Charles Richardson: Well, Christopher Lingle, welcome back to Australia.

Christopher Lingle: Thank you.

CR: In your book, The Rise and Decline of the Asian Century, on the very first page you say that ‘There are reasons to believe that long-run trends may reverse the fortunes of ostensible economic powerhouses.’ They may be long-run trends, but things actually happened in the short run. Did you ever expect the crisis to come on so quickly?

CL: Well, I thought before the end of this century there would be substantial signs of decline, but what I was saying was that the previous long-run trends that were being extrapolated by others would very shortly begin to give these countries problems. There was a real myopia, and there was a residual belief that authoritarianism is actually good for economic growth. People were quite happy to believe that for a variety of reasons – some of them commercial, some of them ideological, some of them simply naive. Hopefully the best result of the East Asian crisis is that that myth has been put to rest.

CR: How did you first get interested in the Asian countries?

CL: It probably came from my grandfather’s experiences in the Far East as a member of the U.S. Navy, there were artifacts from his trip around the house, and I suppose that was part of the allure. But I was drawn to Asian philosophies and art at a very young age. So when I became an economist, I shifted my attention accordingly.

CR: So you’d studied the Asian economies before you went there?

CL: Actually yes and no. I think one of the wonderful things about economics is that one can take very simple tools and apply them in a very wide range of circumstances, very often without necessarily having background knowledge (although it does help), without knowing languages (although that obviously helps), without knowing history in some cases. Economics provides you with an ability to sort of step right in and make a fool of yourself.

In the case of East Asia, I’m interested in authoritarian regimes, and Asia is one of the applications of that. I first was in China in late 1987 and I was interested in the sort of transition that was happening there. But I often say I’m an Asianist by accident – I was invited to Singapore on the basis of my expertise on the European economies. But of course once I was in Singapore, I was actually more interested in researching what was going on there. So I began to focus my attention increasingly on East Asia and less on Europe, because I was on the spot as it were. That’s the way it developed.

CR: And then you had an unpleasant experience with the Singaporean government?

CL: Well after I had my misadventures with the regime, people provided me with a forum: they wanted to hear what I had to say about Asia. And that redoubled my efforts and my interest, because I was satisfying a demand.

CR: One thing that struck me reading your book was that it’s not just about Asia, it’s about the West as well – it’s about the values which have helped the West endure the shocks which the Asian economies seem to have been unable to cope with.

CL: I think that’s right – I think the story of Asia is a universal story, in the sense that my tools of analysis are very unsophisticated relative to high theory in economics. I apply economic principles to understanding how markets function and how institutional arrangements influence the functioning of markets. East Asia is just a way of testing out those sorts of models, and I found East Asia lacking in the institutional infrastructure needed to support market economies in the long term, and indeed to survive in a global economy.

CR: Do you see tendencies in the West that perhaps we should be worried about – are there people who want to take Western economies in the same sort of direction?

CL: Well of course not to the same degree; we’ve had our flirtation with fascism and communism, but the greatest threat is the sort of corporatist arrangements that we see in much of East Asia. To give it a regional flavor I refer to it as ‘Confucian corporatism.’ It does in a sense also reveal some of the peculiarities: a much greater reliance on one-party states and authoritarianism than in corporatist arrangements in Western Europe, in France or in Germany in the post-war period – or in Britain, before the breakdown of the social contract after Labour’s demise. And those forces are always there: there are always ideas that this ‘third way’ can be invented, that a strong government will pay economic dividends, despite thousands of years of evidence to the contrary. So yes, it hasn’t gone away.

CR: I always find it disturbing that there are people in the West who are very strong on the importance of free trade, for example, but much less keen on the free flow of information and human rights.

CL: And they don’t understand the connection. I think the best case in point on that is these economic freedom rankings that my good friends at the Heritage Foundation and the Cato Institute did, because it’s missing the point in many ways: you cannot have free markets without a free society. That’s not to say that markets will not function at all, it’s just that they will function very poorly, much less effectively, when you don’t allow a free society. So I’m afraid these economic freedom rankings are misguided in some ways. They were motivated by good intentions, but we don’t need to prove that markets work any longer.

CR: We know that already.

CL: Yes, one doesn’t have to work very hard to convince most people outside of Canberra or Cambridge that markets work.

CR: And I take it you feel the connection runs the other way as well – that you can’t sustain a democratic or free society without free markets.

CL: Absolutely. They go hand in glove – they’re mutually supporting. And of course we never know what triggers this development – it’s a very long term process – but I do think the essential element is the development of individualist-based social structures, political structures, economic structures. That is what actually creates, hopefully, a free economy and a free society at the same time. All these ersatz democracies in East Asia – they created an illusion that you can have free markets without other freedoms, but that was under very special circumstances. Those circumstances have passed, and they’ll find that it’s going to be much more an uphill battle in the future.

CR: You were saying over lunch that you thought adopting the values of democracy was a matter of modernising rather than specifically ‘westernising’ – do you think it was just more or less historical chance that those values arose first in the West?

CL: Yes, I do; the objective conditions that various communities found themselves in led to changes in the systems of governance in the West first. If you look at the Chinese in particular, or any of the rice cultures, the free access to a steady flow of clean water was essential for the sustenance of the community. That meant that private property, especially in earlier days, might have been quite problematic, because if you control the headwaters you control the whole community. It made sense to have collectivised, centralised control of resources; it was a rational outcome, a choice of people pursuing their life purposes simultaneously, and doing it so that most of them would get the most out of it. But of course those conditions have changed, and that is no longer a rational outcome – that was then, this is now. And I think what they’re finding now is that if they’re going to adopt a market culture they’re going to have to abandon a collectivist culture.

I also choose to refer to modernisation so that it doesn’t appear that one is asserting cultural superiority, because that creates a resistance to change, and maybe a resentment, so it’s a matter of cultural sensitivity.

CR: It certainly creates a valuable weapon in the hands of people like Dr Mahathir.

CL: Yes, demagogues use it, but at the same time I call it modernisation because I do think it’s universal, at least potentially. If the objective conditions had occurred in East Asia, perhaps they would have gotten there first. And there was a time when their institutions were superior, in terms of generating advances in cultural change. But we find that they became too inflexible and in the longer term incapable of delivering the goods.

CR: Why do you think that was? Was it their political arrangements that didn’t permit rapid change?

CL: Well, I think they were deeply conservative cultures in that sense. Collectivist mentalities are hard to uproot, when the political status quo is able to wield such extensive power over all the institutions in the community. In the West the decentralisation of economic power that developed was probably what generated political change. And that sort of decentralisation of economic power just didn’t happen in East Asia until much more recently. It took centuries in the West to shed the absolute monarchs – but I believe it had to happen because the absolute monarchs weren’t really able to control their expanding empires on their own. So they had to disperse their power, and that was their undoing. As these people acquired power they began to demand protection from their own patrons, because they realised that their patrons could take away what they had given them. So this helped give rise to a demand for a less arbitrary form of government. And of course in East Asia the way that the industrial forces developed led to a situation where economic power continued to depend on a relationship with government, whether it’s with the chaebol in Korea, the monopoly arrangements in Indonesia, wherever you look it’s very similar.

CR: Looking again at the situation today, where do you see Australia fitting into developments in East Asia? Are we going to be caught up in what’s happening?

CL: I think you can credit the Keating government for inducing people to put too many eggs into an Asian basket. While it is sensible for Australian companies to involve themselves in East Asia, it should be their choice. When governments provide inducements or advice, it tends to lead companies to overlook commercial risk and to be motivated by political impulses, and that almost always comes to grief. So I think whatever problems that you have in response to the Asian contagion are in fact a failure of government policy, in the sense that those policies were trying to push people into areas that, although they were volitional, they were doing so on the basis of their interpretation of what the government was saying.

But I don’t think the impacts will be catastrophic. I think they’ll be sectoral, based on particular industries. Just as the boom in East Asia didn’t push Australia right to the top in high economic growth, nor should its bust drag Australia down to the doldrums. I think it’s strange that people overlook the simple logic of that, but it’s because people are just grasping for answers. They really don’t know, they haven’t done their homework. But I believe that if you understand markets, if you understand what are the facilitating mechanisms necessary for markets to function, then you can be much more comfortable with the future in Australia, because Australia has the institutional infrastructure – the rule of law, property rights – of an individualist-based community, where entrepreneurs can contribute to expanded growth opportunities that will put Australia on a much better footing for long-term growth than the East Asian economies.

CR: Is there anything that we can be doing to assist our neighbors in Asia?

CL: I don’t think so, unfortunately.

CR: You said on the radio this morning, in relation to Indonesia, that Australia had aligned itself with the forces of evil.

CL: Well, unfortunately Australia is in a very difficult position in that regard, and governments are forced to make political declarations that are very distasteful. I suppose that in private conversation Prime Minister Howard would have different things to say – I suspect that’s the case. It’s really a tough political position for them to be in. But I do know that the Suharto regime seems to be unswerving in its determination to run the economy right into the ground, even if it drags some of their South-East Asian neighbors down with them and creates frictions with its neighbors like Australia. They seem to be impervious to any sort of logic other than a banana republic logic at the moment. They’re just blind to anything but power and looking after their own nest egg.

CR: So I take it you think that political change is essential for recovery in Indonesia.

CL: Yes, they must change the political culture. Changing personalities will not necessarily change outcomes; if the incentive structures are flawed, and that’s what you’ve got in Indonesia, even the best of people will behave badly. I’m not very hopeful about the short-term results in that regard; I think the change in political culture is going to be a long and painful process. It took the Philippines almost 20 years of economic decline before there was a – happily peaceful – demand for political change. And the Philippines is a very different country in many ways to Indonesia.

CR: So you think we could be heading for quite a long period of turmoil there?

CL: Well, I hope not turmoil, but I think what we have to remember is that many economies over much of history have endured very long terms of very slow growth or stagnation, so this is not outside the realm of possibilities. I think the best case scenario for Indonesia is that we hope for stability in the short run, and recovery is going to be something that’s much more remote, much more distant.

CR: What about the rest of the region – which is going to be the next domino to fall, so to speak?

CL: Well, they’re all pretty rattled. I don’t know that any of them will necessarily have to be in the same position as Indonesia; they have different internal conditions that will perhaps lead to different responses. I think Singapore’s banking system has deep problems, and we cannot know the extent of them because with the state-owned banks, there’s no parliamentary inquiry to help us discover it, and the privately-held banks don’t have to reveal, and so we’ve got a really serious problem there. I think that is really characteristic of many of the East Asian problems. The fact that they’ve indicated that they’ve got some problems suggests to me that they’ve got enormous problems – it confirms my suspicions. And Singapore has supposedly some of the best, some of the most conservative banks in the region – if they’re in big trouble, then it’s not a good sign.

CR: And China?

CL: I think China is the biggest problem. Foreign capital is going to stay away from China – there’s already been a serious curtailment of capital inflows, and this is not going to be reversed any time soon. The internal contradictions of their so-called ‘market socialist’ economy are going to require the kind of tough political decisions that authoritarian regimes can never make. They will delay the inevitable necessity to devalue the yuan, they will wait until it’s too late, and the yuan will probably go into free fall, dragging the Hong Kong dollar down with it. And when Hong Kong melts down, then that’s the real Asian crisis. Indonesia is a really big problem, and a problem for Australia, but the big story will be if and when Hong Kong melts down. And it’s probably unavoidable because of the nature of the authoritarian political leadership in Beijing, where decisions will be made upon politics, rather than economics and the market.

CR: You think they’ll be unable to maintain the peg of the Hong Kong dollar?

CL: It’s impossible that they would be able to maintain it.

CR: Is political reform in China on the cards?

CL: Not for 20 to 80 years. Again, political culture reflects the underlying social values, and those have to change. And that’s two or three generations away. These things do not change rapidly.

CR: You don’t think that people said the same thing about the Soviet Union, as it was, 20 years ago?

CL: Well yes, but we don’t know who succeeds Yeltsin yet, so we don’t know how it’s all going to play out. I’m hopeful, and I do think that the Russians are probably more adaptable in terms of learning by example, and their culture seems to be more amenable to individualist-based institutions, than the Chinese are at the present time. But that story’s not over. You could have a change in leadership that could throw a huge spanner in the works, unlike a place like India, where political transition could occur without making dramatic reversals in economic reform. I’m not so convinced that that couldn’t happen in the short term in Russia.

CR: Is that because in somewhere like India the democratic culture is more well established?

CL: I think so, and I think the nature of the sort of coalition politics in India has induced them to embrace a consensus on the necessity of continued economic reform.

CR: What about nationalism in China? One thing you hear sometimes is the thought that it’s too big a country to hold together, that the progressive south could split off from the more conservative north. Do you think things like that are possible?

CL: I definitely think that is a possibility. Hopefully it may be remote, but the sort of provincial cultures and dialects that exist throughout China result in many of the provinces being as distinctive as the states are in Europe – the languages apart from Mandarin are often totally unintelligible across provinces. That wasn’t enough of a unifying force to maintain Europe as a cohesive political unit over the years. It’s not clear that if there is a loss of a collective centre of gravity in China that centrifugal forces won’t overtake them. China is no more and no less a civilisation than is Europe. Having a shared civilisation isn’t enough to have a cohesive political entity. And I don’t really understand – maybe ethnic nationalism will be an adequate glue, but I don’t see a political structure that will provide it on its own.

CR: What about the role that the West generally is playing in the crisis now? Is the International Monetary Fund a force for good in Asia?

CL: Well, unfortunately we’re stuck with the IMF. It’s my understanding that the most immediate problem, if we’re going to have any restoration of stability, much less recovery, is that liquidity has to be restored to the East Asian financial community. And it seems that without the IMF it’s going to be extremely difficult for this to occur. The IMF has increasingly become the lender of last resort, and the IMF in conjunction with the international banks with such extensive exposure in the region are going to have to come together and come to terms with discovering a way to help restore liquidity – but of course that requires the co-operation of the local leadership, and if the local leadership is intransigent then there’s nothing that the IMF can do.

CR: You talked a bit at lunch about the Mexican bailout, which didn’t get a lot of coverage in Australia, but seems to have sent the wrong message to the Asian countries.

CL: That’s clear, I think. The meltdown of the Mexican peso and the rapid response of the IMF sent a signal to international bankers that the casino was going to cover all bets, and that bad judgements would not cost the international banks. I think in many ways a lot of the capital flows into East Asia looked like a one-sided bet: the IMF has apparently committed itself to help cover these bad judgements by the international banks. But having said that, I don’t know what else to do at the moment: we’ve really painted ourselves into a corner on this. I don’t know what else to rely on.

CR: Do you think that if investors are to get burnt badly here it might make it less likely to happen again somewhere else in the future?

CL: Yes, but politically it won’t happen. Those financial interests just have too much political clout, and they’ll see to it that that won’t happen, and someone will look after them. I would like to see the banks fail – not as a matter of some sort of populist judgement, but in the sense of restoring economic prudence to capital flows. It would be useful, because bankruptcies are a normal expression of the market. People make mistakes, and their punishment by the market is actually good for the rest of the people, because it shows them what are the costs and consequences of making the wrong judgements. So you’re right, it does induce people to seek better information and to make more rational choices.

CR: You talked a bit in your book about the institutions of civil society, bodies that mediate between government and the individual. How important do you think that is in the difference between East Asia and the West?

CL: I think that’s a pretty fundamental difference. Places like Singapore have tried to create the sort of components of civil society that exist elsewhere, but that misses the point. It’s like a lot of government-driven institutions; institutions that evolve through human action are ones that will serve the community best, institutions that are imposed by government action will tend to fail. It’s rather like in Kenya where the ruling party invented opposition political parties by funding them – you know, that’s not what an opposition political party is. They really don’t understand. Or maybe they do, but they’re happy to have their own ability to control them. But civil society is spontaneous evolution, individual actors finding common cause with other individual actors, so that their collective action will help to moderate the excesses of other forms of collective action – especially government, but also gangsters, the abuses of other individuals and other groups.

It’s really a natural outgrowth of this quest for autonomy and self-determination that was triggered by the development of liberal institutions in the West. One of the ironies in a place like America is that the individualism is seen now as a source of evil, but indeed it’s individualism that is the basis, I believe, for the formation of these elements of civil society, these voluntary associations.

CR: This is the irony, isn’t it, that a lot of people nowadays who talk most about civil society tend to be anti-individualist, communitarian –

CL: Yes, exactly. Of course they want their own elitist definition of what is a good community. I’m a communitarian in the sense that I would like to leave it up to individuals to discover what the good community is rather than leave it to some elite to dictate what a good community is. Singapore I think is the classic communitarian project – and look what you get. If people want to see the future of communitarianism, I think they should look very closely at Singapore.

CR: Francis Fukuyama and others talk about ‘social capital,’ the network of institutions and attitudes that help people to be more productive. I take it you think that also is something that governments can’t just create – it has to grow spontaneously?

CL: What’s happened in much of East Asia is that political connections have been an attempt to replace those institutions that we have in the West, of trust. It’s hard to explain to people who don’t think about the economy and markets very much, that the impersonal relations of markets actually lead to much greater harmony and much more respect for other individuals, whereas the personalised arrangements in East Asia lead to the distrust of others. For example, if you go into a small community in, let’s say, South Korea, and you’re a stranger – whether you’re a Korean or a foreigner – because you haven’t developed a personal relationship with those people, then they may try to take advantage of you. In a setting like that, where markets haven’t really been as important as a basis of success, where people rely on political connections or family connections, then you have a situation where people don’t treat one another with respect – they don’t respect the individual. Whereas in the market, where it’s very impersonal, I tend to be polite with you, because even if I don’t know you, you want to do business with me –

CR: Regardless of whether you’re from my ethnic group, or my clan, or whatever.

CL: You have this almost perverse result where if you have systems based upon personalised relationships, the out-
come tends to be unhappy; whereas – and this is where communitarians or critics of the market don’t understand – the impersonal side of the market is really a strength. It helps induce people to be more civil towards one another.

CR: So is there any last word of advice you’d have for East Asian countries in their current problems?

CL: Well, be patient, because this adjustment process is going to take a very long time. I think the last word to Australians is that if they want to be players in the global economy, the government is going to have to allow institutions that foster entrepreneurial-driven growth to occur, and to be very cautious about policy changes that will inhibit the emergence of the entrepreneur. It’s so obvious to me, given the way I think about the market, but I can understand why it’s not obvious to others, I really can sympathise. And the other thing, it’s so simple. Most people think it’s complicated, that they’re things that only people like Paul Keating can understand, someone who’s brilliant – or who tells you how brilliant they are – or university professors, or whoever: no, it’s simple. We have a simple task that’s not very easy to carry out.

But I am confident; just as economists in particular were able to educate the general public about the evils of inflation and the causes of inflation – we won that argument – I think we can also win the argument on free trade. A simple issue, clear message, considerable evidence that we are right.

CR: I think five years ago in Australia we thought we had won it, and it’s gone backwards again.