Pragmatism rules

The Politics of Practical Nostalgia

Asians are rallying to new leaders promising something the region once took for granted: growth.

George Wehrfritz and Jonathan Adams
NEWSWEEK, March 29, 2008

Voters in Asia are kicking out incumbents like never before.

As maturing economies combine with the global slowdown to put a brake on the pace of development, Asians are electing pragmatic managers-in-chief who promise a return to the good old days of fast growth, job security and social mobility.

The first came in South Korea last December, when former Hyundai chairman Lee Myung-bak won election as president vowing to serve as the pro-business CEO of a "Global Korea" and ending the reign of a string of populist liberals.

On March 8 in Malaysia, an opposition coalition dealt the ruling party its worse loss in four decades by running on bread-and-butter issues and promising to end a stifling Malay affirmative-action system.

Then on March 22, voters in Taiwan tossed out a quixotic nationalist who had undermined Taiwan's key economic advantage—access to mainland China—in favor of Ma Ying-jeou, who promises to improve economic ties with the mainland. In an exclusive interview with NEWSWEEK last week, Ma said he won because voters were tired of "pugnacious nationalism" and because the economic performance of outgoing President Chen Shui-bian had been "so poor, people just felt that enough is enough."

It's a counterrevolution of sorts. Unlike the rabble-rousers, populists and old-guard ideologues they've ousted, Asia's new leaders are mostly common-sense conservatives who preach limited government, free trade and multipronged development strategies that evoke the go-go 1980s—in the hope they can recapture the 8 to 9 percent growth that transformed backwaters like South Korea and Taiwan into modern, high-tech economies.

Such pledges have hit home with voters keenly aware that, outside China and India, Asia's growth rates have slowed to an average of about 5 percent in the last decade (compared with 6.5 percent in emerging markets worldwide).

"Prodded by a realization that the world is passing them by, voters in the region's laggard economies have either thrown incumbents out or cast protest votes against their governments," writes Ruchir Sharma, head of global emerging markets at Morgan Stanley, in a recent note.

Yet reviving the kind of rapid growth that Asia enjoyed before the 1997 financial crisis may not be possible. These countries, particularly Taiwan and South Korea, may be too mature to expand as fast as developing economies can. Lee, for example, has promised to push South Korea's growth rate back to 7 percent. But with a GDP already at $950 billion, that would require an additional $67 billion in output each year. Ten years ago, the same feat would've required only $25 billion.

East Asia's industrial giants have lost much of their labor-intensive manufacturing to China, and governments are under intense pressure to respond. But the old strategy of export-led expansion—which included keeping currencies artificially cheap and erecting barriers to protect the local market—won't fly anymore. Once upon a time, these states used centralized government to build and defend internationalization, but that is increasingly difficult in a world where vast trade and capital flows are overwhelming national bureaucracies.

"All of these leaders have to cope with a new world where they have much less power over their own economies," says Phil Deans, a political economist at Temple University in Tokyo. "You can't be ideological when confronted with globalization, you have to be pragmatic."

That's one trait the new leaders share. Ma joined the ruling Kuomintang shortly before it ended 38 years of military rule in 1987. In 2000, the KMT lost power for the first time to the Taiwan-born Chen, a former human-rights lawyer who obsessively championed Taiwanese identity and implied that Ma and other mainlanders had divided loyalties. Chen fought economic integration with China as a threat to national security, and Taiwan paid the price: during his eight-year reign, the economy grew at just 4 percent annually—down from nearly 13 percent in the 1980s.

Ma campaigned on the argument that integration with China is a savvy global economic strategy, not a threat. When he takes office in May, he plans to forge direct transport links with the mainland, free up capital flows and open the door to millions of Chinese tourists. "We're not saying we want to be pro-China," says Ma. "We're just trying to do business as usual."

South Korea is also eager to relive its bygone boom. Its last president, Roh Moo Hyun, tried to radically restrain the nation's giant conglomerates, which he claimed had gained unfair advantages during decades of authoritarian rule. Roh preached higher taxes, wealth redistribution and greater independence from the country's traditional protector, the United States. His popularity suffered from policy flip-flops and bad management, but what really cost his allies the presidency was a 5 percent growth rate, declining foreign investment and paltry job creation.

Now Lee, who promised in his Inaugural speech to go "beyond the age of ideology to the age of pragmatism," is planning steps "to boost investor and business morale," says Sakong Ill, co-chair of a new presidential competitiveness committee. Both Ma and Lee advocate deregulation and business tax cuts, and aim to build their capitals into regional financial hubs.

"Pragmatism in policymaking [is] spreading across the region," wrote Nicholas Kwan, regional head of research at Standard Chartered in Hong Kong in a recent note to clients. "Economic sense once again prevails over populist politics."

There is, however, a throwback, statist side to some of these leaders, who are setting specific growth targets and spending heavily to reach them—as did their predecessors from the '50s through the '90s. Lee's "Plan 747" aims to deliver 7 percent growth, a per capita income of $40,000 within a decade, and to earn South Korea a spot in the G7. Ma's "633" plan aims to achieve 6 percent annual growth, boost Taiwan's per capita income to $30,000 by 2016 and cut unemployment to 3 percent.

To promote growth and build financial hubs, both are doling out billions: Lee has proposed a multi-billion-dollar north-south canal and Ma favors $130 billion in public-works projects for upgraded mass transit and expanded airports and container terminals. Political scientist Shih Cheng-feng of National Dong Hwa University in Taiwan says such massive public works are "an old game" that will at best provide a short-term growth spurt.

Still, the urgent desire to rev up growth that animates Ma and Lee has also surfaced in Southeast Asia. Because both the economies and democracies are less developed in the Southeast, the electoral backlash against incumbents has been even more dramatic.

In Malaysia, three tiny opposition parties nearly ousted a coalition that has reigned since independence in 1957. Led by Anwar Ibrahim—a former deputy prime minister who was purged in 1998 after clashing with strongman Mahathir Mohamad over how far Malaysia's economy should open—the opposition won control of two key industrial states and is now positioned to challenge Prime Minister Abdullah Badawi. "Issues long considered too sensitive to broach—such as Malaysia's affirmative-action policy—are on the table," writes Sharma.

In neighboring Thailand, voters have broken a cycle of coups that goes back to the 1960s. In the past, junta leaders held on to power as long as they could and then installed civilian allies. But 14 months after generals ousted Prime Minister Thaksin Shinawatra, they were forced by public pressure to hold the Dec. 23 elections that Thaksin backers won. As a result, Thaksin has changed "the way things are done in Thailand," says Thitinan Pongsudhirak, director of the Institute of Security and International Studies at Chulalongkorn University in Bangkok. "Today the forces at home and abroad are in his favor."

A successful economic answer to the pressures of globalization was central to Thaksin's rise and helps explain his return. During his five-year term the economy boomed, rural growth spiked and Thailand became the only country in Asia to narrow its rich-poor gap. His Thai Rak Thai party gained popularity by spending heavily on infrastructure and the poor, including village-level development programs and nearly free health care, yet keeping Thailand open to foreign investors and aggressively promoting trade.

Then came the junta, which managed in a few short months to scare off foreign investors and alienate rural Thais by advocating quasi-Buddhist "efficiency economics" that emphasized stability over growth. Under the generals, Thailand grew by just 4.8 percent last year. Now Samak Sundaravej, the new prime minister—who is widely seen as a Thaksin proxy—has approved $635 million in new funding for villages and a $1.3 billion tax-cut package to boost the sluggish economy. Thaksin inspires such personal loyalty that Bangkok cabby Dogruk Komning, 26, who saw business plummet under the junta, says he voted for Samak even though he feared it might lead to another coup.

It's too soon to tell whether the rise of the popular pragmatists is a paradigm shift or a passing fad. A lot depends on whether the new leaders can deliver. With the U.S. economy entering what could be a serious recession, Asia's richer economies have particular cause for concern. Their strategies, mixing free-market pragmatism with the old Asian impulse to command economic growth, suggest some confusion about how to grow fast.

What the new leaders aren't asking is whether the old rates are still realistic. The richest economies typically can't grow faster than 3 percent for sustained periods without overheating. With average incomes now exceeding $15,000—not matching Japan but not poor either—South Korea and Taiwan may find that 5 percent is their new speed limit. With average incomes of only $6,150 and $3,400, respectively, Malaysia and Thailand will likely find it easier to hit 7 percent or more.

But as Deans points out, the growing power of global markets means "new state leaders have fewer levers they can pull, [and] it's much harder to manage economies than it used to be."

Particularly when voters expect past performance to predict future results.

With Jaimie Seaton in Bangkok and B. J. Lee in Seoul

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