Expect this to change, for one of the effects of the East Asian economic shock has been to encourage economists to think more profoundly about the causes and durability of the East Asian miracle. Those who were more critical in the past can also expect to be listened to be with greater attention - a good example being Christopher Lingle, former Fellow at the University of Singapore, who publishes a new edition of his book The Rise and Decline of the Asian Century later this month.
Perhaps the best example of this reassessment is over the importance of the region's high savings rates. Until recently people tended to see the high savings rate as the engine of high growth rates. Certainly the level of investment has been astonishingly high in the region: typically 30 to 40 per cent of GDP, double that of Europe or north America (see left- hand graph). High savings, it was argued, financed this high investment which in turn generated high growth.
There is a touch of that view lingering here, for you sometimes hear people (like our present Chancellor) talking about the need to increase investment in order to improve our growth performance. And of course there is something in it: provided there are investment opportunities that will generate good returns, then yes, you need the savings to finance these. Recently, however, this view of investment as the great good has been vigorously attacked. There are two main counter arguments.
One is that the quality of investment matters more than the quantity. High investment is only a spur to economic growth if there are adequate returns to be derived from that investment. People have been aware for some years that much recent investment in Japan has been money down the drain - either developing technologies that will never yield a commercial return, like analogue high-definition TV, or buying property which subsequently plunged in value.
Now similar arguments are being applied to the tigers. Much of the investment has been in prestige projects and some has been to cronies of the political leaders. Not all of the investment has been wasted of course - you never really know whether investment is well spent until many years later - but the quality has clearly been uneven. These countries would need to have somewhat higher investment than, say, the UK, partly because of their rapid population growth and partly because the stock of infrastructure is lower. But despite these factors the levels should not have been so high.
The second line of scepticism about the "investment is good" thesis focuses not on the investment itself, but on the age structure of the country concerned. The argument here is that high investment is a natural and inevitable function of a relatively youthful but rapidly ageing population. This makes obvious sense. Just as young people need to save for their old age, so a country with a large proportion of people of working age needs to save for the time when the workers retire and, accordingly, that proportion will be much smaller. The age dependency ratio - the proportion of people over 64 relative to the proportion aged between 15 and 64 - for a number of East Asian countries is shown in the graph on the right. As you can see there are two distinct phases in this ageing process. Dependency rates are very low at the moment, even in Hong Kong, the highest. They climb slowly until about 2020, then quite suddenly they shoot upwards as the present group of young people hit retirement age.
These patterns are similar to those in Western Europe and Japan, but there is one big difference: public pension provision is much more limited. Looking at the graph, you can see why the young feel the need to save for their old age.
This pattern has also had a profound impact on the fiscal position of these countries. The graph comes from a fascinating IMF study of the problem, Ageing in the Asian Tigers: Challenges for Fiscal Policy, by Peter Heller. He argues that since they have fairly limited social insurance programmes, at first sight they might not appear to face great fiscal pressures as a result of this shift. But if you look at illness patterns and medical costs, they will still face great pressures. While the fact that they tend to rely on private pensions and private medical insurance might seem to take some pressure off the public sector, in practice the burden on working people will still be considerable, and heavy responsibilities will remain with the state. Even if the state is not the actual provider, it will need to regulate and manage.
There is a further problem. Countries in East Asia, relying more on the private sector to provide services for the old, need to build up balances now to fund these services. So high saving is in part a simple function of demography. For the next 25 years these countries will need to accumulate balances that can subsequently be run down as people draw their savings.
Question: where will these balances be invested? As we have seen last year, a lot of local investment has been wasted, in which case it cannot help pay pensions. If the local opportunities for profitable investment are limited, then presumably these countries will have to invest abroad, running current account surpluses.
This is precisely what Japan has done, arousing the ire of the US and periodic protectionist pressures. But Japan is an ally of the US, arguably even a client, so these pressures have been muted. China, like Japan, is running an enormous current account surplus with the US. But there the relationship is different, for it is a natural rival rather than an ally. One could envisage small countries such as Malaysia or Singapore building up foreign assets, mainly in the US, which they would subsequently run down. But China?
So it is helpful to see the high East Asian savings partly as a function of the age structure of their population - they need to save a lot now but will have to run down their savings later - as well as the need to invest a lot to catch up on the infrastructure of countries that developed earlier. What are the consequences of this for one's view of East Asian economic prospects in the next century?
Until a few months ago there was a convenient shorthand. The 19th century was the European one. This century has been America's. The next one will be the Asian century. That is now being reassessed, by books such as Christopher Lingle's. His view is that we are neither coming to the end of the American century, nor beginning the Asian one. Rather we are beginning what he calls the "global millennium". A truly global economy will enable living standards to carry on rising, provided countries allow market signals to govern their investment and spending decisions. East Asian countries, in particular, will need to open up their economic decision-making processes - and their political decision-making too.
This is a helpful way of looking at things, though I would prefer to think in terms of a balanced world, in which neither the US, nor Europe, nor Asia is the dominant region, rather than a "global millennium". I suspect, too, that globalism will start to meet increasing resistance within the next generation. But the idea that it is overwhelmingly in the self-interest of Asia to have an open world economy is absolutely crucial. Is this fully appreciated in the region? I'm afraid not, or at least not yet.Reuse content