Weak Asian tiger ends West's easy takings

Weak Asian tiger ends West's easy takings

By Martin Woollacott

LONDON: Rioters in Bandung smash the windows of Chinese stores, while in Saigon thousands watch the execution of businessmen charged with corruption. In Seoul foreigners fly in to buy, or buy into, whole firms that a few months ago they could only have dreamed of purchasing. In Tokyo, Japanese banks admit they have debts three times larger than previously admitted. As the Asian disease spreads, no wonder the Situation Room at the White House, normally used for meetings on the missile threat from Iraq or NATO expansion, has become a forum for discussions of liquidity, loan exposure, and bail-outs.

The world economic crisis has a dangerous symmetry. The solutions being sought to it could undermine both Asia's and the West's systems of work, welfare and social provision. This goes beyond the more general threat of a world recession. In East Asia, the welfare of ordinary people is assured by economic systems in which most benefits are delivered by firms. These can be big companies -- state owned in China, private in Japan and South Korea -- which provide not only employment but many other forms of support. Or they can be small firms, protected by various barriers from competition whether domestic or foreign, like the corner shops of Japan. In South East Asia, in an inefficient and undoubtedly corrupt way, structures of patronage are also designed so that work and benefits are distributed to some extent among common folk.

In the West, most countries have systems in which the wellbeing of the population is secured by a combination of state action and that of companies ready to carry some social costs, but these systems are more and more underpinned by private provision, particularly for pensions and terminal health problems, based on investments. Many of these investments, to deliver the high returns needed to finance the high pay-outs promised, go to emerging markets, and in recent years very much to Asia. Tony Blair's new government in Britain, for example, is proposing to make changes which, in order to concentrate state resources on the seriously poor and disadvantaged, will, by implication, much enlarge a middle-class private welfare system based on high returns on often foreign investments.

Yet what are we doing now? Asian societies are being urged to take action -- have already taken it, in some cases -- which will lead to the dismissals of thousands of workers and the closure of many firms, while preventing the additional government spending that might succor the victims. Right wing American opinion condemns both "statist" and "crony capitalism" without accepting or understanding that these systems give work and other kinds of security to millions.

At the same time many firms may pass out of national into foreign ownership. You could not imagine a much better recipe for political trouble, which in turn makes it the more unlikely that, after a short period of cherry picking, Western banks and pension funds will ever again enjoy the returns to which insurance companies and pension funds had persuaded themselves they were entitled. That in turn will deliver a substantial blow to private welfare in the West.

In the last decade, three billion, mainly Asian, people have come into the global economy. The optimistic view was that this was a wonderful new wealth engine for the world of which the West could take full advantage. They would get much of the growth, while we would get a serious slice of the money, and some of this could be used to deal with the inevitable adjustments in Western economies as a number of our firms contracted or moved in the face of the competition.

The outcome has been different. There is huge overcapacity in the global economy which gives us, for example, a world automobile industry capable of producing 20 million more vehicles than there are likely customers. Manufacturing overcapacity was one of the reasons why so much recent Asian investment went into hotels, shopping malls, luxury housing and golf courses, predictably producing over-capacity in those areas as well.

Where could the money go to get the required returns? And, the most fundamental question of all, had we become addicted to rates of return that are not sustainable? Rates of return that could only be offered by ignoring environmental and social costs, by ignoring Asia's need for massive infrastructural and anti- pollution investments, by chasing cheap labor on a slash and burn basis, or, simply, by lying about the books?

The latest from Asian capitals is that the exchanges are steadying, and maybe the corner has been turned. Well, maybe. But there can be no going back to where we were before. The East-West symbiosis was based in part on false premises, and, even where it was not, we have damaged it probably beyond repair by the way in which we have tried to solve the crisis.

-- Guardian News Service