IMF should require end of crony-style 'capitalism'

Americans might not have seen the last of Asia's currency and banking crisis. Unless Asian economies are quickly restarted, a flood of cheap Asian imports could reduce corporate profits in the United States and send the stock market and employment for a tumble.

But one group of Americans has benefited from the financial fallout across the Pacific: Reagan-era Treasury officials who had to endure academics' scorn for believing in the wisdom of private capital markets.

The collapse of Asia's crony capitalism has finally shut-up the academic know-it-alls who were certain that U.S. capital markets needed government guidance. Otherwise, they said, the U.S. economy would lose out to the long-term view of the Japanese financial system.

Among those convinced of the superior wisdom of government over the market were Harvard Business School Prof. Michael Porter, Yale Management School Dean Jeffrey Garten and Massachusetts Institute of Technology Dean Lester Thurow.

Publishers flooded stores with books with such titles as Short-Term America, which excoriated the United States for allowing shareholders' interests to take precedence over the interests of employees, suppliers and "society." The emphasis on profit-making was allegedly causing the United States to make the wrong investments for the future. The gurus who penned all this nonsense are now busy eating their words.

The focus on profits has the great advantage of holding management accountable. Bad performance is swiftly punished. In contrast, "the long view" became an excuse for political favoritism. The accumulated bad results have now come home to roost, and the International Monetary Fund (IMF) is rushing in with our money to bail out the cronies.

Real Problem Is Cozy Relationships Among Elites

For a bailout to work, the IMF must recognize that the real problem is the close relationships between government, financial institutions and businesses in Asia. Unless the cozy relationship between elites is broken apart, IMF bailouts will simply perpetuate control of Asian economies by self-dealing insiders. When the IMF gives loans, it imposes conditions. In the past, the IMF has insisted that the borrowers raise taxes and tighten monetary policy. The purpose is to reduce domestic demand in order to squeeze more exports out of the economy. The earnings from these exports are then used to repay the IMF loans.

If the IMF follows this austerity policy this time, U.S. employment and corporate profits will be the victims. Moreover, this policy would do nothing to rectify the real problem. Asia needs accountable financial markets, and this requires increasing the role of markets in the allocation of investment, and reducing the role of government and cronyism.

The Asians read the admiring books by American professors praising the Japanese financial system and copied it. The condition that the IMF must now impose is the dismantling of this crony-style financial system.

The post-war era has established that capitalism is the only system that works. Communism has failed. European socialism has failed.

Development planning has failed in Latin America and Africa, and now industrial policy has failed in Asia. The IMF must acknowledge this reality and bring capitalism to Asia's financial markets.

This requires opening those markets to competition by Western financial institutions. Indeed, sweeping financial reforms would make the IMF loans unnecessary. The currency markets would ratify the victory of capitalism over cronyism. The IMF's austerity measures would be pointless, and the United States would be spared a flood of imports.

In The Capitalist Revolution in Latin America, published last year by Oxford University Press, I argue that the IMF should be converted into a private institution or closed. IMF loans are a moral hazard because they underwrite the failed policies of governments at the expense of domestic populations and foreign taxpayers.

The IMF has much to answer for, but it could go a long way toward redemption by insisting on American-style capitalism for Asia. It is past time for intellectuals to give up their naive faith in the ability of government to manage the economy and to come to terms with public-sector failure.

Mr Roberts, a nationally syndicated columnist, is a distinguished fellow at the Cato Institute, based in Washington, D.C.

Copyright Human Events Publishing, Inc. Jan 16, 1998
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