Western Economies Could Learn From the East

A festively decorated department store in China, where the economy is flourishing. Wang Xin / Xinhua-Landov

For most of the 20th century, Asia asked itself what it could learn from the modern, innovating West. Now the question must be reversed: what can the West's overly indebted and sluggish nations learn from a flourishing Asia?

First and foremost, the West should relearn the virtue of pragmatism. Just a few decades ago, Asia's two giants were stagnating under faulty politico-economic ideologies—strict Marxism in China, Nehruvian socialism in India. However, once China began embracing free-market reforms in the 1980s, followed by India in the 1990s, both countries achieved rapid growth. Crucially, as they opened up their markets, neither China nor India threw the proverbial baby out with the bath water—instead, they balanced capitalism with judicious government direction. As the Indian economist Amartya Sen has wisely said, "The invisible hand of the market has often relied heavily on the visible hand of government."

Contrast this levelheaded middle path with America and Europe, which have each gone ideologically overboard in their own ways—and whose utter lack of pragmatism helped precipitate the global financial crisis. Since the 1980s, America has been increasingly infatuated with the ideology of unfettered free markets and dismissive of the role of government—following Ronald Reagan's dictum that "government is not the solution to our problem; government is the problem." Former U.S. Federal Reserve chief Alan Greenspan took this ideology to the extreme by refusing to regulate the large new market in derivatives that emerged under his watch and that quadrupled between 2002 and 2008 to 12 times the size of the total world economy. Of course, when the markets came crashing down in 2007, it was decisive government intervention that saved the day. Despite this fact, many Americans still espouse a deep ideological opposition to "big government," as evidenced by the current wave of antitax Republicans and Tea Party candidates who swept into Congress during the midterm elections.

Photos: Life on the Economic Edge Kenneth D. Lyons

If Americans could only free themselves from their antigovernment straitjackets, they would begin to see that the U.S.'s problems are not insoluble. A few sensible federal measures could put the country back on the right path. A simple consumption tax of, say, 5 percent would make a significant dent in the country's huge government deficit without damaging productivity. A small gasoline tax would help wean America from its dependence on oil imports and create incentives for green energy development. In the same way, a significant reduction of wasteful agricultural subsidies and other earmarks could also lower the deficit. But in order to capitalize on these common-sense solutions, Americans will have to put aside their own attachment to the rhetoric of smaller government and less regulation. American politicians will have to develop the courage to follow what is taught in all American public-policy schools: that there are good taxes and bad taxes. Asian countries have embraced this wisdom, and have built sound long-term fiscal policies as a result.

Meanwhile, Europe has fallen prey to a different ideological trap: the belief that European governments would always have infinite resources and could continue borrowing as if there were no tomorrow. Unlike the Americans, who felt that the markets knew best, the Europeans failed to anticipate how the markets would react to their incessant borrowing. Today, the EU is in firefighting mode to stave off sovereign collapse. In concert with the IMF, it has created a $580 billion fund to bail out Europe's troubled economies. This will buy the EU time, but it will not solve the bloc's larger problem. Just as Americans need to learn how to intelligently raise taxes, the Europeans need to learn how to intelligently cut expenditures—a challenge that Asian economies were taught to surmount by their own past crises.

Of course, this won't be the first time the West has needed to relearn its own wisdom from the East. Once upon a time, the great European Renaissance was facilitated by the preservation of Greek and Roman wisdom—lost to Europe during the Dark Ages—in the universities and libraries of the Arab world. Let's hope the current financial Dark Ages for the West last a much shorter time.

Mahbubani is dean of Singapore's Lee Kuan Yew School of Public Policy and author of The New Asian Hemisphere: The Irresistible Shift of Global Power to the East.