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From: yfyap@pop.jaring.my (Yap Yok Foo)
To: sangkancil@malaysia.net
Subject: [sangkancil] 'Asian values' idea: Is it out?
Date: Mon, 30 Mar 1998 02:42:05 GMT
Organization: Private
Reply-to: yfyap@pop.jaring.my (Yap Yok Foo)
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>From Singapore Sunday Times
MAR 29 1998
'Asian values' idea: Is it out?
The regional tigers have gone bust. Should they abandon the 'Asian
values' model for the Western ideal of free-markets-with-democracy?
By LINDA LIM
THE Asian economic crisis is cause for rethinking the long-established
consensus about the region's "miracle" economic growth.
Most recently restated in the Asian Development Bank's 1997 study,
Emerging Asia: Changes And Challenges, the consensus view was as
follows: Asian economic success was the product simply of orthodox
Western textbook economic principles -- on the one hand, external
"openness" to trade and foreign investment; and on the other, domestic
"good governments", with balanced or surplus budgets and conservative
monetary policy leading to low inflation and high savings rates.
But mainstream economists are not the only Western scholars who have
sought to dissect the Asian economic miracle. Political scientists too
have had their say on the subject.
They have usually cited the "developmental state" -- focused on
promoting economic development -- and "statist" industrial policies
targeted at developing specific "strategic" industrial sectors, as
keys to the rapid industrialisation of East Asia.
South Korea is the classic case, but it is harder to identify similar
instances in South-east Asia outside of Malaysia and Singapore.
State development policy in Thailand, Indonesia and the Philippines is
more likely to be viewed as having been "captured" by "crony
capitalists" with close personal relations with governments.
Notwithstanding this, both "conservative" Western think-tanks like the
Heritage Foundation, as well as "liberal" multilateral institutions
like the World Bank and the International Monetary Fund, always cited
South-east Asian countries as part of the so-called Asian economic
miracle.
Although these economists generally did not care for the "statist"
model of economic growth, they nevertheless praised East Asia's
practice of conventional macroeconomic policy.
When the Philippines, Taiwan, South Korea and Thailand became
politically democratic as well, this completed the picture of triumph
for the Western liberal model of free-markets-with-democracy, which
Francis Fukuyama proclaimed ushered in The End Of History.
In Asia, it was proclaimed that the United States "lost the Vietnam
war (against communism) but won the peace", as reflected in the
economic prosperity and political stability enjoyed by its capitalist
allies in the region.
Culture as an element in the Asian economic miracle has largely been
neglected or dismissed by both Western economists and political
scientists, though the former might occasionally acknowledge the
highly entrepreneurial populations in the region, while the latter
sometimes noted that Confucian cultures may have lent moral authority
and political legitimacy to interventionist developmental states.
Western anthropologists and sociologists, on the other hand, have
identified kin and ethnic networks, or "culturally embedded network
capitalisms", as locally-efficient means of mobilising capital and
industrial growth.
Culture has also played a much larger role in explanations offered by
indigenous Asian intellectuals, hailing mostly from the political
establishment in patriarchal-authoritarian and semi-authoritarian
states like Singapore, Malaysia, China and Indonesia.
They have argued that "Asian values" -- emphasising the primacy of
order over freedom, family and community interests over individual
choice, and economic progress over political expression, together with
thrift, ambition and hard work -- were largely responsible for the
"Asian miracle".
Whose model failed?
THE Asian values school was unpopular among many Western commentators
for suggesting, among other things, that capitalism and democracy need
not go hand-in-hand.
So it was predictable that when the Asian economic crisis hit during a
period of economic strength in the United States and economic recovery
in Europe, opponents of the Asian values school were out in full swing
crowing over its assumed demise and the concomitant assumed triumph of
the "American way".
The Asian miracle has been attacked for its reliance on industrial
policy and cronyism, both of which contributed to "moral hazard" in
the inefficient financial sector and the resultant over-investment in
a classic "asset bubble".
Mr Paul Krugman, the Massachusetts Institute of Technology economist
who had some years earlier pronounced the Asian miracle a "myth" based
on low total factor productivity growth, is one of those who favours
the "moral hazard" argument that "crony capitalism" or guanxi
(relationships) is what caused the crisis.
This line of argument challenges both the praise of statist industrial
policy by (mostly) Western political scientists and of
"culturally-embedded networks" favoured by (mostly) Western
anthropologists and sociologists.
There is no question that crony capitalism did play a role in the
crisis. But this is far from the only or most plausible interpretation
of the crisis.
Indeed, in the affected Asian countries, another interpretation is
taking hold, one that is much less favourable to the Western liberal
orthodoxy.
In this view, it is the "Washington consensus", the Western model of
free-markets-with-democracy, which has failed with the collapse of its
prime success stories in Asia -- a case of "the West won the Cold War,
only to lose the peace".
The perils of openness
FIRST, if openness was a key ingredient of the Asian economic miracle,
"too much openness too fast" was responsible for its downfall.
In particular, rapid and sweeping (though not complete) capital market
liberalisation beginning in the late '80s, led to a massive influx of
foreign capital, especially short-term loan and equity capital.
Without this influx of foreign funds -- which in some cases amounted
to as much as 75 per cent of the equity capital on local stockmarkets
-- domestic "crony capitalism" alone could not have created the Asian
bubble economies of the '90s.
High domestic growth and investment in turn contributed to ballooning
current account deficits, with imports constantly exceeding exports by
a wide margin.
This was further fuelled by overvalued currencies, the result both of
exchange-rate regimes established to attract foreign capital, and of
large inflows of capital. Open capital markets and capital-account
convertibility also increased these economies' vulnerability to
currency speculation.
Financial market liberalisation in Asia had proceeded in advance of
the appropriate state institutions necessary to monitor and regulate
financial institutions, and in advance of local expertise to manage
them.
The region's much-vaunted entrepreneurialism led to the establishment
of a horde of new banks -- in Indonesia alone, over 200 banks -- most
of which with inadequate expertise in the management of money.
Even without crony capitalism, excess capacity in the financial sector
and intense competition among the neophyte institutions would have led
to a fair proportion of "bad investments".
This was aggravated by the easy availability of cheap capital from
abroad, in many cases pressed on local borrowers by over-eager foreign
lenders who "should have known better".
Openness in the Asian economies severely limited their governments'
ability to intervene to control such flows. Governments should have
allowed their currencies to depreciate, raised taxes and interest
rates, and cut government spending, to reduce domestic demand and
correct the external imbalance.
But in very open economies such as these, currency depreciation would
have increased costs, including offshore loan servicing costs, and
caused inflation from higher import prices.
Higher domestic interest rates would also have been ineffective so
long as businesses could resort to cheaper borrowing in accessible
offshore markets.
In addition, public sectors were small and governments had little
control over private sector over-borrowing. This reduced the
effectiveness of raising taxes and cutting expenditures.
In short, the dominance of private enterprise reduced the influence
that governments had over the macroeconomy.
The perils of democracy
DEMOCRACY took hold in South Korea, Thailand and the Philippines in
the late '80s. Whereas previous authoritarian regimes could impose
higher interest and taxation costs on local business communities
almost at will, and had done so to maintain currency stability for
decades, this had become difficult in the '90s.
The political influence of business over elected legislatures grew,
especially when legislators were either business persons themselves,
or required business support to get and stay elected.
Thailand, especially, because of its short-lived coalition governments
(five in six years), was particularly vulnerable to vested interests.
Democracy also contributed to the expansion of crony capitalism, as
exemplified by the favouring of businesses with ruling political party
connections in Malaysia.
In contrast, Hongkong, which does not have an elected government, and
Singapore, which has a single-party-dominated parliament, have done
relatively well through the economic crisis.
Like the authoritarian governments of the past in South Korea and
Thailand, both administrations maintain strong central economic
control and can impose economic hardship on their ly populations or
take political-unpopular measures when necessary.
Thus the Singapore government acted to cool off the domestic property
market when it was still booming in 1996, and the Hongkong authorities
ignored domestic business leaders' complaints about the currency peg
hurting their businesses, and raised interest rates to beat back an
attack by currency speculators last year. In the terminology of
political scientists, both states possess an autonomy from business
interests that governments in their newly-democratic neighbours do not
have.
In defence of the Western model
PROPONENTS of the Western liberal model do not, of course, see things
this way. Instead, they assert that open markets and democracy have
worked, and it is rather the "Asian" parts of the Asian economic model
which have failed.
They further argue that the excess lending and investment by domestic
and foreign financial institutions resulted from information gaps
caused by inadequate local government prudential regulation,
monitoring and disclosure requirements, not from mistakes made by
financial market actors.
They believe that financial restructuring along Western lines and the
takeover of troubled local financial institutions by more experienced
foreign counterparts would increase efficiency in the channelling of
local savings to investments.
The IMF occupies a peculiar position in the Western economic policy
canon. On the one hand, the multilateral agency is seen as an
instrument of Western policy orthodoxy, advocating free trade and
capital flows together with fiscal austerity and monetary
conservatism.
It typically requires policy deregulation and liberal economic
reforms, including financial sector liberalisation and restructuring,
in exchange for low-interest emergency loans.
At the same time, it is recognised that the availability of IMF
"bail-outs" creates another "moral hazard" problem, by encouraging
governments and private borrowers and lenders to take excessive risks
in emerging markets, secure in the (rational) expectation that their
risk is minimised by the likelihood of an IMF rescue should things go
really bad.
The Asian response
FOR Asians, disillusionment with market openness has set in. At
worst, they see themselves as the victims of a
massive Western conspiracy to first deliberately inflate, and
then deflate the asset values of Asian banks and
corporations, the better to subsequently take control of them at
post-crisis "fire sale" prices.
At best, Asians view the current crisis as a case of massive
market failure, particularly on the part of globally
unregulated foreign financial market actors.
Despite their greater expertise and experience, they still
indulged in excessive lending and investment in Asian
markets, and so cannot be trusted to better manage the local
financial institutions that they may take over.
Already, China and Vietnam have postponed capital market
liberalisation that would expose their currencies to
speculation, and there have been calls for more regional and
global cooperation in the monitoring -- and possibly,
regulation -- of international capital flows.
There is a growing consensus that, at a minimum, some
international monitoring, and perhaps, risk-insuring
agency, is necessary to oversee these largely unregulated flows.
Conclusion
CLEARLY, both the Western economists' and Western political
scientists' competing "open" and "statist"
models, have, in some sense, failed.
On the one hand, market openness without the requisite
institutional infrastructure and expertise to manage it, can
be a recipe for economic disaster. Even the normal workings of
global financial markets themselves can be
disruptive to small open economies.
On the other hand, statist industrial policy can lead to crony
capitalism, excess capacity, and "bad investments".
Both openness and statism have contributed, not only to the Asian
miracle, but also to the Asian meltdown.
What about Asian values?
At first glance, the need that all see for more state-led
institution building, state monitoring if not control of private
sector financial transactions, and state autonomy from private
interests in the political sphere, might seem to be a
confirmation of the wisdom of the "Asian values" school.
"Too much freedom too fast" in both markets and politics can lead
to downfall, suggesting a continued need for
strong, benevolent central state authority.
But at the same time, Asian cultural networks, as well as the the
involvement of Asian governments in industrial
policy, may also be indicted for fostering the "crony capitalism"
which led to over-investment in "bad projects",
ranging from Indonesia's national car project, to Malaysia's
favouring of politically well-connected businesses and
individuals in the privatisation of huge public infrastructure
projects, to the over-extension of credit by Overseas
Chinese-owned banks to Overseas Chinese industrial conglomerates
with the presumed security of "relationships"
substituting for modern "risk assessment".
The fact that policy errors committed by the continued
authoritarian regime in Indonesia has compounded both
the economic crisis and its adverse social and political
consequences in that country, also undermines the belief of
some Asian values advocates that authoritarianism might be
superior to democracy in economic policy
management.
The Indonesian case contrasts vividly with the market confidence
increasingly inspired by the policy statements
and actions of newly-elected President Kim Dae Jung of South
Korea.
In short, the Asian economic crisis does not provide unqualified
support for either the Western
open-markets-and-democracy model or the Asian
strong-government-and-cultural-values model. Both need
some adjustment for global and national capitalisms to work
smoothly.
Certainly the paths to capital market liberalisation and
democracy should be carefully planned, and perhaps
staged to occur only in line with the concomitant development of
supportive state and civil institutions.
At the same time, governments need to resist the pressures of
would-be "crony capitalists" to interfere with their
fiscal, monetary and regulatory autonomy, while private sector
business networks need to be adjusted to
adequately account for risk.
Above all, the Asian crisis does expose the futility of applying
simplistic and essentially ideological models to the
messy practical business of public and private sector economic
management.
Far from presaging the "end of history" -- in this case, the
presumed triumph of "Western" over "Asian" models --
the crisis suggests that it is time to return to history, that
is, to each country's particular configuration of economic,
political, social and cultural forces, to discern both the
complex, multi-faceted causes of the crisis, and its eventual
solutions.
This is a task too important to allow to be jeopardised by those
who would approach it only through the limited
lenses of partial theories, and models of one or the other
cultural-ideological predilection.
The writer is the director of the South-east Asian Business
Programme, University of Michigan. The essay is an
excerpt of a paper first presented at the Harvard Business
School.
Copyright c 1998 Singapore Press Holdings Ltd. All rights reserved.
http://www.asia1.com.sg/straitstimes/pages/stfea1.html
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NIL CARBORUNDUM ILLEGITIMI
Don't let the bastards grind you down
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Uncle Yap Yok Foo yfyap@pop.jaring.my
Tel : 603-7811648 Fax : 603-7812108
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