Chris Patten is right about the universal superiority of liberal market democracy, but is wrong about the causes of the Asian crisisby Martin Wolf / October 20, 1998 / Leave a comment
Chris Patten did not expect to become Hong Kong’s last governor. He rather hoped to become foreign secretary, but the voters of Bath intervened. In Hong Kong Patten became, if not an angry old man, an impassioned middle aged one. This book, with its rousing defence of the universal relevance of liberal democracy, is one of the results.
Patten brought Britain’s imperial history to a close. To his credit, he made a belated effort to do so as honourably as was possible in unhappy circumstances. Hong Kong was to be handed over to the corrupt despotism from which its inhabitants-or their parents-had fled. But Patten was determined to go as far towards democracy as “Hong Kongers themselves were prepared to go, but no less far either.” He was right. Let the Chinese regime do as it will-it almost certainly will anyway. As Patten says, it was contemptible for Britain to do China’s dirty work for it.
The experience of negotiating with China strengthened his understanding of what he stood for and what he believes the west stands for, too. “Values are universal,” declares Patten. “So, too, is the case for market economics, which work everywhere better than any other economic system, and free and open economies perform most effectively in plural societies. Liberal economics and liberal democracy go hand in hand.”
He has reacted vigorously to blather from more or less paternalistic Asian despots in favour of “Asian values.” He is right. As much by luck as design, the west evolved a system of government and economic organisation which is the least bad ever. But it is far from perfect and the move from agrarian despotism to industrial democracy is fraught with difficulty. Today’s great Asian financial crisis is just another proof of that.
As Patten points out, a market economy is not a place where top businessmen rule. That is what the Russians believe, still under the sway of the old Marxist-Leninist delusions. Nor is it a system in which political elites connive with their peers in business to divide up the spoils. The heart of the market economy is law-governed competition. For competition to be fair, it must be subject to laws which apply equally to everybody-to big businesses and small ones; to rulers and ruled. The market economy means economic freedom under the rule of law. But the rule of law can only endure in a democracy. A tyrant is never subject to his own law. Sooner or later, however good his intentions, his power will be abused-for the benefit of himself, his friends, his ethnic group or whatever. Then the economy will cease to be a market; it will become what most economies have been down the centuries: an arena for plunder by the powerful.
What Patten recommends, therefore, is “a system in which people not only elect their own government and lawmakers but also have their individual rights protected by a system of rules that apply to everyone.” This is not just a desirable system; its coming may be inevitable, if the economy itself is to advance. As people make choices in economic life, they will insist on making political choices. As their economies become richer, citizens will become better educated and informed. As they become better educated, they will also become aware of the frailties and follies of those who claim the right to command them. In the end, the government of an advanced society must rest on the willing consent of the governed.
As Patten argues: “First, the countries most successful economically are invariably those that are politically free; second, countries economically free are invariably politically free; third, those countries which enjoy little economic freedom are usually denied political freedom as well.” Hong Kong was an unusual exception to the second rule-something Patten tried to end.
This, then, is the crusading spirit which animates Patten’s book. But has he exaggerated and over-simplified his case for democracy and against “Asian values?” “Asia,” he argues, “has shown the rest of us how much can be achieved by energy, commitment and hard work, but it does not offer some new idea for the age-least of all the case of authoritarianism, whose delusive and presumptuous bluster has recently been comprehensively repudiated by events.”
This rejection of “Asian values” is persuasive, for several reasons. First, the very notion of Asia as a cultural, rather than a geographical expression, is absurd. Asia is not even an “Asian” concept. The continent as a whole-or at least the eastern part of it-is marked by diversity rather than by homogeneity. What, as Patten asks, “is the value system that links umbilically the commuter in Japan, the forest dweller in Irian Jaya, the mid-levels resident in a high-rise flat on Hong Kong’s Victoria Island, the peasant in Sichuan setting out to try to find a job and a fortune in Shanghai or Guangdong?” Where is the common element among the Hindus, Muslims, Buddhists, Confucians and lapsed communists?
Second, even if “Asian” is taken to mean “Chinese,” that civilisation was, for all its achievements, a dead end. Indeed, it was a dead end largely because of those achievements. The Chinese found history’s best solution to the challenge of running a vast agrarian empire: a divine emperor; a small, meritocratic elite; a sophisticated culture; and well-ordered taxation of the peasantry toiling below. But this system failed to cope with the western challenge. The western bourgeois states-late-comers to civilisation-outperformed China because they hugely increased the sphere of initiative open to ordinary people. They were not as frightened of the destructive impact of change as imperial China.
Third, many of the personal values deemed Asian-hard work, thrift, devotion to family and sense of community-are as much products of a certain stage of development as of particular civilisations. They are a good description of the US in the early 19th century, for example. Whether they will survive wealth, ageing, emancipation of women and the other concomitants of economic progress remains to be seen.
Finally, the alleged Asian acceptance of the authority of government, while convenient to those in charge, is more than merely debatable in practice. It is probably true that-at early stages of development, when poverty and ignorance are rife-people are prepared to put up with top-down government by benevolent bureaucrats or paternalistic politicians. But that tolerance is not going to survive the first signs of serious incompetence. Above all, that tolerance is bound to disappear when rulers are seen, not as the benevolent guardians of the people, but as greedy and corrupt despoilers of the public weal. It is foolish for Lee Kuan Yew to generalise from his own performance.
Patten is, like Isaiah Berlin’s hedgehog, right on the big thing. He is also right to argue that China should be expected to live by the same standards as everyone else; he properly condemns the pusillanimity of many European states towards China. It is, ironically, the countries which speak in favour of a strong European voice in the world which seem most determined to utter their thoughts while on their knees.
Where he is less persuasive is in blaming Asian authoritarianism for the economic crisis. Patten says: “Asia’s 1997 crisis demonstrated the limits of authoritarianism in promoting successful free economies.” But let us consider the extent of the crisis; its fundamental causes; and the role of democracy (of lack thereof) within it.
Between 1965 and 1990, incomes per head in Asia rose some five-fold. Hong Kong and Singapore surpassed the income per head of almost all of western Europe. Taiwan and South Korea joined the ranks of the high income countries. Never before had anything like this happened so quickly and on so broad a scale. And never before had there been so dramatic a reduction in the proportion of populations living in dire poverty. In Indonesia, for example, the share of the population living under what the World Bank defines as “absolute poverty”-real income per head of less than a dollar a day-fell from 60 per cent to about 10 per cent over a generation.
The success of these countries, based on private enterprise and open trade, was both a model and a source of hope for all. Today, things look depressingly different. Back in May 1997, the IMF forecast that the Indonesian economy would expand 7.5 per cent this year; the latest forecast from Goldman Sachs is that it will shrink by 15 per cent. Thus the difference between the GDP expected for this year and the outcome now forecast is 22.5 per cent of 1997 GDP. In the case of South Korea, the difference is some 13 per cent; in Thailand, it is 14 per cent.
Behind these shifts lies a dramatic turnaround in finance from abroad. Net private capital flows to these three economies, plus Malaysia and the Philippines, went from plus $97 billion in 1996 to minus $12 billion in 1997-a swing of about 11 per cent of pre-crisis GDP. The short-term response has been to suppress domestic demand, drastically reduce imports and increase exports almost regardless of the prices they fetch.
Economists are going to argue about the causes of this crisis forever; everyone reads into it what he or she wants to. Those who believe in free markets argue that too much government interference is to blame; those who despise free markets argue that the fault was too little government interference. All agree that regulation should have been better, but they disagree over what this means. Yet some elements in the story are clear.
First, and perhaps most important, success bred complacency and that bred failure. Behind the story lies a belief among foreign investors, domestic borrowers and governments that what had lasted for a generation had to last forever. The result was that they all took greater risks, without being aware that they were doing so.
Second, governments made important technical errors in monetary and exchange rate policies. These included reliance on adjustable peg exchange rate regimes and implementation of monetary policies which made borrowing abroad immensely attractive to domestic companies and banks.
Third, governments failed to regulate banking systems effectively or, in many cases, forced them to make loans to politically well-connected borrowers or projects deemed to be important to the national interest. They did so, while giving generous implicit and explicit guarantees to the owners and creditors of financial institutions.
Fourth, governments were persuaded, cajoled or chose to liberalise inward capital flows prematurely. This multiplied the problems already likely to be caused by inappropriate exchange rate and monetary policies and by feeble and corrupt regulation of financial institutions.
Fifth, countries were subject to big external shocks, including the emergence of China as an important exporter of low-cost, labour-intensive manufactures and wildly fluctuating exchange rates among major currencies, particularly the US dollar and the yen.
Sixth, foreign lenders failed to understand the nature of the economies to which they were lending. In their enthusiasm they hugely exacerbated the boom-and so the bust-by the scale of the lending. Since none of these countries had effective bankruptcy procedures or adequate protection for creditors, short-term lenders relied on other lenders to enter whenever they wanted to leave. When they all tried to exit, both the drying-up of liquidity and massive currency depreciations became inevitable. Capital flight by nervous domestic residents was certain to accompany-or trigger-flight by foreigners.
Seventh, foreign bankers had good reason to believe that they would be baled out, be it by the IMF or their domestic governments. This almost certainly increased their willingness to take risks.
Finally, there was contagion, with the mishaps and mistakes of one country creating ever more serious difficulties for all the others.
This, then, is a complex story. As so often with accidents, it turns out that a great many things went wrong at the same time. What had it all to do with democracy-or the lack of it? The easiest case to make is that of Indonesia. Here was an ageing and corrupt dictatorship. There is little doubt that corruption lay behind much of the corporate borrowing. There is also no doubt that widespread fear of political collapse lay behind the capital flight which drove down the rupiah by more than 80 per cent. It was this collapse which made a crisis that many believed would be mild, ruinous for both regime and country.
South Korea and Thailand are trickier cases. Both went on their way to financial hell under weak and incompetent democratic regimes and neither was likely to have made such serious errors with the old technocracy still firmly in control. It is easier to argue, therefore, that their crises resulted more from the problem of managing the transition to democracy than from the absence thereof. Yet it is also true, as Patten observes, that “as South Korea has demonstrated in 1998, more representative forms of government are invariably better at handling change relatively smoothly and peacefully.”
Patten has made a heartfelt case for a noble cause. At the grandest political level, he is right. Those of us fortunate enough to enjoy life in prosperous liberal democracies have a duty not just to defend those systems but to insist on their superiority to kleptocracies and dictatorships everywhere. To do so is simply to insist that adult human beings should be treated as grown- ups, not as children.
Yet it is also necessary to remember that there are more things in heaven and earth than are dreamed of even in the best philosophy. Almost all of today’s universal suffrage democracies did not start their industrial revolutions when they were already democracies. Populist democracies can do as much damage as corrupt dictatorships. Managing the entry of fragile developing economies into global capital markets is tricky and dangerous, be they democracies or not. Many technical questions concerning the role of international lenders of last resort, exchange-rate regimes, and so on, remain to be learned and acted upon. The link between democracy, dictatorship and economic success must not be oversimplified.
Yet, at bottom, Patten is right. If the crisis-afflicted economies take the opportunity to move towards more open economies and societies, if they introduce greater transparency, less corruption and improved regulation, they will have taken from this disaster the most important lessons. They need more market, but they also need much better government. That cannot come from despots, however benevolent. East and West
Macmillan 1998, ?22.50