From: "DR. PHUA KAI LIT" To: wchew@concentric.net, wsn@csf.colorado.edu Date: Mon, 6 Apr 1998 17:55:36 +0000 Subject: (Fwd) (Fwd) [sangkancil] 'Asian values' idea: Is it out? ------- Forwarded Message Follows ------- 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) ________________________________________________ This week's sponsors -The Asia Pacific Internet Company (APIC) Business Internet Services. Some talk. Some do. We talk and do! for instant info ________________________________________________ >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. 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