THE NEW STRONGMEN

Mahathir Mohamad must be smiling. At the height of the Asian financial crisis, Mahathir ignored Western free-market advisers by imposing a very personal form of state control. The problem was money fleeing the country, so Mahathir banned capital flight, and it worked. Malaysia weathered the crisis better than most Asian tiger economies. What must be making Mahathir smile is a string of imitators--who wield state controls by whim to manage economies with startling success.

The leading practitioners of this new statism include Thai Prime Minister Thaksin Shinawatra, whose theories have come to be known as Thaksinomics. This eclectic doctrine includes most known forms of state control, including price caps on energy, and some new ones, including a weird plan for a lottery to fund a Thai state share in the Liverpool football club. South Korean President Roh Moo Hyun has been described as a spendthrift "socialist" by the head of emerging markets at Goldman Sachs. Venezuela's Hugo Chavez has become famous for funneling oil money to populist spending programs. And while Russian leader Vladimir Putin slowly extends Kremlin control over the economy, particularly the oil companies, he, too, is diverting petrodollars to welfare-state spending. "These countries like the benefits of the free market but not the cost," says Anthony Chan, managing director and senior economist for JP Morgan Fleming Asset Management. "They want to be able to keep a grip on things, so they've decided a more activist role on the part of government is not a bad way to go."

It's not as if these leaders plot moves together. But their simultaneous emergence on three continents is made possible by the widespread backlash against the free market as promoted by the U.S. government for much of the 1990s, and by the decline of American economic models since the stock-market correction in 2001 and the subsequent scandals and recession. The neo-interventionist mix of fast growth and populist spending is also made possible by booming commodity prices--for oil in Russia and Venezuela, semiconductors in South Korea, circuit boards in Thailand, soybeans in Argentina. Growth in these countries is forecast to remain well above the global average, at between 5 percent and 7 percent, into 2005.

Neo-interventionism has met with little resistance from the IMF, say economists, because its largest shareholder is currently the world's biggest public spender. The Bush administration's decision to spend its way out of recession created a worldwide liquidity glut. Low U.S. interest rates and an overvalued dollar established America alongside China as a fertile market for imported goods and commodities, including Russian oil, Argentine soybeans, and so on. "The U.S. has had the best recovery that money can buy," says Mohamed El-Erian, managing director at California-based Pimco, the world's largest fixed-income investor. "It became the engine of growth through the serial leveraging of balance sheets--first in its corporate sector, then in the household, then in the national budget, and finally in the rest of the world. This could be a calm before the storm."

The storm is likely to hit the neo-interventionists hard. While most emerging markets are lowering their debts, these populist big spenders are not. They've revived the beggar-thy-neighbor strategy of stimulating exports at the expense of imports, which allows them to collect foreign exchange to offset equally hefty external debts to fund capital investments. In South Korea, external debt is expected to rise from $123 billion in 2002, before Roh took office, to $147 billion in 2005. South Korea leans so heavily on exports to China and the United States that if either market slows, let alone both, "it could be a real shock," says U.S. economist Marcus Noland. In Thailand, the problem is how to sustain a fuel-price cap in the face of record oil prices, and inflation sparked by a plan to fund homeownership in rural areas. "Thaksinomics is a high-risk strategy," says Asia specialist Robert E. Looney. If the global economy slows, "we may see Thailand back where it was before the Asian crisis, with rising debt, balance-of-payments deficits, falling international reserves and increased concern over the Thai bhat."

But if the neo-interventionists survive a slowdown? Mahathir's instinct for state control could become an enduring counter-Western fashion.