Asia: The Road To Real Capitalism

After the Berlin Wall fell in 1989, two visions of the post-cold-war world were set forth. Francis Fukayama's optimistic The End of History predicted that, with the end of communism, liberal democracy and market capitalism would spread everywhere and end international conflict for good. Why? Trading partners with similar economic systems don't go to war. Samuel Huntington's pessimistic The Clash of Civilizations, in contrast, predicted that culture would replace ideology as a source of global conflict. Right now, Fukayama is looking good. But is it only for the moment?

As 1997 closes, Asia--the last bastion of authoritarian mercantilism--is under siege. The financial crisis is undermining Indonesia, Korea, Malaysia, Thailand, and even Japan. The Asian model of closed command-and-control political economies, sustained by the ideology of "Asian values," is proving surprisingly vulnerable to global competitive pressures. It is under strong pressure to open up to international market forces and investment by foreign bank creditors and the International Monetary Fund.

The spread of liberal democracy and market capitalism a la Fukayama could reduce the conflict between Asia and the West. Asian crony capitalism creates huge overcapacity while damping down domestic consumer demand. This generates a surge of exports that destabilizes trade patterns and increases wage inequality within the U.S. More open, democratic Asian economies would boost imports, free up funds for small local businesses, offer Asian consumers more choices of goods at lower prices, and rebalance trade.

There are two caveats to Fukayama's optimistic view. Beware of the backlash. Up till now, the Asian system has worked for Asians, drastically reducing poverty for the masses while creating great wealth for the elites. These elites, reluctant to give up power, are now leading public campaigns blaming the U.S., the IMF, and others for their countries' sudden economic fall from grace. They are shifting their own responsibility to foreigners. Japan's success at rebuffing U.S. efforts to change Japanese export-driven mercantilism into a consumer-based economy is giving other Asian leaders heart. Asia will not choose market democracy easily.

Which leads to the second caveat. Beware of the pain. The medicine Asia is being told to swallow may make it sicker. The IMF demands that Asia cut growth and consumption. But that will lead to more overcapacity and exports, not less. It will hurt consumers, make for lower wages, and penalize the poor more than the rich. Japanese, American, and European banks should not be allowed to squeeze every last cent out of their troubled Asian clients. After all, the banks now clamoring for blood once lent huge sums based on flawed credit analysis. Why should the IMF bail them out completely? Surely, they deserve to take a haircut in any debt rollover. Otherwise, Asians will take an even greater hit, and the loan restructurings will seem unfair.

The process of getting to liberal democracy in Asia will be difficult at best. China, for one, remains a major question mark. A backlash could easily reestablish Asian authoritarian mercantilism and set the stage for future clashes. There are many signs that Asia is becoming more open. But it is far from clear that Fukayama's optimistic views will prevail.

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