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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story


The region's financial crisis has cast doubts
on the Asian way of business and government.
An Asian roundtable ponders change

By Ricardo Saludo

"BAD LOANS TO GOOD friends." That is how Dave Kang, professor of government at Dartmouth College in New Hampshire, sums up one root cause of the Asian financial crisis. From bankrupt Hanbo Steel's founder Chung Tae Soo, sentenced to 15 years imprisonment for bribing bankers on the way to $6 billion in corporate debt, to Thai politicians unable to repay the now-defunct Bangkok Bank of Commerce, a string of oh-too-friendly deals between lenders and borrowers built the financial house of cards which famously collapsed into the Asian debacle. Caught up too in the merry-go-bust are corrupt bureaucrats, many now being hounded by zealous prosecutors - and, especially in Japan, finding escape through a continuing string of suicides.

While there are other factors behind the regional meltdown, like the vagaries of global money flows, the key players dealing with the crisis - reformist Asian leaders, the International Monetary Fund, powerful Western nations, banks, multinationals and investors - have zeroed in on entrenched practices and structures falling under a now-pejorative catch-all: The Asian Way of Doing Business. Leading the charge is the IMF's own prescriptions for recovery, which include a double-dose of transparency, good governance and economic liberalization. They are all intended to curb such ills as crony cartels, collusion between officials and businessmen, and unsound banks and companies hidden by faulty accounting and propped up by easy credit.

Not a week passes without some headline-grabbing attempt at reform. The Fund has insistently demanded an end to Indonesian monopolies. Korea and Thailand may prosecute former top finance officials for their dismal performance during the crisis. In Bangkok, governance and transparency have become ubiquitous buzzwords, while the decades-old gin muang ("feeding on the state") is falling out of favor. The new Bank of Thailand governor has told staff to get set for major restructuring of the institution. "The crisis has forced people to realize that some old systems do not work," says government spokesman and Democrat MP Akapol Sorasuchart. "There is a need to reform bureaucracy, education, finance and banking, to make things more transparent."

Structural change also marched forward last week in South Korea, where the five leading chaebol or business groups revealed details of their restructuring plans. Hyundai, for example, aims to raise $8.5 billion from the sale or spin-off of non-core units by 2002, and to focus on five main lines of business: construction, cars, heavy chemicals, electronics, finance and commercial services. President Kim Dae Jung's government is breathing down the necks of these behemoths. It has told them, among other directives, to slash their debt to less than twice their equity, and to dismantle the vast "Office of the Chairman" departments which lord it over chaebol enterprises even without controlling stakes in them.

In Indonesia, where the embattled Suharto regime faces mounting demands for political change, some top officials feel obliged to talk reform. Indonesian Justice Minister Muladi has no doubt about what's needed in his area of responsibility. Last month, barely a week into his term, the former university rector declared war on collusion. "The court is not a place of business, but the last resort of justice," he declared. "We realize judges' salaries are low, but who asked you to become civil servants in the first place?"

What structural reforms does Asia need, and how can it best go about them? What obstacles do reformers face, and what are their chances of success? In this special report, we make an initial stab at Asia's agenda for reform, with the aim of taking up the issue more intensively in future articles. For this current package of stories, we have drawn mainly from a roundtable conference on structural change in the region, sponsored by the Manila-based Asian Institute of Management's Washington SyCip Policy Forum and the Konrad Adenauer Foundation of Germany. This is the first publication of material from the conference, which will be more fully recounted in a book out next month.

Central to the issue of structural reform, which the conference quickly settled on, was the cosy relationship between government and business. For Maria Serena Diokno, director of the Third World Studies Center at the University of the Philippines, the key question was "how business locates itself vis-a-vis the state and civil society" (the latter refers to citizens' organizations that advocate human rights, poverty alleviation and other social causes). Diokno, a PhD from London's School of Oriental and African Studies, zeroed in on how business tended to get special favors from governments facing pressure from society and needing corporate support for its leadership and policies.

The Asian development model is itself based on the relationship between government and business, and state involvement in the economy is widespread. Policy Forum director Chito Salazar noted that this system, once "a pillar of growth," is now derided as the problem. He stressed that past policies which lead to cronyism were needed to erect whole industries from scratch, undertake monumental infrastructure projects, and mobilize mammoth capital resources for those building blocks of development.

If he were at the roundtable, Zafer Achi would have nodded in general agreement. The Lebanese-born Indonesia director of management consultancy Booz-Allen & Hamilton told Asiaweek that close government-business cooperation - some would say collusion - was a feature of nearly all economies aiming to develop fast after a period of social malaise.

"In the aftermath of decolonization, it was the most natural strategy," says the MBA from MIT's Sloan School of Management, who observes a similar pattern in Latin America and the newly capitalist economies of Eastern Europe. Not to mention 19th-century Britain and America, where crony deals and shady firms were widespread until the Crash of 1929 and the excesses of robber-baron industrialists provoked sweeping regulations and economic upheaval.

The Asian economic crisis, it's hoped, would spur the same housecleaning and basement-to-roof restructuring. How much of that actually happens seems to depend mainly on whether there is a change in national leadership. Having installed new heads of government since the crisis broke last July, South Korea and Thailand have gone a long way toward sweeping, if painful, change. They have shut dozens of insolvent lenders and cracked down on corruption. Under new Prime Minister Zhu Rongji, China has redoubled its resolve to reform state banks and industrial enterprises. But in Japan, Indonesia and Malaysia, where decades-old ruling parties remain entrenched, governments are strongly resisting the shutdown and radical restructuring of financial institutions, conglomerates and monopolies.

With much less foreign debt than other crisis-hit nations, Malaysia has been able to avoid many IMF structural reforms, like bank closures. Prime Minister Mahathir Mohamad's government has also used its control of cash-rich companies and investment trusts to shore up well-connected corporate giants like Renong, instead of letting financial troubles recast the business landscape. Merchant banker Nazir Razak is not one to speak harsh words about officialdom, which includes his older brother Najib as education minister. But he allows: "It is hard to reconcile different pronouncements of the government." Translation: Kuala Lumpur has yet to show clear commitment to structural change.

In the Manila conference, Loekman Soetrisno, a professor at Indonesia's Gadjah Mada University, described how official intransigence can stonewall reform. "To protect [politically connected] family businesses," he said, "the government will not tolerate any group that tries to change these conditions" of autocratic control and crony capitalism. "It believed it could do no wrong," he added, and even maintained "its own meaning for concepts like corruption and human rights, [which] constrained the flowering of ideas." What was worse, Soetrisno lamented, in the "scapegoating [which] was part of a national conspiracy to distract people from real problems," ethnic Chinese were blamed and targeted.

What complicates the problem of governments refusing to reform is their past success in leading Asian nations to prosperity. National University of Singapore professor Tan Chwee Huat discussed "the catalytic role of statutory boards in spearheading" development in the Lion City since the 1960s. Operating like long-term task forces, the boards have promoted economic growth, foreign investment, industry, science and technology, housing and urban renewal, and, in recent years, overseas ventures and even the privatization of statutory boards and state enterprises. Tan summed up the strategy: "The government provides the overall policies and directions. It lays the foundation with infrastructure. Government-linked companies spearhead the investment and invite private-sector participation."

While the Singapore Inc. approach succeeded in lifting domestic industry and living standards, its success overseas is less assured. Singaporeans, Tan said, "must be prepared to deal with situations they have not encountered in the home market." Indeed, industrialized East Asia, so used to state planning and support, faces a similar problem as growing foreign competition and the search for new markets make it imperative to deal with an unfamiliar, fast-changing world.

"Hopefully, with the close relationship between government and business investors, these problems can be overcome without much difficulty," ventured the professor. Yet for much of Asia, if not for Singapore, the paradigm of government-backed development may not be as effective in the challenge of global competition and rapid innovation, as it was in the earlier phase of sweat-shop, cut-price industrialization.

Now, of course, the regional economic crisis and the role played by cronyism, corruption and collusion have become more pressing reasons to rethink the Asian development model. But where exactly did it go wrong? At the structural change forum, Joel Rocamora, the Cornell-educated executive director of Manila's Institute for Popular Democracy, warned against "the anti-state bias of the West and neo-liberal economic thinking in the analysis and the efforts to surmount the crisis." These leanings have tended to castigate Asian governments even though the crisis sprang from errors and excesses of the private sector, particularly imprudent Asian borrowers and investors and their creditors at home and abroad.

The same ideological bent, said ex-dissident Rocamora, has prescribed more liberalization as the way out of Asia's economic woes. "Supposedly, the market is much more efficient and therefore we should have less government," he argued. "One explanation for this crisis, in fact, has been indiscriminate liberalization," particularly in the financial sector, "where the regulatory framework was quite weak." He also spoke of government vulnerability to pressures and demands from the elite. "The divisions and competition among different factions of the upper classes prevent the government from developing coherent policies," he explained. "And implementation is corrupted by the intervention of politicians and business."

Achi of Booz-Allen & Hamilton distinguishes between two kinds of liberalization. He favors moves by governments to end their role as active players in the economy, competing for capital and dictating which sectors get funds and business. However, Achi wants the state to do more "as an enforcer of fair play." The kinds of rules needed should "not limit space for competition, but open it up and make rules clearer" though far fewer. Such a less cumbersome, more transparent regulatory framework would form part of the institutional foundation for business activity which is taken for granted in the West, but still lacking in much of Asia.

These fundamental structures should also include labor markets able to supply trained personnel, a reliable legal system to enforce contracts, transparency in financial accounts and business transactions, and efficient information and financial markets. The Booz-Allen executive adds that the rise of chaebol and other Asian business groupings, including Chinese commercial clans, was a way for enterprises to somehow obtain necessary legal, personnel, information and financial services in the absence of Western-style institutions providing them. For instance, if a firm cannot be sure a supply pact would be binding, it simply sets up subsidiaries from which to buy what it needs.

At the Manila roundtable on structural change, all participants agreed that more democracy would be good for the region. It would spur people to push for other kinds of reforms, from campaigns against corruption and cronyism, to greater transparency and accountability. Moreover, an electoral mandate enables leaders to press hard for painful change, as South Korea's Kim has been doing, and strengthens the government against vested interests.

Where do Asian values fit in all this? Clearly, there is need to temper the intense family focus, which can hurt the common good. Singapore-born social scientist Theresa Carino, who runs a China NGO out of Hong Kong, called for greater efforts to share wealth more equitably beyond privileged clans. Rocamora agrees, deploring IMF reforms that tended to favor mega-banks, which can excessively concentrate wealth. He also wanted democracy grafted to the Asian value of community - "the primacy of collectives over individuals . . . an antidote to the rampaging individualism, which the West is trying to push." In mixing the formula for structural reform, plainly, past and present, Asian and Western are all crucial ingredients.

- With bureau reporting

This edition's table of contents | Asiaweek home



U.S. secretary of state says China should be 'tolerant'

Philippine government denies Estrada's claim to presidency

Faith, madness, magic mix at sacred Hindu festival

Land mine explosion kills 11 Sri Lankan soldiers

Japan claims StarLink found in U.S. corn sample

Thai party announces first coalition partner


COVER: President Joseph Estrada gives in to the chanting crowds on the streets of Manila and agrees to make room for his Vice President

THAILAND: Twin teenage warriors turn themselves in to Bangkok officials

CHINA: Despite official vilification, hip Chinese dig Lamaist culture

PHOTO ESSAY: Estrada Calls Snap Election

WEB-ONLY INTERVIEW: Jimmy Lai on feeling lucky -- and why he's committed to the island state


COVER: The DoCoMo generation - Japan's leading mobile phone company goes global

Bandwidth Boom: Racing to wire - how underseas cable systems may yet fall short

TAIWAN: Party intrigues add to Chen Shui-bian's woes

JAPAN: Japan's ruling party crushes a rebel at a cost

SINGAPORE: Singaporeans need to have more babies. But success breeds selfishness

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