The challenge of the Asian tigers: why we are looking east for ideas

Both Labour and Tories believe we could learn from Asian welfare systems, says Nicholas Timmins

For more than 20 years, Conservative politicians have tended to look west, to the United States, for ideas with which to reform the economy and the welfare state. More flexible labour markets, the purchaser/provider splits in health and social services, magnet schools and some of the tougher ideas touted for social security can all be traced back to American models or ideas.

It has been industrialists rather than politicians who have looked east, chiefly to Japan, for lessons on the production methods that made Japanese goods irresistible in the West.

Suddenly, however, both Conservative and Labour eyes are directed towards Asia. John Major has talked of Britain as the enterprise centre of Europe, drawing on the success of the Asian tigers. Chris Patten, Governor of Hong Kong, has been singing the virtues of the low-spending economies of Hong Kong, Korea, Malaysia, Taiwan and Singapore as a model for sluggish European countries.

Malcolm Wicks, Labour's newest social security spokesman, has been to Singapore as part of a social security select committee visit whose membership from the Conservative side included Bernard Jenkin. Chris Smith, Wicks's boss, is off on a similar round, with Tony Blair due in Singapore tomorrow. Conservative Central Office has been debriefing its MPs after their visits, while the right-wing Adam Smith Institute has lit upon Singapore as a model for reconstructing Britain's welfare state.

Three items have grabbed attention: the dramatic growth of the tiger economies, their low levels of public spending - typically 15 to 20 per cent of GDP, against Britain's 43 per cent - and funded welfare.

Furious debate surrounds how far their growth rates are the result of their relative under-development in an increasingly global and open market or a function of important policy and cultural differences. Backward countries can enjoy much faster growth rates as they close the gap with the more developed world: this is certainly one of the factors in the growth rate experienced by countries such as China, Korea and Malaysia. But that cannot be the only explanation. Low public spending may well contribute, though on their own they are plainly not enough, otherwise Pakistan would be among the tigers. Compulsory saving schemes, infrastructure investment, a high premium on education, and social cohesion (although this is coming under pressure amid their rapid industrialisation) have played a part.

The argument about low public spending and government taxes can be deceptive. Some Asian tigers insist on high compulsory contributions to welfare funds which count outside public spending but to which dues have to be paid.

"When you get to Singapore," Malcolm Wicks says, "they do have low levels of taxation and they tell you 'we don't believe in a welfare state'. But what they do have is the Central Provident Fund." This is a state-run fund in which both employers and employees are required to invest 20 per cent of wages apiece - 40 per cent of earnings. These compulsory contributions amount to a tax - but individuals own their own savings account, a distinction which Bernard Jenkin says leads to it being regarded vastly more favourably than Britain's tax-funded pay-as-you-go system, where today's national insurance contributions and taxes pay today's benefits, without being invested for the future.

The fund provides pensions and much health care, and once a minimum level of provision has been reached it can be used for home purchase, education and much else. But it involves no redistribution from the better-off. It operates in a profoundly different society, where the safety net is closer to Britain's old Poor Law, with children expected to care for ageing parents before the family has recourse to state help. For anything like it to be adopted in Britain would involve massive transitional problems.

For both Labour and the Conservatives the idea holds attractions. Labour would like to rebuild some form of social insurance, and the idea of funded schemes, state-regulated if not state-run, would be one route to do that without directly raising taxes. The Conservative right would see it as a route to privatising more welfare provision and making people more self-reliant.

But for both, it is a scheme far easier to design from scratch than switch to from present tax-funded provision. Present contributors would be paying twice - for their own future and to maintain present benefits. It would take years to build up big levels of benefit. It would load costs on to employers, and therefore jobs. It would, however, provide a bigger pool of savings for economic investment - an element that both sides find attractive - while raising questions about how far the state should compel people to plan for their future.

The continuing dynamism of the East Asian economies suggests that the present interest in them will prove far more than a fad. It is a sure sign of the shift in global economic power that Messrs Blair and Major are now seeking inspiration from Asia.