I’m Shocked, Shocked, to find that Cronyism is going on in East Asia

One day it’s globalization’s poster child, the next day a pariah. What happened to the East Asian miracle, and how can it be resurrected?

Surprisingly, the U.S. stake in this question is more political than economic. After all, the four East Asian “tigers” in deepest trouble--South Korea, Malaysia, Indonesia and Thailand--are smaller than most reports would suggest. Combined, these countries are about the economic size of France, and their exports are less than 8% of the world total. Their rapid growth during the decade 1985-1995 did little for the world economy. While per-capita income in East Asia rose, on average, by more than 7% annually over this period, the world’s increased by less than 1%. In short, no locomotive has derailed, and the doomsday predictions of some pundits regarding spillover effects on the United States are wildly exaggerated.

But the political problems raised by the financial collapse are a different matter, and these emerge at both the national and international levels of governance. On each level, important reforms must now be made. Specifically, democratization and reducing corruption are needed in East Asia, while better regulation of the global economy is needed on a multilateral basis. As usual, Washington must take the lead.

What’s most amazing about Asia’s troubles is the belated “discovery” of profound rot throughout the region’s political system. Cronyism, nepotism and corruption are rampant, but this didn’t stop the world’s bankers, bureaucrats and businessmen from extolling the region’s economic virtues. Indeed, until recently, payments for bribes were tax-deductible business expenses in many European countries. Why was nobody in Western governments or the international organizations sounding the warning bells about East Asia earlier? Perhaps because too much money was at stake.

Problematic domestic politics has always been the global economy’s dirty little secret. Economists and international bureaucrats believed markets and politics could be decoupled, and that dictators were often more capable of building free markets than democratically elected leaders. Around the world, many authoritarian regimes used technocrats to provide a veneer of sound policy-making. A good example is Indonesia, which has had a long-standing relationship with the Harvard Institute for International Development. As a result, international capital markets have mistakenly equated such regimes with soundness and stability. But the data suggest the opposite: Totalitarian regimes that enjoy economic success are the exception, not the rule.

In fact, authoritarian leaders are usually bad both at home and abroad. Domestically, they suppress opposition groups and violate basic human-rights standards while, overseas, they often engage in behavior that threatens their neighbors. Neither is conducive to long-term economic growth. The lesson to mobile capital is clear: Avoid dictators.

How should the United States confront East Asia’s governments as it helps them dig out from the financial rubble? For one thing, U.S. officials must not dismiss the tremendous economic gains that these countries made in recent years, nor forget that several, like South Korea, have taken important political strides as well. Rather than trash the entire East Asian model, a strategy is required that retains the good parts of the “miracle”--such as the region’s emphasis on income equality--while showing the way ahead.

What would be the main elements of such a strategy? The correct response would be a triad operating on the economic, security and political fronts. To date, only the first two have been launched.

Thus, as a first step, the International Monetary Fund and World Bank mobilized their resources to assist in stabilizing the region’s--and the world’s--financial markets. While East Asia does not represent a large share of global activity, market actors, like lemmings, all tend to head toward the cliff at the same time. To the extent that losses of savings and productive output can be minimized, that is all to the good.

Second, U.S. Defense Secretary William S. Cohen is making a well-timed visit to the region. Given the historically grounded fears among these countries about how each will respond to a prolonged economic crisis, U.S. military reassurance is a low-cost and effective way of preventing an outbreak of international violence.

Yet, these movements on the economic and security fronts must be bolstered by a third set of policies focusing on political reform at both the national and international levels. With regard to domestic reform, the emergency assistance now being provided to the region should contain explicit “conditionality” provisions that go well beyond the IMF’s normal macroeconomic criteria. Issues of governance must be included.

As a starting point, Asian leaders should examine the World Bank’s 1997 World Development Report, “The State in a Changing Environment.” It includes all sorts of sound ideas about how governments can reduce corruption, while promoting greater openness in their transactions and public participation in their activities. Governments should be required to make progress along specific political measures before receiving loans--for example, holding free elections or prosecuting corrupt officials--just as they must meet specific economic targets. Naturally, these must be fashioned to each nation’s particular case.

But international reforms are also needed. As the Asian crisis demonstrates, global capital movements can disrupt economic activity even in the best-managed regimes. Democracy and free markets at the national level do not provide the entire answer when it comes to promoting sustainable growth. Stronger international governance of financial activity is a further requirement.

In fact, the foundation for better oversight already exists. The IMF and the Basle Committee of Bank Supervisors have substantial resources at their disposal for following global and domestic financial flows. The problem is that these organizations have no independent regulatory authority over nationally based financial institutions. But just as countries have reached regulatory agreements in such sectors as telecommunications, air travel, shipping and whaling, attention must be turned to strengthening the world’s joint capacity for supervising banking and financial activity. To date, most of this work has focused on the commercial banking sector; now, greater emphasis must be placed on investment firms, like those that have recently failed as a result of the current turmoil.

The political stakes in the East Asian crisis are thus great at the regional and international levels, but to date we have little evidence that this has been recognized in the White House, which has understandably focused on short-term fixes. If the U.S. walks away after this particular patient is stabilized, however, it may well face a far worse epidemic in coming years. Regimes that are infected by deeply corrupt officials and business practices should be cordoned off from the global economy.

Requiring the reform of authoritarian regimes is therefore the critical starting-point on East Asia’s road to recovery, and it would provide a good return on the taxpayer’s investment in the region’s bailout. It would mean Western governments are finally sending a message to decaying regimes everywhere that the capital markets have not yet delivered: Dictatorships, no matter their technocratic support, don’t make for good investments. Ultimately, politics will always trump economics.