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By George P. Brockway, originally published January 26, 1998

1998-1-26 Beware Your Cronies title

THE PAPERS say the East Asian Debacle (previously known as the East Asian Miracle) was caused by something new under the sun called “crony capitalism.” It seems you have crony capitalism when one man (guided by family values and assisted by sons, nephews, in-laws, and pals) runs the show, which includes not only the government but most of the standard and all of the illicit ways of making money.

1998-1-26 Beware Your Cronies LeninWhat’s so new about all that? Joseph A. Schumpeter, once the intellectual guru of conservative economics, in his presidential address to the American Economic Society just before his death in 1950, said: “Capitalism does not merely mean that the housewife may influence production by her choice between peas and beans; or that the youngster may choose whether he wants to work in a factory or on a farm; or that plant managers have some voice in deciding what and how to produce. It means a scheme of values, an attitude toward life, a civilization-the civilization of inequality and the family fortune.” This is the world of Thomas Mann‘s Buddenbrooks, in which everyone of importance knew everyone else of importance.

At about the same time C. Wright Mills, a sociologist as liberal as Schumpeter was conservative, published his analysis of what he called The Power Elite. A comparatively small group of men (almost exclusively men), well known to each other and generally congenial, they controlled what Lenin referred to as the “commanding heights” of industry and finance.

On a much less exalted level, I must confess that in my days as head of a publishing house I couldn’t boast with Will Rogers that “I never met a man I didn’t like,” and I found it much easier to do business with people I did like. I had my cronies, and I don’t doubt that J. P. Morgan had his too.

So I don’t see what’s so new about crony capitalism. Nor do I understand why the Debacle was a surprise to anyone who reads the papers occasionally. And I particularly fail to understand why it was a surprise to American bankers and businessmen and politicians, their economic advisers, and even to the journalists who reported on crony capitalism before it had a name[1]. The story of the young man who got whipped in Singapore may have had only a tangential bearing on economics, but the story of how Nike sports shoes are made is certainly relevant, and it is only one of many such stories.

Ten years ago I attended a conference at Brigham Young University on the ethical problems of doing business with the Pacific Rim. Most of those present had done business on the basis of figures that later proved to be largely imaginary, had contracts changed on them in midstream, and had difficulty getting a straight answer from a trading partner. One of the most articulate speakers was an officer of one of the largest American banks. Do you suppose he was the only American banker who knew what the score was?

However that may be, all the big American banks are now at least somewhat entangled in the East Asian Debacle, as are scores of American producers and retailers, especially of sporting goods, electronics and T-shirts. During the past few years, as our stock exchanges have become crowded with baby-boomers driven frantic by the prospect of bleak golden years, dozens of mutual funds and investment trusts have also become active players in East Asian markets.

It is these people whom the International Monetary Fund, prodded and abetted by us, is trying to rescue. Although we have kowtowed to the various swarms of cronies in the past, and hope to be able to do so in the future, it is not their skin but ours that we are trying to save.

Our business press is nevertheless full of good advice for the East Asians: Their banking systems should be more “transparent” (meaning, I suppose, that bankers shouldn’t talk in conundrums like Chairman Alan Greenspan); their industrial accounts should conform more closely to practices generally accepted in the First World; and someone (say, the IMF) should be watching to see that things are done right.

This advice seems reasonable enough; yet it sounds to me pretty much like regulation and bureaucratic intervention and all that Old Democratic New Deal stuff that we’re trying to clear away as we prepare the bridge to the 21st century. One must wonder how policies said to be bad for us can be good for East Asians, particularly since the IMF combines deregulation and privatization with balanced budgets and high interest rates to produce austerity.

Austerity and economics, of course, are mutually contradictory ideas. Economics has to do with the production and distribution of goods and services, and austerity means not consuming or using them. To be sure, the latter is supposed to lead to the former, but there is really no reason to expect it to do so and there is little evidence that it ever has, except in wartime or in some command societies.

Invariably austerity, while it may cause the leisure class some annoyance, is devastating in its effects on everyone else. Such devastation is intended. The theory is that otherwise the poor and middle classes will spend any money they are allowed to have on food, clothing and shelter, thus depriving entrepreneurs of money to invest. (How many cases can you cite where producers of mass-market goods achieved success by expanding production when no one among the masses had any money to spend?).

The theory is both callous and erroneous. Its callousness accounts for the success of the East Asian Miracle, and its fallacy accounts for the Debacle. Following the advice of Western (why is that word acceptable, while “Oriental” isn’t?) economists, the East Asian countries embarked on ambitious export programs.

Since what is consumed at home can’t be exported, domestic consumption was discouraged-first by holding wages down, and second by energetic pro-saving propaganda. The low wages had the essential advantage of improving the East Asian competitive position in the world markets. The saving reduced home demand for consumer goods and gave the banks a little extra to speculate with in real estate.

Led by Japan (which, after all, had been sufficiently Westernized to defeat Russia in 1904-5 and had taught its neighbors the work ethic in the Greater East Asia Co-prosperity Sphere in the 1940s), the East Asian Miracle was a remarkable phenomenon. From every point of view, it was more successful than the contemporaneous development programs of India and South America (which stagnated), and of Sub-Saharan Africa (which slid backward).

But the system was fundamentally unstable. It depended on controlling imports at the same time that exports were promoted. An excess of exports over imports is defined, in conventional economics, as an increase in Gross National Product. So the East Asians restricted imports as the way to get rich.

HOW, THEN, were we to pay them for their exports? If the Japanese demanded yen, which we didn’t have, they had to sell yen to us for dollars, which we didn’t have. They could use quite a few dollars to buy oil and other things they needed for their industries, but they still had billions of dollars left over. In the wonder-working years of former Federal Reserve Board Chairman Paul A. Volcker they happily used many dollars to buy U.S. Treasuries that paid 15 per cent interest or more. That was fun, but of course the interest was paid in dollars; so in the end all they had to show for their hard work and ingenuity was a lot of money in their banks, by far the biggest in the world.

Most East Asian banks can own industries, play the stock market, dabble in real estate, and do other speculative things American banks hope to do in the next century. In Japan, whose area is slightly less than that of Montana, the value of real estate ballooned to double that of the entire United States. When the balloon burst in the early 1990s, Japan went into a recession it has yet to shake.

Next to “supply and demand,” the two most holy words in contemporary economics are “market discipline.” But there was no discipline in this Debacle, and no significant penalty is proposed for anyone but the poor and defenseless. President Suharto and his family in Indonesia may lose a few fortunes, but they will still have many left.

The cronies could not have done it alone. American banks and businesses were not hijacked, as by Malay pirates of yesteryear. They eagerly took well-understood chances because they counted on the spread between American and Asian wages to make pots of money for them very fast. And it did. The East Asian Miracle was erected on the backs of American working men and women who lost their jobs because of the wage spread, and the East Asian Debacle will fall on the backs of East Asian working men and women who are now losing their jobs because of the notion that austerity is good.

Congressmen oppose an East Asian bailout on the ground that it will use our money to save banks and businesses from the consequences of foolish or greedy investments. But if the banks and businesses are not rescued, we will, as Treasury Secretary Robert E. Rubin and Chairman Greenspan warn us, suffer at least a slowing of our economy, and this will, as always, be most damaging to those among us least able to bear it.

The East Asian bailout may cost us billions of dollars-many billions more than the Mexican bailout of two years ago, and perhaps more than the Savings & Loan bailout of only yesterday. It may not be successful. In that case we might be swamped, too, dragged down into a worldwide depression.

If the bailout is successful, our bankers and businesspeople may get our money back, or most of it, without learning a thing from the experience. At best, they might come away with a fuzzy sense that crony capitalism is not all it’s cracked up to be, and a warm feeling (which is not the same as contrite gratitude) that Uncle Sam will take care of them no matter what they do.

For the rest of us, the lessons are with us always, because we don’t seem to learn them. In general ethics, what we do unto others we do to ourselves. In the special branch of ethics that is economics, any system built on the shaky backs of the downtrodden will be forever unstable.

The New Leader

[1] Ed:  Perhaps they should read Charles Kindleberger

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