Asia's Choice

Asia's Choice: Open Markets or Government Control?
Keynote Address of Fidel Valdez Ramos

Fidel Valdez Ramos

Asia's Choice: Open Markets or Government Control?

Asia Society's 10th Annual Corporate Conference
Shangri-La Hotel, Makati City
February 24-26, 1999

I. Introduction - A Summary of the Argument

The question before us is how the East Asian countries are responding to the issure of open markets versus government control.

In public policy, in our time, the question is seldom posed as starkly as that, in real life - in the lives of the Asian states and the Asian peoples - the choice is often not "either-or" but "more or less," and "some of both."

Ideally, state and market are symbiotic: one needs the other to carry out its purpose.

As the American economist Robert Heilbroner noted, " The realm of capital cannot perform its accumulative task without the complementary support of the state, as Adam Smith clearly perceived."

In every political economy, what commonly takes place is an interplay between market forces and state interventionism - favoring one and then the other, depending on policymakers' assessment of the national circumstances.

Let me summarize my argument here before I elaborate on it.

First, I don't see any East Asian state turning its back on the market - despite the devastation the financial and currency crisis has wrought on our economies.

No East Asian state has followed Malaysia's plunge into capital controls. Even Kuala Lumpur keeps saying the controls are temporary and will be dismantled as soon as the crisis eases.

Then, also, the structural reforms all of the East Asian states are being compelled to undertake imply that East Asian markets will become more open and transparent.

In East Asia, the market system has been not only a means to faster and more sustained growth: it has also been a liberative social and political force.

In fact, open markets have changed East Asia dramatically these last 30 - 35 years. Not only have they reduced the region's mass poverty: they also brought the peoples of the region greater freedom.

Second, while the market system's positive effects on East Asia over this last generation have been unprecedented, there are things the market system cannot do - is not equipped to do.

And these things the state must accomplish, particularly in developing countries that are undertaking "late industrialization."

Most urgently, we need the state to mitigate the downside of globalization on East Asia, and its first task must be to deal prudently with volatile, short-term capital flows.

Here, too, I would add a cautionary note: the activist state must first be efficient and effective - and even then, it should (in Peter Drucker's appropriate phrase) try and influence the climate and not the weather.

I would say that the weaker East Asian states (such as the Philippines and Thailand) are well-advised to give the market system a looser rein than their stronger counterparts (such as South Korea and Singapore).

The Interplay of the Market and the State is Like the Ebb and Flow of the Tide

Third, the interplay between market and state is therefore like the ebb and flow of the tide. At any one historical period, one or the other will be dominant - depending on the circumstances.

As for the future - the political implications of the East Asian crisis have been relatively unrecognized. But I for one believe that, in the longer term, this crisis might even have a beneficial influence on the Asia-Pacific region.

Consider how, across differences in history and culture, the crisis is even now compelling East Asian states to establish their authority less and less on coercion - and more and more on transparency, accountability, and social consensus.

Now let me proceed by surveying what the market system has wrought in East Asia.

II. What the Open Market Has Accomplished in East Asia

The financial crisis has obscured the social and political benefits the market system has brought about in East Asia. But we need only to think back on how poor and disorderly this region was - as recently as the middle 1970s - to appreciate what great changes have taken place.

First, consider East Asian poverty.

Over the 30 years between 1965 and 1995, average incomes in Malaysia, Indonesia, and Thailand multiplied four times - doubling every seven and a half years. In South Korea, incomes multiplied seven times - doubling almost every four years.

And growth at this rate produced a dramatic decline in regional poverty.

Over the 20 years between 1970 and 1990 - according to world bank estimates - the incidence of absolute poverty in Malaysia declined from 18% to only 2% -- in South Korea from 23% to only 5% -- and in Thailand from 26% to 16%.

In Indonesia, thanks to rural development programs that brought high-value crops, fertilizer subsidies, supplementary incomes to farming families and outright dole-outs, poverty declined the most - from 60% down to 15%.

Now consider regional stability.

Just as the market system has made the East Asian states less poor, so has it brought them together - despite their differing political systems.

Today we have an alphabet soup of regional groups - ASEAN, AFTA, ARF, APEC, and ASEM, etc. - working to ease bilateral and regional conflicts.

And just as early capitalism brought down feudalism in Western Europe, so does the commercial way of life now erode authoritarian regimes and centralized decision-making in East Asia.

South Korea and Taiwan are now completing the transition from authoritarianism. In both Thailand and Indonesia, strongmen regimes have been subverted by the open market. And "anti-communist" ASEAN has been able to incorporate "communist" Vietnam and Laos.

Even China has been changed - irreversibly, I believe - by Deng Xiaoping's economic reforms over these past 20 years. And as the Chines economy modernizes, note how the political institutions that regulate and support them are perforce modernizing also.

For instance, consider how China is being compelled to establish the rule of law, as the basis for foreigners to do business in the country, and foreign capital and technology.

I regard greater pluralism as unavoidable - and beneficial to China's future. And Beijing rulers realize this - this is why they are treating individual dissidence with careful deliberation.

Who wants to stop Globalization and get off?

I have noted that no East Asian state has followed Malaysia's plunge into capital controls.

While the controls may have stopped capital flight and insulated Malaysia from external economic uncertainties, they have also hurt the country's reputation as an open investment field with predictable rules.

Malaysia tried to stop globalization at its borders, but I for one do not think any people con profitably say: "Stop globalization: we want to get off!"

Globalization offers all of our countries immense opportunities to share capital, technology, and knowledge on the global scale.

Globalization also opens up tremendous possibilities for East Asian freedom. The spread of the idea of modernization and development through incorporation in the international economy compels even once-isolated states to align more closely to international norms and practices - in civil liberties and human rights, for instance.

The concern often expressed over the state's loss of autonomy and authority to the global economy I think is overstated.

Governments can still do a great deal to prevent their monetary policies from being constrained by the scale and international nature of the market.

States still have a positive function --- that of establishing and insuring the rule of law needed to enforce market transactions and of helping mobilize the nation's resources for competitiveness in the global economy.

Let us now consider the role of the state in the age of globalization.

III. The State in the Age of Globalization

I have argued that while the effects of the market system on East Asia before the 1997 crisis have been unprecedented, there are things the market cannot do - is not equipped to do.

The market can not supply, equitably, the public goods - such as primary health care, basic education, and protection from crime - which must be provided for every citizen.

And only the state can provide the intelligent macro-economic policies, the infrastructure - both physical and human - and the political framework that enables private enterprise to flourish.

The market cannot ensure that producers stop to consider the social costs of the technologies they use.

Throughout history, the uninhibited pursuit of self-interest has resulted in social inequities and political instability.

Now these side-effects of the market system are being worsened by the reach and velocity of the technologies that have created the global economy.

The new economic regime - with its emphasis on new and higher-level skills - is ironically worsening income inequality, by limiting the job chances of poorly-educated young people.

Only the State can ease the Inequalities generated by Globalization

Since the invention of the automatic loom, technological change has always produced losers. But never before has it taken place on a scale and at a speed necessitating change and creating disruption in our own time.

The market by itself cannot ease these inequalities. Only the state can do something positive and concrete about them.

We need effective states to reconcile the priorities of global markets with society's need to care, share and dare for those whom development leaves behind.

We need effective states that will channel technological progress to enhance the quality of life - and not just to expand the quality of production.

Free enterprise has come a long way since a 19th-century British cabinet debated whether it was right to restrict the import of beef known to be infected with foot-and-mouth disease.

Governments in the advanced nations how intervene routinely in the economy - to prevent the cycles of boom-and-bust to which capitalism is prone; and, through social legislation, to mitigate its human costs.

In the developing countries, economic modernization in our time has generally called for a greater degree of state intervention than when the western powers industrialized through invention and innovation.

In the 19th century, those agrarian societies which industrialized successfully did so by learning from those countries which had preceded them - chose the industries in which they could compete in the world market - and exported their way to growth.

In East Asia, this learning, borrowing, and choosing was largely organized by developmentalist states.

Generally speaking, a relatively stronger South Korea state has been better able to "direct" development than those of Southeast Asia. But East Asian states have always been much less interventionist than their European or American counterparts. Even at the height of the euphoria over the "East Asian economic miracle," no East Asian country ever contemplated setting up a welfare state on the Western model.

Within the group of seven (G-7), the Americans now counsel prudence and restraint in setting up new rules and institutions to regulate globalization.

That, I think, is a wise general rule in our increasingly interdependent world, which has also become fast paced and increasingly complex.

Every state will need increasingly to work within the framework of a global market. For such a world, the response mechanisms of the free market are probably better suited then the deliberate consensual kind of decisions of governments, particularly of democratic ones.

IV. The Ebb and Flow of the Tide of Public Affairs

The state and civil society (of which the free market is, I think, the key institution) are not meant to be antagonists - where each one is perpetually trying to overwhelm the other.

A western scholar offers what I regard as an apt metaphor for their long-term relationship. The relationship (he wrote) is like the ebb and flow of the tide on every shore.

In the course of this long-term relationship, first one side and then the other tends to dominate.

At critical junctures in the life of the national community - during wars or revolutions or financial crises - the state may grow in power and prestige.

But during periods of stability and peace, markets and the institutions of civil society may contain the state more easily.

In our time, East Asia certainly needs more open markets than it now has. But East Asia also needs stronger states - to carry out the tasks that the voluntary institutions of civil society cannot carry out by themselves.

More State Activism in the Foreseeable Future?

What of the future? What is the economic landscape of East Asia likely to be - in the early years of the new century?

Over the foreseeable future, we are likely to see more state activism - not only in East Asia but all over the globe.

In the European community, we are likely to see more interventionist public policies under its new democratic socialist governments.

The American economist Heilbroner in fact foresees the tide turning against capitalism as a system. He questions the adequacy of the market to serve as the coordinating mechanism of the social order in the face of the grave ecological problems - such as global warming which is becoming worrisome because of accelerated industrialization in the new century.

Certainly the global economy shall be needed closer international cooperation. There is also likely to be some homogenization of economies, politics, education and even popular culture.

Functionally distinct components of the nation-state will link up more and more with their foreign counterparts - forming a complex web of networks that will eventually make up a veritable transgovernmental order.

Democracy is part of the Spirit of the Age

Finally - in the future world, I expect the interplay between the market system and the state to take place even more intensely than it has done so far.

Globalization favors the open economy.

Authoritarianism might have been appropriate for cheap labor industrialization and crony relationships between government and big business, but not any more, for today, industry, is less and less susceptible to central organization - as production grows more complicated, more varied, and more flexible.

The open market, greater freedom of the press, and the knowledge highway have created new mechanism s and opportunities for common people to expose and seek redress from the abuses and inadequacies of leaders, and to fight graft and corruption and crony capitalism more openly.

And the structural reforms that states must undertake - to keep their economies competitive - will unavoidably result in more democratic governments.

Like open markets, democracy will thus also be part of the spirit of the new age - as ordinary people claim their right to take part in and benefit from the economic and political life of national society.

Thank you and mabuhay!