Let's revisit Asia's ‘Crony Capitalism’; America's free-trade proselytizing is the true root of what is now a global crisis

By Chalmers Johnson, President of the Japan Policy Research Institute, 8 July 1999

After all the endless mouthing off in the pages of the English-language business press about East Asia's crony capitalism, the lack of transparency in Asian stock exchanges, the no pain, no gain logic of the International Monetary Fund and how the Asian economic challenge to Anglo American capitalism had fizzled, we now know that none of these things had anything to do with the Asian--now global--economic crisis. Addressing what did cause the crisis is the main business of the leaders of the countries of East Asia as they reflect on what has happened to them over the past two years. If they ignore this question and pretend that the road is still open to globalization in the Pacific, they risk being repudiated by their own people.

Here's the new explanation as it is developing in seminar rooms from Seoul to Kuala Lumpur to Beijing.

With the end of the Cold War, the United States decided it had to launch a rollback operation in East Asia if it was to maintain its global hegemony. The high-growth economies of East Asia had become the main challengers to American power in the region, and it was time they were brought to heel.

The campaign worked in two phases. First, a major ideological barrage was launched to soften up the Asians. The Americans mobilized famous professors of economics from their universities, who never once faced a market force in their own lives, to preach the beauties of globalization; in this case meaning American economic institutions. These include total laissez faire, destruction of unions and social safety nets, staffing of regulatory agencies with retired financiers, indifference to the pay differentials between CEOs and the ordinary labor force, moving manufacturing to low-wage areas regardless of the social costs and totally unregulated flows of capital in and out of any and all economies. Ever since the Asia Pacific Economic Cooperation summit in 1993, the Americans hammered home to the Asians that they needed to open up their economies in these ways.

Then came phase two. Once the Asian economies had begun to deregulate and were standing in the world marketplace more or less naked, the hedge funds were let loose on them. These funds are actually huge concentrations of capital owned by very wealthy Western white men, who manipulate bewilderingly complex financial instruments called derivatives. They usually locate their offices in offshore tax havens like the Cayman Islands and do everything in their power to avoid regulators or tax collectors in the so-called free market democracies. The funds easily raped Thailand, Indonesia and South Korea and then turned the shivering survivors over to the IMF, not to help the victims but to ensure that no Western bank was stuck with nonperforming loans in the devastated countries. The IMF is also the U.S. government's chosen instrument for reforming these countries to make them look more like New York.

The Americans suspected that all this might cause some trouble. On March 4, 1998, Adm. Joseph Prueher, then commander in chief of American military forces located in East Asia and today the U.S. ambassador-designate to China, testified before Congress that the U.S. military was on alert for early signs of instability in East Asia, including labor disputes. The Indonesian armed forces, whom Prueher's special forces had been training for years, got rid of Suharto when it seemed necessary. The Indonesian troops killed about 1,200 shopkeepers and raped more than 150 Chinese women doing so.

But then it all got a bit out of hand. One of the biggest hedge funds proved to be so greedy that the U.S. government had to organize a bailout for it, which brought the scheme out into the open. David Mullins, a former deputy to Federal Reserve Chairman Alan Greenspan, had gone straight to work for the Long-Term Capital Management fund after he left the Fed in 1994. Had this not been the case, it's unlikely that the Federal Reserve Bank of New York would have arranged a $ 3.5-billion rescue package for the hedge fund. The incestuous relationship between Washington and Wall Street--what Columbia University economist Jagdish Bhagwati calls the Wall Street-Treasury complex--made East Asia's crony capitalism look tame.

The weakened economies of East Asia also could not continue to buy the weapons the Pentagon wanted to sell them, and some began to have second thoughts about paying to keep U.S. Marines (a.k.a. the Hedge Fund Protective Corps) in their countries. Globalization was discredited as a crooked financier's scam. The Chinese never looked so clever as they did in keeping out of the World Trade Organization as did the Japanese when they more or less ignored the pleas for reform from Washington.

These issues came to a head in Kuala Lumpur in November 1998. The U.S. trade representative, Charlene Barshefsky, accused the Japanese of offering $ 30 billion in aid to the stricken countries of East Asia as a way of buying their votes against further market-opening measures. The Japanese foreign ministry responded that the U.S. government was possessed by an evil spirit, a phrase painfully close to the evil empire epithet that former President Reagan used against the Soviet Union. Vice President Al Gore then gave a speech in the Malaysian capital, denouncing its head of state for trying to protect his country from international speculators and calling on the people of Malaysia to overthrow him. After that, APEC no longer had a future worth speaking of.

The Americans do not seem to understand that their message of free trade and market economics is in serious disrepute. Wall Street itself now looks like the ancestral home of crony capitalism.