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Sunday, Jan. 12, 2003

THE ASIAN BOOKSHELF

Facing economic facts, even if it hurts


STRADDLING ECONOMICS AND POLITICS: Cross-Cutting Issues in Asia, the United States, and the Global Economy, by Charles Wolf Jr. Santa Monica, CA.: Rand, 2002, 210 pp., $20 (paper) You have to give Charles Wolf credit. It takes courage to reprint articles when some of the predictions included are flat-out wrong. And not only does Wolf bare those mistakes, but he even provides a postscript to each article, pointing them out. Yet even when he is wrong, Wolf's analysis is worth considering. And fortunately, there is far more right than wrong in this collection.

Wolf is former dean of the RAND graduate school and head of its international economics program at the think tank. The 38 essays were written between 1996 and mid 2001, although two were published in 2002. Most of the articles originally appeared in newspapers, such as the Los Angeles Times and the Wall Street Journal.

As expected, Wolf's work is solid analysis that sticks pretty much to the middle of the road. He likes markets and doesn't stray too far from conventional approaches to economic problems. Unlike, say, Paul Krugman, the writing isn't very flashy.

That lends itself to a tendency to deflate the latest "new thing." For example, he concludes: "There are both hype and reality to globalization. But typically the hype much exceeds the reality." His review of the history of international integration leads him to conclude that "globalization has been too little and too limited to realize the potential gains, rather than having been so pervasive and relentless as to overwhelm resistance by those who would be adversely affected."

Remember Asian values? At the height of that fever, he investigated survey research and discovered that "Asian values are decidedly more similar to Western values than is usually presumed to be the case, and . . . for some dimensions of 'values' Asians diverge more from one another than they do from respondents in the United States and Western Europe."

If Asian values don't really exist, then they can't be responsible for the 1997 Asian financial crisis, either. Instead, Wolf pins that on the Japanese economic model, which substituted bureaucratic judgments about companies and industries that deserved support for market-driven determinations about winners and losers. That intervention, he argues, is the "principal underlying explanation for Asia's financial predicament."

Five years after the outbreak of "bahtulism," the worst of the crisis seems like a bad dream (except in Indonesia, where the economy has recovered somewhat but the political system is still in shock). Today, three of the four hardest hit economies -- Thailand, South Korea and Malaysia -- have all reached growth rates at or above precrisis levels. That is an extraordinary achievement given the scale of the collapse. Wolf writes that asset values plunged on average 75 percent across the four economies named above. He also puts that in context, noting that in the U.S. financial shocks of 1929-32, 1962 and 1987, the S&P Index declined 87 percent, 28 percent and 34 percent, respectively.

Wolf is a China bull. By 2015, he reckons China will produce a quarter of global GDP, and its economy will be roughly the same size as that of the U.S. and twice as large as Japan's. Essential to that growth will be the rule of law and the predictability and stability it creates. He believes that bringing capitalists into the ruling Chinese Communist Party, agreed at the most recent Party Congress, will increase pressure for a more business-friendly environment and just that sort of change. In Wolf's view, China will more closely resemble the European "third way" economies than the unbridled capitalism of the U.S.

On the other hand, he is not so optimistic about Japan. Japan's main problem is that it is too rich. "Stagnation in Japan is compatible with a high level of consumer well being and comfort." In a sense, the depopulation of Japan works to the country's advantage: Demographic shifts mean that Japan can afford to prevaricate and procrastinate. "A declining population will by 2010 raise per capita income by nearly 1 percent in each subsequent five-year period, even assuming that Japan's GDP remains unchanged."

Nonetheless, Wolf hasn't given up. In 1998, he offered his own prescriptions for a Japanese recovery. In his view, the main task is engineering a shift from an export-oriented economy to one that accommodates large numbers of imports. To achieve that, there should be a rapid reduction and elimination of preferential treatment for export firms and nontariff barriers to competition. Once those products are in Japan, consumers should be encouraged to buy them through the permanent reduction of individual and corporate income taxes to U.S. levels, as well as the permanent removal of the consumption tax. As a goal, the current account should run a deficit for five years to bring foreign exchange reserves down $50 billion to $170 billion. To shore up the banking sector, Wolf calls for an increase in bank capital. Financial institutions should float new equity and the Bank of Japan should raise short-term rates to attract deposits and cut the incentive for yen flight.

As he notes in the postscript, "the drawbacks of Japan's pervasive and protracted mercantilist policies are even more evident now than when this was written in 1998. And the recommendations . . . remain as relevant as well as ignored." It's a pity the authorities can't look at their own work with the same unblinkered scrutiny as Charles Wolf puts on display here.

Brad Glosserman, a contributing editor to The Japan Times, is director of research at Pacific Forum CSIS, a Honolulu-based think tank.


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