MAIN PAGE | SPEECHES & EDITORIALS | 1999 | MANAGED ECONOMY VS. FREE MARKET
PACIFIC BASIN ECONOMIC COUNCIL
MAIN PAGE | SPEECHES & EDITORIALS | 1999 | MANAGED ECONOMY VS. FREE MARKET
A managed economy vs. a free marketSokan ChangExecutive Vice Chairman, Korea Federation of Textile Industries (KOFOTI) Monday, May 17, 1999 The Challenges of the Next Century for the Pacific Basin
As I was gathering my thoughts in preparation for this roundtable discussion, I focused on the first sentence of the session synopsis. There I found two concepts that at first I accepted at face value. But after reflecting for a while, I found myself questioning their validity. The sentence starts out, "These two opposing concepts," referring to a managed economy versus a free market economy, and goes on to state that "the debate continues" about which approach works best. First of all, I think instead of "the debate continues" it seems to me that it's more accurate to say that the debate resumes. Following China's adoption of economic reforms and the collapse of the former Soviet Union, there were just a few countries in the world that were viewed as having managed economies. These included North Korea and Cuba. I believe that in the early 1990s the debate was essentially over and that the market economy system was proved to work the best. However, with the arrival of the so-called Asian financial and economic crisis in mid-1997, some economic analysts started to refer to the affected Asian economies as managed economies, assigning them the blame for their own downfall. In addition, following the onset of the crisis, there were those who insisted that greater government intervention would be necessary, rather than relying on market functions, to prevent a recurrence. This appeared to re-open the debate on the two systems. But I don't think this renewed debate will lead us to a different conclusion that might cause us to change the mainstay of our economic system. And this also highlights my second points. While I do agree that a market economy and a managed economy are opposing concepts, I think that in practice they are opposite ends on the same scale. They are not mutually exclusive and we can find elements of each in every economy in the world. The difference between market economies and managed economies is a matter of degree not a matter of one or the other. For example, the United States, a country recognized by nearly everyone as the most representative of a market economy, still allows its Federal Reserve Board to artificially establish interest rates regardless of market forces and its Department of Justice to decide on whether or not to approve mergers and acquisitions between companies. To be more accurate, we may say that country A is a 90% market economy, meaning that 10% of the economy is run in a managed manner. In combining the elements with the two different economic systems, the specific situation of each country should be taken fully into consideration. We can find that a variety of combinations of elements of a market economy and a managed economy allowed Asian countries to prosper prior to the financial crisis. Now, I'd liked to address the point of whether a global standard economic system exists or not. Looking around the world, I don't see a consensus on a global standard for a market economy. Vaguely, people would say that the British and U.S. systems constitute the global standard, but even these are different from each other. In most countries of Europe, there is even more of a compromise. These are market economies but modified with managed elements. The American system however is accepted as the de facto standard since it is being pushed more forcefully than any other is. As with the economies of other countries, the U.S. economy is a product of the American environment — the sum of its history, society, culture, legal and industrial systems, et cetera. Other countries' economies have developed in a similar way through their own unique backgrounds. I think I can say that there is a global framework for a market economy in place but that the details are country-specific. This leads me to believe that there can be global harmonization with individualized economies. Now, I'd liked to develop this thought in the context of the Asian financial and economic crisis. The Asian economies are said to be rooted in Confucian tradition. In contrast to Western individualism and logical reasoning, Asian values emphasize collectivism and respect for age and authority. This was manifested in their economies by diligence, sacrifice, investments in education and high savings. This so-called Confucian capitalism works best under a system of strong government control. However, as the Asian economies became exposed to the global competition, the merits of Confucian capitalism disappeared and in the global context, these economies became inefficient and non-transparent, leading to an environment conducive to collusion. I can accept that institutional flaws were part of the cause of the Asian collapse, proving the weakness of their managed economies. But I am not alone believe that outside influences had an impact as well. Among the theories on the causes of the Asian economic crisis, four are more prominent. These are crony capitalism, antelope theory, conspiracy theory and Japanese responsibility. The crony capitalism approach is the one taken by the IMF. This blames the crisis on corporate business practices that were based on excessive borrowing of foreign capital and the poor management of the debt. Inadequate government and bank supervision, or collusion over the scale and use of the foreign debt compounded the private sector's financial mismanagement. The antelope theory draws an analogy to an effect a lion has when it attacks a single member of an antelope herd — that is, the whole herd scatters in fright. The reaction of international investors to the severe devaluation of the Thai Baht triggered major capital flight from all other nations in the Asian region. An opinion held by many Asian is that the U.S. government and/or Jewish capitalists plotted a financial siege on the Southeast Asian region in order to check the rapidly growing Asian economies, especially China. By pushing for the rapid liberalization of capital markets, which Asian financial circles did not have the experience, expertise or institutions to deal with, the West set the stage for the collapse. Asia was not sufficiently prepared for a Western-style market economy in the financial sector. The Japanese responsibility hypothesis states that after Japanese banks lent large amounts of money at comparatively low interest rates to Southeast Asia and to Western investment institutions, which also invested heavily in the region, a bubble economy exited. After the collapse of the Thai economy, the Japanese recalled their loans and investments in a hurry, which sparked severe capital out flows. Certainly, the answer to the cause of the Asian crisis lies in some of the above theories as well as other factors that I did not mention. The end result is that although the Asian economies made considerable progress under government initiatives — which were more effective under an Asian value system than under a market economy system — failure to adjust to a rapidly changing international environment has brought home the realization that reform is inevitable. But just like that a standard market economy does not fit every country, a standard IMF solution does not fit every financial crisis. Each country's economy must be treated like the unique entry that it is. There might be a standard framework that could be harmonized with the environment and capabilities of the country to forge a system that fits into the global scheme, Now, I come to the Korea's own response to the crisis and to the IMF-led solution. As with the other Asian tigers, in Korea the government-led development strategy since the 1960s was effective in mobilizing production factors for rapid industrialization. This enabled Korea to achieve remarkably high economic growth averaging over 8 percent annually. However, the price Korea had to pay in change for its outstanding economic growth was enormous. The lagging development and industrialists as well as a strong tendency on the part of government to intervene in the market, especially the financial sector. Experiencing the most difficult period since the Korea War over the past 18 months, many feel that the Korean economy now has bottomed out and turned upward. The most recent economic forecasts put GNP growth at a positive 4% this year and foreign currency reserves have grown to 59 billion U.S. dollars. Still, serious problems exist that without resolution we cannot say that recovery is complete. Among the most pressing issues are financial and corporate reform and labor- management relations. But the main thrust of the effort is focused on reducing government intervention in the economy and transform from a managed economy toward a market economy along the scale I mentioned earlier. However, in the effort to reach this objective, I find it a little ironic that the government says it is necessary to continue to intervene in the market when the goal is to reduce government intervention. But in reality, this is a transitional period, the nation is under the gun of the IMF and businesses are not volunteering to take the initiative in reform and restructuring on their own. Thus, intervention is inevitable for the time being. To give analogy of this situation, I think perhaps you are familiar with Korean golfer Pak Se-ri. She was a phenomenon on the U.S. Ladies' Professional Golf Association tour as a rookie last year, winning four major tournaments and receiving widespread acclaim. Her performance so far this year, however, has not been up to expectations and critics are saying that the reason is the strong intervention of her father. (Or it could be influence of a youthful love affair.) Up to now, Pak's father has been responsible for her training regimen, which some regard as Spartan. Now, sports analysts are saying that it's time for her father to turn over her development to a professional international instructor. Upon hearing this advice, her father said, " I would like to do this eventually, but Se-ri is my work in progress. Until she reaches age 25, I should be responsible for her." But can be sure he will abide by his own deadline. So it is with the Korean government. Will its current invention lead to a continuation of a managed economy? And what is its deadline for withdrawing from hands-on management? When will the government be able to distinguish between intervention and its role in a market economy? There also is discussion in international forums these days about whether the IMF's economic prescription in the future should be more oriented to preventive assistance that could help a country avert a crisis rather than imposing its own kind of managed economy using a standard formula. Korea' economy was treated with the standard IMF prescription, which was too bitter and sour. When the crisis first occurred even domestic bankers didn't know what BIS meant when the banks were asked to meet the 8% BIS requirement. And there are still debates whether Korean enterprises should be judged by A 200% debt-to-equity ratio and banks by the 8% BIS standard. These are Western criteria and it is unclear if they are suited to the Korean economy. The weakness of a managed economy have been fully recognized as a result of the Asian crisis. It is even more evident now that we must move further along toward a market economy in the light of the highly competitive business environment of the next century, which will be characterized by instantaneous global information and communications systems. As the concept of national borders becomes weaker, accordingly the role of government will become smaller. Therefore, at the same time as we work on achieving a market economy in Korea by increasing transparency and fairness and expanding our legal foundation, we must also be improving our political democracy. This is the two-wheeled cart that will carry the country into the new millenium. Without one of these wheels, the cart will not move forward. However, we must be careful of the trap that believing democracy and a market economy are naturally good even when pursued to their extremes. This is the basic economic philosopher of President Kim Dae-Jung — so called DJ-nomics. Thank you for your attention. |