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Message-ID: <199801172117.NAA25117@fraser.sfu.ca>
Date: Sat, 17 Jan 1998 13:17:52 -0800
Sender: Forum on Labor in the Global Economy <LABOR-L@YORKU.CA>
From: Sid Shniad <shniad@SFU.CA>
Subject: East Asian economies will be more like US's (fwd)

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

By Nicholas D. Kristof, [17 January 1998]

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

Still, 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

In 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:

Transition Apparent in Seoul Already

These 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

Yet 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.