Crony Capitalism in SE Asia

As most residents of SE Asia understand, the surging economy of the region is largely controlled by a limited number of wealthy families who suck in the money and only allow the bare minimum to trickle down to the masses, as pointed out today in an excellent overview in Newsweek International. A great story with a book soon to follow.

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.

Newsweek International Link