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.