Compliant judiciary and other causes of Asia's economic crisis
Compliant judiciary and other causes of Asia's economic crisis
By Christopher Lingle
UBUD, Bali (JP): Amid the uproar over the sentencing of former
deputy prime minister of Malaysia Anwar Ibrahim, did someone say,
"compliant judiciary"?
Observers, ranging from President Joseph Estrada of the
Philippines to various bar associations and human rights groups,
have expressed concern that the judgment was tainted by political
influence.
A few years back, I tried to expose the costs of the lack of
judicial independence in East Asia. My thesis was that this flaw,
combined with other institutionalized weaknesses, would lead to
the undoing of the "miracle" performance of East Asia's
economies.
My initial comments on these matters, published as an opinion
article in the International Herald Tribune (The Smoke over Parts
of Asia Obscures Some Profound Concerns, Oct. 7, 1994), were
interpreted by the government of Singapore to be an attack on it.
Its ire was raised by my suggestion that some regimes in East
Asia "relied upon a compliant judiciary to bankrupt opposition
politicians".
Although I mentioned no country or individual by name,
criminal charges of scandalizing Singapore's judiciary were
brought against me. Government prosecutors insisted that I was
speaking of Singapore by presenting evidence of at least 11
opposition politicians having been sued by members of the ruling
party, many of whom were bankrupted. Their remarkable strategy
was to prove I was telling the truth in order to find me guilty.
I identified the shortcomings of the institutional
arrangements associated with the "Asian development model" in
greater detail later in my book, Singapore's Authoritarian
Capitalism (1996), and then The Rise and Decline of the Asian
Century (1997).
Unfortunately, not so long after my prognosis was in print,
the worst-case scenario came true in the form of crises sweeping
the region after the Thai baht was devalued in July 1997.
What I saw as the weak link was the underlying political
culture behind the institutions within which the East Asian
economies tried to engage the global economy. This institutional
infrastructure generated a set of flawed incentives wherein
economic decisions were made.
However, these institutions sent misguided signals, whereby
actions appearing to be "rational" when judged by internal
conditions proved to be irrational and inefficient when compared
to changing or external standards. Meanwhile, most people were
mesmerized by East Asia's high growth rates and did not see these
problems.
My view is that the crises were self-inflicted, reflecting a
general failure of governance. In a nutshell, the turmoil arose
from systematic politicization of domestic financial markets.
Policies of directed-development were followed in most of the
countries in the region.
As such, most investments for development were directed
through banks while domestic capital markets were suppressed.
So, global capital flows were not the cause of the crises.
They merely transmitted the message that the institutional
framework of the East Asian economies was not compatible with the
demands of the international marketplace. Overall conditions of
global competition changed the rules of the game. Political and
economic institutions once thought to help promote growth in the
region began to serve as a drag.
East Asia's problems are deep-seated and arise from elements
of their respective political cultures and similar development
policies. As such, resolution of the crises requires radical
changes, including introduction of greater political and
corporate accountability coupled with increased financial
transparency.
Therefore, recovery from the crises involves a long-term,
structural adjustment. These problems require restoration of
confidence in Asia's economic future. The return of foreign
capital will depend upon reforming or abandoning political and
social institutions that may require decades or even generations.
Global capital flows have become the vanguard of a new
revolution. It has undermined despotism, revealed the
unsustainability of corruption and has forced change in policies
that have curtailed domestic competition. A key to understanding
this process is that capital is no longer to a specific national
base. A world without national capital is one where attempts to
control or restrain capital will cause it to migrate. However, it
is important to note that financiers and bankers do not control
capital markets. Capital migration reflects the will of many,
small individual savers in all countries who require their funds
be placed prudentially so that risks are balanced against
returns.
Although there will be substantial adjustment costs, the
future will be marked by rounds of vigorous institutional
competition leading to the discovery of arrangements that best
attract capital. This "race to the top" will mean that countries
most attractive to capital owners will be rewarded with the
highest rates of economic growth and job creation.
It remains my considered opinion that the region's economies
will suffer from slow growth and recession until the social and
political institutions are sufficiently modernized to accommodate
globalization.
In particular, there must be legal protection for foreign
capital that can be guaranteed by a system of law overseen by
independent judges. Developments in Malaysia provide little
comfort or reassurance that these changes will come quickly.
The writer is an independent corporate consultant and adjunct
scholar of the Center for Independent Studies in Sydney,
Australia.