East Asian economies will be more like US's

[Louis Proyect <lnp3@xxxxxxxxxxxx>]

[Note that this interesting NY Times article names the system "capitalism."
This is some kind of first. LP]

January 17, 1998

Crisis Pushing Asian Capitalism Closer to U.S.-Style Free Market

By NICHOLAS D. KRISTOF

SEOUL, South Korea -- Sitting in his office just off the factory floor, a
week's stubble on his face and weariness in his eyes, Kim Jung-ju eyes his
workers carefully, figuring out whom he might lay off next.

"Now the bottom line is everything," Kim says mournfully, and he complains
that the relationships that were the underpinning of capitalism are dying
quickly. "Before, companies that had done business with us for a decade
would help us out in times of trouble. But no more."

So the customers of Kim's clothing factory are breaking the rules of the
game by squeezing him and curbing orders. And he reacts by breaking the
rules again and laying off one-third of his 130 employees.

That is the harsh reality of free-market capitalism, and it might be
unremarkable in the United States. But this is Asia, where in the past some
nations followed a different economic model, emphasizing not markets but
government planning and long-term relationships.

That version of capitalism, particularly the variety developed by Japan and
adopted by South Korea, is now widely regarded as a problem rather than a
solution. For the present at least, the Asian financial crisis is driving
governments and businesses alike toward a more Adam Smith, market-oriented
version of capitalism.

While many aspects of East Asia's community ethos will remain, Asian
officials and scholars suggest that the region's economies may emerge from
the financial crisis looking a bit more like the American economy.

"Everybody has been liberating markets to take advantage of globalization
and the world economy," said Jusuf Wanandi, chairman of a policy research
center in Jakarta, Indonesia. "So we are all moving more to the American
model."

Still, as Wanandi noted, this does not mean that Asian countries will adopt
the American model outright. Many Asians are still not on friendly terms
with the market forces that over the last few months have demolished their
currencies and stock markets.

While the changes under way seem breathtaking to a laid-off Korean worker,
they still leave the region looking -- to Western eyes -- far more Asian
than American. Western commentators have been saying for generations that
Asians are becoming "more like us," and while in one sense they were right,
that does not mean that convergence lies ahead.

In any case, the change in the mood in Asia is striking because
Japanese-style capitalism was perhaps the most formidable rival to classic
free-market capitalism as a model for other countries. Japanese government
officials vigorously urged other Asian nations to adopt the Japanese
approach to capitalism, even sponsoring a 1993 World Bank report that was
supposed to give the Japanese methods the seal of legitimacy. The report
did not quite do that, but it was not as critical of state intervention as
an earlier World Bank report that Japan had criticized.

To be sure, Asia as a whole never adopted a single economic model. Hong
Kong was traditionally a paragon of laissez-faire capitalism. On the other
hand, Japan and South Korea relied on a very similar system of industrial
planning, huge inter-linked conglomerates, lifetime jobs in big companies,
export assistance and protected domestic industries.

Taiwan, Singapore, Indonesia and Malaysia were somewhere in-between, but
all borrowed in part from the Japanese development model. Bureaucrats in
all those countries sometimes seemed to think that they were better at
allocating capital and goods than markets were.

"How can you go hunting without a target?" Naohiro Amaya, the late former
top Japanese trade official and leading theorist of the Japanese model, was
quoted as saying in 1988. "When you go hunting, you have to shoot at a
target. But your neoclassical school of economics says you can fire in all
directions at once and the 'market' will insure you hit the target. Well,
we don't accept that line of reasoning, and our economic model will
probably be stronger in the future, and have a greater demonstration effect
for developing countries, than either the American model, which has become
weak and less relevant, or the Soviet central-command model."

The wheel may turn again, but for now there are no more boasts about the
superiority of the Japanese-Korean model.

"Other Asian markets should take note and move their economies more in the
direction of free market logic and away from government and bureaucratic
intervention and centralized monopolistic industrial power blocs," warned
the Chosun Ilbo, South Korea's leading newspaper. "If Asians have been
arrogant, soaked in snobbish and boastful attitudes, then now is the time
to realize their limitations and show a degree of humility and repentance."

These days, both Japan and Korea are trying to dismantle regulations and
bureaucratic controls over the economy. "Economies are all going the
American way, and that's a major trend today," Makoto Kuroda, a former top
Japanese trade official and managing director of Mitsubishi Corp., said of
the economy.

Some Trends Were Already in Works

     till, Kuroda noted that there are countercurrents as well, and in
any case the trend away from bureaucratic intervention is not a
completely new one.

In Japan, the government has been steadily losing its ability to manipulate
the economy, and layoffs have become more common in the last few years.
Regulation is diminishing, and imports have risen, and the same trends have
been visible in South Korea and some other Asian countries as well.

The Asian financial crisis has dramatically accelerated this process. While
Asia has had crises in the past, like the oil crisis of 1973-74, that were
in some ways more severe than the present one, those were external shocks.
In contrast, this crisis seems more of a collapse from within, especially
with Japan's long stagnation since 1990, and as a result the problems raise
fundamental questions about whether a new strategy is necessary.

"The model is now clear," said Lee Hong-koo, a member of the South Korean
National Assembly and a former prime minister. "It's not Japan. It's the
West."

"The current crisis has convinced almost all people that that the old style
doesn't work," Lee added. "We will adjust ourselves rapidly to the new
requirements, which means we will fashion ourselves more like the West,
like the U.S. and European model."

Lee and others emphasize that they do not see the collapse of their
development strategy as a defeat for Asia. On the contrary, they hope that
freer markets may give the region a new dynamism.

"If we faithfully implement the reforms we agreed on with the IMF, we will
emerge with a stronger economic foundation, and we will be poised to
overtake Japan," said You Jong-keun, a top economic adviser to
President-elect Kim Dae-jung.

Several Changes Are Predicted

   n the real world, a shift to a new model is never quite so clear-cut a
 transition as it sounds, but in general the changes that diplomats and
business executives are talking about are these:

-- Governments may control economies less than before. The Finance Ministry
in Korea no longer tells the banks whom to lend to, and the Finance
Ministry in Japan has lost its capacity to determine the fate of banks and
securities houses. As a result, despite official Japanese assurances that
no big bank would be allowed to fail, one did in the fall.

-- Labor markets may become a bit more flexible, and unemployment rates
will rise. Lifetime employment and rigid seniority systems will tend to
become less important, and layoffs will increase. This has been happening
for years but will accelerate. South Korea's unemployment rate is expected
to quadruple this year to 10 percent.

-- Relationships in general may tend to become less important. The system
of linked companies, called keiretsu in Japan and chaebol in South Korea,
doing business with one another on the basis of loyalty rather than price,
may gradually give way to a somewhat more open system. Already, business
groups in both countries are for the first time allowing affiliates to
collapse, and Asia's great home-grown champion of relationship finance,
Peregrine Securities in Hong Kong, collapsed this month.

-- Companies may make less effort to build market share and more effort to
make money. Japanese banks and South Korean chaebol alike are being ordered
to disclose more accurate and useful financial information, and everyone is
paying more attention to credit-worthiness.

Transition Apparent in Seoul Already

     hese changes are matters of degree, and even modest change will
take time. But in Chung Youn-goo's small clothing factory in      Seoul,
the transition is already apparent. Chung has laid off a third of his work
force, rather than keep them on in hopes for a rebound, as he would have
done in the old days, and he is now scrutinizing data as much as
cultivating relationships.

"Our methods of doing business have changed a lot," Chung said as he sat at
a small table near the factory floor. "We put a lot more emphasis on making
sure that we have confidence in the companies we deal with. For companies
listed on the stock exchange, for example, we conduct a thorough review of
their financial standing, because now even the big companies can go belly
up very quickly.

The crisis is so recent that the changes in the way of doing business are
tentative, and many still have not fully taken effect. But in South Korea,
for instance, the chaebol have been forced to accept substantial changes by
the markets and by President-elect Kim, who unlike other recent presidents
owes the chaebol nothing.

On Thursday, the chaebol jointly promised to adopt Western accounting
standards, to bring outsiders into their boards of directors and to reduce
the cross-guarantees that subsidiaries make to honor one another's debts.
They also pledged to reduce their debt-equity ratios so that they would be
closer to Western standards.

These measures are important because the top 30 chaebol account for nearly
two-thirds of South Korea's economic output. That ratio was the result of
preferential treatment -- the government ordered banks to lend to the
chaebol, for instance -- and it is expected to drop as South Korea becomes
more market-oriented.

To be sure, while executives find themselves forced to embrace the market,
that is not to say they find it a pretty sight. Dong Hwa International, a
trading company, did some deals with the United States a few years ago, and
its executives were angered when the American company promptly cut costs by
directly contacting the Korean end company, bypassing Dong Hwa completely.

That was shrewd but unethical, Dong Hwa executives say. Still, they see
such moves as the way of the future.

"I think the Korean economy will look more like America's, because all
parties here are trying to cut costs, cutting out third parties, cutting
out middlemen," lamented Kim Jin-hyung, an executive of Dong Hwa.

Resembling America Only a Bit More

     et Asia is not suddenly going to look like America. Young
Japanese, Taiwanese, Koreans, Chinese and Thais already wear      Western
clothes, eat American hamburgers and pizza, enjoy baseball or basketball,
watch American movies and listen to American music. Within a few years,
they are much more likely also to face the risk of layoffs, and to rotate
jobs with American-style casualness.

All this will make Asia's labor markets, finance and industry resemble
America's a bit more, but Americans do not become more group-oriented or
respectful of their parents when they put on a Sony Walkman.

Japan is still the country that is most hesitant about rapid change toward
a more market-driven system, with Japanese wary of the brutality of market
mechanisms. The old system protected a way of life that is often
inefficient -- with the tiny rice shops and futon-makers that charge
ludicrous prices and with lifetime employment for workers of big companies
-- but that is also central to the ethos of Japan. A more efficient,
market-driven system may mean better prices and more supermarkets, but the
fear is that it will also lead to alienation, crime and an end to the
civility that is the most outstanding feature of daily Japanese life.

The result is a profound ambivalence that has Japan tip-toeing toward a
freer market system but still aghast at the layoffs and turbulence that a
radical economic restructuring will require.

"Markets are riddled with defects," the Yomiuri Shimbun, the largest
circulation newspaper in Japan, complained in an editorial. "Markets widen
the rich-poor gap and raise unemployment, putting the nation's entire
social fabric at risk."

Yet the newspaper accepted that there is no alternative to markets,
declaring, just a bit sadly, that "the move toward markets has reached the
point of no return."

Copyright 1998 The New York Times Company