CRONY CAPITALISM, AMERICAN-STYLE
Lester Thurow, one of America's most prominent economists, is professor
of management at the Massachusetts Institute of Technology. His latest
book is ''The Future of Capitalism: How Today's Economic Forces Shape
Tomorrow.'' He spoke with Global Viewpoint editor Nathan Gardels on Tuesday,
NATHAN GARDELS: Let me read this quote: ''Reforms of regulations
and supervision should seek to institutionalize sound business practices.
Improved corporate governance, facilitated by enhanced transparency and
accountability, is needed to restore investor confidence and reduce the
risk of future crises.''
That wasn't President George Bush scolding Wall Street this week. It was
the chief economist of the IMF (International Monetary Fund) scolding
Asia in 1997! What has happened to American business?
LESTER THUROW: The arrogance of America in 1997-98, charging that
Asia was melting down because of ''crony capitalism,'' has now got its
comeuppance with a vengeance. The truth is that every financial boom in
the United States, including the dot.com boom and then bust, has also
produced crony capitalism.
It is nothing new to economists that every financial boom ends in a bust.
And after every bust there is scandal. Remember when the real estate market
in the United States went bust and the savings-and-loan scandal ensued?
It seemed every businessman in Texas was buying a savings bank to make
loans to himself. Four thousand businessmen and six congressmen went to
jail. Six senators were booted from office. Remember Michael Milken, the
junk-bond king? He was more famous than Bill Gates at the time. And he
ended up spending a good spell behind bars.
After the savings-and-loan crisis, the United States passed regulations
and laws that prevented that from happening again. But that didn't stop
today's corporate corruption crisis because it involved different financial
This time around, we'll make rules again to prevent future crises of the
dot.com-Enron-WorldCom type and punish the wrongdoers, as we should, but
that won't stop any future financial scandals with the next boom. It is
naive to believe that. The reality is that at the end of a boom everybody
wants to keep it going a while longer, so they cut corners and cook the
That mentality then seems to spread to the whole corporate culture. Even
solid companies like Merck and Xerox seem caught up in this scandal now
because they too fell under the pressure to report good quarterly profits,
even if there weren't any. Corporate executives fear public knowledge
of their predicament because, well, who wants to fly on an airline that's
going broke, who wants to invest in a company that is going broke?
Some people who run businesses, after all, are crooks. Others convince
themselves honestly, ''Oh, this is just a short downturn and when the
boom comes back, the cooked books aren't cooked anymore.''
GARDELS: Unlike the earlier scandals, though, this eruption of crony
capitalism comes after American triumphalism over its model of globalization.
What do the scandals mean for the American model of capitalism in the
THUROW: America now can hardly continue preaching to the world. At
the same time, it doesn't really change the ''American model'' of regulated
capitalism. After all, let's remember that the Securities and Exchange
Commission (SEC) came into being because of the financial scandals of
the 1920s that produced the depression of the 1930s. Most of the current
rules and regulations we have came from that time. Now we'll make more
rules and send more people to jail. And it will all keep the essentially
sound American economy relatively clean -- until the next boom that will
be different from the dot.com boom but will also end in scandal.
GARDELS: Boom, bust and scandal may be an immutable law of economic
history, but investors have to make decisions now in the short term. What
can be done to restore confidence and credibility in the system?
THUROW: The credibility of the system depends now on punishing harshly
those who broke the laws and putting in place strict new regulations --
far stricter than Bush has proposed. But let's not be naive and think
that new scandals will not follow the next boom.
(c) 2002, Global Viewpoint. Distributed by Los Angeles Times
Syndicate International, a division of Tribune Media Services.
For immediate release (Distributed 7/10/02)