Demagoguery Kills Market in South-East Asia

Gareth MorganEconomics


The turmoil that continues to embroil South East Asia contradicts the conventional view that this region had found a growth formula which countries like New Zealand would benefit from emulating. The Asian formula is rapidly turning to mush and its applicability to other economies becoming more irrelevant than ever – despite our Treasurer's new-found admiration for Asian values. Furthermore, expect the recent inflows of capital into New Zealand from some of the Malaysian, Singaporean and Indonesian business interests to soon take flight – as the Japanese hot money did earlier in the 1990s when their bankers called.

At the heart of the region's problem in harnessing capitalism, is the clash which a market economy has with non-democratic political systems. While Lee Kwan Yew may have been Muldoon's biggest hero and apparently appeals to the populist in Peters as well, his style of political management, now emulated by several leaders in the region, has a limited life. His modern day equivalent is Mahathir Mohamad of Malaysia – a demagogue who has been largely blamed for the instability which has gripped the region's currencies. And the more Mahathir rails against international financial market discipline and the role of "speculators", the deeper into the dungeon his economy is being thrust.

I have just spent a week on one of the smaller of Indonesia's 13,600 islands inhabited by 2,000 people who glean a meagre living from the farming of sea grass, which is ultimately sold to the Japanese and Europeans as an ingredient in the manufacture of cosmetics. Noting that the Indonesian rupiah has just fallen some 30% I suggested to the villagers that they might look forward to markedly higher prices for their production. But apparently not. The whole industry is controlled by Java business interests linked to the ruling clans who will pocket the windfall. They're able to do this because of the export monopoly afforded them by the ruling regime. So the villagers will feel the downside of the devaluation – higher prices for the products they wish to buy, but will not be recompensed through higher prices for their exports – poverty entrenched.

This is just a small example of the type of distortion to markets that are rife through the command and control, feudal societies of South East Asia. In Indonesia there is very much a caste system still in operation. So you can come across, as we did, young people who have all the intelligence and potential to benefit from higher education but are locked out of that because the selection process for tertiary education favours the ruling classes – in terms of allocation of places, fees, and absence of scholarships to lower castes. Again a market prevented from functioning.

Elsewhere banks lend to politicians' pet projects. Private banks have been told to make a $1 bn loan to a "national car" project teaming Surharto's son Tommy with Korea's debt-ridden Kia Motors. Bank Yama controlled by the President's daughter is illiquid and so the state-owned bank has been instructed to bail it out.

There is a school of thought which argues that democracy is not good for developing economies and that efficient, authoritarian regimes are far better destinations for Western capital. This group cites the fact that India continually posts lower than average growth rates, and that the largest dollops of Western money have flowed into Communist China and authoritarian Indonesia respectively. The faster growing economies of Malaysia, Singapore and Hong Kong have always practised only a stunted democracy which supports mainly the interests of those in power and pooh poohs human rights.

But the problems of Asia run deeper than the economic distortion sponsored by any single political leader or particular political style, even if all the economies currently embroiled in balance sheet implosions are governed by non-elected autocrats. At the heart of the problem lies the usurpation of markets' roles in allocating resources across the economy. While authoritarian regimes may be decisive there is no evidence that their "efficiency" is in any way an economic efficiency.

The fragility of the banking system in Asia which the present currency depreciations are exacerbating, is in large part a result of the clash between tyrannical controls over economic resources and opening up these economies to global capital. By placing concrete walls in front of the opportunities which so many of their citizens should have, the rulers impede rather than enhance, economic welfare. Far from threatening the viability of Asia's economies the current currency turmoil brings forward the collapse of their political structures – and that's a good thing.

Demagoguery Kills Market in South-East Asia was last modified: December 15th, 2015 by Gareth Morgan
About the Author

Gareth Morgan

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Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.