Economic expansion Asian-style.

• Author: Sally, Razeen
• Position: Economics - Essay

FIRST THERE WAS the "East Asian Miracle"; now comes the "Asian Century." The aftermath of the recent global economic crisis has reinforced a sense that the world is "shifting East"--to Asia.

Due to the financial crisis, the West has had to endure gaping holes in household, corporate, and government balance sheets. This has been followed by an anemic recovery, though there have been exceptions: Germany, the Scandinavian countries, Australia, and Canada. The main emerging markets, except for Russia, went into the crisis with healthy balance sheets. Hence, a less severe crisis and a sharper rebound for them. Even accounting for the current global growth slowdown, the International Monetary Fund projects China to grow around 8.2%; India, 5.9%; and developing Asia, just under 7.1% in 2013--compared with 1.4% growth for advanced economies. Between 2007-12, advanced economies grew two percent; China, 56%; India, 43%; and developing Asia, 50% (all at purchasing power parity).

These basic facts tell us two things: the crisis has induced sharp divergence of economic growth between the West and emerging markets, and this short-term divergence has accelerated the long-term convergence between emerging markets--particularly in Asia--and the West.

Dry numbers, however, mask the essential story of Asia today--its unprecedented expansion of economic freedom. What 18th-century economist Adam Smith called "natural liberty"--the individual's ability to exercise choice in daily economic activity--has been on the march in "globalizing Asia" (by which I mean East and South Asia, not less-globalized West and Central Asia).

Technological innovation has enabled this transformation, but its crucial enabler has been liberalization of internal and external trade, of domestic and foreign investment, and of product and factor (land, labor, and capital) markets. These "negative" acts---removing restrictions that repress economic activity--have unleashed the animal spirits of ordinary people, who now have incentive to exercise their "natural liberty"; they are doing so with gusto and are transforming the world in the process. This indeed is a vast continental awakening.

However, there still is a long, long way to go, for most of globalizing Asia remains far behind the West. Asia still is home to two-thirds of the world's poor and, economic freedom, though expanding, remains too repressed across most of the continent.

Asia's rise is conditioned by its history, including historical links with the West. Consequently, it is important to look at Asia's past to inform choices for the present and future.

For most of the past millennium, Asia had predatory states that suppressed individual freedom and enterprise. They lacked market-supporting institutions, repressed creative and critical thought, and were inward-looking. This was true in China, India, Japan, and the Islamic world. It allowed Western Europe to catch up with and overtake Asia, and Asia became vulnerable to Western predation and conquest. Asia's 20th-century experience has been similarly blighted. Think of China under Chairman Mao, India's 'License Raj" from the 1950s to the 1980s, and Indonesia under Sukamo. These gross errors obviously should not be repeated.

Asia should emulate the factors behind the West's ascent during the past millennium: treating merchants, entrepreneurs, and creative individuals more generally as socially useful; enabling such individualism through the enforcement of private property rights and contracts; nurturing a variety of other market institutions to support competition and enterprise; and expanding the market through international commerce. These were the ingredients of successive agricultural, commercial, and industrial revolutions. Indeed it was "Trade and Prometheus"--the interaction of openness to international trade and technological progress--that made the West really take off and outdistance the rest after the Industrial Revolution.

Asia can reconnect to past golden ages of commerce--China under the Sung dynasty, India under the Mauryas, and the Silk Road during the Pax Mongolica, for instance but what I especially have in mind are Indian Ocean and Southeast Asian trade before Western colonialism.

Arab traders rode the monsoon winds to trade in ports all over the Indian Ocean, reaching as far as Chinese ports by the middle of the eighth century. As the Tales from One Thousand and One Nights describes, Sinbad the Sailor, a Baghdadi wader, plied the route from Baghdad to Canton, stopping at entrepots along the way. Before the Portuguese muscled in during the 16th century, the Indian Ocean was not controlled by any power and fully open to trade. Coastlines were dotted with "portpolities" such as Aden, Hormuz, and Cambay (near Ahmedabad in modern Gujarat); Goa, Canannore, and Calicut on the Malabar coast; Aceh and Malacca (close to Singapore); and Macassar (in the Spice Islands). These were independent towns and cities whose lifeblood was overseas Wade. They...