Manas Chakravarty:Good-bye to the Washington consensus

A new Asian consensus is taking the place of neo-liberal orthodoxy

Industrial production in July rose by 15.5 per cent in China, 19 per cent in Singapore, 12.8 per cent in Korea, 9.5 per cent in Taiwan and 9.3 per cent in Thailand.

In June, industrial production had risen by 13.3 per cent in Malaysia and 15 per cent in Indonesia. It's plain that the Asian economies are doing very well indeed.

Is that because they took the International Monetary Fund's (IMF's) bitter pill after the Asian crisis, freed their markets, scrapped the cosy relationships between government and business, restructured their economies and buried crony capitalism? Far from it.

"Reform" has been halting, partial, and slow. In South Korea, the chaebols remain, although some have stumbled, and the halo surrounding them has faded.

In Malaysia, the currency remains pegged to the dollar and capital controls continue to be firmly in place. In Thailand, Prime Minister Thaksin Shinawatra has ushered in a new home-grown development model, combining export-led growth with a policy of helping the rural and small industries sector.

Instead of the wholesale restructuring of their economies, as desired by the IMF, Asian nations have instead ensured that they are less vulnerable to short-term forex flows.

IMF officials point out that "The list of unfinished business includes effective bankruptcy laws, tighter prudential oversight, and improved disclosure and governance in the capital markets."

Yet the Asian economies are booming, and even Japan has snapped out of its decade-long stagnation, posting a GDP growth of 4.4 per cent in the second quarter of the current calendar year and a 5.9 per cent rise in industrial production in July. The Washington Consensus' victory over the Asian model has proved to be short-lived.

Other developing nations, envious of Asia's growth rates, are unlikely to be impressed with the World Bank/ IMF's reservations. If they can notch up some of the highest rates of economic growth in the world, they wouldn't mind if a bit of crony capitalism comes along with it.

In any case, with Enron and Halliburton as examples of neo-liberal governance, it's unclear which brand of capitalism has more cronies.

The East Asian model: The growth of the Asian economies, including Japan, was a slap in the face for neo-liberalism. The neo-liberal ideology had argued that development went hand in hand with open economies, private property, free markets, the scaling down of governments, stock markets, financial liberalisation, openness to foreign direct investment, and privatisation.

These prescriptions became known as the "Washington Consensus". Yet the Asian countries had violated every rule in the neo-liberal text book, and had been rewarded by spectacular growth.

The pioneer, of course, had been Japan, with its government-sanctioned cartels, price-fixing, forced savings, import barriers, cheap loans to targeted industries, and cross shareholding.

Its policies resulted in high growth rates in the post-war period, a fact that the World Bank was reluctantly forced to concede in its 1993 report on the Asian miracle, which damned the Japanese example with faint praise.

As Japanese economists have pointed out, " We picked winners such as steel, shipbuilding, synthetic fibre, petrochemicals, automobiles, machinery and parts, electric appliances and electronics, and so forth, most of which were infant industries in Japan at that time."

Similarly, the Korean government targeted infant industries, which received preferential access to credit, lower taxes and protection from foreign competition.

In all these economies, there was a close relationship between government and business, with some of them, such as Taiwan and Singapore, even going to the heretical extent of having a large state-owned sector.

Singapore has sometimes been described as the single successful socialist economy in the world, because of its large well-run state-owned companies "" Singapore Airlines, Singapore Telecom, DBS Bank. In Taiwan, even today Chinese Petroleum, Chunghwa Telecom and Taiwan Power are state-owned.

On the other hand, the disastrous record of those countries that toed the neo-liberal line led to cosmetic changes in the structural adjustment menu.

New features such as the need for social safety nets, corporate governance, the rule of law, and independent central banks were added. Unfortunately, even this New Washington Consensus crumbles in the face of the Chinese experience.

The Chinese model: The Chinese experience has been even more radical than those of Japan or South Korea or the Asian tiger economies.

It has embraced the export-orientation of other Asian countries, relying extensively on foreign direct investment to supply the export push.

It has opened up the economy at its own pace, thus avoiding the disasters that happened to the Soviet republics. While it has given a free hand to foreigners in the special economic zones, the government has ensured that strict restrictions were imposed on foreign investment in the rest of the country, so that investment was tailored to national priorities.

As Harvard's Dani Rodrik points out, "China did not liberalise its trade regime to any significant extent, and it joined the World Trade Organisation (WTO) only last year; to this day, its economy remains among the most protected in the world.

Chinese currency markets were not unified until 1994. China resolutely refused to open its financial markets to foreigners, again until very recently.

Most striking of all, China achieved its transformation without adopting private-property rights, let alone privatising its state enterprises.

China's policymakers were practical enough to understand the role that private incentives and markets could play in producing results. But they were also smart enough to realise that the solution to their problems lay in institutional innovations suited to the local conditions "" the household responsibility system, township and village enterprises, special economic zones, partial liberalisation in agriculture and industry "" rather than in off-the-shelf blueprints and Western rules of good behaviour."

The bottomline "" Chinese growth has been achieved in circumstances very different from that prescribed by the neo-liberal consensus.

Ditto for India. Reform in India has occurred at a glacial pace, labour laws have not changed, the public sector continues to occupy a large place in the economy, the capital account is yet to be fully opened up, the central bank is far from independent, and import tariffs remain among the highest in the world.

And in spite of all this, the Indian economy has achieved star status.

The Asian consensus: Would faster reform have led to faster growth? Perhaps it would in some areas. Yet the experience of the ex-Soviet republics, much of Latin America and sub-Saharan Africa indicates that neo-liberalism is no recipe for growth. Undeniably, growth in today's world has Asian characteristics.

Perhaps all this talk of growth models conceals the real issue, which is the attempt by Asian capital to survive and compete against Western capital.

That would explain why there's no ideal Asian model. The Japanese and Korean emphasis on heavy industry has not been replicated in south-east Asia.

Singapore's version of state capitalism has been very different from Thailand's growth path. The Chinese have relied far more on foreign investment than the Koreans and the Japanese. And India's services-led growth stands in a class by itself.

In short, the Asian experience has been eclectic, and there have been many wrong turnings. Taiwan never did succeed in its attempt to produce cars, and Singapore under Lee Kuan Yew tried import substitution for a short while, making toothbrushes, mosquito coils and garments, before it realised that its strengths lay in altogether different directions. If there is an Asian consensus, it is the conviction that there are many roads to development.

China has shown that it is possible to be part of the global economy in the post Cold War, post-WTO world on one's own terms, adapting markets and institutions for one's own ends.

As Rodrik points out, it's not just a matter of copying a growth model "" the challenge is to find out which policies and institutions suit your country.

The Chinese call it "crossing the river by feeling the stones." To do that, one has to give up ideology "" not just the Communist one, but also the neo-liberal Washington consensus.