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Commentary: Asia's Crisis: The Cold War's Final Legacy

International Business: COMMENTARY


The cold war's legacy dies hard. It lives on in Asia, where financial troubles in one small country, Thailand, have unexpectedly spread calamity throughout the entire Pacific Rim, threatening global prosperity. Explanations abound--excessive lending, competitive devaluations, weak regulation, poor planning. But there is a more fundamental reason: The command-and-control societies of Asia, designed to foster political stability and security during the cold war, are failing to manage today's fast-paced laissez-faire economies. And so they're being swept away.

In essence, what is happening in Asia is the dropping of the other shoe. The fall of the Berlin Wall in 1989 had immediate reverberations in Europe. Authoritarian societies built for the cold war were quickly replaced by more democratic, laissez-faire economies. Now, it is Asia's turn. Going into denial, blaming nefarious speculators, or becoming paranoid will not change one fact--the cold war is dead, and the institutions built to serve it no longer work.

OBSOLETE. The truth is that the political and economic structures now in place throughout most of Asia are obsolete. Nurtured in the '50s and '60s, they were mainly designed to consolidate domestic power and quickly raise living standards to subdue domestic communist insurgents or stiffen resistance to external communist threats. It is no accident that generals continue to influence the politics of Indonesia and Thailand (and, until recently, Korea and Taiwan). Such strongmen have been supported by massive U.S. military assistance for decades.

Had it not been for the communist threat, Asia might be very different today. When U.S. Occupation forces led by General Douglas MacArthur entered Japan, the goal was to democratize and decentralize society to prevent a recurrence of militarism. A massive land reform created a broad, new class of farmers. Parallel efforts to break up the prewar zaibatsu conglomerates were begun with a stringent antitrust code put in place.

But the first salvos of the Korean War reversed the priorities of the Americans in Japan. It's easy to forget now that early in the cold war, Japan played a crucial role as a staging ground for American troops headed for the Korean front. To ensure that Japan remained a loyal ally and that the political left would never gain power, the U.S. moved quickly to revive the Japanese economy. The ambitious plan to democratize Japan was dropped, and the swift restoration of Japan's economic structure became top priority. That meant huge interlocking conglomerates, bureaucrat-led industrial policies, and banks offering cheap credit to selected companies.

FREE REIN. Japan's revived corporations, with the blessing of the Occupation authorities, crushed communist-led unions, often using Yakuza thugs. They provided lush campaign financing for the pro-U.S. Liberal Democratic Party, which has dominated Japanese politics for 50 years and has given the bureaucrats free rein to run the economy. The Occupation also allowed high tariffs to protect weak industries. U.S. auto makers, which had been big players in Japan before the war, were basically shut out to protect Toyota Motor Corp. and Nissan Motor Co.--all with the support of the U.S. government. Asia's early mercantilism carried a "made-in-the-USA" label.

A similar pattern took place in Asia's military-controlled societies. U.S. military missions were by far the largest American presence in Asia, including Japan, through the '70s. Indonesia's President Suharto came to power in the '60s in an anticommunist bloodbath that left half a million people dead.

With Washington's approval, General Suharto installed a regime that has lasted for 30 years. Indonesia's economy was rebuilt with overseas Chinese family conglomerates providing the investment, jobs, taxes, and campaign financing for the vast Suharto political machine.

Military rule buttressed by Chinese conglomerates also prevailed in Thailand, while in Taiwan, the Kuomintang ruled under General Chiang Kai-shek with enormous help from U.S. armed forces. Ditto for South Korea, where the military nurtured homegrown conglomerates, which, in turn, nurtured the military government.

For nearly 30 years, this arrangement worked well for both sides. First Japan and then the rest of Asia adapted the region's high savings rates, strong work ethic, and enormous labor supply to the mercantile economic model. Growth rates soared, poverty was cut sharply, and a huge middle class arose for the first time in Asian history. The U.S. secured strong allies in the region and got cheap products as well. Of course, trade disputes erupted in the 1980s, when cars and consumer electronics replaced toys and apparel as Japan's top exports to the U.S. By then, Japan and its Asian neighbors had grown into strong competitors in world markets, including the domestic American market.

Yet this American-inspired policy also nurtured a corrosive brand of crony capitalism that did tremendous damage to the region. Huge conglomerates with intimate ties to politicians used cheap credit to invest in everything from big ships to semiconductor chips. Markets didn't determine the direction of investments--bureaucrats and politicians did.

CHEAP MONEY. These antiquated cold-war structures should have changed years ago. Yet global investors, dazzled by Asia's achievements, kept this defective model alive. The global capital markets sent hundreds of billions of dollars into Asia from 1986 to 1996, providing local banks with even more funds to lend out on incredibly easy terms. Armed with cheap money, Japanese corporations fled their high-priced and overregulated domestic market and opened factories all over Asia. Chinese family conglomerates, Korean chaebol, and Malay businesspeople with good political connections built an enormous overcapacity that now haunts them. Billions went into property speculation and public-works projects that made little economic--though lots of political--sense.

Asia's traditional strengths of cheap land and plentiful, cheap labor also helped keep the system going by fueling a boom in mass manufacturing. Today's markets, however, demand flexible, fast production everywhere, all the time. American and European purchasers of goods want manufacturers to design new products, deliver them just in time, and manage inventory and quality control. The plodding Asian conglomerates are now up against a wall. They cannot meet these new demands for nimble manufacturing, and they cannot lower costs enough to beat the Chinese, who are flooding the world with low-priced goods. Even many of Japan's corporations are losing competitiveness.

Asia's political systems can't move fast enough, either. Paralysis has afflicted Japan for seven long years because bureaucrats will not allow the market to solve the nation's banking crisis. Only now are they permitting one bank to fold because of bad loans left from the bubble economy of the '80s. Nearly a decade of scant economic growth is a high price to pay for a command-and-control society. But it is one the rest of Asia will pay if it does not resolve its banking crisis by depoliticizing the financial system. Thailand is suffering, and Korea is in trouble, with the won sinking like a stone as politicians dither.

SECOND CHANCE. The U.S., which played so large a role in reconstructing Asia after World War II, should not shrink from playing a major role now. That does not mean that Treasury Secretary Robert E. Rubin should propose some kind of updated Marshall Plan. The conditions of the cold war no longer prevail, and it is neither possible nor even desirable for America to try and remake Asia. Asia is too rich and too independent for that. Asians must transform their own political and economic systems to compete in the 21st century arena of global capitalism.

But America can help. Its odd reluctance to play a strong economic role in the current Asian financial crisis, thanks in large part to a parochial Congress, hurts both Asia and America. The financial shocks of 1997 have given America and its Asian allies a second chance to create democratic, laissez-faire societies across the Pacific Rim. It's time to move beyond the old rules of Asia's cold-war economics and invent a new approach to generating prosperity.By Bruce NussbaumReturn to top

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