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Responses to Mallaby

Responses to Mallaby

Mini Teaser: Chalmers Johnson, Martin Feldstein and Francis Fukuyama

by Author(s): Chalmers JohnsonMartin FeldsteinFrancis Fukuyama

Chalmers Johnson:

Sebastian Mallaby's screed is the mirror image of what Moscow's old Marx-Lenin Institute used to do - try to convince people that, in Mallaby's words, "the tide of history is flowing in the West's [conversely, the Soviet's] favor." Like his magazine, The Economist of London, Mallaby is an ideologist for the economic system that exists at least formally in the United States, Britain, and some other English-speaking countries (places that he and his fellow defenders of the faith like to call "the West" in their metaphysical writings). Just as the biggest problem for Mallaby's predecessors at Pravda was to find evidence of proletarian immiseration in the democracies, the biggest problem for the American triumphalists is to explain East Asia in ideologically acceptable terms.

These ideologists did not even notice the enrichment of East Asia until after it had become self-sustaining, could not explain it using their Nobel Prize-certified textbooks, and now predict that it will either collapse or start to copy the United States since no other outcome is "theoretically" possible. They want people to believe that "America enjoys world dominance in diplomacy, warfare, industry, science, media, and the sheer sense of how to live", as implausible as this is on the surface, and they insist that it is only a matter of time until the American way of life is "universally adopted."

The true mark of ideology is not what it asserts but what it leaves out. The ideologist suppresses evidence that contradicts what he or she is trying to sell. The group of scholars, journalists, businessmen, and government officials that Mallaby so disdainfully calls "revisionists" were in fact the first to investigate how Japan became the world's richest big country in per capita terms rather than simply defining Japan as America's "little brother." Even though Mallaby and other American triumphalists (e.g., Paul Gigot of the Wall Street Journal) now accept the revisionists' main premise - "an economic style [in Japan, South Korea, and elsewhere in East Asia] that differs markedly from Western laisser-faire" - they must still denounce revisionism because it subverts their ideological conviction that the West will triumph.

What Mallaby and his fellow true believers do not want to discuss includes the following:

1) Japan is the leading source of long-term capital for the world today, whereas the United States is the world's biggest debtor nation. The United States is financing its mountainous debts with the help of Japanese savers.

2) Japan's savings would be better used to bail out its own failed banks and reflate the Japanese economy so that it could serve as a locomotive of growth for the rest of East Asia. This, however, would cause a recession in the United States that would cripple Japan's export machine. So our two economies remain locked together in a perverted embrace.

3) Standing behind the current economic crisis in East Asia is serious overcapacity in manufacturing, exacerbated by American multinationals moving many American jobs to low wage areas, thereby undercutting demand in the United States. So far from the East Asian economic crisis being a sign of "the triumph of the West", it more seriously portends a potential collapse of global demand and depression.

4) Mallaby's magazine likes to think that Japan does not change because it is run by bureaucrats (something The Economist used to deny) and beset by crony capitalism. Both may be true but are irrelevant. The Japanese trust their bureaucrats more than their politicians and also admire how successfully the Chinese are dismantling some of their Leninist institutions while avoiding the disasters of Yeltsin's Russia. They cannot think of a single example in which a foreign nation listened to Mallaby's "technocrats of the International Monetary Fund" and got anything better than Russia's mafia capitalism or Latin America's permanent dependency. Thus, Japan's bureaucrats will continue to do things their way.

Mallaby's most serious ideological distortion is to omit the United States from the East Asian crisis. He notes casually that Japan "hosted (and later paid for) large American bases on its soil." If he thinks the locals are willing hosts, he should visit Okinawa. Those bases for 100,000 American troops in Japan and South Korea got there exactly the same way the former Soviet Union's bases in former East Germany and Poland did - through conquest and Cold War military intervention. Japan is America's East Germany, its richest Cold War satellite, and the primary beneficiary of American militarism in East Asia. Japan still finds this status useful. It therefore pays to support foreign troops in Japan, helped reelect Bill Clinton by keeping Japanese capital flowing to the United States, and pretends to listen to American advice.

This charade will continue until some crisis forces either the Americans or the Japanese to face up to how the world has changed around them. When that happens we will see what form of capitalism has the strength to survive. But I wouldn't place all my bets on the longevity of the insanely inflated New York Stock Exchange.

Chalmers Johnson is president of the Japan Policy Research Institute.

Martin Feldstein:

Contrary to the theme of Sebastian Mallaby's essay and to many of those whose views he cites, I believe that the recent currency crises in Southeast Asia and in Korea should not be seen as a test of the fundamental economic strategies of those countries. The currency collapse in Thailand and its neighbors is just what conventional economics would predict in any country that had an overvalued and fixed exchange rate. The same can be said of Indonesia and Malaysia. Korea's problems had a different origin: allowing some of its financial institutions to incur substantial short-term dollar liabilities and to invest those funds in risky and longer term assets. The severity of the subsequent collapse throughout the region and of the economic downturn that followed reflect the management of the crisis rather than the fundamental features of these economies. It's worth looking more carefully at the problems in Southeast Asia and in Korea to see clearly that they are not related to such "fundamental" features as government-business relations, labor market rules, the degree of import protection, the reluctance to permit foreign ownership, and other features of these economies that have been blamed for the current troubles and taken as harmful aspects of Asian economic policy.

The Thai baht collapsed because Thailand's overvalued exchange rate produced massive and sustained current account deficits with the rest of the world. When those current account deficits surged to 8 percent of Thailand's GDP in 1995 and 1996, creditors became increasingly nervous and sought to reduce their exposure. The Thai government tried to stem this withdrawal of funds but eventually gave in to the inevitable currency decline. No country has been able to sustain such large current account deficits. Although the combination of high interest rates, promises of fixed exchange rates, and stories about special conditions may keep funds coming to finance such current account deficits for a few years, eventually fear exceeds greed and foreign investors want out.

The current account deficits of Indonesia and Malaysia were also unsustainably large: over 5 percent of GDP in Malaysia and over 4 percent in Indonesia. While no one could predict when their fixed exchange rates would collapse, such a change was inevitable.

Korea did not have a serious current account problem. Although the current account deficit had risen temporarily in 1996 (because of the decline of the world semiconductor market), by early 1997 Korea was heading toward current account balance. Its problem was weak bank supervision that allowed short-term foreign liabilities to exceed foreign exchange reserves.

The impact of the currency collapse in Asia was not dissimilar to what happened a few years back in Mexico or in the 1980s throughout Latin America. A currency decline and the jump in interest rates that follows weakens creditors and undermines banks. The economy is forced to contract in order to reduce imports. This is the standard experience and says nothing special about Asia.

The recent situation was exacerbated by the IMF's policy response. Instead of emphasizing that these are basically sound and healthy economies that were facing a temporary liquidity problem, the IMF declared that these were unsound, mismanaged, and corrupt systems that needed fundamental reforms. This contributed to the sense of panic and frightened away creditors and investors. Instead of seeking to meet immediately with representatives of the creditors and debtors to arrange for a smooth restructuring of loans, the IMF gathered a huge war chest of potential financial aid that it said would only be available as those countries reformed. This too undermined confidence and made adjustment slower and more difficult than it might have been.

There are of course problems with the Asian economies, just as there are with the economies of Europe, Latin America, and the United States. The Asian economies would no doubt outgrow some of their current policies and procedures as they mature and as their incomes rise. But there was no moral or economic justification for the IMF to use the period of economic crisis to force such changes on these countries. And there is no reason to interpret this textbook currency crisis as evidence of a more fundamental weakness of the Asian economies.

The recent situation was exacerbated by the IMF's policy response. Instead of emphasizing that these are basically sound and healthy economies that were facing a temporary liquidity problem, the IMF declared that these were unsound, mismanaged, and corrupt systems that needed fundamental reforms. This contributed to the sense of panic and frightened away creditors and investors. Instead of seeking to meet immediately with representatives of the creditors and debtors to arrange for a smooth restructuring of loans, the IMF gathered a huge war chest of potential financial aid that it said would only be available as those countries reformed. This too undermined confidence and made adjustment slower and more difficult than it might have been.

There are of course problems with the Asian economies, just as there are with the economies of Europe, Latin America, and the United States. The Asian economies would no doubt outgrow some of their current policies and procedures as they mature and as their incomes rise. But there was no moral or economic justification for the IMF to use the period of economic crisis to force such changes on these countries. And there is no reason to interpret this textbook currency crisis as evidence of a more fundamental weakness of the Asian economies.

Martin Feldstein is president of the National Bureau of Economic Research and professor of economics at Harvard University.

Francis Fukuyama:

Much as I appreciate Sebastian Mallaby's invitation to get on a pedestal and thump my chest about how right I was, I will decline the opportunity. I do believe that the Asian crisis vindicates my argument in The End of History and the Last Man, namely that economic modernization brings about a convergence of large institutions in the direction of both democracy and market-oriented economics. I find it quite gratifying that the "Asian values" argument has been put to rest once and for all, and that the long-run costs of authoritarianism have become more widely recognized.

On the other hand, Mallaby wants to read into my book a more caricatured and extreme argument than was actually made, and he ignores completely the book I wrote in the interim, Trust. The latter argues that democratic capitalism at the end of history is a big tent that permits considerable cultural variation among capitalist societies. Chest-thumping obscures a more nuanced analysis of what is a rather complex set of events.

There are at least two levels to the crisis that began with the fall of the Thai baht in the summer of 1997. The first is macroeconomic and has to do with the fact that poorly regulated financial institutions in Thailand, Indonesia, South Korea, and other countries across the region facilitated the loading up by private firms on short-term dollar-denominated debt, which led to a severe liquidity crisis when the dollar appreciated against most other world currencies and especially the yen. This type of problem has been experienced by virtually every capitalist country at some point in its development; everyone, including Asian policymakers, agrees that the problem exists and needs urgently to be fixed through a combination of injections of liquidity, debt restructuring, and strengthening of financial institutions.

The second level concerns microeconomic policies regarding corporate governance, firm structure, credit allocation mechanisms, labor markets, and the like. It is in this area that Asian states and societies have maintained distinctive institutions that differ in key ways from their Western counterparts, such as state allocation of credit to facilitate sectoral transitions (industrial policy), the chaebol (or giant conglomerates) in Korea, the networks of family businesses in Taiwan and Hong Kong, and lifetime employment in Japan. These microeconomic policies lay at the core of the competitiveness debate in the late 1980s between proponents of industrial policy like Chalmers Johnson and James Fallows, on the one hand, and more orthodox market-oriented types, including most of the economics profession on the other. These policies have become highly problematic and lie at the root of Japan's stagnating GDP, and if persisted in will account for declining long-term rates of growth in the states that maintain them. But they were not heavily implicated in the currency crisis of 1997-98, which is what allows people like Chalmers Johnson and many Asian officials to continue to assert that there is nothing fundamentally wrong with interventionist economic policies in the region.

It would not be surprising if many American economists and officials, from Bob Rubin, Larry Summers, and Stanley Fisher on down, did not feel a sense of Schadenfreude over Asia's current troubles. After having been lectured to for a decade on the superiority of everything Asian from firms maximizing market share rather than stockholder value to authoritarian politics, they feel a justifiable sense of satisfaction that Asia no less than other parts of the world must obey the laws of economics. So it is perhaps understandable that they have gone on to use the opportunity of a liquidity crisis to impose a host of microeconomic policy reforms on the prostrate region. Instead of dealing with the problem of short-term liquidity, the IMF has undertaken to restructure many of the basic institutions in places like Indonesia and South Korea - hence Martin Feldstein feeling that the IMF is getting into areas that are none of its business.

In the long run, the economists are probably correct that most of these microeconomic reforms are in the best interests of the countries involved, and I therefore expect to see a convergence in economic and political institutions between Asia and the West over the next generation. But there is something to be said for prudence (usually regarded as a conservative virtue) as well: global competitive pressures are rapidly driving countries to drop practices like state-directed credit allocation, employment guarantees, protected monopolies, and the like. But the United States is not necessarily better off with the IMF driving this process, MacArthur-like (as Mallaby would prefer), since this creates a tremendous amount of nationalistic resentment. Unlike the situation in 1945, it is not clear to these countries that they have lost a war rather than a single battle. It is also a bit disingenuous. The IMF did not see anything wrong with Suharto's cronyism last summer, but now they have suddenly gotten religion and are intervening in the Indonesian political process in a very intimate manner. It is hard to have a lot of confidence that they know what they are doing.

The deeper problem is a conceptual one. Many Americans talk today as if a single currency crisis had wiped away forty-five years of historically unprecedented rates of growth, and that it was obvious that these countries could never do well violating so many of the liberal economic policies currently in favor in Washington. And yet they did: for most of the postwar period South Korea's average rate of tariff protection and capital controls was higher than that of Argentina, and yet it succeeded in making itself the world's twelfth-largest economy. Others sweep Japan's "crony capitalism" into the same basket as Ferdinand Marcos, and yet what was remarkable about the informal, personalistic mechanisms for credit allocation in Japan, Korea, and Taiwan was how clean they had been over a very extended period of time. A fascinating World Bank study suggested last year that it is the quality of governance - that is, a country's administrative efficiency, lack of corruption, and devotion to public ends - that determines the rate of economic growth, and not so much the specific economic policies it follows.

While all that was true in the past, liberalization remains necessary in Asia much as it does for many countries in continental Europe. As the level of economic development increases and countries like Japan and Korea reach the global technological frontier, markets become much more efficient than states in allocating capital and disciplining firms. But within the basic institutional structure of democracy and markets, countries will continue to hold on tenaciously to degrees of cultural difference, and will choose to balance freedom and equality in different ways. It would be very odd indeed to conclude that the central Western idea, the one now victorious over much of the globe, must be equated with whatever particular set of policies the technocrats at the IMF and Treasury departments happen to subscribe to at the present moment.

The deeper problem is a conceptual one. Many Americans talk today as if a single currency crisis had wiped away forty-five years of historically unprecedented rates of growth, and that it was obvious that these countries could never do well violating so many of the liberal economic policies currently in favor in Washington. And yet they did: for most of the postwar period South Korea's average rate of tariff protection and capital controls was higher than that of Argentina, and yet it succeeded in making itself the world's twelfth-largest economy. Others sweep Japan's "crony capitalism" into the same basket as Ferdinand Marcos, and yet what was remarkable about the informal, personalistic mechanisms for credit allocation in Japan, Korea, and Taiwan was how clean they had been over a very extended period of time. A fascinating World Bank study suggested last year that it is the quality of governance - that is, a country's administrative efficiency, lack of corruption, and devotion to public ends - that determines the rate of economic growth, and not so much the specific economic policies it follows.

While all that was true in the past, liberalization remains necessary in Asia much as it does for many countries in continental Europe. As the level of economic development increases and countries like Japan and Korea reach the global technological frontier, markets become much more efficient than states in allocating capital and disciplining firms. But within the basic institutional structure of democracy and markets, countries will continue to hold on tenaciously to degrees of cultural difference, and will choose to balance freedom and equality in different ways. It would be very odd indeed to conclude that the central Western idea, the one now victorious over much of the globe, must be equated with whatever particular set of policies the technocrats at the IMF and Treasury departments happen to subscribe to at the present moment.

Francis Fukuyama is Hirst Professor of Public Policy at George Mason University and director of its International Transactions Program.

Essay Types: Essay