Date created: 28 November 1996

Last modified: 18 November 1997

Maintained by: John Quiggin

Truth blunts the tigers' teeth

A central claim in the continuing debate over Australia's role in Asia is that Japan and several other East Asian countries are not only growing fast but have already overtaken Australia in terms of per capita GDP. This claim has been used to add urgency to the case for microeconomic reform. For example, in its 1991 Annual Report, the Industry Commission stated, 'It is perhaps too little appreciated in Australia how fast the standard of living of our neighbours is rising, including in Japan..' To support this claim, the Industry Commission cited World Bank figures which purport to show that Japanese living standards were similar to those of Australia in 1980 and had grown to a level 66 percent above Australia by 1989.

Partly in response to claims of this kind, resentment over our supposed decline to become the 'poor white trash of the Pacific' has been a major factor in the recent resurgence of racism in Australia. Whether as immigrants or trading partners, Asians have made convenient scapegoats for the social dislocation arising from unemployment and microeconomic reform.

The idea of an East Asian economic miracle has also been used by governments in the region to justify curbs on free speech and free elections, and has influenced our own government in its unwillingness to stand up for the concept of universal human rights. If, it is argued, the authoritarian governments of Asian have produced better economic outcomes than decadent democracies like Australia, we are in no position to criticise them.

There is no doubt that the idea of an East Asian economic miracle is influential. It only remains to ask, is it true? One way of looking at this question is to ask whether the observed increase in output primarily reflects good productivity performance or is simply the result of increased inputs of labour and capital. US economist Paul Krugman has argued that, like the growth of the Soviet economy in the 1950s, East Asian growth was primarily due to increased input use. Since inputs of labour and capital cannot be increased indefinitely, it follows that East Asian growth will slow once capital stock per head and output per head have caught up to the levels prevailing in the rich OECD countries.

An even more fundamental question is whether the published data on GDP per capita is a reliable measure of material living standards (leaving aside debate over the many things left out of GDP altogether). The World Bank analysis mentioned above was based on a simple exchange rate comparison. Such a basis of comparison is fundamentally flawed by the fact that exchange rates measure only relative prices of traded goods. This procedure overestimates the economic performance of a country like Japan, with an efficient traded goods sector and an inefficient domestic services sector. It is also subject to massive influence from short-term fluctuations in exchange rates.

Economically sound analysis of living standards is based on the very simple idea of revealed preference. In comparing, say Australia and Japan, the relevant question is whether an 'average' Australian, facing Australian prices, who worked the same number of hours as the average Japanese could afford to buy the goods consumed by the average Japanese. The revealed preference approach may be seen as a systematic application of the principle illustrated Economist magazine's Big Mac index, which asks how many hours a bus driver needs to work in different countries to buy a Big Mac.

Steve Dowrick of the ANU and I looked at this question a couple of years ago. We found that, in 1990, the average Australian was unambiguously better off, in the sense described above, than the average Japanese. The slow growth experienced in Japan since then means that this conclusion is still applicable. However, precisely because the Japanese economy has been distinctly non-miraculous in the 1990s, attention has switched to the East Asian 'tiger economies', not included in the OECD data set we used. We are currently working on a more comprehensive and up-to-date analysis. Preliminary analysis suggests that, while the tiger economies have done an impressive job in catching up to the OECD countries, they have not surpassed them and are unlikely to do so.

An important feature of the success of the revealed preference approach is the implicit demonstration that people everywhere have much the same tastes and preferences. If they face similar prices and opportunities, they will make, on average, similar choices. The commonly held view that, say, Japanese and Australian consumers have radically different tastes can be tested and rejected.

There is every reason to suppose, that, as in Japan, the 'tiger economies' will become less special as they exhaust the relatively easy gains to be obtained by importing capital and technology. Further, as has already happened in Korea and Taiwan, their people will become increasingly unwilling to accept the self-serving claims of authoritarian rulers that Asians do not want or need universal human rights. The sooner that we realise that the similarities between people of all races and backgrounds are more important than the differences, the better it will be for all of us.

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