Asia's Bad Old Ways: Reforming Business by Reforming Its Environment

Hilton L. Root

From Foreign Affairs, March/April 2001

Article preview: first 500 of 2,348 words total.

Summary:  The crony capitalism of Asian firms was once a rational adaptation to their business environment, but it is now outdated. Rather than preaching or bullying, the West should have faith that the need for foreign capital will spur the necessary changes.

Hilton L. Root is Director of Global Studies for the Milken Institute, a nonprofit economic think tank in Santa Monica, California.

Having rebounded more quickly than expected from the financial crises of 1997, East and Southeast Asian governments today appear to be models of fiscal responsibility. South Korea has won praise for its timely delivery of financial information to the public; Thailand has introduced tougher bankruptcy laws; Indonesia has taken steps to clean up bad loans and recapitalize its banking system. Yet despite such accomplishments and a remarkable revival of GDP growth in these Asian countries, many Western critics warn that the progress has been too slow and that the underlying weaknesses that led to the crisis remain.

The critics fear that most East and Southeast Asian businesses have gone as far as they are willing to go in restructuring operations -- but that this isn't nearly far enough. The greatest concerns center on heavily concentrated business ownership and closed systems of production. Continued economic dominance by a few families and a few firms, the critics contend, reinforces flawed Asian market systems and keeps new global economic opportunities at bay. The original owners maintain control over bankrupt companies and resist the sale of their non-core operations, while promising ventures have trouble competing for investment against "crony capitalists" who use their political clout to attract scarce funds.

But if the bad old ways that critics point to were all that bad, then why did they work so well at first? Why was Asia the fastest-growing emerging market in the world from 1960 to 1997? What the critics disregard is that Asian businesses have responded rationally to particular social and institutional contexts. Their practices led to growth in the past and in some situations could continue to permit short-term growth. If these firms have not adopted Western-style reforms, it is not because they don't understand them; the reforms just have not made sense under the circumstances.

Certainly, the deficiencies in Asia's economic organization are real and will have to be corrected if the region is to prosper in an increasingly globalized world. But the real problems stem less from poor business practices than from the difficult business environment, which lacks, for example, effective contract-enforcement mechanisms and the principle of neutral government intervention. Rectifying these deeper problems will require not just economic policy reforms, but major social and political changes. To offer truly constructive advice, critics must understand the histories of these countries' financial systems. In the short term, hectoring and putting conditions on aid will only make the situation worse.

RATIONAL SINS

Three years ago, the collapse of the Thai baht dragged East and Southeast Asia through a default spiral as exchange rates plunged and equity and property values collapsed. The international financial bailout that helped revive these economies came with scathing criticism of their basic economic structures. The hardest-hit nations were accused of bringing the problems on themselves by tolerating cronyism, corruption, weak legal structures, corporate opacity, and poor business ethics.

These days, despite some superficial changes, many of these factors remain. Japan drifts from one ineffective reform package to another: ...

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