The Asian Model strikes back

19 August 1998

In the early stages of the crisis, Asian economists and Asianist experts seemed shell-shocked. They left analysis of the crisis to others who had only a passing interest in Asia and often were simply good at being expert about anything. Most of the loud comment came from the US and it quickly developed a very strong theme. The crisis is not only a business cycle or a financial panic. It is a judgement on Asian capitalism. And probably also a death sentence.

In the years before the crisis, there had been a growing enthusiasm about an ‘Asian model’ of development. Since the collapse of communism, a small academic industry has compared different capitalist models – US, European and Asian. In late 1997, the American crisis-experts pronounced that this debate was now over. Some denied there had ever been an Asian Model. Some argued that the model had always been flawed. Some held both positions at the same time. The way out of the crisis was taken to be self-evident: Asian capitalism must become like American capitalism, or be bought over by it.

But recently Asian (and Asianist) economists have begun to recover from their shell-shock. There was an Asian Model, they reassert. It did lie behind the great economic success story of the late twentieth century. And it might help to see beyond the crisis if we examined why the Asian Model went wrong, rather than blaming it for everything.

Asian Model. The Asian Model was not the same everywhere. Different countries had their own histories, cultures and resource bases. But there were some strong common themes.

The first bit of the model was not really Asian at all. The disadvantage for late-comers is competing against more advanced economies. The advantage is the chance to borrow technology rather than having to invent it. The European countries which played catch-up with Britain in the nineteenth century copied Britain’s strategies (colonies) and borrowed its technologies (railways). Twentieth-century Asian catch-ups have done exactly the same thing.

Second, governments took a strong role in directing economic development, by identifying growth areas; guiding firms through incentives, subsidies and cheap finance; protecting them from competition by informal and formal means; bailing them out of trouble; but also demanding that they perform exceptionally well to merit all this coddling. This became known as the ‘developmental state’.

Third, banks played the main role in mobilising capital and channelling it into industry. And fourth, the basic business units were family firms or vastly expanded versions like the Korean chaebol. The monarchs of these little kingdoms had the power to take fast decisions to react to the market, and also the power to forego profit while the firm built size and market share.

The best example of this model was Korea. Others varied a lot. In Thailand, the government had less of a role. The banks took the initiative in channelling capital to promising sectors, and then persuaded government to help with subsidies and protection. The route was different. The destination was much the same.

In the enthusiasm to write off Asia in late 1997, this model was blamed for the crisis. Government attempts to direct the economy had resulted in bad investments and over-production. Financing through banks had made economies vulnerable to financial panic. Family-based firms were inefficient. Bureaucrat-business links were always cronyist. Greenspan, Rubin, The Economist and Paul Krugman pronounced that the crisis was "punishment for Asian sins".

Korean re-think. In recent months, some Korean experts (especially Ha-joon Chang) have reacted. The Korean version of the Asian Model, they argue, delivered three decades of rapid growth. No developing economy which has followed an ‘American Model’ can match this record. The crisis has struck not because the Korean approach was wrong, but because it was abandoned.

In the early 1990s, under World Bank influence, a new government scrapped the planning machinery and liberalised the capital market. Suddenly with lots of cheap money and without the disciplining influence of government, lots of Korean companies began investing in the same things. It was as if the members of a disciplined motorcycle formation riding team were all suddenly bribed to break ranks, open up their accelerators, and race towards the same target. The result: crash.

Two western Korea-watchers have argued that reliance on bank debt worked better than an American model of financing through stocks. Stockmarkets take a long time to evolve and only work well in quite sophisticated societies. Transplanted into developing countries, they function like casinos and do a spectacularly bad job of channelling investments to the right sectors (consider the Thai example). Asian Model countries had high rates of savings. Banks were very efficient at converting these high savings into high levels of industrial investment. Banks were also more patient than stockholders about allowing time for catch-up companies to build their competitiveness. Companies were highly leveraged, but the result was rapid growth. Again the system came unstuck because of financial liberalisation.

Past history. But so what if the Asian model did work once and cannot be blamed for the crisis? Does it matter a hoot when so much of Asian capitalism is being trashed? Maybe the Asian model had run out of time.

Several contributors to an Australian conference on "From miracle to meltdown: the end of Asian capitalism?" argue that the Asian Model existed under an international umbrella which has now disappeared. The two key struts of that umbrella were the Bretton Woods system and the Cold War.

During the Cold War, the US patronised developing capitalist economies, particularly successful ones which were living proof of the superiority of capitalism over communism. The US was not very interested in how these countries managed their economies, even if their governments interfered too much and even restricted foreign investment.

But since communism has ceased to be a threat, US sensitivities have changed. American firms want easier access to these (once) dynamic economies. The US government spearheads moves to break down barriers to trade and finance. US corporate leaders, economists and technocrats line up behind liberal-extremist support for free markets.

The Asian Model is no longer the showpiece of capitalism in the developing world, but is directly at odds with the ideology and interests of the dominant world power. In addition, the Asian Model has proved vulnerable to the speculative financial flows that have multiplied since the collapse of the Bretton Woods system.

Other participants in the Australian conference point out that the Asian Model was undermined from inside. The developmental state worked best when run by dictators. But over the past two decades, many Asian dictators have been replaced by more democratic regimes. Businessmen excluded from the bureaucrat-business coalitions of the developmental state have pushed for liberalisation of economic policy and for greater transparency in politics. In Korea, they changed the banking laws to expose the political links of the chaebols, put old dictators and technocrats on trial for corruption, and demanded government stop coddling the chaebols. In Thailand, the post-1992 Democrat government pushed for financial liberalisation.

Under these conditions, isn’t the Asian Model now just a historical curiosity?

Rescue. Maybe not. The Asian economists who are trying to rescue the model from universal condemnation want to make a particular point. The Asian Model worked in the past because it helped to minimise the disadvantages and maximise the advantages of a catch-up economy. American-style capitalism may work very well for the leading economy in the world, but it may not suit countries in very different situations.

According to fans of the US model, free markets and competition build a better capitalism by the laws of survival. And stock-financed companies with shareholder accountability are more efficient than the cosy networks of bankers, planners, and entrepreneurs.

But is this really so – in practice, rather than in theory? The free-market model makes a lot of sense for leading-edge economies which need to grow by innovation. Entrepreneurs are encouraged to experiment, and the market weeds out the failures. The wastage is high, but without the incentive to experiment and court failure, there would be no successes and no growth.

But for catch-up countries, is the model so relevant? They have the luxury of learning from others’ mistakes and copying their successes. And they face shortages of capital, human talent, and other resources. It may make sense to eliminate some of the wastage incurred by open competition. It may be important to build some insulation against the business cycle to allow time for new companies to grow into world-class competitors. Governments may be able to accelerate growth by restructuring comparative advantage.

Also resurrecting the Asian model points to the value of pragmatism in economic policy-making. It’s obvious that too much state protection – particularly the creation of comfortable monopolies – is ultimately counter-productive. But equally, liberalising too fast may be just as risky. In country after country the record has been drearily similar: crashes have followed liberalisation like thunder after lightning.

Japan and the future. As the Asian economies crumbled last year, the US seemed in control. Many US businessmen and pundits rejoiced that the crisis and the IMF bailout would enable US firms to expand in Asia. But now observers from all sides of the political spectrum agree that the US badly misjudged the crisis and that the IMF austerity programmes made things worse. US investors are staying away in droves.

Many in the region now look wistfully back to last November when the Japanese proposed to lead an Asian bailout scheme, which the US squashed. Observers have begun to wonder when the Japanese will decide to use their huge reserves to sort out their own Asian backyard, rather than helping inflate the value of the dollar. Obuchi who proposed the Asian bailout scheme last year is now prime minister. Japan is in many ways the origin of the Asian Model and still its enthusiastic patron. Last week a leading Japanese professor turned up in Bangkok to argue that the Asian Model needed adjusting for a more democratic era, but should not be abandoned. These things do not happen by chance.

Also, as participants in the Australian conference point out, two important forces which shaped the original Asian Model were a nationalistic push for economic growth, and a strong but unsophisticated entrepreneurial drive. These forces have not disappeared. Indeed, the aggressive attack on Asian capitalism over the past year has tended to sharpen nationalistic feelings. The continued flight of western capital has focused Asian leaders on local solutions. In late 1997, international bankers seemed confident that stricken countries would be prised open, made safe for international capital, and then restarted with international inflows. But few now have any faith in this script. In Thailand, the first four phases of the IMF programme followed the liberalisation model. But over the last month, the direction has dramatically changed. We now have a lukewarm Keynesianism fiscal policy, semi-nationalisation of the financial industry, and a return to government planning in industry and agriculture. More intervention, not less. Similarly in Korea, efforts to manage the crisis are driving the bankers, politicians and businessmen back towards old alliances.

In sum, the old form of the Asian Model may have been battered out of existence by the crisis and IMF reforms. And it may be inappropriate anyway in the new setting of international and domestic politics. But equally, it is becoming less likely that it will be replaced by the American dream of free markets, non-interventionist governments, and stockholder capitalism. The result will be much more of a compromise. The exact form of that compromise is difficult to see. Much depends on the balance between US and Japanese roles in the region over the coming year. And much depends on what remains of Asian capital after the inferno of the next few months.

But don’t bury the Asian Model yet. It still has more relevance for the region than its enemies would like to admit.