The Dark Side of business in Asia:

Staggering and pervasive levels of corruption and influence peddling comprise the heart and sole of "Asian values."

  Instead, it is crony capitalism and mercantilist policies that Michael Backman dwells on - in Thailand, Indonesia, and Korea - where such policies have caused devastating problems - and in China and Japan - where similar problems in these vast economic systems threaten to grow to devastating proportions. Problems with the commercial environment in the Philippines are also covered, and particular problems in some of the other Asian nations are touched upon.
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  The book sets forth the staggering and pervasive levels of corruption and influence peddling that comprise the heart and sole of "Asian values." It also includes accounts of efforts by Asian business interests to influence Western politicians and expand their  corrupt practices into Western commerce. Bill Clinton and the Democratic Party - being the party in power at the time - was a primary target. Hundreds of thousands of dollars funneled into Clinton and Democratic coffers by Asian businessmen with extensive ties to Communist China coincided with an evolving Clinton Administration China policy that was far more friendly and accommodating at its end than at its beginning. Backman, however, properly offers no opinion as to whether this policy change was in fact in the best interest of the United States or whether it was in any way influenced by those substantial donations.
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  The limits of Asian Crisis reform efforts - the lack of enforcement of those reforms that were enacted - and the continuation of the corrupt and incestuous business practices of the past - as of the middle of 1998 - are also set forth.
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  The book emphasizes the complications and limitations of the family owned enterprise and conglomerate enterprise system that is the dominant form of business in much of Asia. Anyone contemplating an investment in - or a business relationship with - the typical Asian company must examine not just the company itself, but the family behind the company, and the many affiliates.

The subtle weaknesses of the "Dark Side:"

  The lack of legal accountability allows politically powerful Asian entrepreneurs to keep their profits while passing their losses on to the taxpayers or minority shareholders or unaffiliated  contractors or bank depositors. It is "moral hazard" writ large.

  "The appalling state of the legal frameworks across much of Asia means that commerce really is yet to rise above economical tribalism."

  In Southeast Asian economics, Backman emphasizes, the Chinese are the most prominent tribe.

"Rule by law" rather than "rule of law."

An appeal to the courts is really an appeal to the rulers.

Formal laws are treated with disdain - but social codes tend to be strictly adhered to.

There is elaborate masking of real reactions and feelings - and widespread social posturing ("saving face").

  The Judiciary is just an arm of the Administrative authorities - not independent of them. Laws are written vaguely so they can be reinterpreted to meet the needs of current government authorities. Even in Singapore, the law still gets its authority from the rulers. Singapore is free of corruption because the current rulers want it that way - and lead by example.
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   Indeed, corruption is expected - up to a point. Only when it reaches levels widely considered "excessive" will popular ire be aroused (usually only when it contributes to some general economic calamity that perceptibly and pervasively worsens the conditions of life). Widespread public ire can lead to "withdrawal of the Mandate of Heaven" - and a change of rulers. However, there is - even after such crisis times - no real change in the system.
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  Thus, an appeal to the courts is really an appeal to the rulers.
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  Asian's view agreements - even formal contracts - as the establishing of a relationship. Such contractual relationships are considered flexible enough to change with changing conditions rather than as binding agreements fixed by terms of performance and payment. Formal laws are treated with disdain - but social codes tend to be strictly adhered to.
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  It is vital to maintain and respect the authority that is commensurate with an individuals place in the hierarchy. Correct form is more important than correct substance. This leads to elaborate masking of real reactions and feelings - and widespread social posturing ("saving face"). Personal opinions and creativity are effectively suppressed.
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  It may be properly objected that these are differences of degree. (Even Western legal systems include equitable rules that can alter, reinterpret or rescind contractual terms, and recognize "acts of god" that can completely void contractual arrangements.) However, Backman insists, the difference in degree is more than enough to create a different political, social and economic environment with broad economic, political and social consequences.
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The result of ethical codes that are qualified rather than absolute is that pragmatism and stratagems rule.

  Chinese religion, Backman asserts, does not impose obligations of conduct. The Chinese choose from among many religions those that best serve their personal needs. People don't serve religions - the religious beliefs serve the needs of the people. (Can this be one reason for the violent reaction of the Chinese Communist government to the apparently harmless Falun Gong?)
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  The ruler and his agents can expect total obedience. However, in the great mass of day-to-day activities where these higher authorities are not involved, the result of ethical codes that are qualified rather than absolute is that pragmatism and stratagems rule. In such an environment, individuals can safely extend trust only to members of their "community" - to "insiders."
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  Confucian precepts govern relationships with "insiders." Stratagems govern relationships with outsiders.
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  One observable result, according to Backman, is that - in anonymous crowds in Asia's growing cities - there is generally a lack of courtesy among throngs on the roads and in the buildings. For example, headlights are not dimmed, and those getting on crowded elevators or trains don't wait for those getting off.

Business is viewed as a zero sum game, and is thus conducted as a form of warfare.

  Books about how Asians deal with Asians are irrelevant for Westerners.

Only the naked self interest of the operating entity - the family, the corporation, the narrow community - governs.

  This leads to a pervasive form of "selfishness" on behalf of the family or community, rather than on behalf of the individual, Backman emphasizes. Those on the "outside" - those lacking close affiliation - can expect to be dealt with by stratagems.
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  In the West, Backman asserts, the sense of community is weaker - but extends broadly to all society. In the East, the sense of  community is strong, but is narrowly restricted to family and immediate community.
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  Thus, books about how Asians deal with Asians are irrelevant for Westerners, Backman concludes. Westerners must understand how Asians deal with "outsiders." Cultural sensitivity becomes a one way street (like Political Correctness). Outsiders must be sensitive - but can expect no sensitivity to be extended towards them.
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  Asian corporations are like hierarchical kingdoms. Checks and balances, accountability, transparency, good governance practices - are all widely rejected. Minority shareholders are treated derisorily as not just outsiders, but as weak outsiders.
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  The legal and social framework needed to convert self-interest into public interest outcomes is lacking in Asia, Backman concludes. Thus, the essence of Western capitalism is lacking. Only the naked self interest of the operating entity - the family, the corporation, the narrow community - governs.

Dysfunctional legal systems:

When evaluating economic prospects in Asian nations - both the economist and the businessman must begin with the status of the legal systems.

  The two Asian Tigers with the best legal systems - Singapore and Malaysia - also have, along with oil-rich Brunei, the highest living standards, Backman points out. Indonesia - with the most "corrupt, inefficient, and poorly enforced" legal system - also has the lowest living standards.
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  While conditions vary widely from nation to nation - when evaluating economic prospects in Asian nations - both the economist and the businessman must begin with the status of the legal systems. However, even more important than the laws themselves is the reliability of enforcement mechanisms. For those seeking to do business in nations with weak legal systems, only relationships with powerful political or business figures can be relied upon to protect business interests.
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It is the culture of corruption, and not the laws, that are the problem.

  Moreover, since only locals have such "connections,"  this becomes a high barrier to entry for outside investors.
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  Since the Asian Crisis, new business codes have been drawn up in Thailand and Indonesia. However, Backman pointedly states, the real test is whether they will be enforced. They might have been enacted just to appease the International Monetary Fund (IMF). Writing about conditions as of the middle of 1998, Backman doubts that there will be reliable enforcement in these two nations. "It is the culture of corruption, and not the laws," that Backman sees as the problem.

Recent articles in the Wall Street Journal indicate that enforcement mechanisms remain as ineffectual as ever.

Personnel connections having true depth are essential to protect interests.

  Singapore, Hong Kong, and Malaysia draw their civil legal model from the English case law system, but with judges without juries deciding the facts as well as the law. The courts are open, free of corruption, fair, speedy and transparent - all characteristics needed for functional commercial law systems. "That's the end of the good news" in Southeast Asia, Backman states.
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  In Thailand and Indonesia, it is a waste of time to take legal matters to court. Personal connections are essential to protect interests. However, these connections must have true depth. Merely "knowing" someone won't do.
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  The Philippines has a different kind of problem with its commercial laws. Its legal system is based on the United States model and often relies on U.S. precedents. However, litigiousness is a real problem. Litigation is complex, expensive and interminable - with many cases dragging on for 5 years or more. Litigation is widely used for nuisance and harassment purposes.
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Local affiliates of even the Big Five international auditing firms are under intense pressure to be compliant with client interests - rendering all financial statements highly suspect.

  Intellectual property laws (copyrights, trademarks, patents) often provide a prime example of excellent laws that are never enforced. The pirating of software, CDs, books, and the counterfeiting of brand name goods is widespread.
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  Bankruptcy laws - even where good - are not enforced, leaving creditors rights without legal enforcement. Thus, the extension of credit is fraught with peril.
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  Powerful well connected local businessmen borrow from state owned banks - and often don't bother with repayment - leaving taxpayers to foot the bill. Thus, Western businessmen found few "distressed" corporations for sale during the Asian Crisis - because the distressed never had any intention of repaying their debts or going bankrupt.  For the most powerful family business conglomerates, credit is obtained through a private bank that is part of the family conglomerate. Western financial institutions foolish enough to lend into this moral and legal quagmire have been unsurprisingly left not only with massive loan defaults, but with unenforceable creditors' rights as well.
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  Financial disclosure is intensely disliked by management of Asian public corporations, and pertinent regulations are either inadequate or  not enforced. When audits are required for listing on public exchanges or to obtain credit, corporations shop around for compliant auditors or threaten to change auditors that don't provide desired results. Local affiliates of even the Big Five international auditing firms are under intense pressure - rendering all financial statements highly suspect. These local affiliates are frequently those that themselves are well connected politically - and often have business and political activities as well as auditing and advising activities. Westerners are generally used for consulting and tax divisions, leaving auditing to the local personnel.
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  The Big Five have since introduced "continuous auditing" procedures to check ongoing financial and business activities for results and propriety. However, it remains to be seen how well this is received and carried out. Extensive audit reform is needed throughout Asia.
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  Japanese accounting standards are weak and are subordinated to the corporatist agenda of the Ministry of Finance, which is among other things the audit standard setting agency. China's Institute of Certified Public Accountants sets audit standards, but the Chinese government owns all the accounting firms that audit the wide array of government owned enterprises. 
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  Insider trading is the norm throughout Asia.
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Pervasive petty corruption undermines commerce.

A bribe is a bribe, and whatever its cultural underpinnings, its effects are the same.

  The practice of paying government workers for their services is endemic in Thailand, the Philippines, China, Vietnam, and especially Indonesia, and the speed of service depends on the bribe offered.
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  "A bribe is a bribe, and whatever its cultural underpinnings, its effects are the same," Backman points out. Both government and private agents are affected by corruption. Purchasing managers of private companies routinely expect kickbacks for their purchases.
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  Backman presents Indonesia as a moral basket case. The Javanese culture is the opposite of the Protestant work ethic. It values "rent seeking" without labor. You must be prepared to pay petty - and not so petty - sums to officious people - many of whom have purchased their positions and pay a quota to their superiors on bribes received. Backman goes on at nauseating length about Indonesian corruption.
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  The business media is burdened with censorship, low wages for journalists, poor distribution of foreign competitors, and lack of independence from the businesses covered. Journalists receive "favors" for puff piece reports and face ostracism or worse for critical reports. Many business conglomerates and political parties control their own business publications. Except for Singapore, the media provides little check on business corruption and little reliability in business reporting.
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  "Asian values," based on personal connections, Backman emphasizes, is the result of a culture that has evolved in the absence or rule of law.

  "When legal systems offer traders little protection, it is only reasonable that they should want to trade just with those they know and trust."

  Because of the impotent legal environment, conglomerates operate like feudal villages. They are vertically integrated to provide as much as possible of their own needs without external (and therefore unreliable) contracts.

  Excellent coverage of Asian conglomerates and their business and financial practices and manifold weaknesses is provided by Backman.
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   Poor business structure is pervasive, leading to poor management. Poor transparency often makes it impossible even for the ownership family to know how their empire is actually doing. Incestuous business and financial dealings facilitate the milking of assets. The better organized conglomerates use holding company arrangements to provide internal transparency while limiting external transparency to the few subsidiaries that are listed on stock exchanges. Listed subsidiaries are generally used to obtain cash from the public for the group while providing a repository for the least profitable assets.
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  Because of the impotent legal environment, conglomerates operate like feudal villages. They are vertically integrated to provide as much as possible of their own needs without external (and therefore unreliable) contracts. Of course, this is an inherently inefficient business structure.
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Subservience and sycophancy are rewarded; initiative - which by definition demonstrates a lack of dependence on senior staff - is not.

  Employee loyalty is rewarded far more than merit or results. Subservience and sycophancy are rewarded; initiative - which by definition demonstrates a lack of dependence on senior staff - is not. To leave to work elsewhere is viewed as an act of treachery. Workers expect to be cared for as dependents.
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  This results in the formation of personal networks, cliques and patronage within the firm - and a very political atmosphere. Westerners may be hired for their skills and for "window dressing," but rarely manage to advance up the corporate ladder.
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  These kinds of unwritten business rules can be yet another significant barrier to entry by foreigners.
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  Services are undervalued in Asia. Formal staff training, technology research and development, public relations, marketing and branding, legal advice, and auditing are infrequently used and poorly compensated. Often, Western firms are brought in on terms that include technology transfer - only to find themselves eased out after providing the desired technology.
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  This retards the prospects of Asian enterprises in the modern complex world. "Ramshackle corporate structures, and patriarchal management might be quaint, but they come at an enormous cost," Backman points out.
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  Lack of independence means pervasive related-party transactions - profit and revenue shifting -  in-house lending activities - and lack of confidentiality for outsiders.

•   Hong Kong: Robust banking system - but not independent from non financial sector interests.

•   Singapore: Robust prudently run banking system - but also not independent from non financial sector interests.

•   Taiwan: Politically dominated state banks and growing private sector banks linked to non financial interests.

•   Malaysia: Relatively independent banks, operating under a fairly good legal system with tight central bank rules - with a couple of notable exceptions.

•   Philippines and Thailand: All banks are owned by individual owners with widespread conflicting interests.

•   Indonesia: Simply a banking mess.

  Lack of independence means pervasive related-party transactions - profit and revenue shifting - and in-house lending activities. Information about non-affiliated borrowers which should be kept confidential is frequently shared with affiliated entities that may be in competition with the borrowers or which may act in other ways to compromise borrower business plans. Off-balance sheet activities with affiliates - such as loan guarantees - often create hidden risks.
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Concentration:

In 1996,  the top 49 chaebol reported profits of just $65 million, even though their sales accounted for 97% of the nation's GDP.

The banking system is independent of ties to non financial interests - but not, unfortunately, independent from government direction.

  The concentration of economic power is astounding. The top five chaebol accounted for about 50% of the nation's GDP. The chaebol are both family owned and family managed in a centralized and authoritarian manner. They are comprised of vast arrays of diverse relatively small companies - with some subsidiaries listed on public exchanges - and engage in complex webs of internal business and financial transactions - including massive undisclosed loans and loan guarantees.
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  In Korea, the banking system is independent of ties to non financial interests - but not, unfortunately, independent from government direction. The Korean government is a poster child for "industrial management" run amok. The government appoints most bank presidents and chairmen and allocates credit at artificially cheap rates to those chaebol that comply with government desires. As Backman points out:

  "The chaebol didn't evolve through a process of natural selection. They grew because the government had selected them and then puffed them up with debt."

  Each chaebol's few profitable subsidiaries often provide financial support for the rest of the group, thus acting like in-house banks similar to those of other Asian conglomerates.
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  In this climate, high level corruption is rampant and essential for large scale business success.

Japan's mix of strengths and weaknesses:

Japan's "cavalier attitude to corporate governance" is typically Asiatic.

Japan's institutions - both public and private - "have  conspired to defeat, neuter, or nullify the internal checks and balances" needed to reduce waste and corruption.

Japanese businesses lack internal accountability and the spur of external competition in the domestic market. They operate with ineffective regulation - ineffective legal remedies - ineffective auditing - and a corrupted business media.

  However, the extent of higher level corruption - at the senior management and higher political levels - is emphasized by Backman. Japan's "cavalier attitude to corporate governance" is typically Asiatic. Corporate governance and corporate accountability are "abysmal." Tax deductions are permitted for "unaccounted-for expenditures" - which facilitates bribery (recognizing an essential ingredient for doing business in Asia). About one major corruption scandal per year has broken out since WW II. The construction industry - highly dependent on government infrastructure contracts - is especially corrupt.
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  Japan's institutions - both public and private - "have  conspired to defeat, neuter, or nullify the internal checks and balances" needed to reduce waste and corruption. Backman characterizes this as "a large, modern industrial economy on a Third World frame of corporate governance and accountability."

 "The consensual, cooperative ways of a traditional rice-cultivating society aren't appropriate for the competitive ways of a modern and diverse trading economy. - - - [W]hat once was cooperative becomes collusive."

  Japanese businesses lack internal accountability and the spur of external competition in the domestic market. They operate with ineffective regulation - ineffective legal remedies - ineffective auditing - and a corrupted business media.
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  Backman holds out little hope of immediate reform. An aging society vests all political power in the elderly who support the current system. The bureaucracy and big business enjoy the current system, and government need only cater to an elderly electorate that eschews reform. Revolving door arrangements tie the government, the bureaucracy, and big business together in a web of client-patron relationships. Senior bureaucrats are given high level positions in banking and industry - frequently rising to the top positions. Regulatory zeal is thus undermined by fear of offending a future employer or the ex colleagues currently in industry.

  "Short of another war to wipe the slate clean," Backman asserts, "it is difficult to see how Japan will make the reforms needed, rather than simply lumber from one band-aid solution to the next."
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  (Nothing that has occurred in the last three years has provided any indication that Backman's assessment might be in error.)

 Disdain for transparency and disclosure, and dismissive attitudes towards law, undermines the power of regulatory bodies.

  Japan has the widespread Asiatic view of the law and of contracts as merely "guides" rather than as commands. Verbal agreements and trust are therefore the preferred commercial framework. Private mediation is preferred over litigation for disputes resolution.
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    Disdain for transparency and disclosure, and dismissive attitudes towards law, undermines the power of regulatory bodies charged with antitrust, fair trade, and securities law enforcement. Japan has a functional bankruptcy law, but it is not fully utilized as banks prefer to keep weak borrowers afloat as long as possible. This undermines bank earnings, weakens the banking system, and uses up credit that should more profitably be extended to more healthy and growing businesses.

Even in Japan - with its huge balance of payments advantage - the benefits of mercantilist policies are not nearly enough to overcome the growing avalanche of disadvantages that inexorably increase over time.    

Mercantilism is viewed by some as having been vital for the initial periods of economic growth. 

  Japan still excels in the competitiveness of its export-oriented businesses. Backman underestimates the importance of this advantage. A current account surplus of "just 4% of GDP" is dismissed as "only a small contribution to the overall economy." Backman is obviously no economist. This is a HUGE advantage that most nations can only dream of - and that is astounding for so advanced a major economic system.
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  It is precisely this advantage that mercantilist policies are designed to obtain. This advantage must be weighed against the many economic and financial disadvantages of mercantilist policies. Even in Japan, however - with its huge balance of payments advantage - the benefits are not nearly enough to overcome the growing avalanche of disadvantages that inexorably increase over time.
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  Many commentators correctly point out that trade restraints and other protectionist policies - and even some of the wider array of command economy policies that make up an overall "mercantilist" economic approach - as well as its variation of "Asian values" commercial practices - did not prevent Japan from achieving its extraordinary post WW II growth rates. Nor did they prevent other Asian nations from surging out of third world economic status. Nor does this apply only to Asian  nations.
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  Indeed, they contend that the array of mercantilist policies in Japan - and in Korea, Taiwan, Singapore and the other Asian Tigers, and more recently in China - have  been essential to the high growth rates achieved by those nations.  Without such policies, these nations could not have financed 35% investment rates - or 50% in Singapore.
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    Mercantilism is viewed as having been vital for the initial periods of economic growth in the U.S., and in England, Germany, and other Western European nations, too.  Economic policy in the U.S. seldom failed to include substantial tariff levels prior to WW II, and even Great Britain began its early economic surge in the 18th and early 19th centuries with a broad array of mercantilist policies.
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     The problem comes in recognizing when it is time to change - and in being able to make that change.
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  Japan benefited greatly from its many economic strengths - - an educated population - high savings rates - the know-how of its pre-WW II industrial economy - and relatively low military expenditure burdens. It was able to maintain extraordinary rates of economic growth for four full decades from its WW II ravaged low point until it achieved its current status as a high-ranked first world economic power. In Japan, this economic growth obviously went far beyond what could be attributed merely to the freeing of the agricultural segment of its population for wage-based work - and was achieved under the array of policies and practices that currently clearly undermine its prospects.
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  Evaluating the complex mix of benefits and burdens of protectionist policies for developing nations requires sophisticated economic analysis based on extensive historic research. "Path dependency" arguments have considerable merit, and simplistic assertions clearly do not suffice. The mix of protectionist and other mercantilist policies employed can be studied, and their results analyzed. Unfortunately, we can only speculate on the results of the policies that might have been.
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  In the U.S., early 19th century tariffs helped industry in the northeast but burdened the south and the interior sufficiently to add substantially to sectional resentments. English politics were roiled by the controversies that ultimately led to the removal of the "corn laws"  and the beginnings of English free trade policies in the first half of the 19th century. Moreover, the U.S. benefited greatly from constant trade expansion within its own borders due to substantial immigration rates and the development of new territories. Great Britain similarly benefited from massive extensions of its empire and commonwealth and a consequent extension of trade.
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  As pointed out in O'Rourke and Williamson, "Globalization and History" - reviewed in the February, 2001 FUTURECASTS issue - several of the nations of Western Europe surged into first world status during the free trade globalization heyday of the six decades prior to WW I. Of course, there was also the arrival of the railroad, bringing economical land transportation to interior regions. However, this, too, was a powerful stimulus to trade. Several European nations prospered earlier while clearly pursuing mercantilist policies when they had periods of trade and imperial expansions of their own.
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  Indeed, no major states - even to this day - have ever been totally free of policies that fall under the broad heading of "mercantilist."
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  Whatever the mix of benefits and burdens for developing nations, for developed nations - especially those that have achieved the status of major creditor nations - trade restraints and broader mercantilist policies not only impose heavy burdens on domestic productivity, but also endanger world finances. The 1920s trade war policies of the United States - then the world's primary creditor nation -  were clearly one of the several major causes of the Great Depression - as explained in "Summaries of Controversies and Facts." Today, it is Japan that is the biggest international lender.

The keiretsu do not discriminate against foreigners. They simply prefer to do business with their own members rather than with nonmembers - whether Japanese or foreign.

  The six biggest keiretsu account for over 20 percent of Japan's economic activity, Backman points out. Common characteristics include some or all of the following: Cross-shareholdings, presidential councils, a group office, use of a common bank, use of a common trading company, a common real estate company, staff transfers, joint ventures and joint research efforts - all doing business with each other to assure trust and reliability. They do not discriminate against foreigners. They simply prefer to do business with their own members rather than with nonmembers - whether Japanese or foreign.
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  Thus, trust and cooperation between suppliers and manufacturers is maximized, but outside shareholders lack influence, and there is little pressure to upgrade management performance. Competition between suppliers is stifled.
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  Efforts to prop up weak members has weakened whole keiretsu groups. Opaque practices and form-over-substance governance has allowed financial problems to grow to massive size. Auditing is weak and ineffective, especially with respect to consolidated returns of keiretsu. Large undisclosed off-balance sheet obligations - especially secret guarantees of the debts of weak keiretsu members - and assets valued at cost instead of market price during a long period characterized by stock market decline and price deflation - cause unpleasant financial surprises.
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  The Yakuza organized crime groups operate widely in Japan, enjoying widespread commercial and police connections.
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  Sony, Toyota and Honda are not attached to diversified keiretsu, and thus have fared best during the difficult 1990s. (Japan still maintains a world class competitive edge in such technologically advanced industries as autos, robotics, cameras and video games.)

Connections:

China's commerce is burdened by extensive corruption, rudimentary commercial law, and extensive and smothering price control systems.

China is striving to establish huge diverse conglomerates that include some stock exchange listed subsidiaries - like the Southeast Asian model - but subject to government direction and influence - like the Korean model.

  China's state-owned enterprises are moribund and inefficient - with most dependent on financial life support. They are corrupt and hopeless. On the other hand, town and village enterprises and private and individual enterprises are vigorous and rapidly expanding.
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  However, the state-owned enterprises soak up most available bank credit - leaving the banks holding vast amounts of their debts, most of which is in default. They constitute about 60% of China's investment capital, but account for just 1% of its industrial profits. Thus, the four primary government banks - which lend as politically directed - have negligible capital, derisory reserves, and vast non performing loans.
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  Backman notes that China is striving to establish huge diverse conglomerates that include some stock exchange listed subsidiaries - like the Southeast Asian model - but subject to government direction and influence - like the Korean model. Size is apparently considered more important than return on invested capital. As typical of most of Asia, there is no protection for minority shareholders - who are frequently fleeced.
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  As elsewhere in Asia, the legal system - even where "reformed"-  is poorly enforced. The poor legal structure acts as a powerful inducement to the formation of large diverse conglomerates so that domestic dealings can be confined to trusted affiliates as much as possible. However, some diversify just to grow.
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  This is an environment ripe for crony capitalism. The conglomerates hire many of the bureaucrats that are being cut as China downsizes its bloated Communist government agencies. In addition, the "Princelings" - the children of high Communist officials - are hired for important positions in private firms. They not only provide vital connections, they frequently also enjoy the benefits of an extensive education and thus can be very productive members of management.

  The political leaders of China continue to demonstrate a keen desire to facilitate commerce and the emergence of China as a leading economic power. Efforts at reform continue to be pursued with grim and - to some - surprising determination. These efforts should continue to have beneficial impacts on economic prospects. However, China still faces mountainous governance problems.

A business climate under threat:

  Mainland companies have bought up vast chunks of Hong Kong assets. Purchases by state-owned enterprises in essence nationalize these assets. Corporate disclosure and transparency are visibly declining. State-owned enterprise subsidiaries in Hong Kong are able to resist disclosure requirements.

Good commercial governance:

Accountability plus checks and balances plus competition equals economic success.

  Banks are state owned but not state directed. Bankruptcy laws are effective and effectively enforced. The media is independent. Government workers are relatively well paid. Thus, corruption levels are held in check.
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  As Backman points out, accountability plus checks and balances plus competition equals economic success.

The Chinese connection:

Backman offers practical advice for those wishing to do business in Asia.

• Proper and extensive Asian style networking is an essential prerequisite to any ongoing business activities in order to avoid futile reliance on contracts or legal system enforcement. 

• Knowledge of the business and political affiliations - and the characteristics of the controlling family - of any potential joint venture partner is essential.

• Truly independent audits - of all the several sets of books (kept for tax, audit, or ownership interest purposes) - is an investment essential. Off-balance sheet obligations - like verbal guarantees or another company's loans obtained on behalf of the company - must be suspected. Frequently, it is better to just buy assets than to buy a going company.

• Values based on the connections of crony capitalism can disappear unexpectedly and should not be heavily relied upon.

• Financing should be obtained from Western banks to avoid reliance on local banks that may give away your business secrets and even set up competing businesses within their circle of affiliates. 

    Backman concludes with a list of reforms required for sustainable prosperity in Asia - or anywhere else. Well paid public servants, enforced bankruptcy laws to protect creditor rights, independent banks, proper accounting standards and practices, minority shareholder rights, independent media, and some disconnect between the interests of the regulated and the regulators, are obvious for the development of modern economic systems.
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  The questionable ethics, pervasive corruption, inadequate legal protection, and poor corporate governance that are at the heart of "Asian Values" must be changed. Without suitable reform of this business and political culture, Backman predicts that Asia will experience a continuing series of booms and busts that will inhibit long term growth.

  This view is in stark contrast to that of some Keynesian economists. Paul Krugman believes that these staggering and pervasive levels of corruption and influence peddling need not be confronted - that politically unpopular economic reform requirements - although undoubtedly useful - can nevertheless be ignored - that all that is required from these ethical basket cases is appropriate Keynesian monetary expansion to assure lasting economic growth and prosperity.
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  Many Asian politicians undoubtedly find such views very attractive - and Japan has indeed tried - unsuccessfully - for a decade to borrow and spend its way out of its mercantilist difficulties - although it has up to now avoided the extreme levels of monetary expansion favored by Paul Krugman. However - all else having failed - Japan's central bank is now engaged in injecting a massive 20% increase into bank reserves. Krugman's remedies may yet have their day.