It’s Not Just Japan That’s Failed; The “Asian Miracle” Model Has Also Failed

The inevitable result of the centrally planned Asian Miracle Model is credit bubbles and the crippling misallocation of capital in Building Bridges to Nowhere.

Japan’s extraordinary rise from the ashes of World War II created an “Asian Miracle” template that other Asian nations have followed, and continue to follow.The outlines of the model are straightforward.

The growth engine is export-dependent mercantilism: organize the economy to prioritize exports at the expense of domestic income and consumption. The central government manages the mercantilist project in conjunction with favored cartels or state-owned enterprises (SOEs). In other words, The Asian Miracle Model is central planning plus credit expansion plus export-based cartel-capitalism.

The Asian Miracle form of centrally planned capitalism depends on these four pillars:

1. Integration of government ministries and private-sector cartels

2. Heavy reliance on export sectors for growth and profits

3. Domestic savers provide the capital for export expansion

4. Defaults and write-offs of bad debt cause loss of face and are thus hidden from public view or rescued with government bailouts or zombie loans.

This combination of central planning, credit expansion and export-based capitalism ignites a rocket booster of rapid growth. Since the Asian nations pursuing this model are starting from relative poverty, the rapid expansion of credit, exports and employment in the export sector are all the more miraculous.

But the model runs off the rails when central planning and credit expansion reach diminishing returns. Central planning is very effective at allocating scarce capital in the boost phase, because the capital is invested in building an efficient export machine and in essential infrastructure that enables exports: ports, railways, highways, etc.

But once all this basic infrastructure is built out and exports reach their zenith, central planning slips from miraculous to disastrous. The state bureaucracies that guided the Miracle boost phase have no other plan other than more credit expansion and more investment in infrastructure.