Cross-Cutting Issues in Asia,
the United States,
and the Global Economy
Charl esWolf, Jr.
R
Straddling
Economics and
Politics
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Library of Congress Cataloging-in-Publication Data
Wolf, Charles, 1924–
Straddling economics and politics : cross-cutting issues in Asia, the United
States, and the global economy / Charles Wolf, Jr.

ization is good or bad and for whom, how to measure it or how to
influence it, remain timely questions now as they were then. The ad-
mission of China and Taiwan to the World Trade Organization
(WTO), and the economic and other consequences of this change in
status, will continue to be of regional as well as global significance.
So, too, are issues addressed in other chapters, including the case for
and against a “new international economic architecture,” the out-
look for a strong or a weak euro, the ramifications of China’s contin-
ued if fitful progress toward capitalism, and the “fairness” and other
effects of changes in U.S. marginal tax rates or in government
spending as central elements in U.S. fiscal policy.
As indicated by this snapshot of the book’s contents, the subject
matter covers a wide range of disparate issues, reflecting matters I
iv Straddling Economics and Politics
have been interested in during this period. I have organized the
chapters into three parts to provide a semblance of cohesion:
I. The Global Economy, which includes chapters dealing with
globalization, financial crises, WTO, and the euro;
II. The U.S. Economy and Foreign Policy, which includes essays on
U.S. tax cuts, the trade and budget deficits, and whether and
when it makes sense for the U.S. military to intervene abroad;
and
III. Asian Economics and Politics, which comprises most of the
book’s chapters, spanning a wide range of topics from “Asian
values” and whether they differ from “western” ones, to eco-
nomic forecasts for the Asian region, to Asia’s recovery from the
1997–1998 financial crisis, and to numerous country-specific is-
sues involving China’s economic growth, cross-Strait relations
between the mainland and Taiwan, Japan’s economic stagna-
tion, and the eventual costs of Korean reunification.

with Japan’s economic malaise and possible remedies for it.
A second theme evident in several parts of the book is a pervasive
skepticism and criticism of U.S. efforts, however well intentioned, to
intervene in politically-charged, ethnically-complex, and murky
conflict environments, (such as Bosnia and Kosovo), along with pes-
simism about whether the expected good resulting from such efforts
exceeds a reasonable prognosis of the harm inflicted by them. (As
suggested earlier, this view would warrant reappraisal in the post–
September 11, 2001 environment—a reappraisal not attempted in
this book.) The theme is also manifested in Chapter 37 dealing with
the costs of Korean reunification if and when it occurs, and how to
effectuate it without such large foreign subventions to North Korea
as have been urged by others. Instead, I suggest that emphasis
should be placed on a more austere, closely monitored, quid pro quo
negotiatory and enforcement stance.
Third, and seemingly inconsistent with the preceding theme, is a
more activist inclination toward restarting cross-Strait discussions
between Mainland China and Taiwan. This theme appears, for ex-
ample, in Chapter 30, dealing with “One China and Three Systems,”
and Chapter 31 on restarting discussions between the two WTO par-
ties. The reason I characterize this as only “seemingly” inconsistent,
rather than blatantly inconsistent with the anti-activist position re-
ferred to earlier, is that the concrete policy suggestions offered in
______________
1
For an exposition and elaboration of the theory and evidence underlying this posi-
tion, see Charles Wolf, Jr., Markets or Governments: Choosing Between Imperfect
Alternatives, MIT Press, 1993.
vi Straddling Economics and Politics
these chapters do not specify how much of a role the United States

track at the time they were expressed have turned out to be wide of
the mark when the future they were envisaging actually arrived. One
example: Chapter 13 expressed doubts that the consensus estimates
of a prospective ballooning of the U.S. trade and current account
deficits would materialize. Well, the consensus was correct; my
doubts proved to be wrong. Another example, Chapter 15, dealing
with taxes, trade, and growth in 1996, analyzed the savings-invest-
ment imbalance in the United States by principally emphasizing the
Foreword vii
insufficiency of domestic savings, rather than the excess of
investment. In hindsight, the investment boom and its excesses in
the late 1990s in fact led to domestic excess capacity and the
recession of 2001. So, while my crystal ball helped in some cases
(many relating to Asia), it obscured in others (several relating to the
United States!).
I have always believed that commentators—whether of a scholarly or
more journalistic bent—should be held to account for their pro-
nouncements. Whether such accountability through some type of
scoring system is provided by others or even by themselves, it has
seemed to me that it would serve a useful purpose by discouraging
hype and encouraging responsibility. With this aim in mind, I have
added a brief “Postaudit” at the end of each essay, indicating
whether, in my judgment, the essay seems currently to be valid and
relevant compared to when it was written. In my scoring system, 23
of the essays stand up to this test quite well (each receiving an “A” or
“A–”), ten warrant B’s (meaning they do passably well), and five re-
ceive C’s, which means they fail to make the cut! For those readers
who might be interested in the finer-grained evaluation, I did best on
Parts I and III—on the global economy and Asia, respectively—and
least well on Part II, dealing with the U.S. economy. The record is not

x Straddling Economics and Politics
CHAPTER 9
E Pluribus Incertum Unum 51
CHAPTER 10
The Crisis of George Soros 55
PART II: THE U.S. ECONOMY AND FOREIGN POLICY
CHAPTER 11
Whether and When to Intervene 63
CHAPTER 12
Tax Cuts, Debt Reduction, and “Fairness”: Why Tax Reduction
Is No More “Unfair” Than Debt Reduction 67
CHAPTER 13
False Alarms About the U.S. Trade Deficit 71
CHAPTER 14
Two Deficits That Just Don’t Matter
(Co-Authored with Walter Wriston) 75
CHAPTER 15
Taxes, Trade, and Growth 79
PART III: ASIAN ECONOMICS AND POLITICS
CHAPTER 16
Are “Asian Values” Really That Unique? 85
CHAPTER 17
Through a Hazy Crystal Ball: Asia’s Economic Outlook,
1997–2020 89
CHAPTER 18
Asia in 2015 101
CHAPTER 19
The Accumulation of Military Capital in Asia and the
United States, 1997–2015 107
CHAPTER 20

Long-Term Prospects for Japan 171
CHAPTER 34
New Therapies for Japan’s Economic Sclerosis
(Co-Authored with Mark Buchman) 183
CHAPTER 35
Japan’s Comfortable Stagnation 189
CHAPTER 36
How to Defend Japan While “Engaging” China 193
xii Straddling Economics and Politics
CHAPTER 37
When a Balance of Power Can Be Destabilizing 197
CHAPTER 38
Managing the Costs of Korean Reunification—If It Occurs 201
Index 205
About the Author 211
xiii
FIGURES
1.1. Integration of Global Capital Markets:
One Indicator 8
17.1. GDP Estimates for Asian Countries, Germany,
and the United States, 1997–2015 93
17.2. Per Capita GDP Estimates for Asian Countries,
Germany, and the United States 95
19.1. Military Capital Estimates, 1997–2015 108

xv
TABLES
1.1. Exports as a Percentage of GDP, 1870–1999 7
1.2. Aggregate Response Means from Business
Questionnaire 9

As a result of the rhetoric, media hype, and spin associated with
globalization, as well as the occasionally violent demonstrations
against it, globalization has become a convenient scapegoat for
many things—indeed, for almost anything, and sometimes seem-
ingly for everything. Globalization has been blamed for the Asian fi-
nancial crisis of 1997–1998, the Russian economic plunge in 1999,
global warming, hormone-treated beef, the spread of foot-and-
mouth disease in Europe, and even piracy in the South China Sea!
______________
A slightly edited version was published in Critical Review on April 30, 2001 under the
same title.
1
Based on a presentation originally made at the 3rd annual conference between RAND
and the China Reform Forum, held in Beijing in November 2000, on The Challenges of
Globalization.
4 Straddling Economics and Politics
The phenomenon recalls the role of the Vietnam war as an all-pur-
pose scapegoat for anything that went wrong in the 1960s and 1970s:
stagflation in the United States, the drug culture in the United States
and Europe, even the sharp increase in teenage pregnancy in the
United States.
Use of the term “scapegoat” doesn’t mean that globalization has had
no contributory responsibility for any of the untoward developments
mentioned above. But in each case the predominant causes and re-
sponsibilities lie elsewhere. For example, the Asian financial crisis
was mainly caused by misguided policies, especially by maturity
mismatches between the terms on which funds were borrowed and
those on which they were invested, rather than by anything properly
attributable to globalization.
2. What Does It Mean?

global commercial-defense industrial base.” (Donald Hicks, De-
fense Science Board, 2000)
The first three of these quotations are representative of many generic
definitions, while the fourth has a more distinctive, and perhaps
slightly paradoxical, quality. The paradox is that, while proclaiming
globalization as a “fact” and not a “policy option,” its focus on the
“emerging reality” of a “shared global commercial-defense industrial
base,” actually opens up a wide range of differing policy options: for
example, easing or restricting controls on the export of military or
dual-use technologies, procuring military equipment abroad or con-
fining procurement to defense industry at home, and so on.
I suggest the following, somewhat syncretic definition, which will
underlie much of what follows in this paper:
“Globalization is the increased speed, frequency, and magnitude of
access to national markets by non-national competitors.”
In defining globalization this way, I intend it to encompass all mar-
kets: social, cultural, and recreational markets, including markets for
intellectual property, literature, film, media, music, and sports, as
well as those for merchandise and commercial services.
3. Measurement Issues and Applications
The preceding definition implies several tendencies in global and na-
tional markets, and the conditions we should expect to find or to im-
pend as globalization proceeds. These conditions should, in turn,
6 Straddling Economics and Politics
affect the identification and design of appropriate indicators or met-
rics for globalization.
First, and most obviously, this definition implies that global markets
have become and are becoming more integrated.
Second, increased access to national markets by non-national com-
petitors suggests that disparities across countries in prices, wages,

Exports as a Percentage of GDP, 1870–1999
Year
1870 1913 1950 1973 1987 1995 1999
5.9 8.2 5.2 10.3 12.8 17.3 15.0
SOURCES: Kevin H. O'Rourke and Jeffrey G. Williamson, Globalization and
History, MIT Press, 1999.; Department of Commerce, Bureau of Economic
Analysis, 1995, 1999. Data for 1870–1987 cover only merchandise exports for
OECD countries; data for 1995–1999 are global and cover all exports.
less move toward globalization—the ratio fell between 1995 and
1999.
The volume of international capital flows is another useful and rele-
vant, although also imperfect, indicator of globalization. As with
trade data, the data on capital flows are also subject to distortions of
various sorts; for example, by tax policies, government-subsidized
investment guarantees, and other measures designed to promote or
impede such flows.
Interestingly, and contrary to some conventional wisdom, O’Rourke
and Williamson (1999) have found that foreign capital flows relative
to domestic savings were considerably larger at the start of the 20th
century than at its end! However, whereas capital flows at the turn of
the century were overwhelmingly in the form of loans, now they
consist mainly of foreign direct investment and, to a lesser extent, of
portfolio equity investment. One particular form of current capital
flows that was virtually non-existent in bygone periods is foreign di-
rect investment (FDI) associated with transborder mergers and ac-
quisitions (M&A). For example, in 1999, FDI for M&A amounted to
$800 billion, representing an increase of almost 50 percent from the
prior year.
As noted earlier, we might expect on theoretical grounds that global-
ization should be associated with widening differences between do-

capital markets appear to have been more closely integrated before
World War I than they currently are!
In an effort to develop new and improved measures of economic
“openness”—an important aspect, if not synonym, of globalization—
a recent RAND study devised three additional measures of the rela-
tive degree of market access (i.e., economic openness) in five coun-
tries: the United States, Germany (as a proxy for the European
Union), China, Japan, and South Korea.
2
The three measures are:
______________
2
See Charles Wolf, Jr., Hugh Levaux, and Daochi Tong. Economic Openness: Many
Facets, Many Metrics. RAND, MR-1072-SRF, Santa Monica, California, 1999.
Globalization: Meaning and Measurement 9
• a survey questionnaire relating to the relative ease or difficulty of
engaging in trade or investment business in the five countries,
distributed to the top executives responsible for international
operations in 500 multinational corporations;
• a detailed review of legal and administrative documents in each
of the countries to assess the extent to which foreign business
operations were restricted or prohibited;
• comparisons between the purchasing power parity (so-called
“real”) value of each country’s currency, and its foreign exchange
(“nominal”) value. (The rationale underlying this measure is that,
other things equal, the more “open” an economy, the closer
should be the PPP and foreign exchange values of its currency,
and conversely.)
The survey was conducted over a five-month period in late 1997 and
early 1998 with a response rate of 60 percent. Respondents were