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Microscope on the miracle
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Joe Studwell’s book, Asian Godfathers, makes interesting and sad reading. It relentlessly exposes the economic arrangements in East Asia (primarily in the South-East, but includes the Philippines and Hong Kong) that have rewarded monopolies, fostered opaqueness and allowed tycoons to enrich themselves, usually at the expense of minority interests. It reiterates that 10 years after the Asian crisis, the suboptimal and inefficient economic arrangements in South-East Asia continue to flourish. One of the most telltale evidences of this is that while 13 South-East Asian billionaires figure in the list of top 50 global billionaires, hardly one genuinely private company from the region figures in the list. There are rich promoters but not reputed companies. That is a strong indictment of the economic model that prevails in South-East Asia.
The book is an exhaustive catalogue of how various organs of the economy were put in the service of the tycoons across the region. Banks were there to support the funding needs of businessmen who set them up. At times, even central banks were co-opted. Firms promoted by the same businessman came to the rescue of the tycoon when he needed cash. Companies were taken public, only to be privatized when the share prices dropped.
North-East Asia has done better. Japan, South Korea and Taiwan have developed relatively more open societies, built robust democracies and created globally successful companies. Inequality is also lower than in the South-East. The author points out that these countries, early in their modern development phase, undertook broadbased, comprehensive land reforms that laid the basis for the fruits of economic success to be dispersed among large swathes of population. South-East Asia has shied away from land reforms. These North-East Asian countries also encouraged labour unions and that has not stopped them from industrializing and scaling technology frontiers. In contrast, the South-East has muzzled labour organizations.
China, despite its size and other advantages that lend themselves to the country following its neighbours in North-East Asia, resembles the oligopoly-dominated, inefficiently organized economies of the South-East. The common elements are low negative real rates (much of the South-East had low negative real rates in the early 1990s), exchange rate manipulation, export sector dominated by foreigners, suppression of labour movements, absence of democracy, forced high savings with little reward and no interest in genuine land reforms.
In some sense, it is no surprise that China has opted for an exchange rate- dependent, export-led growth model when its size and scale cry out for a domestic demand-led model. South-East Asian nations and China have something in common. They realize that a vibrant domestic economy with a strong and dispersed entrepreneurial class is a threat to established interests. Such an economy would see the fruits of success dispersed among many, not few. Hence, a strong domestically led economy is not encouraged. In these countries dominated by a few players and defined by narrow interests, corruption, cartels and conglomerates belonging to the oligarchs have combined to expropriate wealth from minority shareholders. A paper published in the American Economic Review in 2001 observed that the problems of East Asian corporate governance were more severe and intractable than suggested at the time of the financial crisis. Without credible regulatory reforms, the risk is that South-East Asia will go the way of Latin America, a region that continues to perform well below its potential. Once the recent, uninterrupted, unprecedented global growth becomes history, weak economic and societal foundations would come to the fore here.
Stock market investors clearly have no time for these issues. True, to an extent, it’s rational to focus on corporate earnings. If these are rising and if interest rates are low, stock prices will keep rising. But, if governance issues remain and if minority shareholders continue to get the short shrift, stock prices will reflect those risks.
For India, the book’s relevance comes from this quote by Philippine author Francisco Sionil Jose in the Far Eastern Economic Review in December 2004: “We are poor because our elites have no sense of nation. They collaborate with whoever rules—the Spaniards, the Japanese, the Americans and, in recent times, Marcos…"
Elites and intellectuals must speak up when the government errs—it will eventually listen. This has not happened in recent times. Short-term and nationally divisive decisions have not received the attention they deserve. If India is to succeed in becoming a great political and economic power, its elite must develop a national vision. The book is a reminder of where the country might end up, if they do not.
V. Anantha Nageswaran is head, investment research, Bank Julius Baer & Co. Ltd in Singapore. These are his personal views and do not represent those of his employer. Your comments are welcome at baretalk@livemint.com
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