7/10/02

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, July 9.

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 arrangements.

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 books.

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 world?

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
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For immediate release (Distributed 7/10/02)