On July 2 1997, the day after the handover of Hong Kong from British to Chinese sovereignty, the Thai baht was floated in Bangkok and immediately sunk by 50 per cent. This event was to trigger the Asian currency crisis, prompting a financial “tsunami” to sweep across South-east Asia, to Indonesia where the GDP lost two-thirds of its nominal value, and up to North-east Asia, where it crippled Korea.

But the Asian financial crisis was soon to have broader global ramifications. It spread to Russia, causing the collapse of the Moscow stock exchange, down to Turkey, relentlessly across the Atlantic, hitting Brazil and finally leaving Argentina in economic ruin. The crisis also contributed to giving globalisation a bad name, providing much impetus to the multiple anti-globalisation movements, demonstrations and riots that erupted, notably at the WTO ministerial meeting in Seattle in November 1999. So soon after the collapse of communism, the financial crisis seemed to confirm that global capitalism and the market economy could hardly be the answer.

Capitalism’s apologists quickly countered, however, that what was being practised in these emerging markets was not really capitalism, but an ersatz form that they labelled “crony capitalism” or just “cronyism”. This is a system in which business leaders bask in the aura of their apparent invincibility arising from their political connections and consequently dispense with telling their investors or creditors anything approaching the truth regarding their assets, liabilities and profits. Cronyism, as the term implies, depends on personal connections. It is therefore open to widespread corruption and nepotism, and is consequently characterised by opacity. One of the most egregious examples of cronyism was the association between the Indonesian-Chinese Liem Group and the Suharto regime.

The term crony capitalism was also widely used in discussions about the Enron scandal in the US, and similar scandals in Europe, such as Parmalat. The view, however, has generally been that while crony capitalism exists in advanced capitalist economies, it is more the exception than the rule. In emerging markets, on the other hand, it is the rule, to which there are very few exceptions.

Consequently, while emerging economies may experience periods of high growth, as is currently taking place in China, until and unless there is a marked improvement in corporate governance, the growth will not be sustainable. This is all the more pressing given that, in virtually all developing economies, the state command and control economic system has been discredited and replaced by the market. The economic destinies and wellbeing of the populations of these countries depend on the private sector. Corporate governance, therefore, is not just one of those imported western luxuries; it is a vital imperative.

So what is needed in the socio-political environment to bring about a positive effect on improving standards of corporate governance? Of absolutely critical importance is a vibrant civil society, the active presence of NGOs and a free and investigative press. Transparency cannot be obtained by diktat from above. Indeed “above” is more likely to favour opacity. Hence it can only come about as a result of pressures from below. The price of good corporate governance, as Thomas Jefferson noted of democracy, is eternal vigilance.

A proper political framework for good governance is one where the distinction between rules and regulations on the one hand, and laws and institutions on the other is clearly drawn. Laws and robust institutions, notably in respect to property rights, are vital for good governance, whereas rules and regulations, especially in an environment of weak institutions, are a recipe for corruption and for the preponderance of the informal economy.

Many emerging countries are characterised by excessive and cumbersome rules and regulations, resulting, among other pernicious things, in an environment that is unfriendly to legitimate business, especially to new and also small- and medium-sized enterprises. The World Bank annual Doing Business reports show how, in many emerging economies, rules and regulations strangle business, resulting in opaque corporate governance.

In a good number of economies, a major problem in corporate governance is the power of organised crime. In fact, criminal gangs thrive in environments with myriad rules and regulations compounded by weak laws and institutions, as is the case, for example, in Russia. (This syndrome is, of course, not limited to emerging economies, as similar forces exist in supposedly “advanced” industrial economies, such as Japan and Italy.)

India is an interesting and quite exceptional example of a country where the laws and institutions are quite solid, but in which business – and indeed all of society – is also burdened by excessive rules and regulations, epitomised by what is referred to as the “licence Raj”. Once reform really sets in at solidifying laws and institutions and streamlining rules and regulations, India will emerge as a leading economy of the 21st century with formidable corporate players, as most other elements – a vibrant civil society, free press and democracy – are already present.

In contrast, the outlook for China is much more problematical and, notwithstanding its high rates of GDP growth, rather bleak. Transparency in corporate governance is vital for shareholders and creditors to ensure that assets are being properly managed. The role of the stockmarket, therefore, is key. As Stephen Green has pointed out in his excellent book, China’s Stockmarket: a Guide to its Progress, Players and Prospects, it is questionable whether it is possible to have a properly functioning stockmarket in a non-democratic society. China’s current system combining dictatorial politics with market economics is not sustainable. Ultimately, one has to transform the other – hopefully it will be the latter over the former, as occurred in Taiwan and South Korea.

Another imperative is to have a strong foreign presence – not just foreign investors, but also in management and on boards. Emerging economies should consider the fate of Japan, where an economic crash followed four decades of growth. A significant portion of the blame can be placed at the feet of the country’s inbred, indeed incestuous, forms of corporate governance, which themselves arose in part because of a lack of foreign investment, especially in respect to acquisitions.

So what are the prospects? If one takes the four leading emerging players: Brazil, Russia, India and China – what Goldman Sachs has termed the “Bric” economies – the bleakest outlook is for Russia, where hardly any of the political prerequisites for enhanced corporate governance apply, whether before or after Yukos. China, as noted, must evolve a political and administrative system and, especially, the rule of law that will strengthen rather than undermine its market economic system. Among positive prospects, it is reasonable to be cautiously optimistic about India, as I have already suggested. I would also include Brazil, which, like India, has a long way to go, particularly with institution building, but is headed in the right direction and benefits notably from a very vibrant democracy, civil society and free press.

Hong Kong, with which this article began, stands out as the model in many respects. Though it is not yet, much to the regret of most of its citizens, a democracy, it gets strong marks in respect to civil society, the press, laws and institutions, including its financial institutions, and benefits from a strong foreign presence. I would also argue that it is because of, not in spite of, its strong institutional framework that Hong Kong businesses have maintained that great buccaneering Chinese capitalist risk-taking entrepreneurial spirit that has been such a powerful driving force in Asia’s “economic miracle”.

Jean-Pierre Lehmann is professor of international political economy at IMD