Solving Asia's Problems

December 3, 1997

International capital markets have taken on something of an "upright Dad" role. They are telling some Asian nations to be more honest and open in their financial and political affairs. "Straighten out, lads," the investors are saying.

"Perhaps the biggest failure in Southeast Asia," writes Standard and Poor's DRI economist Nariman Behravesh, "has been the inability to develop the transparent and democratic public institutions necessary for sophisticated societies.

"Informal and personal ways of doing business and governing predominate [in] the region," he continues, "cronyism and favoritism thwart the development of an entrepreneurial class and encourage corruption. .... [which reduced] tax revenues, thwarted privatization and market reform, and undermined the effectiveness of public institutions."

Indonesia's economy is hampered by the business dealings of President Suharto's family; Thailand's by corruption; Malaysia's and Singapore's by limits on political opposition. In Japan and South Korea, financial institutions have been allowed to hide assets in good times and losses in bad times. With each failure of a bank or brokerage house, new loan losses come to light.

International markets eventually detect such financial imperfections. And so the trouble quickly spread.

The panicky reaction wasn't entirely fair. Weaknesses weren't so great as to justify each attack on markets and currencies. Spared overwrought fear of a domino effect, some nations might have found solutions over time.

As it is, the International Monetary Fund is forcing reforms on Korea, Indonesia, Thailand, and the Philippines as a condition for rescue loans.

IMF programs are not popular. They often involve higher interest rates, economic slowdowns, and unemployment. They may also hit privileged regime supporters. And the discipline comes from an organization controlled by Western nations.

Many Asians see Western capitalism being pushed on them. That's one reason the idea of an Asia Fund to assist in financial crises has become popular. Politicians want to feel more in control of their nations' economic fates.

Certainly there should be room for variations in free-enterprise democracies: more or less centralization, more or less welfare-orientation.

But it is increasingly recognized that honesty and openness help an economy. Patronage, nepotism, and hidden self-dealing are damaging. Individuals must feel the system is fair, giving all citizens, not just a limited elite, a sense of economic opportunity.

The idea that an authoritarian regime is necessary for fast growth now "rings hollow," notes Mr. Behravesh. "The most authoritarian governments in the region have shown a penchant for corruption and statism that has led to a reluctance to tackle the structural problems...."

What has stimulated growth in Asia is a dramatic increase in education levels, a high savings rate encouraging high levels of investment, low taxation, a youthful labor force, and more women in the labor force.

What is needed is political will to strengthen fragile financial systems, greater emphasis on competitiveness and productivity, and, above all, more honesty and fairness in the system.