Krugman: Asia was impressive but still human

MIT Economics Professor Paul Krugman wrote an article "The

Myth of Asia's Miracle" published in Foreign Affairs in

1994. In that article, he denounced the Asian miracle and

believed that Asia's growth could not be sustained. During

his visit to Singapore last month, he talked about the

current Asian economic crisis and suggested some radical

measures. The following is an abstract of his interview with

Business Times.

Q: In your 'Foreign Affairs' article, you argued that

Asia's growth could be basically explained by high rates of

investment. But how did that growth manage to be sustained

for so long --close on 30 years?

A: There were three things going on. The first was high

rates of investment. The second was high rates of labour

force growth. Finally, you had increases in education

levels. So if you took into account those triple sources of

growth, which were all measurable inputs, they somewhat

surprisingly seemed to explain pretty much all of what had

happened in Asia. There's nothing paradoxical about that:

the mobilisation of resources was immense.

Q: What were the earliest signs of things being wrong?

A: The stuff I talked about in 1994 wasn't a sign of an

impending crisis -- at least I didn't think so. But I

suppose you could look at the indicators there and say there

were signs there that Asia's growth at that pace was not

sustainable.

The first I began to see that some kind of crisis might be

in the offing was some time in 1995 or early 1996, when I

began to notice how similar the balance of payments

developments were in South-east Asia to those in Latin

America a couple of years before.

Like a lot of people, I saw the very large current account

deficits and the buildup of short-term debt and I thought:

this looks awfully like Mexico and Argentina in 1993-94. And

since I had already decided on the basis of my earlier work

that Asia was impressive but still human and subject to the

normal limitations that affect other countries, I began

saying: Gosh, there could be a currency crisis here. But I

never imagined that anything like what has happened could

happen.

Looking back, I think we didn't pay enough attention to

the Mexican crisis of 1995. It was over relatively quickly,

the rescue plan worked and we all kind of filed it away as

just a blip -- a horrific blip, but still a blip. We really

should have looked at it more closely because it was an

indication that a new kind of economic crisis might be

possible -- one that did not involve irresponsible monetary

or fiscal policies and yet led to all hell breaking loose.

Q: Why didn't the approach that worked in Mexico work in

Asia?

A: One reason was that Mexico was extremely fortunate, not

just to have the US as a neighbour, but to have the US

experiencing an unexpectedly vigorous expansion. And Asia

has been unexpectedly unlucky by having Japan being a

deadweight instead of a locomotive. The sheer scope of the

crisis --- the fact that it wasn't just South Korea or

Indonesia, but this whole arc of countries, with each