Mon, Jul 02, 2007 page9

• Democracy takes backseat to Asian economic growth

  In the age of globalization, capitalism often widens the gap between rich and poor, even undermining the push toward democracy

  • By William Pesek / BLOOMBERG
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  In September 1997, at the height of the Asian financial crisis, former US Treasury secretary Robert Rubin visited China's Great Wall. It was a brief respite from the tense talks in which he was embroiled in Beijing.

  As we walked along, he paused for a moment, pulled at one of the wall's stones and deadpanned: "Yep, pretty solid. Hopefully we can say the same about the yuan."

  The reference was to the first of two missions back in the Chinese capital -- encouraging China not to devalue its currency. The concern was that China would join Thailand in weakening its exchange rate. Even though Indonesia and South Korea did it too, investors predicted disaster if China were to do so.

  Today marks the 10th anniversary of the start of the Asian crisis, and China's currency is still effectively pegged. China formally severed the yuan's link to the US dollar in 2005, though it has amassed more than US$1 trillion of reserves to hold the exchange rate in place. Even so, getting China to keep the yuan steady was a big coup for Rubin at the time.

  Ten years on, Rubin's other mission in Beijing that week -- nudging China toward democracy -- isn't looking so good. At the time, US president Bill Clinton felt Rubin, a Goldman Sachs Group Inc alumnus, would have more success than his State Department in making the case for more openness. The pitch: Democracy leads to prosperity.

  Given China's 11 percent growth and rising global stature, it's doubtful many officials in Beijing regret ignoring the US' democracy-is-best message. What may be surprising, though, is how China's views on democracy are gaining favor in Asia.

  The region is certainly back. While much work remains to be done to improve economies and spread the benefits of growth, Asia is again a hot investment destination. Many -- including Federal Reserve Bank of New York president Tim Geithner -- say the crisis made Asia more resilient.

  "They are much less likely to face the type of crisis, the acute, self-reinforcing panic produced by the balance sheet problems of that era," Geithner, who visited China's Great Wall with Rubin 10 years ago as a Treasury official, said of the region's economies on June 20.

  One of US President George W. Bush's most consistent philosophies is that democracy is a necessary ingredient to economic success. It's well-known that China, Russia and Venezuela see things differently. However, less recognized is how Asia isn't embracing political openness the way officials in Washington expected in the late 1990s.

  Thailand is one example. Last September, popularly elected prime minister Thaksin Shinawatra was removed by a coup. Prior to that, Thailand's post-crisis recovery made it an investment darling. Since September, three years of economic gains and wealth creation have been squandered. Singapore's politics, meanwhile, haven't changed much since the late 1990s. Hong Kong residents still don't have universal suffrage.

  Asia does have its democracy success stories. Taiwan is one example, of course. India, Japan, South Korea, Malaysia, Indo-nesia and the Philippines are others.

  Yet there are a couple of reasons to be disappointed about the state of democracy in Asia. One is weak government institutions: They hold democracies together more than national leaders do.

  The Philippines is a case in point. While Gloria Arroyo is the elected president, democracy hasn't been the panacea that was supposed to reduce poverty. The country was never one of the Asian tigers, and corruption remains rampant.

  Across Asia, strong ministries, independent courts, a free press, credible central banks and outside watchdog agencies would not only enhance democracy, but also the forces of capitalism. In Thailand, Thaksin governed according to his own playbook and circumvented the rule of law. A constitution and elections isn't enough to ensure democracy.

  The other reason democracy isn't thriving in many parts of Asia is disillusionment with the process, coupled with the example offered by China. Instead of US-style government, Asia may be moving toward "illiberal democracy."

  The phrase was made popular by Fareed Zakaria in a Foreign Affairs article in 1997, the year the Asian financial crisis began.

  It refers to a model in which leaders are elected to some extent, but civil liberties and press freedom are kept under tight watch in the name of stability. Some call such leaders "elected autocrats."

  The US' founders pursued democracy in sync with capitalism. In the age of globalization, though, capitalism often widens the gap between rich and poor, and even undermines the push toward democracy. If political freedom doesn't quickly translate into riches, populations will question its utility.

  Meeting with businesspeople in India, one often hears some variation of "it's so hard for us to get things done, but China's top-down system can do what it wants, when it wants."

  It's not that Indians want to live in a China-like system that censors the Internet.

  It's more a recognition that democracy can have its limits when it comes to economic policy making.

  Rumblings in Asia may increasingly shift toward economic growth first, full-blown democracy second. It doesn't mean openness and capitalism are incompatible in the long run. It's just that Asia needs more convincing in the short run.

  William Pesek is a Bloomberg News columnist. The opinions expressed are his own.

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