The role of the rich in Asia’s financial crisis
By Victor Mallet

Do not forget the tycoons. Ten years after the Asian financial crisis, there has been much debate about the macro-economic causes, including open capital accounts, current account deficits and over-investment in unproductive assets. Not enough has been said about the magnates who contributed to it.

South-east Asia’s secretive billionaires played a crucial, if disputed, role in the postwar economic “miracle”, the market meltdowns of 1997-98 and the subsequent recovery. Understanding the persistent political influence of tycoons such as the Liems and Widjajas of Indonesia and Thaksin Shinawatra, the deposed Thai prime minister, illuminates the history of the crisis and points to the challenges still facing the region.

David Burton, the International Monetary Fund’s Asia-Pacific director, politely told the Singapore Press Club last month that the roots of the crisis lay “in financial and corporate sector weaknesses not fully apparent at the time”. In a blunter series of reports for the Asian Development Bank – which notes that average annual growth in the five worst-hit countries is 2.5 percentage points lower than before the crisis – economists called for improved governance and criticised corruption in Indonesia and the Philippines as “a deeply embedded obstacle to progress”.*

It has been left to Joe Studwell, editor of the China Economic Quarterly and a director of research company Dragonomics, to put the boot in with his new book Asian Godfathers. He argues that greed, corruption and excess were partly responsible for the crisis and that Asia’s tycoons have long been beneficiaries rather than instigators of economic growth.

For all the differences of tone, most analyses of the Asian financial crisis reach similar conclusions. South-east Asia’s economic success until 1997 and its recovery after 1998 were driven by competitive export industries, while the tycoons – with a few exceptions – made money in protected, cartelised and often inefficient domestic sectors such as property and banking. Mr Studwell mocks the hubris of tycoons who “congratulated themselves at conferences and in the media for making south-east Asia prosperous while (mostly) female assembly line workers in export processing factories really did make south-east Asia prosperous”.

While a slowdown in Thai exports was one trigger for the crisis, it was the now-notorious “double-mismatch” of investors borrowing dollars short-term for projects with long-term paybacks in domestic currency that turned it into a rout when Asian currencies plunged and debt-servicing became impossible. Across south-east Asia, property tycoons and monopoly distributors of imported goods, with their poorly managed in-house banks and tame finance houses, were a big part of the problem.

Ten years on, the role played by some of the tycoons in the crisis, including the siphoning of billions of dollars out of Indonesia to Singapore and beyond as capital fled the region, is often forgotten. Mr Thaksin and others have successfully created a nationalist myth, in which western speculators and the IMF are the villains and Asian business leaders are portrayed, astonishingly, as victims.

Those godfathers and politicians who were found guilty of wrongdoing – including Muhammad “Bob” Hasan, a business crony of Suharto – were handled leniently and treated in prison more as holidaymakers than as jailbirds. Politicians fared only slightly worse. Suharto, named by Transparency International as the world’s foremost kleptocrat, has avoided a criminal trial, although Indonesia this week filed a $1.54bn civil lawsuit against him for stealing state money through a charitable foundation.

The majority of tycoons implicated in the financial crisis emerged unscathed if somewhat poorer. “Local economies are still godfather economies,” writes Mr Studwell, “and the smartest, slickest godfathers were actually strengthened by the crisis.”

Tycoons and their conglomerates are even raising money again on international markets. Asia Pulp and Paper, which reneged on $14bn of debts in 2001 and became the biggest emerging market debt defaulter in history, is considering a return to the markets. The Widjajas, the family behind the company, have already raised $540m in Singapore.

To avoid another financial meltdown, to satisfy the expectations of citizens accustomed to consistent economic growth and to compete effectively against China and India, south-east Asia needs to improve corporate and national governance, which in this region means ending the symbiotic relationship between politicians and tycoons. Yet there is scant sign of progress. The gap between rich and poor is growing. Governance, according to data analysed by the ADB, has worsened in recent years in absolute terms and by comparison with other countries.

Few tycoons accept the need for change. Even in developed economies such as Hong Kong, they believe they have a right to control the government and to override the democratic wishes of ordinary people, on the grounds that big business contributes the most to general prosperity. The evidence from the crisis of 10 years ago reminds us that this contribution is highly questionable.

*Beyond the Crisis: Emerging Trends and Challenges, ADB **Asian Godfathers: Money and Power in Hong Kong and South-east Asia, Profile Books