US Capitalism Is New 'Tiger'
With Asia's troubles, US firms' focus on short-term profits is becoming world model.
WASHINGTON — No one can say with authority how - or when - Asia's money woes will end. But one thing seems clear as banks totter from Tokyo to Taipei: The US financial system is looking pretty solid by comparison.
Call it Wall Street's revenge. For years, many economists charged that US-style capitalism focused too much on next quarter's profits. They urged America to adopt some aspects of the Asian model, with its emphasis on long-term planning and tight relations between banks and business.
But "short-term focus" now looks like market discipline that keeps firms on track. Asian "long- term planning," in some instances, included bad loans to leaders' cronies for projects that made no economic sense.
It now seems inevitable that Asia will be forced to embrace some aspects of US financing, such as greater public disclosure of banking information and more-rigorous critiques of short-term prospects.
"We have a much better type of set up for a financial system than they have in Japan or Korea, and they will move closer to the US model," says Morris Goldstein, a senior fellow at the Institute for International Economics here. "But that doesn't mean the US model is without problems."
The US model looks good today due to the continued strength of the nation's economy. Asia's troubles have dealt the stock market a few blows -- but that instability has not affected the outlook for the actual US production of goods and services. Not yet, anyway.
Meanwhile, stock markets throughout Asia dived sharply yesterday. Asian currencies continued to lose value versus the US dollar, amid concerns that Korea was procrastinating over its implementation of reforms required by a $57 billion International Monetary Fund bailout.
South Korean President Kim Young-sam apologized to the public for the second time in a month for the nation's deepening economic crisis.
Asia hurt by cozy bank-firm ties
The causes of Asia's woes are many and varied. Ironically, one is the very success of the US economy, which drives up the dollar's worth and has hurt Asian currencies.
But at the heart of many current Asian problems is finance. From Singapore to Japan, the system for pumping funds to businesses is fundamentally different than it is in the US.
Flexible. Short-term. Harsh. Rigorous.
Call it what you will, "we have an incredibly competitive system," says Gary Jefferson, a professor of international economics at Brandeis University in Waltham, Mass. "Capital can move very quickly."
That's because dispassionate financial markets - as opposed to more-friendly banks - are more important in the US than elsewhere. Bank loans in the US are equal to only about half the nation's gross domestic product, according to a World Bank study. Much of the rest of US capital comes from places like the bond market, which can punish a corporate misstep overnight via a drop in value.
In Malaysia, by contrast, bank loans equal 100 percent of GDP. In Japan, they equal 150 percent.
Furthermore, huge chunks of US stocks are owned by pension funds, mutual funds, and other "hot" institutional investors who are keenly interested in their own quarter-to-quarter results. Stocks that seem off track can get hammered.
Less willing to punish missteps
Some Asian practices look cozy by comparison. Korea, for instance, has followed Japan in building up big "chaebols" - conglomerate corporations that dominate the economy and own one another's stock. Corporate boards can be interlaced, leading to an inevitable reluctance to quickly punish any problem and less ability to move fast in the face of market changes.
So when some macroeconomic imbalance occurs, such as the recent dive in value of Asian national currencies - wham.
"Asian cooperation has worked well in the longer run, but it's not very flexible," says Peter Temin, an economist at the Massachusetts Institute of Technology.
Some aspects of the bond-driven US economy will show up in Asia in coming years, say economists. Witness the effort by the IMF, which is asking South Korea to make some changes in disclosure and other aspects of its capital markets in return for its big bailout loan.
But such change may not come easy. Resentment is building over what many see as a US-dictated infringement of Korean sovereignty and over Washington's refusal to put much of its own money at risk to help an old ally.
Furthermore, the US system isn't without its flaws. It didn't prevent the big US savings-and-loan crash, which is somewhat similar to Asia's crash today. It also depresses investments in research and development and other long-payoff items.
In a few years, the Nike may be on the other foot, if Asia recovers and the US goes into recession.