CIAO DATE: 06/02

Economic Crisis and Corporate Reform in East Asia

Introduction

The Asian financial crisis of 1997-98 involved, among other things, a failure of regulation. Some believe this failure is endemic to global capitalism, and others believe it was profoundly local and idiosyncratic, emanating from regulatory flaws in the affected countries, stretching an arc from Thailand and Indonesia to Korea and Japan. There is also a debate about the nature of the regulation that failed. Some argue that the crisis emanated from a surfeit of nettlesome regulations and endemic industrial policy; others claim it happened for want of effective regulations and (even) industrial policy. Across the hypotenuse of these disagreements, however, stretches a universal recognition that regulatory infrastructure and institutions do matter and that they must play a major role in the way we think about economic development. After the miracle years in East Asia, "good governance" has become the Spirit of the Age.

I intend to examine one aspect of this trend toward good governance: corporate governance. Reform of corporate governance was at the heart of the comprehensive reform package put together during the Asian crisis by the International Monetary Fund (IMF), especially with regard to Korea. The ambition behind the reform package was to alter, once and for all, the way that the Korean big businesses conducted themselves. Thus the IMF, in full cooperation with the newly elected government of Kim Dae Jung, demanded that Korea's big businesses reduce their reliance on debt financing by half—from over 400 percent to 200 percent by the end of 1999—and suggested specific ways it could be done. The IMF also asked Korea's big businesses to sell off their "non-core" subsidiaries and to stop diversifying into unrelated fields. Moreover, it demanded that Korea institute a governance system whereby the power of minority shareholders and outside directors would be vastly enhanced.

I will argue that the issue of corporate governance must be understood in time and place, and in historical and political context. Such an approach may mean eschewing common assumptions about regulatory frameworks and reform proposals that make more sense in settings, such as the United States, accustomed to complex legal regulation. In presenting my argument, I will also underscore the enormity of the economic, social, and political problems lurking in the shadow of this innocuous term, "corporate governance." To instruct the present and to caution future expectations of reform, I will examine past practices of corporate governance in East Asia. Several East Asian countries have now embarked upon reforms, prompted by the exigencies of the 1997-98 financial crisis and the disciplines of the International Monetary Fund. Much American commentary in the past six months blames the Asian crisis on certain generic attributes—"crony capitalism," absence of transparency, moral hazards, and a general failure of the rule of law, all characteristics considered ubiquitous throughout the region.However, I sharply distinguish Northeast Asia from Southeast Asia and find two highly distinctive patterns of corporate governance.The first is a Japan-shaped model that influences Taiwan and the current leadership in China but is best exemplified by South Korea (hereafter Korea). The second is a Chinese business-practice model whose roots are at least 150 years old. It is market-adaptive and efficient enough to need little reform of corporate practice— or perhaps, from an Anglo-Saxon standpoint, to need so much as to make the task impossible.

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