Having embraced international commerce and the global flow of capital for much of this decade, the governments of some developing countries now wonder whether they made a mistake. The dark side of economic liberalization has cast a nasty spell over key parts of once-booming, now-recessionary Asia and Latin America. It turns out that good times can turn bad as quickly as money, in the age of computers, crosses international borders.
Globalization isn't the rosy deal everyone once believed it to be. But it's still the best deal available.
Developing-country governments need to remember that. The problems with which most of them now struggle became manifest during speculative runs on their currencies, which they see as assaults from abroad. Some now feel tempted to build regulatory walls against financial activity by foreigners. However natural such a defensive response may be, it is self-destructive. Isolationism in any form creates more problems than it solves.
A struggling anchorGovernments needing persuasion on this point need to look no further than the refining and marketing business of Asia's struggling industrial anchor-Japan. A series of Oil & Gas Journal articles continuing this week depicts an industry approaching collapse after the slow removal of trade protections (see p. 25). Wholly dependent on crude oil from abroad, Japan's refiners should be profiting from abysmal feedstock costs. Instead, they're reporting huge earnings drops, even losses. Heavyweights Nippon Oil Co. Ltd. and Mitsubishi Oil Co. Ltd. are merging in what's likely to become a trend born of desperation.
Deregulation triggered the Japanese refining industry's financial problems. But it didn't cause them. Deregulation just relieved pressures long building behind protectionist barriers. The fundamental problem became evident early this decade when Japan failed to share the benefits of energy market liberalization sweeping the rest of Asia.
Among steps taken so far, the country's refiners no longer hold sole authority to import petroleum products. Gasoline retailers do not need purchase certificates from suppliers-a requirement that formerly kept supermarkets and other discounters out of the business. Wholesalers must publish product prices. And the government has lifted its ban on self-service stations.
Capacity surpluses loom. An estimated 1 million b/d needs to be cut from Japanese distillation capacity totaling 5.3 million b/d. Of the country's nearly 60,000 service stations, as many as 20,000 ultimately may have to close. Gasoline prices have fallen enough to keep the crude price slump from helping refining margins.
The carnage doesn't stop with refining and marketing, although that's where Japanese oil companies make most of their money. State-run Japan National Oil Co., set up to finance foreign upstream ventures by Japanese companies, has lost financial support. The government decided JNOC should generate returns rather than try to ensure supplies of crude from abroad for Japanese refiners. JNOC is liquidating profitable operations to cover large investment losses and bad loans.
The adjustments that Japan's oil industry must make are extreme and painful. They correspond to the even greater and more painful changes that the formerly insular Japanese economy must endure before it can recover from its deepest recession since World War II.
Protectionist legacyFree markets, international investment, and open economies didn't cause Japan's problems. A protectionist legacy did.
Economically troubled countries should remember Japan before they reject globalization and the economic liberality associated with it. Governments do more harm than good when they regulate against competition. Nothing ails the Japanese and other struggling economies that can't be cured, once the right legal structures are in place, by a healthy dose of global business.
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