The Miracle: The Epic Story of Asia's Quest for Wealth

The Miracle

The Epic Story of Asia’s Quest for Wealth

Michael Schuman

TO MY MOTHER, EMILY,

WHO FIRST INSPIRED ME TO WRITE

Contents

Map

The Cast

Introduction: A Few Thoughts on How Miracles Happen

Chapter One: The Radio That Changed the World

Chapter Two: Why Koreans Want to Clone a Dictator

Chapter Three: Minister Mentor’s Asian Values

Chapter Four: The Early Days of Superman

Chapter Five: A Tale of Duck Eggs and Dragon Dreams

Chapter Six: To Get Rich Is Glorious

Chapter Seven: The Father of Development and His Mafia

Chapter Eight: Mr. Thunder’s American Dream

Chapter Nine: The Man in the Blue Turban

Chapter Ten: A Dose of Dr. M’s Tough Medicine

Chapter Eleven: Every Street Is Paved with Debt

Chapter Twelve: A Fish Jumps through the Dragon Gate

Chapter Thirteen: An Unexpected Journey from Shortening to Software

Epilogue: Lessons from a Refrigerator Factory

Acknowledgments

Interviews

Notes

Bibliography

Searchable Terms

About the Author

Copyright

About the Publisher

Map

THE CAST

(IN ALPHABETICAL ORDER)

MONTEK SINGH AHLUWALIA: A civil servant in India, Ahluwalia advocated for the dismantlement of the License Raj and assisted Manmohan Singh and P. Chidambaram in their market-reform program of the early 1990s.

ANWAR IBRAHIM: As Malaysia’s finance minister, Anwar challenged Mahathir Mohamad’s radical economic policies during the Asian Financial Crisis. He became the leader of a Malaysian reform movement.

PRAMOD BHASIN: As chief of GE Capital in India, Bhasin, in cooperation with Raman Roy, turned India’s fledgling business-process outsourcing sector into a large and influential Indian industry.

CHAN CHIN BOCK: As a member of Singapore’s Economic Development Board, Chan was responsible for attracting some of the earliest and most important foreign investors to the island.

MORRIS CHANG: A former Texas Instruments executive, Chang was invited to Taiwan by the government to develop new technology industries. He founded the first independent chip foundry, Taiwan Semiconductor Manufacturing Company.

CHIANG KAI-SHEK: The leader of China’s Nationalists, Chiang lost control of the country in a bloody civil war with Mao Zedong’s Communists. He reestablished his regime on Taiwan, where he and a team of skilled technocrats transformed the island into one of Asia’s earliest and most impressive economic success stories. Chiang served as president of the government on Taiwan from 1950 to 1975.

PALANIAPPAN CHIDAMBARAM: A lawyer and ally of Manmohan Singh, Chidambaram, as commerce minister in the early 1990s, played a key role in dismantling the License Raj during India’s market-reform drive.

CHUNG JU YUNG: Founder of South Korea’s giant Hyundai group of companies, the bold Chung rose up from poverty to develop the country’s powerful car and ship industries. He became known as King Chairman.

CHUNG MONG KOO: Chung Ju Yung’s son, Chung took over management of Hyundai Motor in the late 1990s and surprised the auto industry by transforming the second-rate carmaker into a major global competitor.

DAIM ZAINUDDIN: As finance minister of Malaysia, Daim, a close protégé of Mahathir Mohamad, was the country’s most powerful economic official and led the government’s liberalization and privatization efforts.

DENG XIAOPING: As China’s paramount leader, Deng championed the reforms in the late 1970s and 1980s that transformed the economy from a centrally planned Communist model to a system based on trade, foreign investment, and private enterprise. He is responsible for making China the world’s budding superpower, but his brutal crackdown on protestors in Tiananmen Square in 1989 tarnished his reputation.

FUNG HON-CHU, VICTOR FUNG, AND WILLIAM FUNG: The Fungs manage Hong Kong trading firm Li & Fung. They played a pioneering role in developing borderless manufacturing, in which products are assembled from components from many countries to lower costs.

GOH KENG SWEE: A long-serving minister in Singapore, Goh was Lee Kuan Yew’s right-hand man and a tireless proponent of industrialization in Singapore.

BACHARUDDIN JUSUF (B. J.) HABIBIE: An Indonesian government minister and aviation engineer, Habibie oversaw an expensive effort to build a heavy industry sector. His ideas on state-led development challenged the free-market ideology of the Berkeley Mafia. He became president of Indonesia after Suharto’s resignation in 1998.

MOHAMAD BOB HASAN: A golfing partner of Indonesia autocrat Suharto, Hasan was the prototype crony businessman who became the country’s top timber tycoon. He once called himself King of the Jungle.

ALAN HASSENFELD: The former chairman of U.S. toymaker Hasbro, Hassenfeld developed ties to Asian industrialists in the late 1960s and 1970s, including Hong Kong’s Li Ka-shing, as American industry began to shift production to Asia.

SOICHIRO HONDA: The most successful automobile entrepreneur of the post–World War II era, Japan’s Honda aggressively built his upstart business with important technical breakthroughs. Honda is famous for challenging the dictates of the powerful bureaucrats at Japan’s Ministry of Trade and Industry (MITI). His company was the first Japanese carmaker to open a factory in the United States.

HU YAO-BANG: A general secretary of China’s Communist Party, Hu was a key supporter of Deng Xiaoping and one of the country’s most aggressive reformers and champions of free expression. His death sparked the protests in Tiananmen Square in 1989.

MASARU IBUKA: Co-founder of Japan’s Sony, the brilliant Ibuka was the engineering genius behind many of the company’s most famous gadgets.

HAYATO IKEDA: As Japanese prime minister in the early 1960s, Ikeda built confidence in Japan’s economy by launching a plan to double national income in ten years.

SHOICHIRO IRIMAJIRI: The manager of Honda’s first car plant in America in the 1980s, the quirky Irimajiri became the face of Japanese automakers in America. He was known as Mr. Iri.

JOHN JOYCE: As IBM’s chief financial officer, Joyce negotiated the sale of the firm’s PC unit to Chinese PC maker Lenovo.

KIM DAE JUNG: South Korea’s leading democracy advocate, Kim challenged the country’s dictators for more than two decades. He was elected president in 1997 and guided Korea through the Asian Financial Crisis.

KIM WOO CHOONG: The flamboyant founder of the Daewoo Group, Kim became South Korea’s most international and well-known tycoon. His mismanagement created one of the world’s biggest bankruptcies during the Asian Financial Crisis.

F. C. KOHLI: The dictatorial Kohli is known as the father of India’s IT industry. He turned Tata Consultancy into India’s first international IT services provider.

LEE KUAN YEW: The first prime minister of Singapore, Lee instituted creative economic policies that transformed the island into a major industrial and finance center. His Asian values argument and criticism of Western democracy also make Lee one of the Miracle’s most controversial figures.

LI KA-SHING: Chairman of Hong Kong conglomerate Hutchison Whampoa, Li rose from a small plastic-flower maker to one of Asia’s richest men. His amazing success has earned him the nickname Superman.

LI KUO-TING: A physicist, Li was a key policymaker in Taiwan for four decades. His ideas helped the island become a major exporter and electronics manufacturer.

LIU CHUANZHI: A former government researcher, Liu took great risks in founding PC maker Lenovo. As China’s first multinational enterprise, Liu’s purchase of IBM’s PC unit signaled the country’s growing global ambitions.

MARY MA: As chief financial officer of Chinese computer maker Lenovo, Ma led the company’s quest to acquire IBM’s PC unit.

MAHATHIR MOHAMAD: As prime minister of Malaysia for twenty-two years, Mahathir, a former medical doctor, strove to develop his tropical nation with policies adopted from Japan and South Korea. He is known more for his tirades against the West and Jews than for his economic achievements.

SRIDHAR MITTA: A talented engineer, Mitta played an instrumental role in the 1980s in the emergence of India’s Wipro as a computer and IT firm.

AKIO MORITA: Co-founder of Sony, and Asia’s best-known businessman, Morita was the marketing mastermind behind the company’s success. Morita became a passionate defender of Japan as trade disputes flared with the United States in the 1980s.

NARAYANA MURTHY: A former socialist, Murthy built India’s Infosys from a tiny firm housed in his apartment into one of the world’s major IT services providers.

TAIICHI OHNO: An engineer at Toyota, Ohno was the creator of the Toyota Production System, the highly efficient method of making cars that became known as lean manufacturing.

PARK CHUNG HEE: A general who claimed control of South Korea in a 1961 coup, Park ruled for eighteen years. He was the driving force behind Korea’s government-led development and is responsible for the policies that created the country’s giant family-run business conglomerates, called chaebols.

PARK TAE JOON: A South Korean military officer and colleague of Park Chung Hee, Park is the founder of the country’s steel industry.

AZIM PREMJI: As chairman of Wipro, Premji transformed the family vegetable oil firm into one of India’s most powerful IT service providers. Today, he is one of the country’s richest men.

SUBRAMANIAN RAMADORAI: As Tata Consultancy’s first representative in New York, Ramadorai was instrumental in building the IT services provider into a major international enterprise. He later became the company’s chief executive.

P. V. NARASIMHA RAO: A longtime functionary of the Indian National Congress party, Rao became prime minister amid the financial crisis of 1991. He surprised the nation by acting as the political backbone of the effort to reform the economy.

RAMAN ROY: Known as the father of India’s business-processing outsourcing industry, Roy was responsible for setting up the country’s first call center.

ROBERT RUBIN: As U.S. secretary of the treasury, Rubin helped organize rescue programs for Asia’s faltering economies during the Asian Financial Crisis.

SHIGERU SAHASHI: Sahashi was a controversial vice minister of Japan’s powerful Ministry of Trade and Industry (MITI). He personified the intrusiveness of Japan’s state in guiding the economy.

EMIL SALIM: A long-serving minister in Suharto’s government in Indonesia, Salim was a core member of the Berkeley Mafia, the team of economists who guided the country’s policy for nearly three decades.

STAN SHIH: Founder of PC maker Acer, Shih is the grandfather of Taiwan’s computer sector. He also left his mark on the global PC industry by inventing the fast-food model of assembling computers.

MANMOHAN SINGH: A soft-spoken economist, Singh as finance minister in the early 1990s led the effort to reorient the Indian economy toward the international marketplace that jump-started the country’s rapid growth. In 2004, he became India’s prime minister.

SUHARTO: A former army general who ruled Indonesia from 1966 to 1998, Suharto brought about a stellar record of poverty alleviation in the world’s fourth-most-populous nation. However, his authoritarian regime was also riddled with corruption and nepotism, and he was forced to resign in 1998 amid the Asian Financial Crisis. Like many Indonesians, he has only one name.

SUN YUN-SUAN: A premier of Taiwan, Sun supported key policies that helped develop the island’s influential technology industries.

H. C. TING AND KENNETH TING: As father and son, the Tings built Kader Industrial into a major Asian toymaker and one of the earliest companies to shift production to China.

EIJI TOYODA: A member of Toyota’s founding family, Toyoda oversaw the development of the Toyota Production System and the company’s successful expansion into the the U.S. market.

WAN LI: Communist Party official and protégé of Deng Xiaoping, Wan Li took the lead in reforming China’s agricultural sector by advocating for family farming over collectivization.

ALI WARDHANA: A key member of Indonesia’s Berkeley Mafia and a long-serving finance minister, Wardhana helped design the free-market economic policies that brought about the country’s Miracle.

JACK WELCH: As CEO of GE, Welch helped develop India’s IT and business-process outsourcing industries by bolstering the sector’s international credibility.

WIDJOJO NITISASTRO: A skilled economist, Widjojo was the unofficial chief of Indonesia’s economic policy team, the Berkeley Mafia. He pushed the other members to put their economics training to practical use developing the nation.

ALBERT WINSEMIUS: The Dutch economist became a key advisor to Lee Kuan Yew in Singapore and influenced some of the country’s most important policies.

YANG YUANQING: As an aggressive young executive, Yang devised the strategy that turned Lenovo into China’s largest PC maker. As chief executive, Yang has played a key role in managing Lenovo after its historic acquisition of IBM’s PC unit.

ZHANG RUIMIN: As chief executive of Haier, China’s largest appliance maker, Zhang made history by opening the first Chinese factory in the United States, to make refrigerators.

ZHAO ZIYANG: As general secretary of China’s Communist Party, Zhao was the most inventive economic reformer and the most important figure in the economy’s transformation, after Deng Xiaoping.

ZHU RONGJI: A premier of China, Zhu’s creative economic policymaking solidified Deng Xiaoping’s reforms and further liberalized the Chinese economy. His most important achievement was steering China’s entry into the World Trade Organization.

INTRODUCTION

A FEW THOUGHTS ON HOW MIRACLES HAPPEN

The ambition of the greatest man of our generation has been to wipe every tear from every eye. —JAWAHARLAL NEHRU

The spies called as soon as I returned to my desk.

I was the South Korea correspondent for the Wall Street Journal, living in Seoul, and the country at that moment—December 1997—was in the deepest depths of the Asian Financial Crisis. Companies toppled into bankruptcy, unemployment soared, and the local stock market and currency (the won) plummeted in value. The country had nearly run dry of foreign currency and faced the possibility of defaulting on its international debt. In November, the president had turned to the International Monetary Fund for a rescue—a national humiliation in Korean eyes—but the promised $58 billion support package had done little even to slow the economy’s downward spiral. Gripped by uncertainty and confusion, Koreans feared the worst was yet to come. The economy was on the verge of complete collapse.

Thus the phone call from the spy agency. I had just attended an hour-long meeting at the U.S. embassy with Stephen Bosworth, the recently installed ambassador, who briefed me and two other journalists on Washington’s position on the Korean economic crisis. Afterward, I decided to enjoy the clear winter day and take the twenty-minute walk from the boxy embassy compound down Seoul’s main thoroughfare, Sejong-ro, to the Journal bureau near City Hall. I got that phone call shortly after I arrived.

The caller identified himself as a member of the intelligence service, but did not bother to give his name. We want to know what the ambassador told you, he said.

I was a bit stunned. Calls from the spy agency were not unusual at the bureau. Though Korea had been a democracy for a decade, the old authoritarian practices of media control died hard, but I was startled that the Korean government knew of the briefing so soon. The spies were never this well informed.

I decided they knew enough already. In my two years in the bureau, I had learned that the best way to handle such calls was to say nothing. The less the government knew about what I was doing, the better. I don’t know what you’re talking about, I said.

The mystery man persisted. We know you were in the ambassador’s office. We want to know what he told you.

I began to surmise what was afoot: Paranoid government officials had most likely assumed that the ambassador was dictating the next day’s press reports—a common practice within the Korean media—and they had worked themselves into a lather that some kind of conspiracy against Korea was being hatched by American diplomats and the international press. I had already come under suspicion in Korea for my stories about the Crisis. My colleagues and I had been the earliest journalists to warn of the country’s impending calamity and the Korean press blamed us for causing the Crisis. I spent weeks parrying complaints and angry letters from a panicked finance ministry.

Whatever the government thought, however, I had no intention of blabbering out Bosworth’s briefing to Korea’s version of the CIA. You’ll have to read about it in the newspaper tomorrow like everybody else, I said, then got off the phone.

I was usually easily angered by Korea’s meddlesome spies, but that time, I felt bad for them. I, too, was moved by the trauma the Crisis was causing in Korea, a country that was turning into my second home. Over the previous four decades, Koreans had become accustomed to economic growth and rising incomes. The Crisis hit them as an incomprehensible nightmare. All of their tremendous gains, won with Herculean effort, seemed to be slipping away—and in a matter of days. Stunned, unemployed managers, too embarrassed to inform their families they had lost their jobs, donned the dark blue suits of Korean salarymen and pretended to head for the office each morning. They spent the day hiding out in the mountainside parks on Seoul’s outskirts. Housewives volunteered to sell their precious gold jewelry to the government for worthless won in a selfless yet futile attempt to refill the country’s depleted coffers. The elderly finance minister, unfortunate enough to be in office when the Crisis hit, was later tossed into prison by vengeful prosecutors.

Americans and Western Europeans who suffered through the global recession of 2008–09, with its tremendous destruction of wealth, jobs, and hope, can begin to empathize with the insecurity and dread experienced by the average Korean at that time. Any Korean over thirty years old remembers the poverty the nation endured and the agonizing sacrifices made to crawl out of it. Since the early 1960s, Koreans worked in miserable factories, scrimping and saving to build themselves better lives. They surrendered civil liberties and personal freedoms to authoritarian regimes in a national quest for economic development. And they had triumphed. In only thirty-five years, Koreans transformed a nation poorer than Liberia, Zimbabwe, and Iraq into a member of the rich countries’ club, the Organization for Economic Cooperation and Development.

Korea’s economic boom was far more than just a route to wealth. It defined the nation’s purpose, engendered a sense of pride and confidence rarely matched in Korea’s five-thousand-year history, and elevated the country to a position of respect and power in the global economy. The same can be said of nearly all of Asia. From India to Japan, countries only recently emerged from centuries of colonial domination or the devastation of war and revolution forged themselves into modern nations through the trials of economic hardship, sacrifice, and, eventually, success.

Fortunately for Korea and its neighbors, even the Financial Crisis proved a brief hiatus from Asia’s relentless progress. Since the 1950s, the economic gains achieved in Asia are almost impossible to comprehend. Asia has produced the most sustained economic boom in modern history, a massive surge in income that has brought unprecedented gains in wealth and economic opportunity to three billion people.

The Miracle created an almost unbelievable increase in wealth.

GROWTH OF GROSS NATIONAL INCOME PER CAPITA (IN CURRENT US$)

Source: World Bank; Taiwan Directorate General of Budget, Accounting and Statistics.

Economists call it the Asian Economic Miracle, and a miracle it certainly was. In 1981, East Asia had the highest poverty rate of any region in the world, with nearly 80 percent of its people living on an income of less than $1.25 a day. By 2005, the rate had fallen to only 18 percent. (By comparison, the percentage of the population of sub-Saharan Africa suffering in absolute poverty has remained almost unchanged over that same time period, at 50 percent.)¹ Hundreds of millions of Asians who would have been stuck knee-deep in muddy rice paddies, living in thatch huts, and surviving on subsistence diets now work in air-conditioned glass-and-steel skyscrapers, inhabit glitzy high-rises with stuffed refrigerators, and sip Starbucks cappuccinos. Forty years ago, most Asians were lucky to get a primary school education; now many send their children to the best American universities. In the 1950s, Asian economies could barely feed their own people; today, Asians make more memory chips, LCD panels, and notebook computers than anyone else in the world.

This transformation drew me toward Asia. I had read quite a bit about economic development as a university student, and I wanted to experience the process in real life and real time. Asia has not let me down. Each time I ride the Skytrain through congested Bangkok, take an old Ambassador taxi around New Delhi, or stroll down the busy streets of Shanghai, the cities look wealthier and more modern than they had on my previous visit. Asia is changing by the day.

My first visit to Asia was in 1991, as a graduate school intern at Far Eastern Economic Review magazine in its New Delhi bureau. I had never been to a country as underdeveloped as India. The poverty shocked me. In Kolkata (formerly Calcutta), I could not step from my hotel without getting swarmed by street children, all tugging at my shirt and begging for money. I bought them bunches of bananas. In Varanasi, the holiest city in Hinduism, parked on the edge of the sacred Ganges River, the townspeople spent each morning bathing, brushing their teeth, and washing clothes in the smelly water, polluted by raw sewage streaming down from the city in open ditches. At first, I found myself emptying my pockets, but after several weeks, the scale and scope of the suffering was so great that the only way to survive it was to immunize myself. I felt guilty, but the desperation of India left me no choice.

Today, that poverty still exists in many parts of India, but so does an economic vibrancy that was unimaginable during my first visit. From Mumbai to Chennai, young, well-dressed professionals cram multiplex cinemas while taxi drivers jabber on mobile phones. In the old Muslim town of Hyderabad in southern India, sleek technology parks exist only a short drive away from the city’s traditional market, where craftsmen still bang out silver and gold leaf with old hammers. Even Kolkata has been resurrected. The restaurants along Park Street, a thoroughfare famous for its night-life and eateries, are abuzz with raucous diners and unlimited hope.

This rush of new wealth has had repercussions well beyond Asia. The Miracle has given this continent more influence in world events than it has held for hundreds of years, perhaps all the way back to the fourteenth century, when the Mongol Khans reigned from Moscow to Baghdad to Guangzhou. For the first time, stock markets in Hong Kong and Shanghai help determine what happens on Wall Street. The statements of central bankers in Tokyo and Beijing are almost as closely monitored as those of the Federal Reserve chairman. Asian investors have become important players in global securities, currency, and real estate markets. With that economic power has inevitably come political power. Backed by their growing economies, Asian nations are pursuing their strategic interests more aggressively than they have in centuries. Their voracious quest for natural resources has sparked fierce competition for global sources of energy and raw materials. Asian countries have launched a diplomatic offensive from the halls of the United Nations to the capitals of Africa. China especially has flexed its new financial and diplomatic muscle in such crucial international issues as climate change, trade liberalization, nuclear-weapons proliferation, and human rights. The Miracle is the single most important trend in world history since the end of World War II—with a longer-lasting and deeper impact on the future than either the fall of Communism or the war on terror.

In the United States and Europe, Asia’s rise has generated fears that the region will eclipse the West. British historian Niall Ferguson wrote that the relative decline of the West became unstoppable once Asia modernized, and the result was nothing less than the reorientation of the world.² For three decades, politicians, journalists, and economists have warned of the threat from Asia. Trade negotiator turned anti-free-trade pundit Clyde Prestowitz has been predicting since the late 1980s that a rising Asia would doom the American economy. The first conqueror was supposed to be Japan, and then the menace switched to China and India. Whether slowly or quickly, the forces now bringing wealth and power to the East will also bring crisis and painful adjustment to the West, he wrote in 2005. Far from leading the world on a global march to freedom, the United States could find itself hard-pressed to maintain a reasonable standard of living and defend its vital interests. The conditions could be in place, he alerted his American readers, for an economic 9/11.³

Though we need to keep this kind of fearmongering in perspective—the Chinese economy, for example, is still less than one-fourth the size of America’s—it is indisputable that over the next several decades the United States will face an Asia that possesses greater and greater economic power. The West is not in decline. The East is on the rise. The ascent of Asia is creating a world in which the global economy has more than one dominant power. As the world’s economic center of gravity shifts to Asia, U.S. preeminence will inevitably diminish, economist Jeffrey Sachs wrote in 2004. The 21st century could well be a period of unprecedented prosperity and scientific advance, but one in which the U.S. will have to learn to be one of many successful economies rather than the world’s indispensible country.⁴ Investment bank Goldman Sachs in an influential 2003 report predicted that China could overtake the United States as the world’s largest economy by 2041. India could race past Japan by 2032 to become the third-biggest. By 2050, the Chinese and Indian economies combined would, by Goldman’s reckoning, be more than twice the size of America’s. Goldman’s report ends with a simple, but ominous, question: Are you ready?⁵

The Miracle is reshaping the global economy. By 2050, China will have over-taken the United States as the largest economy in the world; India will not be far behind.

We all better be ready. There is little reason to believe the Miracle will come to an end anytime soon. It will remain the primary force determining global economic relationships and events for the foreseeable future. Asia may experience an occasional crisis along the way, like the one that roiled Korea in the late 1990s. Economies may slow down or even slide into recession, as they did during the global financial conflagration of 2008, or get sidetracked by political upheaval and social turmoil. But we are, after all, talking about a Miracle, and like all miracles, real or perceived, they become forces in and of themselves. In 2005, I was traveling in China’s far west and met Chen Xiangjian, then a bespectacled thirty-two-year-old salesman for a state engineering firm, in Chongqing, which, at 32 million people, is among the world’s largest urban centers. Chen told me how his life had changed in just the previous five years. His income had tripled, he owned a Sony digital video camera, a notebook computer, and two apartments, and was thinking of buying his first car. Though excited about his own future, he was even more buoyant about the prospects for his daughter Youyou, then one year old. By the time she’s my age, he predicted, her life will be as good as the best in America.⁶ In modern Asia, that dream is coming true.

IN ORDER TO appreciate just how miraculous the Miracle has been, we need to look back at how pitiful Asia was in the early 1950s, when our story begins. Just about every corner of the continent was in chaos. In Japan, the desperate and ruthless conflict with the United States had eviscerated the country’s once formidable economy. By the end of World War II in 1945, a quarter of Japan’s wealth had been lost. Some 40 percent of the sixteen largest cities targeted by Allied bombers were destroyed. Millions were homeless; many were malnourished and even starving. Foreign correspondent Russell Brines, upon arriving in Tokyo after the war’s end, said that everything had been flattened…. Only thumbs stood up from the flatlands—the chimneys of bathhouses, heavy house safes and an occasional stout building with heavy iron shutters. One American official reported that the entire economic structure of Japan’s greatest cities has been wrecked.⁷

The war brought similar devastation to much of Asia as Japanese armies rampaged from Shanghai to Singapore. In 1937, Japan launched a brutal invasion of China, punctuated by the infamous Rape of Nanjing, one of the twentieth century’s greatest atrocities. After Japan’s defeat, China descended into a destructive civil war between the U.S.-backed Nationalists under Chiang Kai-shek and Mao Zedong’s Communists. Mao emerged victorious and proclaimed the People’s Republic of China in 1949, while Chiang fled to Taiwan and set up his own regime. Less than a year later, war erupted in Korea. The Korean peninsula was a Japanese colony that after World War II was split in two—one sphere controlled by the Soviet Union in the north, the other by the United States. Three years later, the zones became North and South Korea. In 1950, the North invaded the South in an attempt to unite the peninsula under Communism. U.S. forces rushed to defend the South and, shortly after, Mao’s China jumped in to save the North. The three-year conflict left the Koreans with smashed cities and little industry. A legacy of this period is a Korean stew called budae jjigae. Starving Koreans picked through leftover army rations in the garbage dumps outside U.S. military bases for scraps of Spam, spaghetti, and American cheese—anything that could bolster their diets—and cooked them in traditional Korean spicy red pepper soup. The dish is still served today, though the ingredients are no longer pilfered from waste bins.

In South and Southeast Asia, the nations we know today were just coming into existence as modern nation-states. After Indonesia declared its independence from the Netherlands in 1945, the country’s first president, the dynamic nationalist Sukarno, had to fight off Dutch forces attempting to reclaim their colonial empire before knitting together 17,500 islands that were home to a disparate collection of ethnic groups speaking myriad languages. India won its independence from Great Britain in 1947 after Mahatma Gandhi’s legendary nonviolent mass disobedience movement. India, like Indonesia, emerged as a modern nation-state for the first time, cobbled together from a collection of princely states and colonial provinces. Malaysia did not exist until 1957, when it was formed by merging semi-independent sultanates under the thumb of the British with Crown-controlled territories. Singapore became an independent country after splitting from Malaysia in 1965.

These mid-twentieth-century convulsions, revolutions, and wars, however, were only the latest calamity in centuries of stagnation. There was a time when the societies of Asia were much richer and more developed than those of Europe. In the year 1600, Asia accounted for two-thirds of world GDP, compared to about 20 percent for all of Western Europe. China and India were the world’s two largest economies, representing 29 percent and 23 percent of global GDP respectively.⁸ François Bernier, a Frenchman who traveled in India in the seventeenth century, wrote of the country’s Mughal emperor: I doubt whether any other monarch possesses more of this species of wealth [i.e. gold, silver and jewels]…and the enormous consumption of fine cloths of gold, and brocades, silks, embroideries, pearls, musk, amber and sweet essences is greater than can be conceived.⁹

Yet by the 1500s, Asia began a long, slow decline relative to the West. European societies invented new technologies (advanced weaponry and navigational tools) and forms of economic organization (the modern corporation) that gave them a military and economic edge. The spices, silks, porcelains, and other valuables of Asia were among Europe’s most coveted items, so it is no surprise that Europe’s new technologies were employed in a worldwide quest to find their sources and control their trade. By the late sixteenth century, the tiny country of Portugal dominated East-West economic ties by conquering or founding a series of trading colonies stretching from West Africa to the Persian Gulf to Japan. The Industrial Revolution in Great Britain in the eighteenth century gave Europe an advantage in manufacturing that Asia would not match for two centuries. By the late nineteenth century, most of Asia had even been subjugated by European colonial powers. China, too vast to be taken over by the Europeans, was nevertheless under their control. Led by Britain, the Europeans, using the threat or actual use of force, extracted unequal treaties from China that gave them special concessions, such as control of pieces of Chinese territory. Hong Kong, for instance, was ceded to Britain in 1842.

By the late 1950s, Asia was generally free from colonialism but far from its former glory. Development economists had much greater hope for other parts of the developing world, such as the more advanced countries of Latin America or resource-rich nations in Africa, such as Ghana or the Congo. The depleted economies of East Asia, including Korea, Taiwan, and Singapore, with few sources of money and practically no existing industry, seemed especially hopeless. Yet it was here, supposedly the bottom of the international economic barrel, that the Miracle was born.

East Asia outperformed every other region in income growth.

AVERAGE ANNUAL GROSS DOMESTIC PRODUCT PER CAPITA GROWTH, 1965–1999

Source: World Bank.

HOW DID THESE countries defy economic logic and ascend to the forefront of the global economy? How did the Miracle happen? The answer to that question has been one of the most hotly debated in modern economic history. The result is a library of literature and an avalanche of explanations. Yet no single theory tells the whole story.

One school of thought argues that there is something special about Asians themselves that gave birth to the Miracle. Asian cultures, the argument goes, contain the necessary ingredients to cook up rapid economic achievement. Proponents of this view have been especially focused on Confucianism, the ancient moral and ethical code of China. Among its main tenets are a stress on societal order, respect for hierarchy, bureaucratic excellence, and devotion to a strong work ethic and education—all elements that laid the groundwork for economic development. Confucianism, wrote British politician Roderick MacFarquhar in 1980, is as important to the rise of the east Asian hyper-growth economies as the conjunction of Protestantism and the rise of capitalism in the west.¹⁰

It is true that Asians across the region exhibit certain behavior patterns that contributed to their economic success. Foremost is a propensity to save rather than spend, which built up the capital necessary for industrial investment. Furthermore, the societies that entered the Miracle in its first stages—Japan, South Korea, Taiwan, Hong Kong, and Singapore—are all tinged by Confucian culture. However, as the Miracle spread across the continent, countries with an increasingly wide range of cultural influences achieved the same results—from India’s Hindus to Malaysia’s Muslims to Thailand’s Buddhists. The cultures of Asia are too diverse to be bunched together, so it is impossible to credit any one culture or clear set of cultural practices for the entire Miracle. Most of all, the culture thesis falls apart when put into historical perspective. Confucianism has been a pillar of many Asian societies for centuries, but that did not stop Asia, and especially China, the Confucian heartland, from falling far behind the West in economic development and technology. Asia had to do something, and something new, to make the Miracle happen.

A second category of thought claims that that is exactly how the Miracle was created. Asia designed unique and superior economic policies and institutions that brought about the region’s spectacular growth. The focal point of this argument has been the unusual role the state played in economic development. Rather than adopting a pure, American laissez-faire ideology, most Asian governments intervened in their economies in ways that classical economics considers unwise and potentially catastrophic. The ultimate government sin was playing a direct role in allocating resources within the economy, a task, according to economists, best left to impartial markets. Government bureaucrats picked winners by choosing specific industries to nurture, then devised a mix of policies to support and accelerate their growth. Asian governments directed finance and investment, created special banks, and set up biased trade regimes to turn chosen industries—and in some cases, individual companies—into top-notch global competitors. As many Asian governments pursued similar programs, some experts believe that Asia created its own model for development.

The Asian model theory has been highly influential, and we will continue to examine it in coming pages. However, it has its limitations. The model was adopted in some form by many—but not all—countries that joined the Miracle. In fact, two of the most important entrants—China and India—sparked their Miracles by removing state influence from the economy. Furthermore, the debate over the true effectiveness of Asia’s state-led development rages to this day. Advocates argue that the model produced economic results above and beyond what would have happened in a free-market environment. Detractors contend the role of the state in the Miracle has been exaggerated and the record of Asia’s attempts to pick winners is riddled with failures and hidden costs.

Those who harbor reservations about the Asian model tend to lean toward a third type of explanation for the Miracle—that Asia did nothing special to create it, crediting instead the basic forces of capitalism. Asia took full advantage of the global system of free trade that emerged under American auspices after the end of World War II to generate exports, investment, jobs, and growth. Every country—from Japan to India—capitalized on its comparative advantages in the world economic system to generate rapid development. Government policies fostered private enterprise—what the World Bank called getting the basics right.¹¹ Policymakers, for example, invested heavily in education to build up human capital and in infrastructure to reduce business costs, and they maintained healthy, stable macroeconomic environments by keeping inflation and budget deficits low. From this standpoint, Asia followed a route to growth that was essentially classical in its economics. Developing nations, Goh Keng Swee, one of the architects of Singapore’s Miracle, counseled, need not go beyond Adam Smith for guidance on their economic policies.¹² The Miracle was in this way a textbook case of the power of free markets and free enterprise. Perhaps the Miracle was not that miraculous after all.

Yet even this explanation is incomplete. Purely theoretical reasons for the Miracle tell us how growth happened but not why. If the Miracle was so easy to achieve, any country could have done it. The persistence of grinding poverty in large swaths of the world, especially Africa, reveals that is not the case. Setting in place the proper conditions for development never happens automatically. There is something special about Asia.

SO THE QUESTION remains, at best, only partially answered. What really caused the Asian Economic Miracle? My own theory completes the puzzle with a missing piece that economists tend to ignore: the people.

The story of economics is at its heart the story of human endeavor. Behind the statistics, charts, and graphs that are the standard tools of the professional economist lay the decisions and deeds of people, both great and ordinary. Economies are built not by policies but by the people who craft them; not by capital flows, but by the people who use them to invest; not by data on production and exports, but by the people who take the bus to work each day and spend twelve hours on an assembly line making the goods counted by statisticians. Theories on economic development tend to leave out the human element. Yet it is in the lives of people that the secret to Asian success is found. As South Korea’s great nation builder, Park Chung Hee, once wrote, his country’s economic transformation is not so much the work of a miracle as the fitting results of many years of hard work to make ourselves stand on our own feet.¹³

Since the 1950s, Asia has been blessed by a series of determined, devoted, and inventive leaders, in both government and business, who, to a substantial degree, believed their own success depended on economic achievement. The group was a diverse one—bureaucrats and technocrats; politicians and generals; Communists and capitalists; democrats and dictators; engineers, economists, and entrepreneurs; even a medical doctor. But they all shared common goals: to elevate their people from poverty, to build thriving economies on war-torn landscapes, to forge new nations from disaggregated colonies, to hoist Asia into its proper place in the world. Jawaharlal Nehru, India’s first prime minister, summed up this spirit on the eve of Indian independence from British rule in August 1947. The achievement we celebrate today is but a step, an opening of opportunity, to the greater triumphs and achievements that await us, he said. The service of India means the service of the millions who suffer. It means the ending of poverty and ignorance and disease and inequality of opportunity. The ambition of the greatest man of our generation has been to wipe every tear from every eye. That may be beyond us, but as long as there are tears and suffering, so long our work will not be over.¹⁴

Nationalists throughout the developing world expressed similar sentiments, but few held to these ideals and doggedly pursued the well-being of their countries. All too often they turned into power-crazed tyrants or persisted with economic programs that brought their countries to ruin. Asia has had its share of poor leadership as well. But eventually, most of Asia’s misguided leaders and wrong-headed policies got washed away and replaced by new faces and intelligent ideas. Once again, though, we need to ask ourselves, Why Asia? Why did this exceptional group of leaders appear in Asia and not Africa or the Middle East? Why were Asian nationalists devoted to economic growth while those in other parts of the emerging world were not? These questions are hard to answer. One economist simply chalked it up to luck.

I am not such a fatalist. I believe there were factors at work—historical, political, and economic—that created the Miracle. The leaders of the Miracle faced remarkably similar economic and political conditions and they set in place the policies that produced rapid growth during a period of tremendous weakness and political upheaval. They either forged entirely new states, as did Lee Kuan Yew in Singapore (chapter three) or Chiang Kai-shek and his technocrats in Taiwan (chapter five), or founded new, often illegitimate regimes, as did Park Chung Hee of South Korea (chapter two) and Suharto of Indonesia (chapter seven), both of whom were generals who claimed political power. Simultaneously, these same leaders all confronted severe threats from Communism. Korea’s Park faced off with North Korea and Taiwan’s Chiang with China, while Singapore’s Lee and Indonesia’s Suharto contended with powerful domestic Communist movements. To tackle these threats and challenges, all of these leaders made rapid growth a top priority. Park, Chiang, Lee, and Suharto realized that they needed strong economies to ensure the survival of their states or governments. Not only was there a need to build weapons and arm men, but