Probing E. Asian crises in-depth

By Christopher Lingle

UBUD, Bali (JP): Explanations abound as to what pattern of events led up to the Asian crises that began in July 1997. Most of them come from Monday morning quarterbacks who were not able to see what was coming and pretend that no one else could either. Hubert Neiss's remarks that appeared recently on these pages (The Asia Crisis in Perspective 10 April 1999) fall into this category.

It should be interesting to consider why economic turmoil in the region was not better anticipated. There was no conspiracy of silence; however, there was a pattern of slinking away from the truth and some basic ignorance.

It is wrong and self-serving of those who were unable to see the crises coming to suggest that no one did. There were many people who expressed skepticism about the sustainability of East Asia's "miracle" economies.

David Roche of Independent Strategy in London consistently waved red flags that others chose to ignore. Perhaps most famously was Paul Krugman's demurral that the party would not last. But he was right for the wrong reasons.

My recent book, The Rise and Decline of the Asian Century, was written and published well before the beginning of the crises. Therein I examined inherent weaknesses in the institutional arrangements behind East Asia's economies. The signs were so clear to me that I was able to explain to my students the arguments within the first few weeks of an introductory course in economics both before and after the "ship hit the sand".

While some Asia observers had little grasp of the economic fundamentals behind the operations of markets, still others suffered from conflicts of interests that kept them from offering honest appraisal. Rating agencies were of little help. As in the case of the Mexican peso crisis, their warnings lag behind newspaper reports that are themselves both tardy and too often uncritical. For example, Moody's belatedly downgraded the sovereign debt of Indonesia, South Korea and Thailand to "junk" status only in the last weeks of 1997 or in early 1998.

Journalists provided little better information. In fairness, few have the training to sniff out theoretical or practical inconsistencies in economic policies. And custom or legal restraints thwart even those with the ability or an inclination to ask the sort of tough questions that might reveal such disharmonies.

One problem is that many Asian countries require questions for press conferences be submitted in advance. In other countries press restrictions or rough handling of "uncooperative" journalists ranges from assassination to blatant censorship or limitation of circulation of periodicals and expulsion.

Local media often face similar or even heavier constraints so that a lower level of investigative initiative is unsurprising. Social conventions can also lead to restrained snooping. For example, noisy foreign journalists uncovered most of Japan's big political scandals while local coverage followed presentation in the international press. What is puzzling now is that many journalists continue to rely upon the same market analysts and Asia "experts" who did not tip them off to what lay ahead.

Foreign diplomats assigned to the region or visiting politicians are apparently congenitally incapable of criticism or to offer challenges to conventional wisdom. A similar problem seems to afflict international bureaucrats such as from the ADB, IMF and World Bank. It is a scandal that none of the so-called experts who were so far off-the-mark had the dignity to resign and none were sacked.

Many people assigned to assess the region's economies bought into the idea that an "Asian model" exited and represented a third way between free-market capitalism and socialism. Consequently, they were incapable of seeing the rot beneath the surface arising from fatal contradictions with the demands of the global economy.

Then there were the investment houses and brokers who were mostly mute or were irredeemably bullish on East Asia, especially those trying to sell the junk paper offered by many of the regimes. Many of these relied upon misleading macroeconomic models and an understanding of growth that incorrectly characterized operations of the global market economy. In short, these models implied stability in the interaction of economic variables that does not exist.

There was also a characteristic lack of independent analysis among the region's academics that was combined with weak political oppositions. The tendency for persistent dominance of a political party that often led to single-party states meant that parliamentary challenges were unheard of and inquiries into potential economic disorder were few and uncritical.

Behind much of the unwillingness to see was an abiding belief that political connections were sufficient to insure profitability. At the same time, there was a presumption that authoritarian regimes are inherently stable and that they contribute to economic growth. Based on these myths, political risks were underestimated and financial risk was assumed away since political support meant that losses could be passed on to taxpayers.

The simple explanation for the end of East Asia's "miracle" lies in the incompatibility of their political and commercial institutions with an increasingly efficient global capital market. While these arrangements worked under other conditions, they were too rigid to allow for a flexible response to the external competitive shocks that visited their shores. In particular, the domestic financial markets were heavily politicized to allow for market-based direction of investment funds. Therefore, there was a great deal of misdirected investment that contributed to banking and currency crises throughout the region.

East Asia's economies exhibited a series of flaws that led to avoidable turmoil. Unfortunately, there were few rewards for telling the truth, and punishments were often outsized for those who were willing to be critical.

It remains to be seen if any lessons have been learned.

The writer is an independent corporate consultant and adjunct scholar of the Centre for Independent Studies in Sydney who authored The Rise and Decline of the Asian Century (Hong Kong: Asia 2000, 1998).