Joe Studwell is the author of Asian Godfathers: Money and Power in Hong Kong and South-East Asia. What follows is an article he wrote for the latest edition of Newsweek magazine.
Crony capitalism is stunting southeast Asia, says the author of a new book on the region’s godfathers.
By Joe Studwell
July 23, 2007 issue – A couple of years ago I was fortunate enough to have dinner with Bob Zoellick, the wise American who now heads the World Bank. The conversation turned to Southeast Asia, a region Zoellick knows intimately, and about which I had recently agreed to write a book. In the wake of the 1997 financial crisis, Southeast Asia had been overtaken by China and India as the darlings of developmental economists and multinational business, yet I was optimistic. Zoellick listened quietly as I conjured up images of how the crisis could inspire a cathartic transition from crony capitalism to a market free of manipulation by bureaucrats and politicians. When I was finished, Zoellick looked across the table and said simply: “I am afraid that you may find that is not the case.”
Faulty Towers: Singapore’s growing economy has made the rich richer, but the working- and middle-classes are being left behind. Photo: Vivek Prakash / Reuters
He was right, as three years of research have revealed. The architecture of the Southeast Asian economy remains what it was 10 and 50 and 100 years ago. The domestic economies of Hong Kong, Singapore, Thailand, Malaysia, Indonesia and the Philippines are all still dominated by reclusive, enigmatic billionaires and their families, even if fewer of them rank among the richest people in the world. In 1996 no less than eight of the top two dozen billionaires on the Forbes global rich list were Southeast Asian; in 2006 only Hong Kong’s Li Ka-shing, with a net worth of US$18.8 billion, ranked in the top 24. Nonetheless, while some Southeast Asian tycoons have been overtaken by more entrepreneurial billionaires from other parts of the world, the region remains the global epicenter of rentier family business.
This sits heavily with ordinary citizens. To the extent Southeast Asia has succeeded, it has done so despite the influence of the tycoons. For 40 years the growth of gross domestic product and the creation of jobs in the region have moved in lock step with the expansion of exports, produced either directly by multinational corporations or under contract by small-scale local manufacturers. The billionaires avoid export manufacturing and its requirement for global competitiveness. Instead they prosper from concessions, monopolies and cartels in local service economies that define things like port handling, real estate, telecommunications and gaming.
A decade after the Asian crisis, Southeast Asia’s billionaires remain in the ascendancy because promised deregulation has never bitten. Even Hong Kong— lauded by the Heritage Foundation as the world’s freest economy (de facto cartels affect the port to supermarkets to electricity to cement) —has failed to pass the kind of antimonopoly statutes that are a central pillar of developed economies around the world. There has been no substantive progress on creating a common free market in services for the members of the Association of Southeast Asian Nations, despite relentless rhetoric. ASEAN is a toothless tiger, with no mechanism for enforcement of rulings, in a jungle of petty vested interests. Unlike the European Union, there are no regional or global brand-name corporations with the capacity to originate new services and technologies. There are simply local billionaires, lionized by domestic media, but running businesses whose productivity is regularly shown by economists to lag both that of Southeast Asian manufacturing and global enterprise in general. Why else, as once example, would container-handling charges at Hong Kong’s port be more than twice those in Germany?
Despite now bullish stock markets in the region, the billionaires—with their lousy corporate governance and manipulation of local banks to provide cheap and easy alternative sources of credit—also have contributed to the worst long-term emerging-market-equity performance in the world. From 1993—when the first significant international portfolio investments came into Southeast Asian bourses—to the end of 2006, total dollar returns with dividends reinvested in Thailand and the Philippines were actually negative. Returns in Indonesia and Malaysia were worse than leaving money in a London bank account. Singapore produced less than half the gain of the London or New York markets, with which only Hong Kong was comparable. It is a brave investor who thinks long-term equity returns will improve in the absence of structural economic change.
For working- and middle-class Asians, the past 10 years are mainly defined by rising and palpable inequality. The two wealthy city-states, Hong Kong and Singapore, today boast inequality as measured by the international Gini benchmark that is on par with urban Argentina. Postcrisis, the proportion of people in the Philippines, Thailand and Indonesia living on less than the World Bank’s $2-a-day measure of poverty and near poverty is greater than in Latin America. Today, it seems all too possible that the region’s coddled political and economic elites will allow their states to slide into a Latin American morass, as they continue to live high on the hog while the dreams of ordinary people go down the tubes.
Colonialism is partly to blame for this state of affairs, and for the whole tycoon system, though not entirely. In Thailand, which was never formally colonized, kings were employing Persians and Chinese to operate trading monopolies and tax farms from the 16th century. In Indonesia, Chinese entrepreneurs also entered into monopoly management arrangements with Javanese aristocrats before the arrival of Europeans.
Typically, there was a racial division of labor in which locals were political entrepreneurs focused on maintaining political power against indigenous rivals and, later, in partnership with Western colonists. Outsiders, often Chinese immigrants, were the economic entrepreneurs. So in Indonesia, the Dutch gave key ethnic Chinese traders both monopolies and pseudomilitary titles: majoor, kapitein, luitenant. The Spaniards who controlled the Philippines until 1898 named the top Chinese trader the gobernadorcillo de los sangleyes—the governor of the businessmen. In Malaya, the British and local royals sold trading, mining and other licenses to Chinese and Indian immigrants while encouraging rural indigenes to stick to farming.
When independence came, in the 1940s and 1950s, the region’s new leaders built on a system in which politics rules the economy. In Thailand, military leaders demanded substantial equity positions and a board presence in ethnic Chinese-run companies; the Malay political elite made its financial expectations of Chinese businessmen very clear, in what became known locally as “the bargain.” While the Thai and Malay elites stuck with established Chinese trader families, the two great Southeast Asian dictators of the postwar era—Suharto in Indonesia and Ferdinand Marcos in the Philippines—turned to unknown small-timers of whose absolute loyalty they could be sure. They were men like Liem Sioe Liong, a trader who in a few years became Indonesia’s top tycoon, and Lucio Tan, a man who once worked as a janitor but ended up as a Marcos billionaire.
To this day, there are precious few Southeast Asian tycoons whose wealth is not rooted in some form of state-sanctioned monopoly. (The exceptions are a couple of lesser Hong Kong billionaires, Patrick Wang of micromotor maker Johnson Electric and Michael Ying of clothing business Esprit, whose money was made in recent years in manufacturing in mainland China.) Soft-commodity monopolies for consumer items like sugar and flour produced early cash flows for Indonesia’s Liem and Malaysia’s Robert Kuok. Gaming licenses primed Stanley Ho in Macau and Lim Goh Tong, Ananda Krishnan and Vincent Tan in Malaysia, and lumber concessions made Mohamad (Bob) Hasan, Prajogo Pangestu and Eka Tjipta Widjaya in Indonesia.
In Hong Kong and Singapore, real estate became an effective cartel because of the way British colonial regimes structured the land market—selling off “crown land” in large lots that created a barrier to entry for all but a few big players. In the 1990s land packages in Hong Kong were commanding prices of about US$1 billion. The city-states also restricted access to their banking markets, creating other huge rents for local players; the biggest of all went to the institution that is now known as HSBC.
After access to concessions, access to capital was the second prerequisite of Southeast Asian tycoons. Elsewhere in the region, tycoons used their political influence to secure credit lines from state banks or opened their own institutions, which served as private piggy banks. The Philippines has lurched from one banking crisis to the next for almost a century, some based around state banks and others around private banks set up by tycoons. The country has never recovered from the financial-sector meltdown in the mid-1980s, when Marcos went into exile.
Across Southeast Asia the impact of the 1997 crisis followed the degree of corruption in the banking systems of Indonesia, Thailand, Malaysia, Singapore and Hong Kong. The Indonesian case was extraordinary. By 1997 every Indonesian tycoon had his own financial institution, and most banks had more than half their loans made to businesses run by the controlling families, ignoring the legal maximum of 20 percent. Liem’s Bank Central Asia, the biggest in the country, was owed 60 percent of its loan portfolio by other Liem companies.
In the wake of the crisis, there was some banking consolidation. Indonesia now has 130 banks, compared with 240 in 1997. Many banks were nationalized. Unfortunately, corrupt governments have an even worse record of managing credit allocation than tycoon-controlled financial institutions. It was notable that the Indonesian billionaire named by Forbes as the country’s richest individual in 2006—timber to real-estate tycoon Sukanto Tanoto, worth an estimated $2.8 billion—was listed by state bank Mandiri the same year as one of its six biggest delinquent borrowers.
Those Southeast Asian banks that have been reprivatized have often gone back to the billionaire fraternity; Liem’s BCA, for instance, is now controlled by the Hartono tobacco dynasty. Almost no bank in the region is widely held. The obvious exception, HSBC, whose terms of incorporation never allowed any shareholder to own more than 1 percent of its equity, is the only financial institution (and almost the only company) to have broken out to become a global enterprise.
After the financial crisis in Southeast Asia, in state after state, taxpayers picked up the tab, tycoons picked up the pieces and life went on as before. The lesson of the past decade has been that the relationship between political and economic elites in Southeast Asia is more enduring than almost anyone imagined.
Malaysia, which imposed capital controls and raised a finger to the International Monetary Fund as the crisis spread, dealt with its fallout in traditional fashion. The businesses of Halim Saad and Tajudin Ramli, the leading bumiputra (or indigenous) tycoons with close links to the ruling United Malays National Organization, were bailed out with injections of government money and state share purchases. Ananda Krishnan, the Tamil Sri Lankan billionaire and Mahathir confidant with an empire including telecoms and broadcasting, was shored up when state oil company Petronas bought out his interest in the vast Kuala Lumpur City Centre and Twin Towers real-estate development. Most telling was the fact that after the crisis, UMNO began to set up new tycoons on the old model. Within a few years, tycoon-of-the-moment Syed Mokhtar al-Bukhary, a former rice and cattle trader, built a vast conglomerate based in power generation, the operation of Port of Tanjung Pelepas, mining, plantations and hotels through government concessions and the provision of state financing.
Throughout the region, businessmen have been pushing deeper into politics, and Thaksin Shinawatra took this trend to its logical conclusion in Thailand. Backed by other key tycoon families—such as the Chearavanonts of CP Group and the Sophonpanichs, who control Bangkok Bank—he formed a political party and won election as prime minister. As had happened long before in the Philippines, the businessmen overran the political system, blurring the traditional distinction between political and economic elites.
The Thaksin adventure was doomed, however, and not just because middle-class Bangkok opinion was against him. Though Thaksin brought representatives of tycoon families like the Chearavanonts into his cabinet, his fellow tycoons became ever more livid that—in their view—all the spoils of power appeared to go to Thaksin. The prime minister’s telecoms and media business boomed (far faster than the Chearavanonts’), and by the fall of 2006, when Thaksin was pushed out in a coup, the other plutocrats were delighted. Today, Thaksin is in exile and buying an English soccer club; Thailand is again ruled by a military junta, and Thaksin’s peers are back at work, sailing in familiar political winds.
Almost none of the big players was ruined by the financial crisis in Malaysia, Thailand or the Philippines, and so it was in Indonesia, despite the fall of Suharto. The old man’s closest confidant and golfing buddy, Hasan, was made an example of with a conviction for fraud; he served a couple of years in a special and commodious prison cell. Despite a $56 billion write-off by the Indonesian Bank Restructuring Agency, most of which was required to bail out tycoon banks that engaged in illegal lending practices, most billionaires were able to hold on to the bulk of their assets.
Many prominent figures, nervous that they were not quite safe in Jakarta, decamped to Singapore and ran their operations from there. Sjamsul Nursalim, who repaid only about 10 percent of the money he borrowed from IBRA, is today focusing on large and growing businesses in Singapore and China. The most extraordinary escape story was that of the Widjaya family, which crawled out from under a cumulative debt of $13.9 billion owed by their Asia Pulp and Paper business and its subsidiaries. The Widjayas forced almost all their creditors to take a haircut, bought back bonds they issued for pennies on the dollar, survived the attempted intervention of senior European and American politicians with the government in Jakarta and faced down legal suits from Singapore to the United States. The family filed successful suits in Indonesia that declared some of its bond issues to have been illegal under local law and therefore not subject to repayment. The Widjayas, who were responsible for the biggest debt default in Asian history, are today probably richer than ever.
So where do these shenanigans leave Southeast Asia? It is easily forgotten that 150 years after the modern globalization era began, there is still only one significant Asian country that has made the transition all the way from backwardness to developed-nation status: Japan, and that was a century ago. We are not so good at learning the lessons of development as we think, and Southeast Asia richly illustrates the point.
In the absence of a deregulated common market, ASEAN’s intraregional trade is currently 20 percent of its total, compared with more than 50 percent in the European Union. Banking systems remain bloated by the region’s high savings rate but dysfunctional in their lending practices. Domestic economies are still concession-based, and corporate governance leaves much to be desired. Perhaps more than anything, what stands out in a review of Southeast Asia 10 years after the crisis is the contrast with South Korea and Taiwan, which is starker than it has ever been in the postcolonial period. Where Southeast Asian states stuck with modified colonial rentier systems after the second world war, South Korea and Taiwan took a different course. They successfully implemented land reform—in stark contrast to countries like the Philippines, where political elites have ensured the continuance of a landed ascendancy—and thereby ensured a bottom-up development process. Their governments made a commitment to social equity, reflected in far lower levels of inequality than are present in Southeast Asia, and the existence of independent organized labor. And when South Korea and Taiwan backed leading family businesses—as all developing states are wont to do—they supported local manufacturers rather than cosmopolitan trading elites.
Most obviously, it is clear today that South Korea and Taiwan take political systems seriously as drivers of development. In 1997, Kim Dae Jung, a longtime democracy and human-rights activist, was elected South Korean president and set in motion the most effective reform process to have occurred in the main crisis countries. Reporting and compliance requirements in the Seoul stock market are now stricter than in Southeast Asia, and the judiciary has shown far greater independence and resolve in pursuing those whose actions contributed to the crisis. The families behind Korea’s chaebol are today much weaker than their peers in Southeast Asia.
When the colonial era closed at the end of the second world war, South Korea and Taiwan were just as impoverished as the new nations of Southeast Asia: indeed, South Korea was much poorer than the Philippines. Today, with GDP per capita of about US$19,000 in South Korea and US$15,000 in Taiwan, those countries are three to four times richer than Malaysia and 10 to 12 times richer than Indonesia and the Philippines. The difference is political choices that in one part of Asia are creating free societies and globally competitive companies and in another sustain a superannuated economic aristocracy.