THE MYTH OF THE MIRACLE

By Richard Hornik

News flash--the law of gravity does apply in Asia. For the past decade or two, Japan and then a succession of its East Asian neighbors had us convinced that they were exempt from conventional economic constraints. The proof: year after year of high growth with minimal inflation. Contravening all known wisdom of economic management, they did it with lots of direction from government bureaucrats--who regularly outguessed the markets in developing efficient industries. The dawn of an Asian Century was upon us, and pundits struggled to explain this miracle.

Most took as their starting point the thesis that the region's comparative advantage over the West was its culture. We Westerners, you see, are too--how shall we put this?--liberal. We emphasize individual rights and initiative. Asians are more group oriented. Following the dictates of Confucius, they are willing to submerge their identities and desires into those of the collective. Most important, Asians have more respect for authority, especially that of an educated elite.

The Japan Inc. model, which has been adopted to varying degrees across East Asia, relies on the body politic's accepting the dictates of a meritocracy chosen from society's best and brightest. When the technocrats decreed that the economy needed vast amounts of capital to invest in development, the citizens did not protest, even when cajoled into saving upwards of a fifth of their incomes. On this ocean of funds, the economic mandarins launched one industrial battleship after another, directing banks to back companies in industries that offered the most potential for growth. Profits be damned too--market share was the goal.

Yet the low cost of capital may have been East Asia's undoing. Cheap money can make people do silly things. In the 1980s it led them to pay ridiculous prices for stocks and real estate, and the fever spread from Tokyo to Bangkok. But even after the Japanese bubble burst, the experts on the Asian model justified similar excesses around the region because we were on the cusp of the Asian Century, one of limitless growth. The vaunted technocrats thought--or perhaps hoped--that they could once more invoke the Asian model to wipe away the looming mess. Only recently have most governments admitted that there is no easy way out.

Unfortunately that admission misses the point, for it is the top-down nature of the Asian model itself that is the real cause of the crisis. This model bred complacency, cronyism and corruption. Isolated from public opinion, just as they insulated bankers and businessmen from market forces, the technocrats ignored the deafening clamor of alarm bells that market forces have been ringing for years. Worse still, because there was no public scrutiny of the iron triangle of bureaucrats, businessmen and bankers, the natural coziness that developed in that clique led inevitably to decisions based on personal relations. At best this was inefficient, at worst corrupt. The financial crisis facing Asia today is merely a symptom of a much deeper problem. The social and political assumptions on which the Asian model was founded are terribly outdated. The global economy is far too complex and fast paced for any bureaucrats to control. The only miracle in Asia is that this approach worked as long as it did.

Hornik, TIME's European business editor, is a former Hong Kong bureau chief