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Cross-Cutting Issues in Asia,the United States,and the Global EconomyCharl esWolf, Jr.RStraddlingEconomics andPoliticsThis publication was supported by RAND using its own funds.RAND is a nonprofit institution that helps improve policy anddecisionmaking through research and analysis. RAND®is aregistered trademark. RAND’s publications do not necessarily reflectthe opinions or policies of its research sponsors.© Copyright 2002 RANDAll rights reserved. No part of this book may be reproduced in anyform by any electronic or mechanical means (includingphotocopying, recording, or information storage and retrieval)without permission in writing from RAND.Published 2002 by RAND1700 Main Street, P.O. Box 2138, Santa Monica, CA 90407-21381200 South Hayes Street, Arlington, VA 22202-5050201 North Craig Street, Suite 202, Pittsburgh, PA 15213-1516RAND URL: http://www.rand.org/To order RAND documents or to obtain additional information,contact Distribution Services: Telephone: (310) 451-7002; Fax: (310) 451-6915; Email: order@rand.orgLibrary of Congress Cataloging-in-Publication DataWolf, Charles, 1924–Straddling economics and politics : cross-cutting issues in Asia, the United States, and the global economy / Charles Wolf, Jr.p. cm.“The 38 essays in this book were written between the end of 1996 and the middle of 2001, and published in the Wall Street journal, [et al.]”—Forward.“MR-1571.”ISBN 0-8330-3181-31. Globalization—Economic aspects. 2. Globalization—Political aspects. 3. Free enterprise. 4. International economic relations. 5. United States—Economicpolicy—1993–2001. 6. United States—Economic conditions—20th century. 7. United States—Politics and government—20th century. 8. Financial crises—Asia. 9. Asia—Economic policy—20th century. 10. Asia—Economic conditions—20thcentury. 11. Asia—Politics and government—20th century I. Title.HF1359 .W653 2002330.9—dc212002069746Cover design by Maritta TapanaineniiiFOREWORDThe 38 essays in this book were written between the end of 1996 andthe middle of 2001, and published in The Wall Street Journal, TheAsian Wall Street Journal, The Wall Street Journal Europe, TheLos Angeles Times, The New York Times, The International HeraldTribune, The Weekly Standard, Critical Review, Society, The MilkenReview, and International Economy. All the essays appear in theiroriginal, unedited form, and none has been altered in light of theworld-shaking and world-shaping terrorist attacks of September 11,2001 on the World Trade Center in New York and the Pentagon inWashington, D.C. Two of the essays (Chapter 29 and Chapter 35),although written in 2001, weren’t published until early in 2002.Most of the cross-cutting issues dealt with in these essays are as per-tinent in the post– as in the pre–9/11 environment. Whether global-ization is good or bad and for whom, how to measure it or how toinfluence it, remain timely questions now as they were then. The ad-mission of China and Taiwan to the World Trade Organization(WTO), and the economic and other consequences of this change instatus, will continue to be of regional as well as global significance.So, too, are issues addressed in other chapters, including the case forand against a “new international economic architecture,” the out-look for a strong or a weak euro, the ramifications of China’s contin-ued if fitful progress toward capitalism, and the “fairness” and othereffects of changes in U.S. marginal tax rates or in governmentspending as central elements in U.S. fiscal policy.As indicated by this snapshot of the book’s contents, the subjectmatter covers a wide range of disparate issues, reflecting matters Iiv Straddling Economics and Politicshave been interested in during this period. I have organized thechapters into three parts to provide a semblance of cohesion:I. The Global Economy, which includes chapters dealing withglobalization, financial crises, WTO, and the euro;II. The U.S. Economy and Foreign Policy, which includes essays onU.S. tax cuts, the trade and budget deficits, and whether andwhen it makes sense for the U.S. military to intervene abroad;andIII. Asian Economics and Politics, which comprises most of thebook’s chapters, spanning a wide range of topics from “Asianvalues” and whether they differ from “western” ones, to eco-nomic forecasts for the Asian region, to Asia’s recovery from the1997–1998 financial crisis, and to numerous country-specific is-sues involving China’s economic growth, cross-Strait relationsbetween the mainland and Taiwan, Japan’s economic stagna-tion, and the eventual costs of Korean reunification.Bridging this assortment of subjects and partly connecting them areseveral prominent, cross-cutting themes.First, the author is a strong, but not uncritical, adherent of free andcompetitive markets, and of market mechanisms rather than gov-ernment intervention to address economic problems. This themeoccurs and recurs in the three parts of the book in describing variousissues and in evaluating policy measures to deal with them. How-ever, this stance does not proceed from a belief that markets, whenleft to their own devices (e.g., “laissez-faire”), always manifest the fullrange of attributes associated with perfect markets, to wit: full andfree competition; symmetric information available to buyers, sellers,and potential competitors as well as current producers; generallyrising cost curves notwithstanding economies of scale and scope;and so on. Indeed, it is typically the case that some of these attributesare missing from real-world markets. Instead, my support for marketmechanisms derives from an empirically based belief that theevident shortcomings of markets are frequently overbalanced by theForeword voften neglected, overlooked, and unacknowledged drawbacks ofgovernment efforts to redress the market’s shortcomings.1This theme recurs in Chapters 3, 4, 5, and 6 dealing with financialcrises, the International Monetary Fund, the problem of “moral haz-ard,” and the continuing clash between reliance on markets or ongovernment intervention. The theme also appears in Chapters 24, 25,27, 28, and 29. dealing with the Chinese economy, its prospects, andits fitful march away from central planning and toward capitalism; inChapter 10 where a rebuttal is presented to George Soros’s alarmismabout “market fundamentalists” and his predicted collapse of theglobal capitalist system; and in Chapters 32, 33, 34, and 35 dealingwith Japan’s economic malaise and possible remedies for it.A second theme evident in several parts of the book is a pervasiveskepticism and criticism of U.S. efforts, however well intentioned, tointervene in politically-charged, ethnically-complex, and murkyconflict environments, (such as Bosnia and Kosovo), along with pes-simism about whether the expected good resulting from such effortsexceeds a reasonable prognosis of the harm inflicted by them. (Assuggested earlier, this view would warrant reappraisal in the post–September 11, 2001 environment—a reappraisal not attempted inthis book.) The theme is also manifested in Chapter 37 dealing withthe costs of Korean reunification if and when it occurs, and how toeffectuate it without such large foreign subventions to North Koreaas have been urged by others. Instead, I suggest that emphasisshould be placed on a more austere, closely monitored, quid pro quonegotiatory and enforcement stance.Third, and seemingly inconsistent with the preceding theme, is amore activist inclination toward restarting cross-Strait discussionsbetween Mainland China and Taiwan. This theme appears, for ex-ample, in Chapter 30, dealing with “One China and Three Systems,”and Chapter 31 on restarting discussions between the two WTO par-ties. The reason I characterize this as only “seemingly” inconsistent,rather than blatantly inconsistent with the anti-activist position re-ferred to earlier, is that the concrete policy suggestions offered in______________ 1For an exposition and elaboration of the theory and evidence underlying this posi-tion, see Charles Wolf, Jr., Markets or Governments: Choosing Between ImperfectAlternatives, MIT Press, 1993.vi Straddling Economics and Politicsthese chapters do not specify how much of a role the United Statesshould play in this process. To be sure, this is a bit disingenuoussince the likelihood that the parties would actually do somethingalong the lines I suggest without an explicit and committed U.S.initiative may be small. Attempting to reconcile my general aversionto interventionism with this inclination to exert influence in tension-easing directions in the case of China and Taiwan would at best belabored. Suffice it to say that, at least in this instance, I agree withEmerson’s dictum that “foolish consistency is the hobgoblin of littleminds”!Fourth, several of the chapters try to envisage the economic and mili-tary directions in which particular countries or regions are moving,and what the movements portend for the future. Sometimes thistakes the form of formal economic forecasts, as in Chapters 17, 18,and 19, in which forecasts are made for the principal Asian countriesof four key variables: gross domestic product (GDP), per capita GDP,military spending, and the accumulation of military capital. Based onthese forecasts, comments are made about the Asian political andsecurity environment that may result from these trends. Underlyingthe formal forecasts is a premise that two of the critical ingredients ofnational power, and the relative stature and influence of countries,are their economic size and growth, on the one hand, and their mili-tary capabilities, on the other. While these are certainly not the onlyingredients of national power, they are among the most salient aswell as the most calculable ones. Elsewhere in the book, the forecaststhat appear are of a more qualitative and at least equally conjecturalsort, as in Chapter 33’s and 35’s assessment of Japan’s long termprospects, and Chapter 26’s speculation about whether a freely andfully convertible Chinese yuan would be more likely to trade at a de-preciated or appreciated rate against the dollar.Finally, I should acknowledge that some of my views that seemed ontrack at the time they were expressed have turned out to be wide ofthe mark when the future they were envisaging actually arrived. Oneexample: Chapter 13 expressed doubts that the consensus estimatesof a prospective ballooning of the U.S. trade and current accountdeficits would materialize. Well, the consensus was correct; mydoubts proved to be wrong. Another example, Chapter 15, dealingwith taxes, trade, and growth in 1996, analyzed the savings-invest-ment imbalance in the United States by principally emphasizing theForeword viiinsufficiency of domestic savings, rather than the excess ofinvestment. In hindsight, the investment boom and its excesses inthe late 1990s in fact led to domestic excess capacity and therecession of 2001. So, while my crystal ball helped in some cases(many relating to Asia), it obscured in others (several relating to theUnited States!).I have always believed that commentators—whether of a scholarly ormore journalistic bent—should be held to account for their pro-nouncements. Whether such accountability through some type ofscoring system is provided by others or even by themselves, it hasseemed to me that it would serve a useful purpose by discouraginghype and encouraging responsibility. With this aim in mind, I haveadded a brief “Postaudit” at the end of each essay, indicatingwhether, in my judgment, the essay seems currently to be valid andrelevant compared to when it was written. In my scoring system, 23of the essays stand up to this test quite well (each receiving an “A” or“A–”), ten warrant B’s (meaning they do passably well), and five re-ceive C’s, which means they fail to make the cut! For those readerswho might be interested in the finer-grained evaluation, I did best onParts I and III—on the global economy and Asia, respectively—andleast well on Part II, dealing with the U.S. economy. The record is notas good as I would have liked, yet better than that of such soothsay-ers as George Soros, Robert Mundell, Paul Krugman, Fred Bergsten,Jean-Claude Trichet, and several others mentioned in these essays.Charles Wolf, Jr.Santa Monica, CAixCONTENTSForeword iiiFigures xiiiTables xvPART I: THE GLOBAL ECONOMYCHAPTER 1Globalization: Meaning and Measurement 3CHAPTER 2Globalization: Less Than Meets the Eye 15CHAPTER 3Financial Crises and the Challenge of “Moral Hazard” 19CHAPTER 4The Morning After 25CHAPTER 5Financial Flu Isn’t Contagious 31CHAPTER 6History Hasn’t Ended: The Struggle Between Markets andGovernments Resumes 35CHAPTER 7The WTO Controversy: Exaggerated Fears and UnrealisticHopes 41CHAPTER 8Economic Facts Point to a Weak Euro 47x Straddling Economics and PoliticsCHAPTER 9E Pluribus Incertum Unum 51CHAPTER 10The Crisis of George Soros 55PART II: THE U.S. ECONOMY AND FOREIGN POLICYCHAPTER 11Whether and When to Intervene 63CHAPTER 12Tax Cuts, Debt Reduction, and “Fairness”: Why Tax ReductionIs No More “Unfair” Than Debt Reduction 67CHAPTER 13False Alarms About the U.S. Trade Deficit 71CHAPTER 14Two Deficits That Just Don’t Matter(Co-Authored with Walter Wriston) 75CHAPTER 15Taxes, Trade, and Growth 79PART III: ASIAN ECONOMICS AND POLITICSCHAPTER 16Are “Asian Values” Really That Unique? 85CHAPTER 17Through a Hazy Crystal Ball: Asia’s Economic Outlook,1997–2020 89CHAPTER 18Asia in 2015 101CHAPTER 19The Accumulation of Military Capital in Asia and theUnited States, 1997–2015 107CHAPTER 20Too Much Government Control 113CHAPTER 21The End of Asia’s Economic Crisis 119[...]... foot-andmouth disease in Europe, and even piracy in the South China Sea! A slightly edited version was published in Critical Review on April 30, 2001 under the same title 1 Based on a presentation originally made at the 3rd annual conference between RAND and the China Reform Forum, held in Beijing in November 2000, on The Challenges of Globalization 3 4 Straddling Economics and Politics The. .. phenomenon recalls the role of the Vietnam war as an all-purpose scapegoat for anything that went wrong in the 1960s and 1970s: stagflation in the United States, the drug culture in the United States and Europe, even the sharp increase in teenage pregnancy in the United States Use of the term “scapegoat” doesn’t mean that globalization has had no contributory responsibility for any of the untoward developments... Measurement Issues and Applications The preceding definition implies several tendencies in global and national markets, and the conditions we should expect to find or to impend as globalization proceeds These conditions should, in turn, 6 Straddling Economics and Politics affect the identification and design of appropriate indicators or metrics for globalization First, and most obviously, this definition... labor in developing countries is “exploited” by the increased penetration of foreign business and investment in domestic markets, the process creates benefits and opportunities that the low wage labor would be denied without globalization It is also worth noting that the gains and losses, and their corresponding beneficiaries and victims occur within both the rich and poor countries Increased access... necessarily causing, increased income inequalities Typically, average rates of income growth have, in the aggregate, been similar for the rich, poor, and the general population, resulting in widened income disparities (hence, increases in such inequality measures as Gini coefficients in both developed and developing countries) Whether and to what extent strenuous efforts should be made to redress these effects... States and Germany Furthermore, it should go without saying that globalization now, as in the past, is not a zero-sum game Although there are losses and losers, as well as gains and winners, the aggregate of economic gains exceeds that of losses While low-wage labor in developing countries Globalization: Less Than Meets the Eye 17 is exploited by increased penetration of foreign business and by foreign investment... savings and investment rates were lower at intervals in the past than they are currently And globalization, in the sense of access by foreign businesses to domestic markets, still varies widely among countries According to a recent RAND study, access by foreign businesses to the markets of Japan, China and South Korea continues to be significantly more restricted than access to the markets of the United. .. that globalization has penetrated in descending order to the economies of the U.S and the EU, with Japan, Korea, and China well below them, but grouped fairly closely to one another, for the time periods covered by the measurements 4 Concluding Observations: How Much Globalization Is There, and How Much of It Is New? There is no question that some aspects of globalization are genuinely new These include... media hype, and spin associated with globalization, as well as the occasionally violent demonstrations against it, globalization has become a convenient scapegoat for many things—indeed, for almost anything, and sometimes seemingly for everything Globalization has been blamed for the Asian financial crisis of 1997–1998, the Russian economic plunge in 1999, global warming, hormone-treated beef, the spread... making something worldwide in scope or application.” Before dismissing this definition as too simplistic, it is worth recalling an observation by Ernest Rutherford that unless you can state a technical point in simple, non-technical language, you probably don’t really understand it! Other definitions include the following, more or less in order of increasing complexity: “[Globalization is] the intensification . Cross-Cutting Issues in Asia, the United States, and the Global Economy Charl esWolf, Jr.R Straddling Economics and Politics This publication. early in 2002.Most of the cross-cutting issues dealt with in these essays are as per-tinent in the post– as in the pre–9/11 environment. Whether global- ization
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