Asia: End Crony Capitalism
The $100 billion Asian bailout has just begun. If it succeeds, Asia will move to a higher stage of market democracy and reignite its high-octane economic growth. If it fails, Asia will stay stuck in its self-limiting command-economy capitalism. History is full of nations that failed to live up to their great potential: Argentina at the turn of the century, the Philippines before World War II, the Soviet Union in the 1950s, and, of course, China some 200 years ago.
Success for Asia depends on nothing less than creating a civil society with a free marketplace that is separate and distinct from the state. Asian values have come to mean the comingling of the financial interests of the rich and powerful with the government. Instead of acting as independent referees, Asian governments have become instruments of the politically connected. So an uncompetitive national car program in Indonesia is run by the President's son. Where bureaucrats dominate, as in Japan, whole industries have become instruments of bureaucratic industrial policies. Legal codes, independent courts, transparent dealings are, by and large, absent, and with them, true competitive capitalism.
The current banking crisis sweeping Asia is no accident. Banking is the vehicle through which capital has been funneled to the children of politicians, the campaign contributors to Prime Ministers, and the favored companies of bureaucrats. Such lending generated enormous overcapacity in real estate, cars, chips, textiles, electronics, and a dozen other industries, setting Asia up for its fall.
China's reemergence as a giant exporter has pulled the rug from under low-cost, low-price Asian producers. Without benefit of market flexibility, their politicized crony capitalism has made them slow to respond. As for Japan, the global economy is leaving it behind. Only now are its bureaucrats beginning to allow the financial markets to mark down billions of dollars of nonperforming loans.
The International Monetary Fund is leading the effort to end government monopolies, political patronage, and economic corruption in exchange for bolstering weak currencies. Inside Japan, domestic forces are battling to repair bank balance sheets, spur lending, and revitalize growth. Bank reform may be the focus of efforts to stop the slide, but it is really the vector into something more critical--putting distance between the state and the economy in Asia.