Crony Capitalism, the Asian Financial Crisis, and the Anticorruption Movement: What Are the Connections?

A couple of weeks ago, I posted a minor diatribe responding to the related claims – which I had perceived in a number of recent blog commentaries – (1) that corruption is not really that big a problem for economic development, and (2) that the emphasis on corruption had more to do with the desire of Western countries to feel superior to the allegedly misgoverned countries in the so-called Global South. One of the targets of my critique, Michael Dowdle, has posted an interesting response that deserves careful consideration.

Dowdle explains that his original post did not claim “that everyone involved in the anticorruption movement is infected by” the impulse to claim moral superiority, did not claim that this impulse “is the only or even the predominant motor behind the global anticorruption movement,” and indeed did not claim that this impulse is “a distinctly Western mindset.” After making these helpful clarifications, Dowdle explains the root of his concern that the desire to claim moral superiority may (partly) explain (some of) the global anticorruption movement: the invocation of a particular kind of corruption – “crony capitalism” – to explain the failures of the neoliberal model of global capitalism, most prominently in the 1997 Asian Financial Crisis.

In a nutshell, Dowdle’s argument goes something like this (and I apologize in advance for what I’m sure will be a bit of an oversimplification, but I think this is basically faithful): (1) the rapid growth of the Asian economies in the 1980s and 1990s, with their allegedly distinctive approach to government involvement in the market, posed a challenge to the purported superiority of American capitalism; (2) the Asian Financial Crisis delegitimized this alleged alternative model of capitalism, and so was greeted “with a clear degree of glee” from many American commentators; (3) commentators (mostly Western) claimed that a root cause of the crisis was “crony capitalism” – the alleged tendency to make loans based on political or social connections rather than expected returns – as part of an emerging narrative about how the “Asian Alternative” had failed; (4) in fact, however, crony capitalism had nothing to do with the crisis; and (5) the global anticorruption movement more generally “was strongly catalyzed by the discourse of corruption that American observers used to describe and explain” the Asian Financial Crisis.

For the moment, let me put aside that last point about the alleged causal relationship between the discourse of crony capitalism in the context of the 1997 crisis and the emergence of the global anticorruption efforts more generally – except to say that I’m skeptical that this was more than a minor factor. (Certainly Dowdle doesn’t point to any evidence, beyond the timing, that would substantiate this claim.) I want to focus instead on his intriguing and provocative arguments (A) that crony capitalism had nothing to do with the 1997 Asian Financial Crisis, but (B) that the emphasis on crony capitalism in some quarters reflected a desire to delegitimize a perceived Asian challenge to American/Western capitalism. I find this narrower version of Dowdle’s hypothesis much more plausible than the much broader version I (mis)understood him to be advancing in his original post. But I still find myself somewhat skeptical, so in the interests of continuing what at least for me has been a very stimulating exchange, let me push back against certain aspects of Dowdle’s argument here.

The main question at issue is how much, if at all, the set of practices labeled “crony capitalism” – or, in Dowdle’s preferred, less pejorative phrase, “relational capitalism” — had to do with the Asian financial crisis. I should say up front (though this is about to become obvious) that I’m no expert in international finance, so I’m very much out of my depth here. That said, my reading of the literature suggests that the causes of the crisis were complex, and could not be reduced to something as simple as “crony capitalism.” So, insofar as some commentators made that latter assertion, then I agree with Dowdle that this says more about the commentators’ desire to fix (moral) blame than anything else. But Dowdle doesn’t argue merely that crony capitalism wasn’t the sole cause of the crisis. He makes the stronger claim that “the Asian Financial Crisis appears to have nothing to do with anything resembling ‘crony capitalism’” (his words, my emphasis). Is that right?

Dowdle asserts that this view — that crony capitalism had nothing to do with the crisis — is “widely held today,” but he provides neither links nor citation. My admittedly cursory reading of the literature suggests a more nuanced view, in which crony/relational capitalism was a contributing factor to the crisis (and its relative severity in different countries), insofar as loans made on the basis of political connections had a higher probability of non-performance. Most of the overviews of the crisis I’ve been able to find discuss a number of causes – among them, the low quality of many of the loans that had been made in the countries hit by the crisis (see here and here). And there’s certainly evidence that one cause (though perhaps not the only one) of these low quality loans was the ability of politically-connected firms to get easier access to credit (see here and here). (There’s corroborating evidence of this phenomenon in other contexts as well – see here and here.) Also, interesting research by Shang-Jin Wei has suggested that domestic crony capitalism and fickle international capital flows may not be rival explanations for currency crises (as Dowdle seems to suggest), but may instead may be linked: a higher degree of crony capitalism is linked to greater reliance on international bank loans (which are more volatile) relative to foreign direct investment (which is more stable).

Given all this, and in the interest of deepening my understanding of these issues, I hope that Dowdle or others who share his views might elaborate on the claim that relational capitalism was not, at the very least, a significant contributing factor to the 1997 crisis.

One more observation seems pertinent here: Dowdle emphasizes that the rise of the Asian Tigers posed a distinctive challenge to the American model of capitalism. Though he doesn’t elaborate on what precisely he thinks the nature of that challenge was, but I presume it’s something along the lines of the alleged “Asian model” of close business-government ties, more self-conscious government management of the economy (the “developmental state”), etc. The basic idea, very popular in some quarters from about the mid-1980s through the mid-1990s, was that the Asian Tigers offered a truly alternative model of capitalism. But of course, the post mortems on the 1997 crisis that downplay the role of “crony capitalism” emphasize (perhaps indirectly) the degree to which these Asian economies were not significantly different from other economies. If that’s right, then there never really was an “Asian capitalism” that “might offer an alternative to American capitalism” (as Dowdle puts it in his post). I guess what I’m trying to get it is that Dowdle can’t have it both ways: He seems to want to argue that Asian capitalism presented a serious alternative model of capitalism, but the analyses of the 1997 crisis that he presumably relies on for the claim that it wasn’t really about crony capitalism also seem to suggest that Asian capitalism wasn’t so different from American capitalism after all.

That said, I think there might be another way of interpreting Dowdle here. The issue might not have been “Asian capitalism vs. American capitalism,” but rather the costs of capitalism (particularly the type with liberalized financial markets) more generally. A problem with relatively unregulated global finance, as we’ve been reminded by recent events, is the risk of a serious financial crisis. When that happened in 1997, perhaps there was a desire in some quarters to say that the problem wasn’t unregulated global finance as such, but rather its “corruption” by Asian-style crony capitalism. That may well be, and if that’s what Dowdle is saying, then at least on this point we are in (tentative) agreement.

Nonetheless, I would still maintain that cronyism was (and is) a serious problem in these economies. Moreover, if Dowdle is in fact correct that this (mis-)diagnosis of the Asian Financial Crisis helped spur the global anticorruption movement more generally, then I would view this more as a happy collateral consequence, rather than a stain that taints the larger enterprise.

One thought on “Crony Capitalism, the Asian Financial Crisis, and the Anticorruption Movement: What Are the Connections?

  1. Without commenting on the various responses by the blogger or Dowdle I would note the description under (2) in the first paragraph of this post.
    There can’t be many who have this view of the anticorruption element. Most would take on board what is being said by them and see that the anticorruption element is more interested in fixing things so that people suffer less from corruption than they currently do, rather than that they are taking the moral high ground.
    But I would suggest that the moral debate is actually between, not the anticorruption element in the North and the global south, but between the anticorruption element in the North and the anti-anticorruption element in the North. This tension has arisen due to well articulated statements by the anticorruption element which have shown the weakness of the position of the anti-anticorruption element. The result is some are uncomfortable with their position and so make extreme statements like (2). It really is a weak response.
    Anyway, there just can’t be many of them but it is surprising that they are so out of touch with the views of the many in the global south who see corruption as a core cause of poverty. This is an almost unbelievable position to hold so it further shows that they are arguing from a weak position and should just admit that they have got it wrong this time. They can join the anticorruption element and make considerable contributions to it.

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