Section 8 from THE ASIAN FINANCIAL CRISIS
 

8. ASIA'S FUTURE ECONOMIC STATUS

Assuming the situation is stabilized, what style of economic system will be favoured in Asia in future? And will Asia be the main future driver of global growth. The latter is a key matter for business and government strategists <274> and particularly for Queensland.

Australian's two attitudes towards Asia: the superiority (of older persons) and the inferiority (of younger persons) will be tested by this crisis <188>

This Section considers: debate about whether the 'Asian' economic development model copied from Japan can be effective; and alternatives which are available.

8.1 Can the 'Asian' economic development model survive, or dominate?

Asian societies have been the only ones to close the income gap with Western societies. Also economic growth has been dominated globally by East Asia for several years <274>, and there has been a presumption that this would continue leading to a dominance by the East Asian model. The latter is generally held to have involved a constructive economic role for government, based largely on the Japanese approach <10>.

• A World Bank study in 1993 showed that there were many basics right in the Asian miracle (stable economic framework and legal system) but that government intervention had helped with low interest rates, and organising investment. <17>
• All Asian economies followed Japan's model in varying ways - with a mix of pro-market mechanisms and intervention. Using imported equipment the aim was to catch up to the West. This worked for a time, but: intervention is only useful in catch up and can lead to problems (in financial systems and over-capacity). Japan's problem is compounded by having no one left to catch up to <147>
• However not all agreed that there it made sense to speak of an Asian model <419>. Others argue that government is a constraint, and that success was a result of marketisation <3>

The financial crisis requires a serious re-evaluation of the 'Asian' model <17, 66, 394>.

These methods (which are central to miracle right back to the roots in Japan) have now gone badly wrong. They contributed to obtaining large investments which were not well used. Recovery will take years (ie a 3-5 year recession is likely) because of the need to create new institutions and expertise - even assuming the political will exists <17>

 For example:

• The financial crisis challenges the 'Asian' model for economic development (ie state directed investment and export led growth), because much investment was excessive and of poor quality <650>. Perhaps this model is partial, dealing only with political, rather than with efficiency requirements <12>, though this view is disputed <7>.. Furthermore, that model was mercantilist and export led, which depended on the willingness of the USA to absorb exports <49> which the US seems increasingly unwilling to do (see Section 5.4)
• One conclusion which could be drawn from the crisis is that the model of close business / government ties is not viable, and must be replaced by a market driven approach, if sustained growth is to be achieved. <> For example, Korea's model of economic development has failed - resulting in crisis. Competitiveness could no longer be maintained with Asia, Chaebol have been run by single families, but the problem is too large for this. <45>
• Problem is a banking and political crisis, not just a currency crisis. Australia took 4 years to recover from its 1980s banking crisis, and political institutions in Asia are less well equipped to cope <66>
• Asia's 25 year boom (founded on speculation, patronage and corruption) is over. The result will be fairer societies, and sustainable prosperous growth - though difficulties will be great in the short term <81>
• There is no more talk of Asia's dominance of the 21st century economy. Downturn could be short (as in 1985) or last 2-3 years. However some believe Asian economies could emerge as strong as ever - because the same fundamentals are in place - open economies, high savings and flexible markets . This could be speeded with appropriate policies - however implementing this would be difficult as it would disadvantage many vested interests <103>

However others suggest that very rapid growth is likely to be resumed: 

For example:

• Asia will recover very quickly from the crisis - as the IMF has been a good circuit breaker - because government's role was not the key to growth <7>.
• Asia was most of the global economy until 1820, but fell to only 19% in World War II. Japan showed a path to high speed growth, and most Asian countries followed. Policy of openness was the key factor in growth; the fundamentals are still in place; and a new miracle will arise. <274>
• Asia's growth will lead the world over the next decade, with long term effects confined to Thailand <105> When confidence is restored, Asian growth will resume at 5-6%pa. <386>
• China has taken up the cause for Asian values <405>

• Commonwealth Treasury who liaises with the IMF and believes that Asian countries have deep seated structural problems beyond the current crisis (ie due to their business / government links); and
• the Department of Foreign Affairs and Trade (DFAT) who have 'invested' in Asian model, and believe that growth will continue despite those business / government connections. < ,356>.

The crisis has led to increasing influence for the Commonwealth Treasury <356>, and has been suggested as possibly ending DFAT's obsession with the region <31>

It is suggested below that Treasury's view is correct, but for a different reason. Treasury holds that government / business links have been economically limiting - while DFAT argues they have not been important. This paper suggests that those links have been constructive in building the 'real' economy, but that financial management is likely to get out of control, if not simply part of 'real' economic activity.

Confusion has long existed about the Japanese economic development approach, because attempts have been made to understand it within the intellectual framework of Western societies, whereas it has been based on traditions which lies outside that framework - as outlined in Attachment K.

Differences in Frameworks: The methods of problem solving and analysis used in Western societies are based on the view that causal relationships in nature (and also in social and economic systems) are fixed. Thus the objective of (positive scientific) economics is to understand those causal relationships, and to use them (eg by building an econometric model) to predict what will happen given certain inputs. However, the alternative approach assumes that such causal relationships are not fixed, and problem solving involves advantageously changing such relationships in social and economic systems. This has the effect of changing the parameters in, rather than the inputs to, an econometric model. How this alternative approach arises, and how it contributes to economic productivity is considered in the author's book, Transforming the Tortoise: Ways to Improve Australia's Place in the Economic Race, 1993.

Japan's economic development model involved leadership of organizational (and economic system level) 'learning'. Superiors aided in the development of new understanding by loyal subordinates (eg MITI's vision development). Authority involves leadership (by the elite), 'bottom up' decisions responding to market and production needs, and no direct management of outcomes (as this is the responsibility of subordinates). Financial resources follow the direction of 'bottom up' decisions, rather than the plans of financial managers. Financial returns are achieved providing loyal subordinates are highly responsive to their customers, and to each other.

Arguably this method worked well in mobilising human resources in an economic 'catch up', But Japan's creation of its 'bubble economy' in the 1980s suggests that such methods suffer weaknesses when applied to financial management as a problem in itself. The difference in managing financial assets is that there are no loyal subordinates involved to make sure that the right decisions are made, and that implementation is efficient, and market oriented.

Despite this, similar methods had been copied by many nations in East Asia.

Korea's bailout by the IMF is a major world event. It had adopted bits of Western methods to suit itself. But more than any other country, Korea had copied the Japanese model, It emphasised big chaebol. The system was bureaucratic capitalism - with guidance and control of banks. Market share was sought, not profitability. Chaebols make no conventional commercial sense - with their strong interest in diversification; payment of low wages; and inability to dismiss employees <299>

• In Korea (as in Japan) bank financing responds to bureaucratic pressure, rather than to commercial risk assessment. This reflects the application of industry policy, rather than corruption. In SE Asia, however, corruption has been a problem <356>
• The politicians in region did not behave like normal politicians - because intervention allowed growth - whereas normally all that could have occurred was patronage <23>

Not only has the Asian 'miracle' been severely challenged by this crisis, but also:

• There is no obvious acceptable alternative model (see Section 8.2 below);
• quite profound difficulties lie in the path of recovery in the most affected countries (see Attachment F, and Section 4.2);
• Long term constraints on growth in East Asia were suggested by Krugman (ie the dependence of growth in increased inputs rather than on productivity) <10, 18>, though these constraints were not seen as the cause of the current crisis <6, 11, 14, 18, 66, 359> - though some appear to have misunderstood Krugman's hypothesis <7>

An argument in a similar vein to Krugman's had been presented in Behind the Myth: Business Money and Power in SE Asia (Clad, Unwin Hyman, 1990). This suggested that despite the appearance of success SE Asian economies were not true market economies. There was no indigenous culture emphasizing thrift and rewarding excellence. Instead, ASEAN was said to be free-riding on foreign capital, enterprise and technology. The same passive approach of the past 400 years was used including: relying on foreigners to create security for the region; relying on commercial talent and energy of immigrant Chinese; relying on outsiders for capital; relying on commodities which are increasingly vulnerable to price shifts; and acceptance by local elites of substantial pay-offs (but doing nothing to engender local entrepreneurship of technology) (Clad 'The Phoney Miracle', Independent Monthly, Oct 1990)

Several future scenarios have been suggested <451>:

• rapid return to business as usual, with close business / government links, and financial institutions deciding that stability is better than transparency (which seems unlikely)
• IMF intervention proves destructive - leading to a breakdown of political and economic order. Reform is not a simple technical process, but one where political and economic structure and power must be re-aligned
• Asia turns in upon itself - emphasising regional self reliance; while protectionism emerges elsewhere
• growing Asian solidarity leads to pressure for reshaping international economic and political order

8.2 A New Asian Economic Model?

• an enhanced version of the Japanese model;
• the offshore Chinese model - as adopted in various ways in Taiwan, Hong Kong and Singapore;
• a Western style market style as suggested by the IMF;
• A mainland Chinese model - whose character is yet to become clear.

First the Japanese model will still be promoted.

Mahathir (Malaysia) still endorses a government orchestrated economic model, yet his approach is not universally accepted in SE Asia <218>. For example, his deputy argues for a different approach. And Singapore suggested that a more liberal style would be required, in establishing which the Malays would be the main obstacle. The fact that this difference is viewed in ethnic terms complicates the analysis.

And Japan will surely try to correct the defects in its model.

After about 1980 Japan successfully developed a process for creativity which had been seen as difficult / impossible in Japanese culture. This built off tacit knowledge, and avoided the need for abstract problem solving (see Nonaka 'The Knowledge Creating company', Harvard Business Review, Nov 1991). Similar attempts may be made for finance.

Second, something like the more decentralised 'Asian' model developed by the offshore Chinese is being promoted, as an alternative to the Japanese model.

One can not understand developments in either the four Chinese (or in SE Asia) without considering the little published role of the offshore Chinese. Offshore Chinese operate trans-nationally <125>, and their webs of relationships are a source of competitive strength <136>. In particular, a significant competitive advantage for SE Asia was their business networks (which allowed information sharing and market dominance). But this is now the cause of problems, as conglomerates come to the aid of their co-investors <136> Overseas Chinese, who are a major factor in SE Asia, are family based which gives problems in ensuring competence in successions. Many concentrate on financial services and property. Their interconnections ensure that shocks are transmitted <10>

The offshore Chinese communities (Taiwan, Singapore and Hong Kong) had adopted a model which is somewhat different to Japan's.

For example:

Hong Kong and Singapore have proper bank reporting standards <41>

• Taiwan stands out as an example where a different type of political and corporate governance arrangement has been used - more decentralised - small firms not larger; Western styles of accountability; and virtual democracy. <215, 464, 465, 488> However, Taiwan is inaccessible to foreign funds and banks (as China is) <120>
• While South Korea had adopted the Japanese model most closely <>, Taiwan had taken a different approach. <465> Taiwan bit the democracy bullet 10 years ago, though Hong Kong is now headed in the reverse directions <332>
• Taiwan is seen as doing better because of: large foreign exchange reserves; capital markets beig off limits to speculators; and intervention when the currency is under pressure <215>

Furthermore, they have all been relatively lightly affected by the Asian financial crisis. And Taiwan is now anxious to extend its political influence in SE Asia <281>, and is providing support to firms wishing to acquire assets in SE Asia <466, 478>.

There is uncertainty about how offshore Chinese business groups fared during the crisis (because reliable information is unavailable). Some observers suggested many were seriously hurt,

• Many overseas Chinese conglomerates will fail, And there will be scope for US style mergers and acquisitions - initially in Thailand. Financing will shift to equity from short term debt. <207>
• Business networks (eg of the offshore Chinese) with links to less affected countries will be obliged to assist those badly affected <136>. This reduces the problem in the worst affected countries, by spreading it more widely. This was ultimately a major problem for Korean chaebol <> and the reason that it is suggested that they need to be broken up.

Yet there are counter suggestions, because, from long experience, a tradition has been established of conducting transactions only in local currencies - or hedging <personal communication>. Alternatively it may be that losses from financial services and property operations have not yet been passed on.

Third the IMF is seeking to introduce something like a Western model (eg as in Australia), though this, as argued in Section 7.2, would require a 'cultural revolution'.

However the offshore Chinese may have some interest in seeing part of the IMF solution applied (ie reducing the ability of governments to favour other 'cronies'), because this could provide a way to protect themselves from the traditional authorities in the region eg those in China, Japan and the native elites in SE Asia. Such protection from authorities with non commercial goals certainly allowed offshore Chinese communities in Singapore and Hong Kong to prosper. However they would have little to gain from the operation of liberal capital markets which is also part of the IMF package.

None the less, there are calls in the region for the adoption of an international style. For example, Singapore and the Philippines have called for adoption of such an approach (which would require major changes to traditional style of governance) - though this is quite different to Malaysia's position <33, 35>. Hong Kong has also established a Financial Institute to promote a more transparent style accountability <309>

If a modified form of the IMF package succeeds this could make it much easier for Queensland to do business in the region.

Finally, China seems likely to develop a contending model - though it is not clear what this model will be. It has been argued that until about 1500, Asia (primarily China) had dominated the global economy <274>, and that its subsequent decline is explained in terms of closing from the world at about that time <274>.

However there is another explanation of China's relative decline, involving the emergence of the renaissance in Europe which led to the development of modern science and technology - which has been credited as the basis of Western strength (Mendelssohn, Science and Western Domination, 1976). This was seen as contributing to efficiency, by reducing the need for primarily trial and error experimentation.

 Furthermore, China has (according to an IMF analysis) achieved a significant proportion of its growth through productivity improvements - rather than just from increased labour and capital inputs - in contrast to Krugman's hypothesis about Asia generally (Hu and Khan 'Why is China growing so fast?', IMF Economic Issues, n8, April 1997). Taiwan also has been seen to achieve substantial growth from productivity gains <>.

However, as outlined in Attachment C, China is now experiencing major difficulties, and appears at risk from the financial crisis (despite its relatively closed financial system).

China is believed to have favoured the Korean model for reforming its inefficient state enterprises (involving centralised control of large enterprises like chaebol) <45, 358, 421> and it is still pursuing this model despite Korea's problems <358> though reports now suggest China is also exploring the German (social market) model <>.