Asia’s economic miracle has traversed several crises.  Today, it is pulling through the global financial crisis quite admirably.

Regional cooperation in Asia has for the most part been led by the Association of South East Asian Nation (ASEAN) grouping.  As Asia makes more solid strides towards creating a community, it is high time that the Big 3 of China, Japan and Korea take the lead.  And this leadership should have a solid base in Japan, the country where Asia's miracle started.

Today, we take Asia's economic miracle for granted when we look at cities like Tokyo, Seoul, Shanghai, Beijing, Singapore and even Bangkok.  They look normal to us. 

It is difficult to imagine that just some 60 years ago it was a different world.  Japan was destroyed by World War 2.  China was also destroyed by the same war, then a civil war.  Korea was decimated by its own war.  And much of South East Asia, which also suffered from war, was going through the pains of decolonization.

What we see here in Asia today most certainly feels like a miracle for those of us who have lived through its rise.

Is it really a miracle?  Yes and no. 

From a long term perspective, the answer is no.  Economic historians have estimated that for much of the past 2,000 years, North East Asia (especially China) was as developed as Western Europe.  About 2000 years ago, the two regions were about the same.  About 1000 years ago, Asia was ahead of the West.  Then with the Renaissance and Industrial Revolution, the West overtook Asia again.  From an historical point of view, what is unique in China’s history is a bad 19th and early 20th century.

What we see today, especially in the rise of China, is a return to historical normalcy.  In a way, we should not be surprised.  And the whole world has to make way for the return of China.  This is a major strategic issue for us all.

But the rapid development in Asia over the past 60 years is really a miracle in many other some ways. 

First, after the World War 2, no economist predicted the rise of Asia.  When economists looked at the world, many saw Africa as the continent of great potential with its vast resources.  They did not foresee the immense governance challenges that Africa would face after decolonization.

When economists looked at Asia, they saw the Philippines as a potential star.  It was a former American colony, English-speaking nation.  But in fact, the Philippines have basically missed out on the Asian miracle.  Burma, or what we today call Myanmar, also had immense potential in agriculture.  That this potential has been wasted is a tragedy for the world and above all the Burmese citizens.

In other words, the future is very unpredictable.  There are many ‘black swans’, as one author describes unpredictable events.  This also is very important, because in planning the future, we have to prepare ourselves for unpredictability.  Today’s global financial crisis is a telling reminder.

The rise of Asia is also a miracle in the sense that over the past five decades, the rest of the non-Western world did not enjoy success.  Communism was a failure.  And inward-looking models of development in Africa and Latin America did not work, even if some countries from these continents are doing a little better now. 

But our East Asian Miracle should not make us complacent.  We have to remind ourselves that nothing stays the same for ever.  And in that regard, what worked in the past, will not necessarily work in the future.  The past 20 years of stagnation in Japan is a regrettable reminder. 

Even less advanced countries should not be complacent.  Economists worry today about a so-called “middle income trap”.  What this means is that while the first stages of economic development may seem easy, the next steps may prove more challenging.  We will have to see how China develops in the coming decades.  Continued success cannot be taken for granted.  China is one country that will become old (in terms of ageing population) before it becomes rich.

The rise of Asia was also a miracle in another way.  That is the speed of its development.  The growth that Japan, Korea, South East Asia, China and now Vietnam have experienced is very much faster than anything that occurred in Western countries.

This is fantastic.  But it can also mean that economies can change faster than societies, faster than politics and faster the international relations.  This can lead to many stresses.  Today, in many ways, the challenge for Asia is to bring its politics and international relations up to the level of its economies.  And there is nowhere that this is more the case than Japan. 

So what are the unique secrets of East Asia’s economic miracle?  Much has been written.  And there are many theories.

But the main points seem to be the following:

(i) good political leadership and cohesive societies that were prepared to be led;

(ii) not only was there good leadership, but leaders had basically sensible policies.  And this is a contrast with Latin America and Africa.  Most Asia leaders saw that there countries should specialize in the export of manufacturing goods, thereby exploiting their work forces.  This was the sensible course of action because most Asia countries are resource poor.  Export revenues financed imports which embodied knowledge and technology, and helped Asia climb the knowledge ladder.  Also, exporting meant Asia had to follow the high standard disciplines of export markets; 

(iii) knowledge-based development strategies through investments in education, and in some cases attracting FDI and in other cases buying technology; 

(iv) sound and prudent macroeconomic management – sound public finances, low inflation and high savings.

East Asia has to thank Japan for showing the way.  It developed quickly after World War 2, and then the others followed -- the Asian NIEs (Hong Kong, Korea, Taiwan and Singapore), then ASEAN 3 (Indonesia, Malaysia and Thailand), and then China and India.  And as Japan climbed the technology and knowledge ladder, others followed by going from labour intensive to capital intensive to technology intensive production.

But economic history is full of crises, and East Asia has not been spared.  These crises have represented the greatest threat to the Asian miracle. 

Back in the 1970s, East Asia was hit by the oil shocks.  By and large, the region adapted well. 

Then, in the late 1980s, Japan experienced a bubble economy, which burst and pushed it into crisis.  Part of Japan’s response to the rise in the value of the yen was to outsource much of its manufacturing production to neighbouring Asian countries.  This allowed Japan to concentrate on what it is best at, that is, the high technological end of the manufacturing process.  It also provided a big developmental boost to Japan’s neighbours. 

But Japan was slow to fix up the financial damage of this crisis.  And it has also been slow in taking its development to the next stage, by transforming itself into a more service-oriented economy.  And a policy boosting the economy by debt-financed stimulus is now backfiring as debt has reached record levels.

A number of East Asian economies, like Indonesia, Korea and Thailand, were then struck by a financial crisis in 1997.  Again, much has been written about this crisis which had seen massive capital inflows come into the region, only to leave again.  This crisis taught us that while global export markets had been a big driver of East Asia’s development, global financial markets could be fickle. 

Strong domestic policies and institutions are necessary to manage global finance.  Also, the Asia region needed to work together better to reduce its vulnerability to global markets.  Many important initiatives were undertaken.  But as happens after every crisis, when the heat cools down, and things start to improve, the pressure to make difficult decisions fades away.

This brings me to the global financial crisis of today.  Again, much has been written of the causes and consequences of this crisis.  But, there are a couple of points that I would like to stress.  First, at the beginning of the crisis, there were some who thought that Asia would be somehow insulated or “decoupled” from the crisis.  They believed that Asia had become strong enough to sail alone.  This was wrong.  Although Asia’s economies are very strong, they still depend on US and EU markets for a lot of their exports.  And it was countries like Japan, Taiwan and Singapore, which are very dependent on these markets, that took the biggest hit.

But Asia’s strength was seen in how its governments responded to the crisis.  Most governments in the region implemented big stimulus packages, especially in the case of China.  This has meant that East Asia has survived the crisis better than any other region in the world.

But East Asia stands at a turning point.  To keep its economic miracle alive, it needs to change course in several ways.

First, East Asia will not be able to rely on the hungry US consumer to buy its exports as much as in the past.  To keep growth high, it will be necessary to have more domestic and regional demand.

Second, in the developing Asia, the past high growth has come at a high environmental cost.  We need to move to a green growth path.  Japan has much to offer its neighbours through its technology.

Third, the past high growth has seen widening gaps between rich and poor within our countries.  And this goes for Japan as much as it does for other countries in the region.

National governments have much to do in tackling these issues.  But there is much for the region to do in working together.

This is where I believe that Prime Minister Yukio Hatoyama’s proposal for an East Asia Community is very important for maintaining peace and prosperity.  To keep the East Asian miracle alive, Japan, China and Korea need to build this community.

In a way, an East Asian Community already exists with all the trade and investment in the region.  Many institutions exist like APEC, ADB, ASEAN, ASEAN+3, ASEAN+6 (EAS).  This year Japan is chairing APEC and will be hosting the APEC Leaders’ Summit in Yokohama.  And fortunately, the US will be chairing next year.  So we have a perfect opportunity for these two powers to take the Asia-Pacific region forward.

But too much of Asia’s cooperation is led by ASEAN, the smallest part of Asia, rather than the Big 3 of Japan, China and Korea.

I believe that the Big 3 of Asia need to work together more for ensuring both peace and prosperity in Asia, and there are many positive developments that we need to build on.

First, China, Japan and Korea are now holding summit meetings for national leaders.  And last week's meeting was very promising.  This political dialogue is very important.

Second, discussions are underway regarding a possible free trade agreement between the three countries.  This is important for create more market opportunities for the three countries.  But also as a concrete instrument of cooperation. 

I understand that Japan is the most cautious of the three countries regarding an FTA, mainly because of agriculture.  Agricultural protectionism has been a giant waste of money in Japan, and a sticking point for its relations with the rest of the world.  It must give up this silly policy. 

Japan’s agricultural policy should be based on excellence, not protectionism.  I understand that Japan has now started exporting Japanese rice to China, and the Chinese love it as a high quality luxury product.  Japan’s agricultural products are the equivalent of high quality French wine or Scotch whiskey!

Third, there is tourism.  Even though we have the most beautiful country in the world, there are very few tourists.  Japan should become a more competitive tourist destination through an open skies policy, and developing tourist facilities.  We would benefit from the tourist revenues.  And by attracting tourists from China and Korea, we would help build mutual understanding and trust in the region.

Fourth, East Asia should create a major Erasmus like the EU's flagship education and training program, which enables more than 180,000 students to study and work abroad each year, as well as supporting co-operation actions between higher education institutions across Europe. It caters not only for students, but also for professors and business staff who want to teach abroad and for university staff who want to be trained abroad. 

Japan is now receiving a growing number of students from Asia, but it is not enough.  And Japanese students travel less and less abroad.  Again, this is important not only for education, but for building trust and mutual understanding in the region.

Fifth, it is a reality that English is the international language.  And regrettably we Japanese are the worst English speakers in Asia.  We and our education authorities have to get serious about English language education.

Sixth and last, we have to get our political house in order.  We cannot build a serious community in East Asia if we keep changing prime minister each year.

Now is the time to act on these initiatives because as we are just coming out of the global financial crisis, we need to make the region stronger for the next crisis.  There will be another crisis, there always is.  We just do not know the nature and timing of the next crisis.  And the risk is, if we don't get our act together, the next crisis will be here, in Japan.

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