INTERVIEW: Lester Thurow, economist

june 1995

East Asia on Thin Ice
Lester Thurow, U. S. Economist and Author


To all outward appearances, Lester Thurow is as Establishment as they come: The former dean of the Sloan School of Management at the Massachusetts Institute of Technology now teaches economics at the university, when not consulting with corporations, making speeches and writing books such as Head To Head and The Zero-Sum Society. But his soft-spoken, thoughtful manner conceals an iconoclastic view of global economic trends. Thurow predicts, for instance, that no new country will crash its way into the Group of Seven leading economies within the next 100 years. Not even China. After a busy day with corporate executives in Singapore recently, Thurow took time to speak to Asia, Inc. Singapore Correspondent Salil Tripathi:

East Asia is skating on thin ice, so thin the only question is when it will break. Each country in this region has a huge trade deficit with Japan that is paid for by large trade surpluses with the U.S. In 1994, Japan ran a surplus of $ 130 billion while the U.S. had a deficit of $ 150 billion -- almost entirely with the Pacific Rim.

No country can run trade deficits forever. Yet people now talk as if the U.S. is somehow so unique that it is able to defy economic gravity. It is not. Reality will come when foreigners refuse to lend to the U.S. unless their loans are denominated in some currency other than dollars.

When that point arrives, the U.S. quickly will have to shift from a large trade deficit to a substantial trade surplus. Without the U.S. as an open market for Asian goods, intra-Asian trade would collapse tomorrow, if not tonight. No one could pay their Japanese import bills and very quickly no one would be creditworthy.

A few years ago it was Japan that was supposed to be able to defy economic gravity. People started to say Super Japan was so unique that it could support stock-market prices unsustainable elsewhere. Then the market crashed from around the 40,000 level to 14,000 points.

Now there is talk of Super China, with its annual growth of 8 percent to 10 percent. Nobody is a bigger China optimist than I. But there is something fundamentally wrong with claims that China will continue to grow at its present rate to become the world's biggest economy in 2010 or 2020.
Economic history shows no country has grown faster than 3.8 percent over a 100-year period. Even if you claim the Chinese are a sort of superpeople and that China's economy will grow by, say, an annual 6 percent over the next century, what would you get? China's per capita income would rise dramatically from $ 400 but would still be significantly less in the year 2100 than Japan would achieve with its present per capita income of $ 36,000 growing by only 1 percent or 2 percent a year.

And what of China's infrastructure? In the U.S. every major road west of the Mississippi was built by the state. In China's case, private businesses will get interested in a project like a Beijing-Shanghai expressway. But they won't put money into linking the middle of China with the coast. China will have to make its own investment. Another interesting question for Asia in the next century concerns regional trading groups. At APEC (the Asia-Pacific Economic Cooperation forum) they are talking of a free-trade area by the year 2020. Whenever politicians promise to do something in the distant future, you shouldn't take them seriously because it won't happen in their political lifetime.

Even if a free-trade area in Asia does come about, look at the problems. You will have one big economic player, Japan, which is a military and political pygmy. Then you have China, which is a military giant but an economic pygmy. How would any group divide the votes between China and Japan? And where would the Malaysias and Singapores fit in?

Europe and North America also have major economic problems, but at least they are thinking of doing something about them. East Asia is so arrogant it thinks it can defy economic gravity forever.