A valuable look into what zapped Asia's 'miracle'

The Years of Living Dangerously: Asia-From Financial Crisis to the New Millennium; By Stephen Vines; Orion Business Books, London, 1999; 276 pages + xii

SYDNEY (JP): Readers who have filled their bookshelves in search of a work to help to make sense out of the Asian financial crisis should throw most or all of the others away to make room for this one. But this is not a book that should only take up shelf space.

Steve Vines' new book merits reading from cover-to-cover.

While it is the most thorough and thoughtful attempt at explaining the origins and the consequences of the crisis, he also expends considerable effort to offer insights into the future of the Asian economies. Another of the author's contributions is to provide a well-informed discussion about the globalization process. And this admirable package is offered up with congenial wit and a well-honed sense of irony.

Judging from the continued flow of blather and nonsense by other so-called experts and analysts, there has been little to learn from earlier offerings on this theme. At last, Vines' offers compelling answers to complex questions that are accessible to the nonspecialist but without being condescending to professionals. This is accomplished by a real talent for converting data and theory from highly technical sources into a digestible form.

At the same time, he lightens the reader's burden by providing personal insights drawn from many years of experience in Asia as a journalist and businessman. Unlike professional economists whose explanation of an arcane concept like "total factor productivity" would put the reader into a deep sleep, Vines offers clear definitions that are folded seamlessly into his discussion.

In a highly personalized manner, he identifies pundits and professionals who were blind to the underlying faults that brought an end to the "Miracle" phase of East Asian growth and holds them accountable for their errors and omissions of logic and theory. Indeed, I found the first part of the book gratifying in that he echoed many of the views expressed in my own book that predated the crisis (The Rise and Decline of the Asian Century, Barcelona: Edicions Sirocco, 1997.)

Vines makes a strong case that his understanding of the Asian economies from the ground floor level served him better than those whose views were formed in the rarefied atmosphere of financial and corporate boardrooms, or in the inner sanctum occupied by high-ranking public officials. In its simplest form, his message is that the financial crisis was the outcome of weaknesses in management practices and corporate governance that were apparent to anyone choosing to see them. He also points to high crimes and misdemeanors committed in the area of political governance that helped undo hard won gains throughout the region.

From a macro perspective of the overall economy, he applies this consistent theme to put to rest many of the simplistic explanations for the "Miracle" performance of Asia's high-growth economies. Among many cited by him are the dubious merits of cronyism as a substitute for sound business practices, that corruption is benign or beneficial, that a contrived set of "Asian values" was the basis for growth and that authoritarianism was superior to democracy in delivering rapid economic advance. At the same time, he points out that stable macroeconomic conditions (sound public-sector fiscal policy with budget surpluses for many governments, sound currencies with steady exchange rates and high saving rates) were not enough to protect these countries from what were initially relatively small external shocks.

From a micro perspective at the enterprise level, he offers evidence of the faulty management practices of Asian enterprises. The dominant model of family-owned firms are shown to lack durability or innovation or global reach. Most of these weaknesses are said to arise from distorted incentives from either internal practices (nepotism as the rule for management selection), but are also reinforced by cultural conditions (the influence of "face" saving in operations and decisions) or from the overall commercial setting (flaws in the system of capital funding).

Perhaps the most obvious signal of the unsustainability of East Asia's boom was the long period of profitless growth experienced by many of the "Miracle" economies. The early and mid-1990s were marked by declining profitability whereby the interest costs of many enterprises began to exceed their profits. Herein lies the tragedy of the declines in prosperity that were experienced in the aftermath of July 1997 from levels that were partly illusionary and simply unsustainable.

Many of his insights rely upon his clear exposition on why it is important to distinguish between the financial and real sectors of an economy. This provides the reader with a better understanding of the nature of the speculative "bubbles" that afflicted many of the East Asian economies. Indeed, it was the underdeveloped state of the domestic capital markets that allowed lending to occur without the sort of commercial and financial risk analysis that might have eliminated much of the misallocation of investment funds.

The reader of this review should be advised that Vines' analysis is much more than a batch of incautious generalizations about East Asia that might be offered elsewhere. Instead, he provides a perceptive examination of the political economy for each of the countries in the region. These views are supported by an impressive array of references that offer readers a road map to sources that provide greater detail or more technical rigor.

While he is what might be considered to be cautiously pessimistic about the (perhaps misleading) impression of recovery for the region, he is not Pollyannaish. Discussions in the final chapter recognize continued obstacles for a believable and sustained recovery (the heavy burden of debt rescheduling) while giving gracious acknowledgement of improvements where credit is due (closures, privatization and consolidations).

There is also a menu of reforms to be undertaken that recognize the necessity of modernizing business practices, and for a policy formula by governments that provides incentives for entrepreneurs to serve as the basis of economic growth and wealth creation for their communities. One of the most crucial is that governments create financial mechanisms, regulations and tax structures that encourage the birth and survival of small and medium-sized enterprises in response to competitive market forces.

And what about the faults of this book? This reviewer found surprisingly few. Besides an annoying habit of splitting infinitives (a sin too often committed by too many journalists) and some personal disagreements on interpretation of events, any reader who gives this book the careful scrutiny that it deserves will find substantial reward in the wealth of information and opinion that it offers.

-- Christopher Lingle

The reviewer, an independent corporate consultant and adjunct scholar of the Centre for Independent Studies in Sydney, authored The Rise and Decline of the Asian Century. His e-mail address is: CLINGLE@ufm.edu.gt.