Corporate Governance, Crony Capitalism and Economic Crises: should the US business model replace the Asian way of “doing business”?

• Author: Ann Zammit,Ajit Singh
• Published date: 01 July 2006
• Date: 01 July 2006
• DOI: http://doi.org/10.1111/j.1467-8683.2006.00504.x

220

CORPORATE GOVERNANCE

© 2006 The Authors

Journal compilation © 2006 Blackwell Publishing Ltd, 9600 Garsington Road,

Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA

Volume 14 Number 4 July 2006

Blackwell Publishing IncMalden, USA

CORGCorporate Governance: An International

Review0964-8410Blackwell Publishing Ltd. 2006

2006144••••ORIGINAL ARTICLES

CORPORATE

GOVERNANCE, CRONY CAPITALISM AND ECONOMIC

CRISESCOPRORATE GOVERNANCE

*Address for correspondence:

Ajit Singh, MA, PhD (Berkeley,

CA), Professor of Economics,

University of Cambridge

Senior Fellow, Queen’s Col-

lege, Cambridge, CB3 9ET.

Fax: 0044 1223 740479; E-mail:

ajit.singh@econ.cam.ac.uk

Corporate Governance, Crony

Capitalism and Economic Crises:

should the US business model replace

the Asian way of “doing business”?

Ajit Singh* and Ann Zammit

This paper considers the Greenspan/Summers/IMF (GSI) argument that the Asian way of

doing business was the deep cause of the Asian crisis. The IMF reform programme for the

crisis-affected Asian countries suggested they should abandon the Asian business model and

adopt the US corporate model. The main findings are: (a) contrary to GSI doctrine, poor

corporate governance and lack of competition are not common characteristics of the Asian

business model; (b) the stock market-based US business model has severe limitations for

developing country corporations, not least because of imperfect share prices and the imper-

fect market for corporate control.

Keywords: Asian and US corporate models, stock markets, Asian crisis

Introduction and background

orporate governance has attracted signi-

ficant attention in developing countries

only since the Asian crisis of 1997–1999. Argu-

ably, this crisis and its analysis by leading US

officials and by the IMF introduced it as a

key issue on the international development

agenda.

The Asian crisis came as a great shock to

the international economic establishment.

Countries with solid long-term records of

fast growth, acknowledged as being fiscally

responsible and to have good economic man-

agement were now faced with an unpre-

cedented crisis, a virtual meltdown (IMF 1997,

1998a, 1998b).

1

At the beginning, there was

some advanced country interest in reforming

the world economic and financial system in

order to stop the recurrence of such crises.

2

Soon this concern evaporated as advanced

C

countries (ACs) realised that there had not

been any serious adverse spill-over effects on

their own economies. Instead, leading US offi-

cials (the then Chairman of the Federal

Reserve, Alan Greenspan, 1998, and the then

Under-Secretary of the Treasury, Larry Sum-

mers, 1998b) as well as the IMF put forward a

“structural theory” of economic crisis in the

Asian countries. They argued that the crisis

may have been triggered by certain macroeco-

nomic imbalances but that the fundamental

causes were rooted in the deficient institu-

tional structures of these economies. The latter

were said to manifest themselves in the day-

to-day microeconomic behaviour of house-

holds and corporations in these countries.

Indeed, what was seen to be at fault was the

whole Asian way of doing business.

3

The most important defects of the Asian

way were regarded as follows: (a) poor corpo-

rate governance, (b) poor state of competition,