Lessons to be learned from visions of order, disorder and political decay

PUBLISHED : Saturday, 23 June, 2012, 12:00am
UPDATED : Saturday, 23 June, 2012, 12:00am


Joseph Yam Chi-kwong's paper on the future of Hong Kong's monetary system caused quite a stir. Irrespective of what happens to the dollar peg, the fundamental thrust of the former Monetary Authority chief's argument is irrefutable - that no fixed exchange rate system is consistent with sustainable budgetary deficits.

This is the major lesson learned from the European crisis and one learned bitterly in the last Asian financial crisis. Hence, I see Yam's remarkable essay as a reminder that any deviation from the convention of positive non-interventionism in Hong Kong's budgetary stance must factor in the exchange rate policy.

There is no doubt that, with strong fiscal surpluses in Hong Kong, and good growth and a strong macroeconomic situation on the mainland, the status quo is not a bad place to be. But as Europeans have found to their cost, good times are probably the best times to think about rainy days, as it is never easy to change course in stormy weather.

The trouble with money is that it lies in the intersection between the state and market. Over time, money tends to fall in value because all states tend to overspend. We are living in a time of financial crises precisely because government debt in advanced countries is at unprecedentedly high levels. There is no global order to manage global money, with private shadow banking credit still being underwritten by public guarantees.

In the prescient words of the late management guru Peter Drucker, in 1993, 'we are not in fact facing the 'new world order' today's politicians so constantly invoke. Rather, we are facing a new world disorder - no one can know for how long'.

Just as we are trying to seek order out of disorder, it is worth taking a look at philosopher Francis Fukuyama's latest book, The Origins of Political Order, that examines history to see whether liberal democracy will survive the challenges of different models of statism, particularly the rise of the modern Chinese state.

Even though liberal democracy spread rapidly throughout the emerging world, its failings in tackling corruption, crime, terrorism, the emergence of predatory states and the creation of a stable international order, led Fukuyama to examine trust as the foundation of social prosperity, and the importance of state-building, drawing on lessons from Iraq, Afghanistan and other failed states.

This is the first of two volumes on the evolution of political and governance systems, and covers the period from the dawn of humanity to the French revolution. The next book centres on conditions since the Industrial revolution.

Rather than try to deal with the idealism of liberal democracy, Fukuyama looks at why there is political decay. He recognises that 'political institutions are necessary and cannot be taken for granted. A market economy and high levels of wealth do not magically appear when you 'get government out of the way': they rest on a hidden institutional foundation of property rights, rule of law, and basic political order. A free market, a vigorous civil society, the spontaneous 'wisdom of crowds' are all important components of a working democracy, but none can ultimately replace the functions of a strong, hierarchical government.'

Fukuyama's work reminded me of The History of Government, the magnificent trilogy by Oxford professor S.E. Finer published in 1997, that also surveyed the rise of government from ancient times to the Industrial revolution. Finer reminded us that 'big government' is a modern invention - from 1821 to 1985, the number of British bureaucrats rose from 27,000 to more than one million; in the United States from 8,000 to 1.8 million. The rise of the state came from the demands of the welfare state when the share of government spending rose from less than 10 per cent of GDP in the 18th century to 46 per cent of GDP in Organisation for Economic Co-operation and Development countries in 2009.

Fukuyama's contribution is to argue that a successful modern liberal democracy comprises three sets of institutions in balance - the state, the rule of law and accountable government. The latter two constrain the state from becoming despotic. His survey of history and comparative analyses across countries, from Chinese to Islamic nations and European states, suggests that the evolution of the rule of law is not ordained, and patrimonialism - the natural human propensity to favour family and friends - is a constant bane of accountable and just government.

Indeed, contrary to conventional wisdom, Fukuyama argues that 'the English experience was exceptional in many ways, but is not necessarily a good guide to development in countries differently situated'. This explains the failure of governance in many former British colonies because the British rule of law often conflicts with tribalism, clan and cultural beliefs, and behaviour that re-institutes patrimonialism.

In many ways, Fukuyama's line of academic research has more relevance in a world where politics trumps economics. He has gone back to the study of social and political institutions that shape human behaviour beyond the narrow economic assumption of rational behaviour. Markets are all about the exchange of goods and services defined in monetary terms, but the state is all about the exchange of power.

All societies struggle with the need for order that conflicts with the need for creativity and innovation. I eagerly await Fukuyama's second volume, to shed new light on this perennial contradiction.

Andrew Sheng is president of the Fung Global Institute