alone). Without revolutionary advances in alternative energy, Asia could face a severe energy crunch. Climate change could devastate the region's agriculture.

The current economic crisis, moreover, will lead to huge overcapacity as Western demand evaporates. Asian companies, facing anemic consumer demand at home, will not be able to sell their products in the region. The Asian export-dependent model of development will either disappear or cease to be a viable engine of growth.

Political instability could also throw Asia's economic locomotive off course. State collapse in Pakistan or a military conflict on the Korean Peninsula could wreak havoc. Rising inequality and endemic corruption in China could fuel social unrest and cause its economic growth to sputter. And if a democratic breakthrough somehow forces the Communist Party from power, China is most likely to enter a lengthy period of unstable transition, with a weak central government and mediocre economic performance.

p/s photos: Yuna Ito