Asia's Failed Politics
It was certainly juicy stuff. There at a press conference on Sept. 22 was Malaysian Prime Minister Mahathir Mohamad, explaining why he had ordered hooded policemen to burst into the home of Anwar Ibrahim, his former deputy prime minister, and drag him off to prison. Anwar was arrested, Mahathir explained, because he was a vicious sodomite, a menace to public morals. He even offered lurid details of Anwar's sex life.
Anwar was a menace all right--a menace to politics as usual. He had made noises advocating economic reform that ran straight into opposition from Mahathir, who has long kept close ties between corporate Malaysia, the banks, and the government. Mahathir sacked Anwar in part because he called for changes to that cozy relationship. Then, in the days before his imprisonment, tens of thousands of people poured into the streets of Kuala Lumpur to express their support for Anwar and his message. But the police did their work well, and the crowds scattered.
BOTTLENECKS. Those crowds may march again to demand reform. Or, deprived of Anwar, the opposition may end up retreating in confusion. Either way, the recent events in Malaysia and elsewhere underscore a scary truth: Throughout the region, politics is fast becoming the chief obstacle to economic recovery. When the crisis began knocking down Asia's economies back in July, 1997, the hope was that the hardships would cause a fundamental overhaul of the system. Sheer necessity would drive change. Gone would be the bad banking practices, the cronyism, and the political favoritism that pushed several Asian countries so deep into debt that they had to go to the International Monetary Fund for help. Transparency, accountability, and profitability would be the rallying cry of the new politics.
More than a year later, politicians throughout the region are choosing to steer clear of painful choices. Many are simply too weak or too closely linked to vested interests to undertake sweeping change. Structural bottlenecks, bureaucratic resistance and labor issues slow or even thwart reform. Those who have implemented changes, as in South Korea or Thailand, have little to show for them. "It's hard to see how these people who are so deeply entwined in creating the problems can turn around and create the solutions," says Marshall Gittler, head of foreign exchange strategy at Bank of America in Hong Kong.
Now, the risk is that instead of redefining themselves as leaner Tigers ready to grow again, the countries of Asia will remain so mired in the old ways of doing business that reform will founder. Then, the old problems--cronyism, opaque banking practices, immature political systems--will fester, weakening the foundation of recovery and setting the stage for future disaster.
The political malaise manifests in different ways. In Japan, where economic stagnation has become the norm, Prime Minister Keizo Obuchi's ruling Liberal Democratic Party cannot dismantle the old patronage machine. In South Korea, President Kim Dae Jung runs a weak government that is opting to play politics the old-fashioned way by hitting its opposition with corruption probes rather than setting up strong institutions that can truly combat cronyism. That leaves the conglomerates, or chaebol, with the upper hand. "As long as this underdeveloped political system continues, the chaebol will not move to overhaul themselves," says Jun Sung In, an economics professor at Hong Ik University in Seoul. "Rather, they will try to expand further to increase their influence in the political system."
In Indonesia, President B.J. Habibie's close association with the discredited Suharto has resulted in weak leadership. A privatization program was supposed to introduce real competition to key industries. Instead, local magnates are objecting to the terms of privatization, and hopes for serious sell-offs are fading fast. Reformers had hoped for a serious inquiry into the Suhartos' business empire and prosecution for possible crimes of corruption. But the investigation is likely to have no bite, given that the attorney general has publicly stated he has no reason to doubt Suharto's claim that he had stashed no money abroad.
EASY MONEY. Sometimes the elected government is pro-reform, but the opposition is strong enough to blunt its best efforts. In Thailand, where the government of Chuan Leekpai has backed a laudable platform, senators who represent real estate interests are intent on blocking the passage of laws that would speed up foreclosures. A deadbeat can hang onto a piece of property for five years before a bank can claim it.
Nothing represents the difficulties of reform as well as the effort to fix the banks. The banking sector has long been the cornerstone of the region's crony capitalism. When times were good, Asia's bankers routinely funneled easy money to favored companies with little regard for the creditworthiness of projects. Lots of that money ended up in the pockets of politicians or their followers. Now, the same players are dragging their feet on reform and defying political pressure to clean up their acts.
Thailand announced a bank restructuring plan last month, but none of the banks so far has agreed to it. Stronger banks like Bangkok Bank and Thai Farmers Bank figure they can survive without government help. The smaller ones, however, are teetering. But families running them are loath to surrender control. "They don't want to change and lose face," says Banthoon Lamsam, Thai Farmers Bank president and chairman of the Thai Bankers Assn. But the longer they delay, the more impaired their capital base, which lessens their ability to make new loans. "In this kind of environment, I see nothing but mounting bad assets," says Michael V. Fung, a banking analyst at Bear Stearns Asia Ltd.
South Korea and Malaysia are assuming more control over the banking sector. Both are pushing ahead with mergers in hopes of squeezing out excess banking capacity and nurturing better-run banks. But most analysts say these are half-hearted gestures. South Korea may reduce its banks from 30 to 15, but there's little sign of a change in a banking culture that has produced staggering loan losses. Essentially the banks cannot afford to allow the chaebol to fail, or they themselves will incur staggering bad loan losses. Most analysts estimate that it will cost at least $70 billion to cover bad loans and recapitalize banks, far more than the $37 billion pledged by the government. Even though the Korean government injected $2.2 billion into Seoulbank and Korea First Bank early this year in a bid to bail them out, increasing company bankruptcies mean their balance sheets have not improved. Min Sang Kee, economics professor at Seoul National University, estimates that Korea's bad loans are doubling every six months. "Hopelessly ailing companies have been kept alive," says Korea University finance professor Park Kyung Suh. "Unless you separate bad firms from good ones, the banking-system bailout will be like pouring water into a bottomless jar."
Malaysia's banking system has turned inward. Capital controls have allowed the leadership to lower interest rates more than three percentage points since early September, easing the pain of the country's heavily indebted business groups. In a bid to stimulate growth, the government is also forcing banks to increase their loan portfolios by 8%, which amounts to an estimated $1.8 billion a month for the rest of the year. Since creditworthy companies are already hard to find in Malaysia, the danger rises that "loans will go out to companies that otherwise would not survive," says Andrew Lee, an analyst at HSBC Securities Malaysia.
The Malaysian government is also pouring money into banks to keep the system afloat. It pumped $400 million into Rashid Hussein's RHB group, despite its mounting debts, to help finance a takeover of Sime Bank. It also put $290 million into ailing Bank Bumiputra, the third rescue plan for the bank since the early 1980s. Bank Bumi, the country's second-largest bank, has just reported losses of $370 million for the year ended Mar. 31. Rating agency Fitch IBCA says the government may need to pump $525 million more into it as losses mount. The government is also merging the bank with cash-rich Bank of Commerce, controlled by the politically powerful Renong Group.
As Mahathir lashes out at Anwar and his supporters, many wonder whether the turmoil will trigger a popular backlash similar to the one that toppled Indonesian President Suharto in May. In the short term, Mahathir has the stronger hand. "It won't happen overnight," but the country will eventually move to support Anwar, predicts Marina Yusof, a former member of Parliament and outspoken critic of Mahathir. Certainly, if Mahathir's policies to bolster Malaysia Inc. fail to improve the economy, he will find himself increasingly vulnerable to attack. In an ominous move for Mahathir, Thomson Bankwatch Inc. cut Malaysia's credit rating to junk.
The irony is that politicians such as Mahathir have legitimate complaints about the punishing effects of global capitalism. He and other Asian leaders have been pointing out for months how hedge funds have been pounding their markets, making recovery more difficult. Mahathir has understandably maintained that the system needs controls to fend off speculative abuses and give Asia time to reorganize. But capital controls without serious reform just prop up the old practices that got Asia into trouble in the first place. And a political solution to the crisis is still a long way off.