Click Here to Read the Interview at the Far Eastern Economic Review
Economic trend-spotter and Reagan administration vetaran Clyde Prestowitz met recently with REVIEW deputy editor Colum Murphy to discuss what the rise of Asia means for the U.S. economy.
REVIEW: In your 1988 book Trading Places: How We Allowed Japan to Take the Lead, you warned that the U.S. economy risked being overtaken by mighty Japanese companies. Why do you think it is happening again with China?
Clyde Prestowitz: There was a huge asymmetry in the Japanese relationship with the world at that time. The Japanese market was extremely difficult to get in to
.Japanese goods were flooding into foreign markets, particularly the U.S. market, at a time that the U.S. economy wasn't doing very well and so there was loss of employment and factories closing...Japan challenged the U.S. in ways that the U.S. had never been challenged before. And the Japanese phenomena highlighted some weaknesses in the U.S. economy...The Japanese did a great job in quality and it highlighted the weaknesses in American quality.
In the 1990s, Japan ran into the collapse of the bubble [economy] and they had a decade of very slow economic growth and restructuring. The media turned around and said, "Why did we ever have to worry about Japan? See, our system is right and we won out in the end!"
Well, no! Japanese had their own weaknesses and they made some big mistakes in the way that they responded to the collapse of the bubble. But what is often forgotten is that, from the laundry list of proposals that I and others made [at that time], a lot were actually adopted. We improved our quality. We had the Plaza Agreement that revalued the dollar. We had a U.S.-Japan Semiconductor Agreement that opened the Japanese market. So through a combination of our picking up our game and the Japanese running into their own problems, it appeared as if the competitive edge in the '90s had swung back to the Americans.
It appeared that way but it wasn't necessarily that way. For two reasons: One is that while we Americans addressed many of the weaknesses, we didn't address all of them. Our savings rate not only did not improve, it got worse. Our investment in critical infrastructure got worse. A lot of the underlying weaknesses in the U.S. were masked by the problems the Japanese had and by the dotcom bubble, and then by the housing bubble. So it looked as if the U.S. economy was just going like gangbusters.
Now in 2006 what we see is that Japan's back and that, in fact, maybe Japan never went away - and now we also have India and China and of course the Asian "tigers." I think that Japan was the prelude and now we are into the main game.
REVIEW: Specifically, what needs to be done to safeguard America's economic position?
CP: First, we really need to address the asymmetry in the global economic structure. Central to that is the role of the dollar. That the dollar is the world's money, that we are the only country in the world that can print that money and can borrow in its own currency, appears to be a benefit, but in fact it's a curse
. It allows us to be irresponsible and it allows everybody else to be irresponsible, too. It allows us not to save and it allows the rest of world, particularly Asia, to oversave. The U.S. ought to lead a global Bretton Woods II or III in which we change the role of the dollar. We need to de-emphasize the dollar. We need to consider creating an international unit of account which is a basket of currencies.
Second, we need to get our domestic fiscal policy under control. We need to balance the U.S. budget. We need to get health care, pensions and social security into some form of long-term stability. We need to build incentives for saving. Right now, all the incentives in the U.S. economy are to spend, to consume. We have to go back to our historic savings rate which is about 10% of GDP. Right now we are negative.
Third, the U.S. needs to develop the same kind of mentality about being competitive that one sees here in Asia and that used to exist in the U.S. Ten years ago, the U.S. telecommunications network was the best in the world and South Korea's was nowhere. Today, Korea's is clearly the best in the world and the Americans are lagging far behind. So what happened since 1996?
REVIEW: What about the other Asian economies, what do they have to in order to improve their competitiveness, especially vis-à-vis China?
CP: The Asian economies all face questions similar to those being faced by the U.S. In fact, in some cases, more severely because they are smaller economies with much fewer resources and capabilities than the U.S. Many of the Asian economies are going to do fine as suppliers of raw materials to China. But clearly many of these economies are in manufacturing and are trying to go high-tech and that's just where China is going, too.
So, it's the same thing: Are you investing to keep your infrastructure right at the cutting edge? Are you educating your kids? Are your taxes and fiscal policies what they should be? Are you adequately looking for niche market where as a small economy you can do very well without going head to head with this behemoth China? I think these are major questions for the other Asian economies.
REVIEW: What are the biggest challenges facing China and India?
CP: India and China face similar challenges in some of the aspects. Cleary, energy availability, energy cost, water availability, desertification, metropolitanization, etc. Both of them have corruption problems, although the sources of corruption are different... In China, the source of corruption is the lack of the rule of law, combined with a one-party system and the lack of a free press. In India, you have rule of law. Everybody knows corruption is there and people know who is corrupt. But often these are politicians that keep getting elected. And Indian corruption is more like New York under Boss Tweed...
In the case of India, I think the question is can democracy, particularly in a country where a large percentage of the population are illiterate and very poor, take the hard decisions to deal with these very big challenges and maintain the momentum for growth.
In China, the question is the opposite. Clearly, they can make fast decisions. They can identify the big problem and deal with it. The question is, how do you know what is going to happen tomorrow? How do you deal with social unrest, the lack of rule of law and corruption? Can they deal with that?
(C)2006 Dow Jones & Company, Inc.