Tuesday 17 Jul 2018 | 12:15 | SYDNEY
Tuesday 17 Jul 2018 | 12:15 | SYDNEY

Berlin Wall: Asia the winner

9 November 2009 12:08

Huw McKay is senior economist for Westpac bank. He is a speaker at today's Lowy Institute's Berlin Wall retrospective.

In 1989, living standards (approximated by GDP per capita) in the command economies of Europe, including the USSR, had been declining in relative terms since 1975. Outside Europe, command systems in Cuba, Vietnam and India had been in relative decline for most of the post-Second World War era. China, which had begun its economic transformation in 1978, was begining to do better in the 1980s, but it had seen living standards stagnate in relative terms through the 1950s and 1960s.

The contrast with the dramatic ascent of Japan and West Germany, the former of which had surpassed the USSR as the world's second largest economy in 1986, was damning.

The fall of the Berlin Wall and the subsequent implosion of the Russian and eastern European economies was a liberating moment for those nations outside the immediate Soviet ambit that were struggling to define an economic strategy that would provide sustainable gains in relative and absolute living standards.

This extremely convincing illustration of the tenuous basis on which the planned economy revolved allowed administrations elsewhere to engage in pragmatic, reformist policy-making while removing some of the guilt associated with the rejection of dogma.

While reform processes were initiated in many key command jurisdictions well before the Berlin Wall fell (eg. Russia in 1987, China in 1978, Vietnam in 1986 and India in 1984), these programs were timid, and were not accelerated until the Wall came down and the Soviet world had collapsed. 

The contrast between 'Big Bang' reform in Eastern Europe and the pragmatic gradualism of Asia is striking. It is in Asia that we find the big winners of the post-1989 world. The Chinese story is well known. India has accelerated its economic growth from the '3s and 4s' to the '7s and 8s', and has become an international power of some standing. Vietnam has grown even faster than India. The second order beneficiaries are those companies and nations that do best from these developments in emerging Asia.

These success stories did not attempt to build US-style economies. Despite their pragmatic rejection of universal planning, they were clearly not interested in a wholesale 'dis-embedding' of the state. And the highly visible examples of Japan, Singapore and Korea showed that an interventionist state was not incompatible with rapid gains in living standards. While pro-market reforms have been pushed through on many fronts over the last twenty years, the economies of Vietnam, China and India are not lower income facsimiles of the US, and are unlikely to become so any time soon.

Some argue that the US interpretation of the collapse of the Soviet system – essentially a vindication of their faith in markets – was a major contributing factor to the recent crisis. There is some truth in this but also some selective use of facts.

Faith in markets encouraged the regulatory authorities in the US to take a lenient view of financial innovations, heightened financial risk-taking and altered market structures that characterised the early years of the decade. In hindsight, this overly accommodating policy, driven by an ideological faith in markets, served the country poorly.

On the other hand, it was public intervention on an enormous scale over decades (via the federal housing agencies) that enabled home ownership to be extended well beyond its natural perimeter. The provision of loans to those that could not service them except under conditions of rising asset prices was first a policy decision, and only later a business model.

 Photo by Flickr user laurenatclemson, used under a Creative Commons license.