Published September 30, 2008

It's not a failure of capitalism

NEITHER the 1998 East Asian financial crisis nor the current American economic crash demonstrates the failure of capitalism. Rather, it shows the need for different economies to pursue their own model of development based on their unique circumstances. This should include the use of government regulatory power as part of a menu of economic policies.

East Asians should not react to the economic problems facing Washington and Wall Street with schadenfreude. If there is one common lesson that economic policymakers on both sides of the Pacific should learn from their respective financial problems, it is that they need to continue securing the foundations of economic globalisation and liberalisation as a way of expanding wealth worldwide. The financial resources that the reforming East Asian economies accumulated as they tried to resolve their crisis in the late 1990s helped to finance American economic growth. Thus, a collapse of the American financial system could have a devastating effect on the development of East Asian economies by slowing down their exports and the growth of their foreign reserves. When it comes to America and East Asia, 'decoupling' from each other's economies is not an option.

A major overhaul of the US economic regulatory system will have to wait for the next American president, who will arrive in Washington next year, but America's economic partners in East Asia and elsewhere have an interest in a rapid Congressional bipartisan approval of the bailout plan that would create the conditions for unfreezing financial markets and perhaps even make it possible to resolve the US housing crisis. The worst-case scenario would involve a high-charging politicisation of the financial crisis in Washington which could only boost the populist sentiment in the US and put pressure on the new president and Congress to embrace anti-business and protectionist policies.

The anti-Wall Street rhetoric embraced by the two leading presidential candidates should highlight these concerns at a time when some lawmakers and pundits argue that the financial crisis proves that the process of economic liberalisation and globalisation are not working anymore. Indeed, those politicians in Washington who advocate initiating a witch hunt against American businesses are bound to advance a nationalist economic agenda that would include searching for economic witches in East Asia.

East Asians who want to see their economies prosper and boom will hope that the choices that will be made in Washington in the coming months and years will focus on the structural problems of the American economy while helping in the long run to reignite the American economic engine that is necessary in order to continue advancing the liberalisation, and by extension, the growth of the entire global economy.