A foremost scholar of Asian economic development shares with HAQ his views on the current state of Asian economies. In a wide-ranging interview, Perkins offers well-considered perspectives on key developments within individual economies as well as in the region as a whole. The overall picture of Asia that emerges is one of great complexity and enormous variation among individual economies.

Dwight H. Perkins is the Harold Hitchings Burbank Professor of Political Economy and Director of the Asia Center at Harvard University. Previous positions at Harvard include: chairman of the Department of Economics, 1977-1980; and Director of the Harvard Institute for International Development (HIID), 1980-1995. Perkins has authored or edited twelve books and over one hundred articles on economic history and development, with special references to the economies of China, Korea, Vietnam and other nations of East Asia. Having served as an advisor or consultant on economic policy and reform to the governments of Korea, China, Malaysia, Vietnam, Indonesia, and Papua New Guinea, Perkins has also been a long-term consultant to the World Bank, the Ford Foundation, various private corporations, and agencies of the U.S. government.

HAQ: Now, more than five years after the Asian financial crisis of 1997, how is Asia doing economically and what important post-crisis trends do you notice? For one thing, despite the substantial progress made in cleaning up bad debts in countries such as South Korea, several Asian countries, including Indonesia, Thailand, the Philippines and China, still have financial systems plagued by massive amounts of non-performing loans. Is a second Asian financial crisis still a possibility?

Perkins: An Asian financial crisis similar to what occurred in 1997 is not very likely if for no other reason than that countries learned the lesson of what happens when there is massive unhedged borrowing abroad under the assumption that the exchange rate will remain where it is. But other kinds of financial crises could occur and one does not have to have a crisis for there to be a problem—Japan’s current financial situation being a good illustration of a financial sector that is dragging down economic growth without creating a sharp crisis.

HAQ: Currently, the economies of the US, the EU and Japan have all slowed down. What effect will the deterioration of the major world economies have on Asia?

Perkins: The main role of this slowdown is to slowdown the growth in the demand for Asian exports and that in turn is an important reason why GDP growth rates have been slower than in the past.

HAQ: At the current rate of rapid growth, China is on its way to becoming the dominant economic powerhouse in Asia and, farther into the future, the largest economy in the world. Can the rest of the world live with this development? In what ways would the rest of the world adjust to such an outcome? How is Japan going to position itself within an Asia dominated by China and within a multi-polar world economy?

Perkins: I think we should wait and see whether China can sustain its high growth rates for another decade or two before we start speaking of China becoming the largest economy in the world. If China continues development based on participation in the international economic system and becomes steadily more open to foreign imports, China’s economic growth should be a benefit to the economies of the rest of the world. The geopolitical implications of this development are another matter and affect more than just Japan, but growth alone should not be a problem for the rest of the world. It depends on what goes along with growth in terms of China’s long-term geopolitical goals.

HAQ: How would you assess the prospects for the rise of an East Asian economic bloc integrating China/Hong Kong/Taiwan, Japan, Korea and Southeast Asia? Is it possible for East Asia to achieve an economic union similar to the EU? What are some of the incentives and disincentives on the part of the various East Asian nations for forming such a union? Is such an economic union an unlikely prospect given the existence of the ASEAN and the APEC?

Perkins: I would place a very low probability on an East Asian economic bloc on the model of the EU. The countries in Asia are more competitors with each other than complementary and the result is that trade within the region is not anywhere near as large a share of their total trade as is the case with the members of NAFTA and the EU. The low-income countries in particular are competing with each other for the export markets in textiles, shoes, electronics and other similar labor-intensive products. There is more potential for trade development between the countries at the high-income end such as Japan and South Korea and those at the low-income end, and one can see this in the rapid development of Japan-China and South Korea-China trade, for example. The competitive nature of trade between many of the countries in the region does not imply that the region will not sign free trade agreements and the like, but that is a long way from having a common government and a common internal and external economic policy.

HAQ: Thomas Friedman wrote an editorial in the New York Times recently

condemning China for not speaking out on the Iraq controversy simply because it does not have "a dog in the fight." In your view, should China in fact have "a dog in the fight"? In general, what is the impact of the current Iraq crisis on the economies of Asia, China included? Particularly for China, is it in China’s interest to be cooperative towards the US War on Terror, given that success in this War helps the US economy, the most important export market for China?

Perkins: It is not clear to me what good would be served by having China weigh in heavily on this issue. The only real leverage they have is through the threat of the use of their veto in the Security Council and I don’t think China would do any good by exercising that veto. The main impact of the war in Iraq on Asia will be related to the impact that the war has on oil prices. If the war is short and oil output in Iraq is not damaged, oil prices will probably fall, and vice versa if the war is long and the oil fields are damaged. If the war with Iraq leads to another downturn in the US economy, that will also have a negative impact on Asia.

HAQ: What economic benefits do you think China's WTO membership has brought or will bring to China, the US and the international economy? What are the negative consequences, if any?

Perkins: The main benefit that the WTO has brought to China is that it has helped bring competitive pressures on the inefficient state sector in China, which should contribute to either the reform of that sector or its abolition. Membership also helps stabilize China’s access to world markets and ensures that many trade disputes will be handled by apolitical technicians rather than politicians, and that is good for both China and the US.

HAQ: China seems to be vastly more adept than other developing nations, India, for example, at attracting foreign investment. In what specific ways has China made a concerted effort to create a favorable environment for investment? Also, what lessons can other developing nations learn from China?

Perkins: Most small nations won’t be able to learn that much from China because they do not have China’s large domestic market to attract investment from abroad. India and others can see from China, however, that a concerted effort to create a favorable environment for investment will pay off in the increase in the flow of that investment. China began by announcing that it was encouraging foreign direct investment, and then backed that up with the passage of a variety of laws designed to provide a favorable tax and regulatory environment for investment. More recently, the agreements connected with China's joining of the WTO provide further support for expanded foreign investment, particularly in the financial sector. India and a few others might also learn from how China has proven to be particularly attractive for investment from the Overseas Chinese diaspora.

HAQ: Will direct trade between China and Taiwan be possible? If so, how will this affect the regional economy?

Perkins: I believe direct trade will become a necessity for Taiwan if it wants to become a major economic center in the region. Taiwan is well placed to play a major role in China’s economy and it is already doing so, but the current restrictions on direct contact seriously hobble this influence.

HAQ: If and when China's economic growth slows down or even turns into a prolonged recession, will this lead to political destabilization or even a sudden regime change? If so, what will be the consequences and how can the rest of the world cope with such an outcome?

Perkins: A major and prolonged slowdown in China’s economy could lead to serious internal tensions in the country and could well destabilize the government in power at the time. It is hard to come up with any scenario where that would be a good thing for the rest of the world. The rest of the world should focus on helping to prevent conditions where this might happen.

HAQ: In response to concerns over economic threats posed by the up-and-coming economies of China and India, at least a few of the ASEAN nations have made attempts to promote a forum for intra-regional economic cooperation, such as the AFTA and the ASEAN + 3 framework. What are your views on the scope of economic integration that can be achieved by the region? What is the prospect for the ASEAN eventually developing into a regional economic bloc along the lines of the EU?

Perkins: I have basically answered this already in general terms. This particular free trade area is likely to have a modest positive impact on trade between the member countries, but these are precisely the countries that are more competitors than complementary except in the field of natural resources, where trade restrictions tend to be minimal anyway.

HAQ: Following the financial crisis of 1997, the economic performance of the ASEAN countries has been rather uneven across the board and across time. Are these growth disparities going to become a permanent fixture in the region and will they lead to the emergence of income stratification between the countries?

Perkins: The main problem is Indonesia and there is little prospect for Indonesia’s return to high growth until they are able to complete the transition to a more stable political system. Where and how that will happen will also have a considerable influence on the region. The Philippines’ economy will probably continue to be plagued by the country’s populist politics, but several other countries in the region should return to fairly high growth and to some degree already have.

HAQ: Is the ASEAN region well-placed and well-prepared to handle the challenges that are and will be brought about by a fast-developing Chinese economy? How real is this "China threat"? Is it really a zero-sum economic game between the two parties as painted by some observers or are there opportunities to be mined in the course of China's economic growth that will make up for the losses to the ASEAN in terms of manufacturing competition and FDI? Furthermore, can you elaborate on specific ways in which the Southeast Asian nations can get their economic policies right?

Perkins: Economic growth is rarely a zero sum game and thus China’s growth should be a benefit to the region. There is a problem for countries such as Malaysia that rely heavily on foreign direct investment and have carried out policies that have hindered their own domestic investors. These countries could lose FDI to China and not have the domestic investors to step into the breach. But, if Southeast Asian countries get their economic policies right, there is no reason why they cannot compete with China. Any attempt to spell out precisely what individual Southeast Asian nations should do would take up many pages of this interview. But one example in the case of Malaysia is the need to foster the development of domestic firms that can export manufactures so that the country is not so heavily dependent on foreign firms for the export of manufactures. That in turn requires Malaysia to rethink some of the provisions of its policies designed to promote the development of Bumiputra businesses.

HAQ: ASEAN has long worried about Chinese intentions in the South China Sea. How does this issue affect economic relations between China and the ASEAN? If there are serious problems resulting from this issue, what can China do to resolve them?

Perkins: As long as the politicians think there is a lot of oil under the sea in this region and they believe that oil is critical to their long-term economic success, there will be tension in this region. At some point, one hopes that all of these countries will realize that the advantages of directly controlling this oil are small compared to the disadvantages of having hostile neighbors, and at that point some compromise over the development of the South China Sea should be possible.

HAQ: Will the economic success of Vietnam lead to changes in Indochina, a region that is still characterized by authoritarian regimes such as Laos and Burma?

Perkins: It hasn’t led to major political changes in Vietnam as of yet and is not likely to do so in the near term, so I doubt that there will be much influence on political change in Laos, and this is even more true of Burma that has little relationship to Vietnam. Over time, economic development in Vietnam will no doubt lead to an increasingly open political system, and that in turn could lead to the creation of a legal political opposition and more democratic elections. But it will take more than just a rising standard of living to create these changes, and progress of this sort is likely to be measured more in decades than in years.

HAQ: Turning to Japan, how can Japan get out of the current malaise it finds itself in? Is reform impossible? In particular, what can provide a solution to the hydra-headed problems of enormous bad debts, an ageing population and the lack of an adequate social welfare system to provide cushion against unemployment?

Perkins: This is too complicated a set of issues to deal with here, but the essence of what is required is no secret. Japan needs to reform its financial system and its service sector more generally, and it needs to find a way to stimulate a return to economic growth that does not involve a continuing rise in the already very high debt to GDP ratio, which is likely to soon become unsustainable. I don’t know how they are going to deal with their rapidly aging population, but they clearly won’t be able to improve their support much if they don’t get back to sustained economic growth.

HAQ: Due to heightened tensions involving North Korea's nuclear program, Moody's Investors Service recently slashed its ratings outlook for South Korea by two notches from "positive" to "negative." This was the first time a global ratings agency has lowered South Korea's outlook since the country bounced back from the 1997 economic crisis, and this had an immediate effect on financial markets in Seoul. How serious a threat does the North Korean problem pose to the economy of South Korea and economic stability in Asia as a whole?

Perkins: If the nuclear weapon development efforts of North Korea lead to military action to eliminate that development, the impact on the South Korean economy would be enormous, and the probability of there being military action would be well above zero. Any rating agency is bound to take that possibility into account therefore.

HAQ: In general, how would you evaluate the progress South Korea has made under President Kim Dae Jung in reforming its economy after the Asian financial crisis of 1997? Has the economy been strengthened enough so that it is now ready for reunification with North Korea? As for North Korea, despite or because of the economic bankruptcy of this Stalinist regime, is it ready for reunification with the far more prosperous South Korea? What are some of the major remaining problems for the South Korean economy and how can these be addressed by the new Roh administration?

Perkins: This is a question that would require an essay to answer.  To deal with only a part of the question, the North Korean economy is not remotely able to be integrated with the South Korean economy, except under conditions that would see most North Korean industries shut down and the labor force slowly absorbed over a number of years by South Korean companies. It is unlikely that there are any internationally competitive companies in the North, although power plants and the like would continue to function. Reunification would pose enormous economic challenges for the South with the choice being millions of migrants moving south in search of jobs or huge subsidies moving north to keep the North afloat.

Reforms in South Korea since the 1997 crisis have been substantial. The corporate debt to equity ratio is way down, the banking system is much healthier, and the government has demonstrated that there is no such thing as being too big to fail. I believe what the government needs to do now is to back away from getting involved in specific corporate restructuring issues. Governments are not very well qualified to do that, and it is not clear to me that the Korean economy will benefit from government-led restructuring. The government instead should be concentrating on strengthening the institutions of a market system – particularly, the legal system. Korea has the foundations of a good economic system for commercial needs, but it needs to be expanded and to become more expert in a variety of commercial areas so that most corporate restructuring issues can be handled by the companies themselves with the courts acting as neutral enforcers of the rules.

HAQ: What are the most significant consequences of foreign-trained Asian economists returning to and working in their countries of origin, whether as policymakers, academics, or business leaders? Do you see the effects as mostly positive, or can you identify any potential downsides? “Foreign-trained,” as you know, can mean a variety of things, ranging from receiving one’s undergraduate and graduate education abroad to participating in short-term programs. In addition, what are the consequences of an Asian “brain drain,” namely, that of Western-trained Asian economists and other professionals remaining in the West rather than returning to their home countries?

Perkins: I believe that the Asian economists who have returned home and have gotten involved in policy issues have had an enormous mostly-positive influence on the economic development of their countries and on the quality of economics education in those countries. This is true of everyone from the Berkeley “mafia” in Indonesia to the economists who went back to South Korea in the 1960s and 1970s and the Chinese economists who are now beginning to return home to China. I used to worry more about the brain drain from places like China, but the opportunities in Asia are often so much more challenging than those in the United States or Europe that I believe most countries in the region will see an increasing return flow of trained economists. This did not happen in China in the 1980s and early 1990s but is happening now. In economies such as South Korea or Taiwan, where 90% of the students who went abroad in the 1950s and 1960s did not return, now that 90% does return and only a handful remain in the US.

HAQ: What are your views on affirmative action policies for ethnic and religious minorities on the part of Asian governments? In the past fifty years of de-colonization and nation-building, what effects, politically and economically, have these polices had? Overall, have they been successful in achieving their intended goals?

Perkins: I am not sure what you are referring to when you speak of affirmative action policies directed at ethnic and religious minorities. In Malaysia, there is a policy of trying to raise the relative income and employment level of the majority, the Malays, and that policy has had some positive impact on Malay standards of living and levels of education, but it has also had some costs to the society as a whole, not the least of which is the lack of internationally competitive domestic firms that I mentioned earlier. On the whole, much of Asia ranging from Japan through China to India does not have a very positive record when it comes to protecting the rights and enhancing the economic opportunities of the minorities in their midst.

HAQ: What have been the major effects of intra-Asian migration in the recent years? Please, address both short-term laborers – skilled and unskilled – and individuals who go to another country for their education and remain there.

Perkins: My impression is that the main intra-Asian migration has been from the Philippines to various other parts of Asia, and this reflects the fact that the Philippines has a large surplus of quite well-educated people that cannot find well paying jobs at home and so they go to Hong Kong and elsewhere. There is also some illegal migration even to Japan, but most Asian countries do not make it easy for people to migrate across borders. Indonesians do go to Malaysia and Singapore to fill low-skill jobs. I am not well enough informed about this latter migration to have a judgment on whether its overall impact is positive or negative, but generally I tend to believe that migrations of this sort are positive even if some of the people in the receiving country don’t like it. I feel the same way about Mexican migration to the US.

HAQ: Some predict that Shanghai will replace Hong Kong as the de facto financial hub of Greater China. Given the Chinese government’s aspirations for the city’s future, what deeper-level implications do you see for the development of Shanghai vis-à-vis Hong Kong? If Shanghai is to truly become such a financial powerhouse, what kinds of changes will be necessary?

Perkins: Shanghai may someday surpass but not replace Hong Kong as a financial center, but it has a long way to go. The first step for Shanghai is to create a number of modern efficient banks, but this is a national Chinese problem, not a local Shanghai issue. Banks with 40% of their assets non-performing aren’t going to be very competitive with Hong Kong banks. The Hong Kong stock market is far from perfect, but it is far ahead of Shanghai’s in being able to control insider manipulation of stock prices and other such predatory behavior. Shanghai is learning fast but there is still a big gap between where Shanghai is today and where it will need to get to be truly competitive in these sectors vis-à-vis Hong Kong. And when Shanghai does catch up, that does not mean it will replace Hong Kong. As I have said before, economic development is not a zero sum game.

HAQ: Touching further on Shanghai’s future as the financial hub of Greater China, how would this rise of Shanghai affect the status of Singapore and Tokyo as Asian financial centers?

Perkins: Tokyo is mainly a financial hub for Japan and much needs to be done to make it a more efficient and competitive financial hub in order to serve that goal. Singapore is mainly oriented toward the markets of Southeast Asia. I don’t see Shanghai as having much influence on the roles of these financial centers anytime in the near future.

HAQ: What are the prospects for the renminbi, the Chinese national currency, in the long run? Do you see it becoming a floating currency, despite the assertion by the Chinese government that it will remain pegged to the US dollar for the foreseeable future? If yes, will the currency’s value change appreciably?

Perkins: I feel the Chinese government needs to get away from what amounts to a peg of the currency to the US dollar, not because there is any problem from the Chinese point of view with the current level of the renminbi. It is just that times change and currencies become overvalued for one reason or another and devaluation becomes necessary. Devaluation in the midst of a crisis tends to exacerbate the crisis, which is why China would be better off getting people used to regular, if small, changes in the value of the renminbi. If I had to guess, I would say that the Chinese renminbi is currently undervalued, although that might not be true if Chinese capital markets were liberalized.  

An undervalued currency has some advantages for China because it helps promote Chinese exports and thus helps maintain China’s high growth rate, just as was done in South Korea in the 1960s and 1970s, but, over the longer run, China cannot continue to push exports in this way. If the renminbi on the Chinese capital markets was made fully convertible, and if imports were fully liberalized, then there might turn out to be a larger capital outflow and a higher growth rate of imports. If that happened, the current value of the renminbi might turn out to be just right for maintaining a healthy balance of payments. But, it will take time to liberalize capital markets and imports, and in the meantime I think one should continue to see the renminbi as being somewhat undervalued.

HAQ: With the Euro now challenging the US dollar as an international currency, what are the prospects for the emergence of a common East Asian currency? Is this an impossibility given the wide cultural, economic and political disparities among the various East Asian countries?

Perkins: I believe there is little prospect for a common Asian currency over the next decade or two. A common currency requires coordinated monetary and fiscal policies, and coordinated policies require shared economic goals and standards and a willingness to live by them. The development levels and interests of the countries of Asia are much too diverse for this to be possible in the near future. Vietnam and Japan have almost nothing in common in terms of economic conditions or goals, to take only one of the more extreme binary comparisons.