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ASIA | MARCH 9, 1998 VOL. 151 NO. 9 |
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What Really Caused Asia's Crisis It wasn't Confucianism or "crony capitalism" but simply poor regulation By MIRON MUSHKAT
These explanations provide modest enlightenment, but they are static, simplistic and only marginally relevant. They are static in that they don't explain why Asia's multiple sins came together in 1997 to cause such trouble. Surely, Confucianism and crony capitalism, implicit guarantees and other institutional peculiarities are not new. One wonders why it took several decades for them to wreak havoc on the economies of a previously dynamic region. The explanations are simplistic because they fail to take into account Asia's diversity. There is no single model of capitalism adhered to throughout the region. Some countries, most notably Japan, have opted for a variant of the managed German/Rhine model. Others, principally Hong Kong, have chosen the market-based Anglo-Saxon model. Most Asian economies combine features of both models. From a cultural perspective, the picture is also one of heterogeneity rather than homogeneity. Japan stands out as a post-feudal society. The Confucian nations of Northeast Asia hold the family in high regard. With the exception of Singapore, Southeast Asian societies are dominated by patron-client networks. It is in this environment, as Indonesia's reluctance to embrace International Monetary Fund-style reforms vividly illustrates, that the manifestations of crony capitalism are most palpable. How pervasive these manifestations are throughout the region, in both absolute and relative terms, remains a moot point. In an illuminating 1997 book entitled Emerging Asia, the Asian Development Bank examines the quality of public governance in the region--the efficiency of government bureaucracy, the extent of state corruption, the efficacy of the rule of law, etc. The verdict is that, on balance, these factors have not impeded economic growth and, indeed, have even promoted it. (Of course, outside of Hong Kong and Singapore, there isn't enough public governance.) The explanations for Asia's financial crisis are only marginally relevant because they accord undue importance to factors that merely compounded the problem, particularly during the later stages, but did not actually cause it in the first place. Despite all the fancy explanations, the truth of the matter is that this crisis is fundamentally no different from the ones that gripped industrial economies--notably Australia, Japan, New Zealand, the Nordic countries, Britain and the United States--in the late 1980s and early '90s. In all of these cases, widespread financial instability can be traced to one simple factor: disorderly financial deregulation that resulted in overly rapid expansion of credit. The credit booms that these openings unleashed were sustained by poor reading of the economic tea leaves by government officials baffled by structural changes and, as a result of their myopia, misguided in their economic policies. Unfortunately, Asian companies and financial institutions borrowed heavily from abroad. Moreover, they displayed an excessive appetite for short-term debt. Finally, when the day of reckoning arrived, the region's exports ground to a halt due to the yen's depreciation, faltering competitiveness and other reasons. That meant the region's economies could not generate the cash flow needed to service their foreign debt. This does not detract, however, from the validity of the diagnosis offered here: that the real cause of the crisis was not bad values but simply too much short-term overseas borrowing. If that's the case, long-term remedial action, both in the region and at the global level, should focus on the architecture of the evolving financial system rather than cultural factors that are intractable as well as elusive. Confucian values and cronyism may no longer have a place in a modern, open, globalized economy, but they are not what got Asia into this mess. And blaming them won't fix things. Miron Mushkat directs research in economics and investment strategy at Indocam Asia Asset Management
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sia's startling fall from financial grace has triggered an
equally alarming barrage of explanations for the anguish. Most
of them emphasize the flaws of the region's political and
economic institutions--and the unappealing cultural foundation
upon which these institutions rest. Commentators who favor
general explanations tend to focus on the broad contours of
"Confucian" or "crony" capitalism and the malpractices these
evils breed. Those who follow more specific routes--frequently
with considerable, albeit unnecessary, rigor--highlight certain
institutional idiosyncrasies, such as implicit government
guarantees given to financial intermediaries, which are said to
have encouraged excessive risk taking.