The Asian economic crisis has created a watershed in contemporary history, where questions long buried by the demise of Western communism and a militant Left in the democratic countries amid an appallingly self-congratulatory liberal triumphalism, now come sharply to the fore. A systematic failure of capitalism has struck precisely those economies long held up as models of industrial efficiency—the Asian ‘tigers’—and no one is quite sure what to do about it, or where it will end. Looming behind the travails of the smaller afflicted countries is a more ominous phenomenon: the shaky financial condition and political immobilism of the world’s second largest economy, Japan, which has more than $600 billion in bad loans and—for a country long praised for its efficient ‘administrative guidance’—a breathtaking crisis of governance. A sober and influential American economist wrote recently that this turmoil ‘produced financial contagion on a scale unprecedented since the collapse of the Creditanstalt in 1931’, and he could not be sure that the ministrations of the International Monetary Fund (imf) had halted its progress.footnote1 Nothing to date has come close to the Asian crisis as constituting a defining moment that tells us what the post-Cold War world will really look like, and the problems it will present.

The international crises of the 1990s over Bosnia, Iraq, and North Korea might go under the rubric of ‘what’s my atavism?’ All were holdovers or recuperations of old problems. But the Asian crisis is no atavism, and it poses a host of different questions: what if markets don’t work? What if investors panic? What if the imf doesn’t know what it is doing? Who pays the costs of economic disaster? And what is the relationship between capitalism and democracy? In recent months, two dominant views emerged among mainstream analysts: one, that Asian economies were at fault for their ‘crony capitalism’, with its many market irregularities and ‘moral hazards’; the other that the imf was a secret, unaccountable operation that was itself interfering with normal market processes by bailing out investors who had made bad decisions. Henry Kissinger, for example, likened the imf to ‘a doctor specializing in measles [who] tries to cure every illness with one remedy’, and The Wall Street Journal editors called it ‘one of the most secretive institutions this side of an average missile base’.footnote2 Certainly these points are valid; the imf is the global embodiment of the ‘new ecumenical gospel’ of neoliberalism,footnote3 and its decision-making is shrouded in mystery. But how can the ‘miracle’ economies of Asia turn overnight into cesspools of ‘crony capitalism’? From the mid-1960s onwards, South Korea and Taiwan were the fastest-growing economies in the world, with China outstripping them in the past decade. In the 1990s the East Asian countries accounted for nearly two-thirds of all capital investment—excluding Japan with its long-term recession—and for half of the growth in world output, even though they constitute only twenty per cent of the world’s gdp.

Robert Wade and Frank Veneroso, writing in these pages, therefore found imf demands for ‘radical institutional change’ in ‘the Asian High Debt Model’ to be perplexing; to require a deep restructuring just because of a temporary liquidity crisis struck them as inappropriate, given that the model had proved its manifold developmental advantages.footnote4 But the model they describe, a national industrial strategy of state-mediated capital going to large firms trying to conquer foreign markets, with correspondingly high debt-equity ratios in the firms, is not an Asian but a Korean and Japanese model. None of the Southeast Asian economies can be characterized in this way, except, perhaps, with many qualifications, Malaysia. China, however, finds this model deeply appealing, and is far along the path of emulation.footnote5 In fact, the unexpected liquidity crunch gave American leaders the chance to dismantle the remaining alternative model of capitalist political economy, before it organized not just Japan and South Korea, but China as well. It also gave them a chance to reassert leadership in East Asia.

Japan, which pioneered the ‘developmental state’, seemed, just a few years ago, to be the likely regional hegemon of the Pacific. It had a dominant economic position in Southeast Asia, and soon might organize China’s entry into the world economy. But that did not happen, because of the history and practice of American hegemony in East Asia: South Korea and Japan have been sheltered economies, indulged in their neo-mercantilism and posted as engines of economic growth, because of the great value they had in the global struggle with communism. Now that this struggle is over, however, the issue of their ‘fit’ with a new era of free markets and neoliberalism comes to the fore—to the surprise and shock of Koreans, and to the consternation of the paralytic Japanese elite. The deep meaning of the Asian crisis therefore lies in the American attempt to bring down the curtain on ‘late’ development of the Japanese-Korean type, and the likelihood that they will be successful—because the strong, nationalistic neo-mercantilism of Japan and South Korea was propagated in the soft soil of semi-sovereignty, and because, as we shall see, the Americans have, paradoxically, had willing accomplices in Northeast Asian peoples who have sought to reform or nullify this same model themselves.

In the late 194os, Japan and South Korea were the subjects of a dual containment policy, while their economies were posted as engines of growth for the broader world economy. Americans revived Japan’s formidable industrial base, reconnected former colonial hinterland territories that were still accessible to it—South Korea and Taiwan above all—and enmeshed them in security structures that rendered them semi-sovereign states. Since that distant but determining point of origin, American generals have had operational control of the huge South Korean army and Japan, long the second largest economy in the world, has depended on the us for its defences. The American bases that still dot Japan and South Korea—containing nearly 100,000 troops—were agents both to contain the communist enemy and to constrain the capitalist ally. Meanwhile, both countries were showered with all manner of support in the early post-war period, as part of a cold-war project to remake both of them as paragons of non-communist development. Japan became the paradigmatic example of non-Western growth for the ‘modernization school’ that dominated American policy and scholarship in the 1950s and 1960s, just as South Korea later became the first Asian ‘tiger.’