Asian Recovery Must Start at Home

by Lim Say Boon

Victims aren't necessarily saints. Indeed, amid the justifiable anger over Western capital's harsh treatment of Asia the 20 months following the beginning of the economic crisis in Asia in July 1997, the region's business, political and opinion leaders are in danger of glossing over their own shortcomings and sins. Consequently, they are at risk of missing the opportunity to build a stronger Asia from the rubble of the present disaster.

That Asians remain shell-shocked and angry at the speed, ferocity and, indeed, hypocrisy of the attacks on their currencies and capital markets is understandable. As an Asian, it's difficult not to sympathize with calls for joint burden sharing to speed recovery. The crisis isn't entirely our fault--foreign banks, the premature globalization of capital markets and "hot money" played their roles. But let's not kid ourselves about our own Asian culpability.

Put plainly: The variations of capitalism practised in the region had become more preoccupied with "clever" and not-so-honest schemes to make super profits than building value. When international capital was pouring billions into the region, Southeast Asia's paper-shufflers could not print shares quickly enough. The new money pushed profits higher, but simultaneously destroyed value. In fact it was no different than a government printing money. It was all worthless paper being pushed around like the counterfeit it was hoping no one would find out. As the kiting went on, real value started to fall, but it was masked by the euphoria of taking candy from the baby. In fact, the real value was quickly and quietly being cornered by the few political and economic elite.

I dusted off an April 1997 report by Credit Lyonnais Securities Asia that measures returns on capital after deducting the cost of capital (both debt and equity). Credit Lyonnais found that of the six markets it studied--Hong Kong, India, Indonesia, Malaysia, Singapore and Thailand--only Hong Kong and Singapore consistently added value for shareholders. The others were destroying value. Regardless of the profits companies in these markets were showing, they were, in aggregate, suffering negative capital spreads--the cost of capital exceeded the returns.

My comments owe nothing to recent critiques of so-called Asian values which, had they been followed properly, would have prevented this dishonest farce in the first place. Clearly, the shenanigans of the boom years owed more to Gordon Gecko than to Confucius. And a good part of the blame must rest on the corruption of easy money. In 1990, just after the fall of the Berlin Wall, there were concerns of an impending global capital shortage due to the cost of rebuilding eastern Germany and Eastern Europe. As it turned out, the amount of capital these economies could absorb was overestimated. Instead, bankers and fund managers fell over one another for a piece of the "Asian story."

The capital market became Asia's El Dorado. The catch-phrases "go public," "privatization" and "government connections" became the modern equivalents of Ali Baba's "open sesame." Only there were more than 40 thieves. The flood of money affected both producers and consumers. In stockbrokers' offices all over Malaysia, for example, little old ladies sat staring at electronic scoreboards--cheering their punts the way one would at the races. Never mind they had no idea what the companies did; their stocks made money. Young men threw in their jobs so they too could stare at the magic boards--and go home each night with money to burn.

And so the wealth effect unleashed unprecedented, frenzied consumerism throughout the region. We worshipped at the altar of shiny foreign products--Mercedeses, Guccis, Rolexes--without thinking hard about whether we had the means to sustain it all.

When the stockmarket soared, you bought your son a car or even a house. And when it went even higher, you bought yet another property--not for anybody in particular, but as an "investment."

Businesses raced to cash in on this unbridled exuberance. Build a new condominium block; develop a golf club; buy a fast-food chain--never mind the price. And so they rose: the impatient, young empire builders. They were among the more innocent.

Then there was the corporate equivalent of daylight robbery: Take funds off gullible investors and get yourself a fleet of luxury cars, or even give yourself an apartment.

A variation on the theme was the "mark-up capitalists." They would cook up a project, sell it to investors and lenders, bribe everybody from the banks' credit-assessment people to the marble contractor, mark-up the project cost and get their equity for free.

At the extreme end of nastiness, were the mark-up crony capitalists, the ones who didn't have to bribe anyone. They just marked up the cost of projects--with their political clout, who dared question them? Even traditional, hard-working business people were snared by the lure of easy money. For example, in Indonesia, you could easily borrow U.S. dollars at rates lower than rupiah deposits. So, traditional value builders ended up arbitraging--with disastrous results when the rupiah collapsed.

Of course, it's a gross injustice to tar all our capitalists with the same brush. But if our businesses are to recover, they will have to find their strength in a return to the traditional Asian business values of hard work, frugality, customer service, group loyalty and competitiveness. It has not been that long ago.

Lim Say Boon is a director with Crosby Corporate Advisory. The views expressed in this article are his own and do not necessarily reflect those of Crosby.