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Hong Kong and the Emperor… and Tohti

September 25, 2014

A pleasant, somewhat lazy, couple of weeks <working> in Hong Kong and Shenzhen. Sitting on a surprisingly pleasant Shenzhen beach this week I watched the Hong Kong tycoon fraternity make its school trip to Beijing. Led by Head Boy Li Ka-shing, it was a full court press. Senior prefects Lee Shau-kee and Robert Kuok kept good order, while the dim but dependable Tung Chee-hwa explained his love of games and recited a short Ode to the Celestial Throne before the assembled Chinese leadership. A tremendous time was had by all, with the boys remarking that carpet and decor quality in the Great Hall is now almost as good as at home.

On the street of course, things are not quite so happy.

While the sixth form of St. Swag’s was up in Beijing learning how all is well in Hong Kong as is, school kids in the Special Administrative Region are boycotting classes this week to protest China’s gerrymandering of the 2017 election arrangements. If you haven’t followed it, the game is that everyone in Hong Kong will get a vote (as promised in the Basic Law), but Beijing will choose the candidates (<two or three>). It is actually a step back from the current arrangements which at least allowed the election of Henry Tang to Chief Executive to be blocked, replaced instead by the ineffectual but more brain-functional CY Leung.

Hong Kong, though it is rarely stated, is now just like Taiwan. The Taiwanese call it <Three Thirds>. In Taiwan, one third is Deep Blue (older, KMT, pro mainland integration). One third is Deep Green (younger, Democratic Progressive Party, pro independence). One third is in the middle.

So too, with only modest variation, in Hong Kong. There is no explicit pro independence camp but the generational gap is just the same. Hong Kong, like Taiwan, has entered its 1960s. And in the 1960s students on campus get beaten, and even shot if you remember, in their fight for what is right.

If you care at all, it is time to do whatever you can to prevent violence from arriving. You might write to the Chinese. But if you are a gweilo, that is likely counter-productive. Better to write to the American and British consuls in Hong Kong (emails below), and to the British and American governments, urging them to stand up for the spirit as well as the letter of the Basic Law, and to be ready to grant visas to Hong Kong students who will get arrest records, even criminal convictions, for peacefully protesting Beijing’s behaviour. It does make a difference if you have a moment.

Meanwhile, the Emperor. At the same time it is gently screwing Hong Kong, the Xi Jinping government’s decision to give a life sentence to, and seize all the assets of, the leading, non-separatist voice of Uighur nationalism, Ilham Tohti, is surely the most horrible, colonial, racist act we have seen from China for a very long time. Obama may have a lot on the Middle East, but he needs to draw some lines in the sand in East Asia. There are still plenty of rational voices in China, like there were in 1920s Japan. But the longer this stuff goes on, the harder, I think, the negotiating process becomes. I do not want to read this blog entry in 10 years time and find that some very unpleasant historical analogies going through my head were justified.

Well, enough of the misery. Tomorrow I return to Hong Kong for dinner with dear Hemlock. Back when CY Leung was elected, Hemlock had a hard-on for him, said he was going to change stuff. Not so much on the democratisation front, which would have to occur through a degree of managed confrontation, but in terms of the godfather economy and all those stitch-up oligopolies in real estate and retail and the securities markets. You gotta love Hemlock, even if he’s not as funny as he used to be. It is so heartening that after all these decades, the old boy could still be an ingenue (accent missing). It is so strange that it should turn out that I am the cynical one.

tycoons in beijing 0914

Above: Can’t get a bigger photo. Running anti-clockwise from Xi Jin-ping on the right, looks to me like Tung, K.S., Lee Shau-kee, Robert Kuok, Henry Cheng (son of Cheng Yu-tung, now decrepit), Lui, possibly Michael Kadoorie, and finally David Li of Bank of East Asia.

Saint Swag’s. September 2014 School trip to Beijing. 6th Form boys attending.

(Parents please note: the wearing of non-school uniform items such flat caps is strictly against school policy, including on school trips. Lui Senior (Cuthberts), who has already been in trouble this term for playing cards in dorm, has been fined a week’s tuck and given leaf sweeping for his transgression. This sort of thing will not be tolerated at St. Swag’s.)

Cheung Kong (Holdings) chairman Li Ka-shing

Chairman of Kerry Group, Robert Kuok

Chief executive officer of Shangri-La Asia, Kuok Khoon Chen

PCCW chairman and younger son of Li Ka-shing, Richard Li Tzar-kai

K Wah Group chairman and Galaxy Entertainment Group founder Lui Che-woo

Henderson Land Development chairman Lee Shau-kee and his elder son Peter Lee Ka-kit

Sun Hung Kai Properties Alternate Director Adam Kwok Kai-fai

Bank of East Asia chairman David Li Kwok-po

New World Development chairman Henry Cheng Kar-shun

CLP Holdings chairman Michael Kadoorie

Sino Land chairman Robert Ng Chee Siong

Harilela Group vice-chairman Gary Harilela

Hang Lung Properties chairman Ronnie Chan Chichung

Shui On Land chairman Vincent Lo Hong-sui

MGM China’s co-chairman and daughter of casino mogul Stanley Ho Hung-sun, Pansy Ho Chiu-king

Ian Fok Chun-wan, son of the late Henry Fok Ying-tung

Wharf (Holdings) chairman Peter Woo Kwong-ching

Asia Financial Holdings chairman Robin Chan Yau-hing

Li & Fung honorary chairman Victor Fung Kwok-king

Lai Sun Development chairman Peter Lam Kin-ngok,

Oriental Press Group former chairman Ma Ching-kwan

Glorious Sun Enterprises chairman Yeung Chun-kam

Phoenix Satellite Television chairman Liu Changle

Swire Pacific director Ian Shiu Sai-cheung

Shimao Property Holdings founder and chairman Hui Wing-mau

China Grand Forestry Resources Group founder Ng Leung-ho

Goldlion Holdings deputy chairman Ricky Tsang Chi-ming

Novel Enterprises vice-chairman Ronald Chao Kee-young

HKR International managing director Victor Cha Mou-zing

Hongkong and Shanghai Banking Corporation chief executive officer Peter Wong Tung-shun

Prof Anna Pao Sohmen, daughter of late tycoon Pao Yue-kong

Far East Consortium International chairman David Chiu Tat-cheong

Shun Hing Group vice-chairman David Mong Tak-yeung

Galaxy Entertainment Group deputy chairman Francis Lui Yiu-tung

Dah Sing Life Assurance Company chairman David Wong Shou-yeh

Far East Holdings International chairman Deacon Chiu’s son, Duncan Chiu

Bank of China International Holdings deputy chief executive officer Tse Yung-hoi

Sing Tao News Corporation chairman Charles Ho Tsu-kwok

More:

UK Consul General to write to about standing up for the Basic Law, granting visas, etc is Caroline Wilson. [email protected]

US Consul General to write to about standing up for the Basic Law (an agreement lodged with the United Nations), granting visas, etc is Clifford Hart. [email protected]

Why foreigners do have a dog in any Hong Kong fight. Re-posted NYT oped.

Op-ed about the Hong Kong situation by former Chinese political prisoners in the Wall Street Journal.

Video stream of Hong Kong student protests this week.

On why allowing everyone to vote but restricting the candidates isn’t democracy, Georgetown professor Don Clarke offers this nicely phrased US 3rd Circuit decision in a corporate voting case from 1985. Here’s the actual law library link (Durkin v National Bank of Olyphant). Of course what the Chinese are doing is just what British colonial governments did, but let’s not go there.

<We rest our holding as well on the common sense notion that the unadorned right to cast a ballot in a contest for office, a vehicle for participatory decisionmaking and the exercise of choice, is meaningless without the right to participate in selecting the contestants. As the nominating process circumscribes the range of the choice to be made, it is a fundamental and outcome-determinative step in the election of officeholders. To allow for voting while maintaining a closed candidate selection process thus renders the former an empty exercise. This is as true in the corporate suffrage contest as it is in civic elections, where federal law recognizes that access to the candidate selection process is a component of constitutionally-mandated voting rights.>

On Tohti:

Teng Biao writes in The Guardian that the guy sent down for life actually deserves the Nobel. Here is the background.

Nicholas Bequelin writes in the NYT that the treatment of Tohti will radicalise more Uighurs. This is your key piece of analysis.

English translation of Chang Ping article trying to find logic in the treatment of Ilham Tohti. See also the translated extracts from Tohti’s statement after sentencing, below.

Ilham Tohti’s statement after sentencing in Chinese. Here are some heart-rending extracts in English:

<My outcries are for our people and, even more, for the future of China.

Before entering prison, I kept worrying I wouldn’t be able to deal with the harshness inside. I worried I would betray my conscience, career, friends and family. I made it!

The upcoming life in prison is not something I’ve experienced, but it will nonetheless become our life and my experience. I don’t know how long my life can go on. I have courage; I will not be as fragile as that. If you hear news that I mutilated or killed myself, you can be certain it is made-up.

After seeing the judgment against me, contrary to what people may think, I now think I have a more important duty to bear.

Even though I have departed, I still live in anticipation of the sun and the future. I am convinced that China will become better, and that the constitutional rights of the Uighur people will, one day, be honored.

Peace is a heavenly gift to the Uighur and Han people. Only peace and good will can create a common interest.

I wear my shackles twenty-four hours a day, and was only allowed physical exercise for three hours out of eight months. My cell mates are eight sentenced Han prisoners. These are fairly harsh conditions. However, I count myself fortunate when I look at what has happened to my students and other Uighurs accused of separatist crimes. I had my own Han lawyer whom I appointed to defend me, and my family was allowed to attend my trial. I was able to say what I wanted to say. I hope that, through my case, rule of law in Xinjiang can improve, even if it is only a baby step.

After yesterday’s sentencing, I slept better than I ever did in the eight months (of my detention.) I never realized I had this in me. The only thing is don’t tell my old mother what happened. Tell my family to tell her that it’s only a five-year sentence. Last night, in the cell next door Parhat [student of Tohti’s] slammed himself against the door and cried out loud. I heard the sound of shackles, nonstop, as they were taken to interrogations. Maybe my students have been sentenced too.

(To his wife): My love, for the sake of our children, please be strong and don’t cry! In a future not too far away, we will be in each other’s arms once more. Take care of yourself! Love, Ilham.>

Only in Chinese on Hong Kong:

Wen Wei Po, Beijing mouthpiece in Hong Kong, says that Hong Kong student organiser Joshua Wong has received training from <black hands> in the US navy. I understand there is lots of this stuff doing the rounds in the official press.

Update, 29 September:

Well, it’s game on after a weekend of student-led confrontations with the police. Parts of HK island (Admiralty, Causeway Bay) are at a standstill, but Central still functioning. Speculation that Xi Jinping is going to can CY Leung, try to buy off the student leaders with small gestures. A talk-first strategy worked well with both Tiananmen in 1989 and more recently with the Falunggong protests in Beijing. But once you have lulled protesters into a false sense of security in HK, it is not so easy to send in secret police to round up the organisers, let alone send in troops. This is a whole new ball game for the CPC…

Here are the early instructions from the Propaganda Dept to mainland media outlets about handling information on the Hong Kong protests, courtesy of China Digital Times:

<All websites must immediately clear away information about Hong Kong students violently assaulting the government and about “Occupy Central”. Promptly report any issues. Strictly manage interactive channels, and resolutely delete harmful information. This [directive] must be followed precisely. (September 28, 2014)

???????????????“??”????????????????????????????????????????????[Original text]>

At the end of this SCMP story on the protests is a 9-minute embedded video interview with student leader Joshua Wong (you will have to do some kind of registration to access this). It is well worth watching. Not only Beijing, but the HK tycoons, have a very serious young man on their hands.

28 September 2014

28 September 2014

HK 280914b

28 September 2014

28 September 2014

Cordon created by police around Tamar/Admiralty, keeping protests out of central for now. 28 September

Cordon created by police around Tamar/Admiralty, keeping protests out of central for now. 28 September

 

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Tribute in the bag

August 8, 2014

image

Thailand’s latest junta, the National Council for Peace and Order (aka National Council for Underdevelopment as Usual), has confirmed it is committing to a US$23 billion high-speed rail investment. Beyond this I can find very few concrete details. But the expectation is that much of the construction work, as well as the rolling stock, signalling equipment, and even quite basic industrial inputs will be supplied by China. Late last year, before the junta got rid of Thaksin’s little sister, Chinese premier  Li Keqiang was down in Bangkok doing the hard sell. When the junta boys grabbed the reins of power they made a show of putting the deal that was then shaping up on hold. But a few months later it is back in play, albeit possibly with some cuts to the project specification suggested by this Bangkok Post article (see the references to lower speed services).

Although we know nothing of the Chinese financing terms, it looks like the Celestial Empire has done an effective number on its traditional south-east Asian tribute states. First they leaned on the Laotians, the poorest and most biddable group, to agree to the first leg from Kunming through their territory. Now they have the Thais in the bag. Officially, the Malaysians say high speed rail is too expensive for them. But my guess is that the Malaysian government will fold once construction starts on the Kunming to Bangkok legs and sign a deal. The Chinese an easily twist their arms by threatening to buy their palm oil and gas somewhere else. (When I saw Mahathir late last year in KL he told me that he personally he is already in favour of a Chinese high-speed deal, so Beijing has one still-loud voice singing its song already.)

Who is all this investment good news for? It is good news for China’s rail equipment and rail construction firms, into which Beijing has sunk vast sums in order to master high-speed rail technology. And it is good news for bourgeois types like myself, who want fast, clean travel between their preferred Nanyang beaches and mountain retreats and the panda lairs of south-west China.

But we shouldn’t pretend it is good news for south-east Asian economic development. By the time there is a high-speed link all the way from Kunming to Singapore — which could now easily be completed within 10 years — the projects will have cost at least US$60 billion in today’s money. That expenditure will have done almost nothing to increase south-east Asia’s grasp of manufacturing technology, or even its project management capacity, because all the value-added goes to China. At a time when south-east Asia desperately needs to increase manufacturing employment to provide jobs for countries’ young populations, the China high-speed rail deals instead reveal the developmental bankruptcy of regional politicians. Their only strategy in addition to being a proto-colonial resource base for China, is to become a tourist destination for a new Chinese middle class.

 

More

This from Geoff Wade at the Australian Strategic Policy Institute, though I am not convinced all the numbers quoted are accurate.

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What is not to like?

July 31, 2014

Summer in Taiwan. I came out two weeks ago with two kids and flew on to Penghu — the ‘Pescadore’ islands between Taiwan and China. Fortunately not on the flight that crashed that week. Clean air, clean beaches, and a diet of oysters and the odd beer.imageimageimage

Then we moved back to Taipei. Fantastic public transport, reasonably priced Chinese language summer camp, sitting in the hot springs at Beitou with a bunch of old boys and girls with flannels on their heads, wandering through night markets and shooting balloons with air pistols, chewing the fat with thoughtful, relaxed, helpful people. Chinese people at ease with themselves. Imagine that!

They tell me they lost the development race with Korea. Not really, I say. You lost the economic development race. But you won the overall development race. In Seoul they are all pissed out of their heads from Monday till Sunday, working 50 hours a week. Here, people are drinking fresh fruit juice and iced tea, eating the best food in east Asia, going to the temple or church, planning a holiday in Laos or Myanmar (it is striking how many people are wholly uninterested in visiting the mainland), reading a good book.

To be sure, I exaggerate for effect. But I honestly suspect that Taiwan is presently the most liveable place in east Asia. The parks, the public pools, the transport system, the schools all work in the general interest. Taipei retains the architectural charm of Tokyo because there are narrow streets but little high-rise construction, but it is more interesting because the Chinese are always up to something. It’s individuality with social responsibility. The losers are males of working age who are compelled to go to the mainland for work. But everyone else is here having a nice time. And there are pleasantly few gweilos of the irritating sort, because they have moved to China, or else stayed in Hong Kong or Singapore in order to better pool their wisdom and thereby earn their clients less money than the market index pays.

image image

Thinking back to Indonesia and Jokowi, if he wants to see what a manufacturing-plus-infrastructure strategy could do for his country, he should pop up here before he assumes the presidency. This is south-east Asia with dignity, built by small-time manufacturers like Jokowi. The Vietnamese, who are the only south-east Asian state on track to replicate this model, might also come over to remind themselves of the future. It ain’t too shabby.

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Jokowi, thankfully

July 27, 2014

This week’s confirmation that Jokowi won the Indonesian presidential election is a relief. The alternative was an administration under Prabowo and his band of western-educated, elitist carpet-baggers.

Indonesia avoided the negative outcome. But it cannot be said that Jokowi guarantees a fundamental change of direction, as many foreign journalists would like to believe. Jokowi is beholden to the PDI-Struggle party of Sukarno’s daughter Megawati, and to the network of Vice President Jusuf Kalla, themselves different stripes of the Indonesian establishment.

Nor does Jokowi have a policy agenda. He stood as an ordinary person who is not corrupt. But a government that rules relatively cleanly and a little more efficiently will be nothing more than a reprise of SBY’s first term, before the ex-general’s team was consumed by corruption-as-usual.

The real game changer in Indonesia would be a manufacturing strategy that creates more semi-skilled employment opportunities and develops indigenous technological skills. An infrastructure build-out would complement this by creating demand for domestically-manufactured inputs. But such a policy shift is probably too much to expect. Since the Asian crisis and IMF intervention Indonesia has settled on a consumer-focused banking system and a proto-colonial raw material export economy. There are lots of vested interests that surround this arrangement. It would be a very big surprise if Jokowi were to upset the IMF’s apple cart.

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Sounds like my book

October 31, 2013

A long trip through Malaysia, Indonesia and China leaves me more convinced than ever that east Asia has two distinct destinies in economic development terms, and that the south-east Asian states are on the wrong side of the tracks.

I start off in Malaysia, where the United Malays National Organisation (UMNO) holds power despite winning a slightly smaller vote share than the opposition in May’s elections. The effect has been a skittish, neurotic administration confronted with deep-seated developmental problems it has no desire or capacity to address. The government commissions reports from the likes of McKinsey as if believing foreign management consultants are likely to come up with some brilliant idea to solve the nation’s problems. In reality, locals know all too well what the issues are — a coddled plantation sector and ignored smallholders in agriculture, low levels of indigenous industrial competitiveness, an untamed army of oligarchs that does almost nothing to promote national economic development and recycles its cash flows offshore, a financial system that pushes out consumer debt rather than supporting industrial development, and resurgent speculation in high-end real estate. Despite oil and gas revenues that cover around two-fifths of the national budget, the government still runs a budget deficit of 5 percent of GDP as it strives to buy off discontent.

In Malaysia today, there is a general sense of malaise, compounded by a recently much increased crime rate — particularly theft, burglary and violent crime. This was never a country that you associated with crime (other than expropriation by godfathers), but that seems to have changed.

On 9 October, a nearly 90-year-old Mahathir was kind enough to grant me a meeting. After corresponding with him during the writing of How Asia Works, I was looking forward to sitting down with him. However the experience did nothing to change the conclusions I had already reached.

Here are the highlights: On agriculture, Mahathir insisted that plantations always produce better yields than smallholders. On Malaysia’s tycoons staying out of manufacturing and not contributing to industrialisation, he commented: ‘They do what they think they can do best. We don’t direct them.’ On the future of economic development, he said he never did, and does not now, see ASEAN as a vehicle for economic policy cooperation and joint development. ‘Economic cooperation is secondary in ASEAN,’ he said. Instead Mahathir talked of the tourism potential of millions of Chinese visitors and of China as a source of cheap manufactured products for Malaysia; he favours buying a Chinese high-speed rail line to run the length of the country.

For me, the takeaway was that Mahathir doesn’t think a country like Malaysia ‘ought’ to be able to compete with a country like China. His parting shot was to say that it was unfair of me to compare the manufacturing development of Malaysia and Korea in How Asia Works: ‘We are not a single ethnic country. We are a multi-ethnic country. That makes it more difficult. They [Malaysia’s ethnic groups] are not at the same level.’ It was the race-based outlook that I describe in How Asia Works as having been so devisive and detrimental to effective policy in every south-east Asian country.

Would Indonesia be any different? I spoke at an event generously hosted by Trade Minister Gita Wirjawan, who read How Asia Works soon after it was published and announced himself ‘a fan’. However, while he might agree with the analysis of south-east Asia’s problems, at the event he offered no clear statements as to policy changes he believes are required if Indonesia is to improve its development prospects. All I picked up in Jakarta was the same, general sense of discontent after 15 post-Asian crisis years of partial economic recovery based on commodity trade (principally with China) and zero industrial progress.

On this topic, I spent the day before the Trade Ministry event at what used to be called IPTN in Bandung, now known as Indonesian Aerospace. People I asked in Jakarta assumed that the aircraft-building industrial policy adventure sponsored by BJ Habibie — which the IMF insisted be cut off from further state funding as a condition of providing credit to Indonesia in 1998 — is long dead.

But not so. IPTN/IAe lends a little support to my assertion in the book that even failed industrial policy will produce some tangible benefits (just very expensive ones compared with well organised industrial policy). Up in Bandung, IPTN had 15,600 employees, including 3,500 engineers, before the Asian crisis hit. The firm was receiving monthly government remittances to cover development costs for Indonesia’s indigenous N-250, 50-seat turbo-prop aircraft. With almost no cash reserves, when the cash was cut off the firm went into freefall. Management did not stabilise the business until the headcount had been cut by more than 12,000, to just 3,000. They did so by turning what had been an aircraft building business into a low-cost parts supplier, particularly to Airbus.

Today, the two N-250 prototypes sit disconsolate in a parking area of the 80 hectare site (the one at the bottom is three metres longer and can seat 70, so was really the N-270, as in two engines, 70 seats). Suharto himself launched the first prototype in 1995, naming it Gatotkoco after a character in Hindu-Javanese legend. Something of the order of US$1 billion had been pumped into the N-250 programme by 1998. The renamed Indonesian Aerospace kept flying its prototypes — racking up 1,200 test hours — until 2007 in the vain hope of finding cash to finish the project. The outside technical reviews were generally positive, but the will and capacity of the government to back the project were gone.

IPTN N250 GatotkocoIPTN N250IPTN N270

After the state cash flow was cut, Indonesian Aerospace first obtained work making wing ribs for the Airbus A380. Then it obtained contracts for the A320, and for Boeing and other aircraft. There was no way for the firm itself to invest in development projects because residual government debt made it unbankable. Only in 2011 did the government agree to a debt write-off (technically a debt-equity swap). This was followed in 2012 by a Rupiah1.2 trillion (circa US$100m) ‘goodbye’ capital injection from the state.

Indonesian Aerospace continued to assemble small aircraft after the crisis that it had assembled before 1998 in a joint venture with a Spanish firm — now owned by Airbus Military. Gradually it has managed improve the terms of its cooperation with Airbus, moving, for instance, to profit sharing on the most popular model it builds. Critically, the post-crisis era focused Indonesian Aerospace on selling aircraft as well as making them. It currently exports around one-fifth of the small aircraft it assembles — to Thailand for rain-seeding, to South Korea for coastal surveillance, to Malaysia, Pakistan and Turkey. Exports, however, are still nowhere near as strong as they were in Embraer’s formative stages in Brazil, before that firm went on to be truly globally competitive. Indonesian non-weaponized defence procurement is the current backbone of Indonesian Aerospace’s order backlog, which stands at US$1 billion.

Perhaps most interesting is that the firm, after conducting five years of market studies (what would have been an unthinkably long period of analysis in the pre-crisis era when it was rushing straight from the N250 to the N2130, a 130-seat jet aircraft), has committed to develop a new civilian aircraft of its own. Indonesian Aerospace managers say they have 150 non-binding commitments for a very small, 19-seat passenger aircraft designed for low-cost travel between second-tier cities in the provinces. Indonesia, like the rest of south-east Asia, already has a booming low-cost sector between key cities based on Boeing and Airbus aircraft. This is an attempt to grab a bit of market share below the radar of the big boys. The aircraft will work off short landing strips, be able to carry substantial amounts of freight relative to passengers, and is designed for use with minimal air traffic control; a prototype will fly in 2015.

Indonesia’s industrial policy was badly conceived, with too little competition, no involvement of leading entrepreneurs, and almost zero export orientation. Even today Indonesian Aerospace has failed to build a supplier cluster around Bandung. But it looks like the firm may in the end produce a marketable aircraft worthy of the name of indigenous technological capacity.

The big point of contemporary comparison, of course, is China. Earlier in 2013 there was a mild panic among foreign observers that that country’s accumulation of bad debt — largely a result of the aggressive industrial policy orientation of its financial sector — could lead to imminent financial melt-down. But not so. Unlike Indonesia, which had no capital controls in 1997, China is protected from changes of sentiment about its banks by capital controls that trap money in the country and keep the system liquid. China’s capacity to grow away from debt is declining as its growth rate gradually falls, but the basic fact of capital controls still meant that this year’s panic was a storm in a teacup. There is always a lot of waste involved in industrial policy, but control of the domestic financial system allows a government to socialise the cost.

Riding the high-speed rail system (HSR) from Shanghai to Suzhou to Xuzhou to Beijing, visiting firms, I also reflected how massively greater is China’s technological capacity today than was Indonesia’s when that country hit the skids in 1997-8. The entire Chinese economy makes stuff that the world economy is willing to pay for. Manufacturing activity is not confined to one or two bellwether projects like IPTN or Malaysia’s Proton. If crisis struck China today, the country would be way more competitive, in more value-added activities, once the crisis abated than was Indonesia after 1998. And China doesn’t face a crisis today because it has not been dumb enough to abandon capital controls. I suspect the country only has one more economic cycle to go before its control over capital is insufficient to escape crisis — the irony of its present stage of development is that China must begin to deregulate finance in order to waste less capital in an era of slowing growth. But by the time crisis does strike, China’s technological competitiveness and its roster of globally competitive large firms will be substantially higher again that it is today.

So what I came back to England thinking is that there is just a lack of political will and political self-belief in south-east Asia to do things differently. I am not sure it was ever really any different. Even Mahathir, who talked the best game in the region in terms of promising a shift to a Japanese-Korean model when he was premier, says that Malaysians cannot really follow the model because they are not racially up to it. On that view, you have lost before you start.

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Is Indonesia different?

August 2, 2013

Below is a critique of How Asia Works with specific reference to Indonesia. Indeed there is a second part of the critique that you can track down via the Lowy site. I am just posting the first part and, underneath it, rejoinders to the main points it makes.

 

Indonesia’s development formula

by Stephen Grenville – 25 July 2013 11:10AM

I share Sam Roggeveen’s enthusiasm for the iconoclastic approach of Joe Studwell’s How Asia Works (his previous book on Asian Godfathers was a great read too). I also share Studwell’s scepticism about the ‘magic of the market’, his views on the IMF, and his admiration for the achievements of the South Koreans.

But I’m unconvinced by Studwell’s three-step development prescription, not because it is intrinsically wrong but because it is too hard to implement successfully.

The Koreans might have done so, but the strategy requires a level of sustained administrative competence, single-minded toughness and luck which are rare. Just as important, there are alternative development strategies, less demanding of skilled policy-making and administrative competence. The growth outcome won’t match Korea’s, but will be more feasible for countries like Indonesia (which Studwell sees as a development failure).

Let’s go through the three elements of the Studwell strategy. The first stage requires land reform and a boost to agricultural productivity.

It’s an old and sensible idea that agriculture has to provide the investable surplus which will propel the rest of the economy along the path of development. Fifty years ago, Clifford Geertz (Agricultural Involution) despaired about Indonesia’s failure to follow the example of Japan, which shifted surplus agricultural labour into factory work to create a modern urban/manufacturing sector. This failure would lead the excess population to atrophy, farming progressively more Lilliputian plots.

But things turned out better. With the average size of farms on Java around half a hectare, the opportunity for land reform couldn’t play the key role that Studwell advocates. But Soeharto, with his roots in agriculture, gave rice production high priority (extension services, high-yield seeds, fertilizer, pesticides and attractive terms-of-trade between agriculture and urban consumers via an active price stabilisation authority). Not very free-market, but big yield increases and self-sufficiency were speedily achieved.

What about a vigorous industry policy, the second Studwell requirement? Despite inheriting the usual disaster story of failed prestige projects from Sukarno, Soeharto was ready to have a go at ‘picking winners’.

Cement, fertilizer, textiles, paper production, food processing and petroleum refining all fitted Indonesia’s comparative advantage and made sense. Others were less defensible: Krakatau Steel,Tommy Soeharto’s national car and Ibnu Sutowo’s tankers. Habibie‘s IPTN aeroplane fits the Studwell strategy and might have succeeded if it hadn’t been stopped by the Asian crisis: ex-aeronautical engineer Habibie was well-qualified to lead this project, plane construction is quite labour-intensive (all those rivets) and the Indonesian archipelago needs lots of them (one airline recently ordered several hundred in one hit).

Whether IPTN would have succeeded is not the issue here: the point is that Indonesia, for better or worse, did try the sort of hot-house industrialisation Studwell advocates, and the IMF wasn’t able to stop this, at least until the 1997 crisis. Planning retained a central role, just as Studwell wants, and state-owned enterprises did the government’s bidding. Where Indonesia had comparative advantage, this often worked out well, and where the industry didn’t suit Indonesia’s attributes, generally it was a failure.

Indonesia’s development experience doesn’t fit the Studwell formula. Java’s rice production has done well without relying on his key element of land reform, and industry policy based on domestic entrepreneurship has been tried without much success.

Governments attempting to steer the process of development need effective administrative capacity; in a follow-up post, I’ll expand on the idea that market failure is common enough, but so too is government failure.

…

Joe Studwell’s response:

1. I doubt, contra Mr Grenville, that there is some arbitrary minimum land holding that makes land reform unworkable. If this were the case, then the micro-plots of a few tens of square metres championed by groups like Landesa would make no sense, when historical evidence around the world shows that privately-held micro-plots produce very high yields.

I am presently up my hill in Italy, and using a very slow Internet connection, and so cannot readily check the average Javan landholding. I assume Mr Grenville means that the average Javan landholding is half a hectare now, and would therefore be less after land reform. (The average land holding in most parts of China, Japan, ROK, and Taiwan after land reform was roughly half a hectare.) If my understanding is correct, my response is that Java has some of the best soil and climate conditions in the whole of east Asia, and so even smaller plots should be more than viable — if indeed size matters at all in a downward direction, a question which I think deserves real scrutiny.

Mr Grenville is correct that yields on Java are high by south-east Asian standards. The rice yield is over five tonnes per hectare. However this is still less than the average in north-east Asia. Given its soil and climate, it would not surprise me if north-east Asian style household farming could produce as much as 9 tonnes per hectare on Java — about as high as has been managed anywhere, because the growing conditions are so favourable.

Mr Grenville is correct that Suharto invested heavily (if patchily) in agricultural extension services and (eventually) used minimum price guarantees to promote higher yields. However he is wrong to say that self-sufficiency was achieved ‘quickly’. Rice self-sufficiency was not achieved until the mid-1980s, 40 years after independence, and wheat self-sufficiency never was. So I maintain my position that Indonesia is a real relative failure in agriculture.

2. On industry, much of my criticism of policy in south-east Asia focuses on politicians’ efforts to ‘pick winners’ rather than run industrial policy that periodically culls losers. I also talk at length about the need for ‘export discipline’ to anchor industrial policy. And I avoid traditional discussions of what is or is not a society’s comparative advantage because, to my mind, development is about changing (within reason) your comparative advantage. Economic development is about investing in a learning process in order to reap higher future returns.

Mr Grenville’s points about industry in Indonesia therefore seem to me to be based on a misreading, or mere scanning, of How Asia Works. He highlights industrial projects that were picked as ‘winners’, were not subjected to sufficient competition or pressure to export, and which consequently produced a poor return on industrial policy investment. His observations are essentially supportive of the policy requisites I highlight.

The one thing I think is truly misplaced in Mr Grenville’s comments is the argument in the third paragraph that, essentially, Indonesians are politically and administratively ‘not up to’ the task of accelerated economic development, particularly compared to people like the Koreans. Is this true? In 1945, South Korea was the rural backwater of a brutally colonised state in which Koreans had been allowed to play perhaps the most restricted administrative and economic role in any east Asian colony. I cannot see that the Koreans had much political, administrative or educational capital. Elite Indonesians, by contrast, held senior civil service positions under the Dutch, could win scholarships to study in Europe, and had much greater (formal) political, administrative and educational resources. The difference was not the endowments, but the change politicians wrought over 60 years of independent government.

Why was the peasant Park Chung Hee able to achieve so much more than the superbly educated Sukarno? Probably, I think, because Park focused on the basics and got them right.

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Singapore reaps what it sowed

June 22, 2013

Sing smog 1 Sing smog 2

 

 

Sing smog 3

 

See the 22 April AFP story below about the life-threatening smog enveloping Singapore. It comes (largely) from deliberately set fires on and around oil palm plantations in Sumatra, fires illegally set to facilitate land clearance.

You need additional information to read the story properly. Here it is. The story identifies two firms as largely responsible for the fires:

1. APP (Asia Pulp & Paper). The tale is too long to tell in detail here. Look it up in Asian Godfathers. Controlled by the Widjaya family, who defaulted on US$14 billion of debt (no, that is not a typing error) during the Asian crisis and then set out to buy the debt back at cents on the dollar. They did this by the most extraordinary acts of financial subterfuge, many of which were run through Singapore-based and Singapore-‘regulated’ institutions. A 2002 petition by creditors to the Singapore courts to have APP taken over and run by a local administrator was rejected. The Widjayas are serial law breakers. Where is their business run from? Singapore. Where did they hole up, and who protected them, after the Asian crisis? Singapore.

2. APRIL (Asia Pacific Resources International Holdings Ltd). Controlled by Sukanto Tanoto, who in the wake of the Asian crisis in 2006 was listed by Indonesian state bank Mandiri as one of its six biggest delinquent debtors. He owed Rupiah5.4 trillion. Tanoto was also under investigation for fraud at his own bank, Unibank, which after the Asian crisis was reported by regulators to have extended 51% of its loans to Tanoto firms; the maximum legal limit for loans to related parties was 20%. Tanoto is a serial law breaker. Where is his business run from? Singapore. Where did he hole up, and who protected him, after the Asian crisis? Singapore.

Finally, what is the east Asian market where it has been least possible to distribute Asian Godfathers since its publication in 2007 (way more difficult than in ‘authoritarian’ China). That’s right. Singapore!

Palm oil companies behind Singapore smog: Greenpeace

Fires on Indonesia’s Sumatra, which have cloaked Singapore in record-breaking smog, are raging on palm oil plantations owned by Indonesian, Malaysian and Singaporean companies, environmental activist group Greenpeace International said.

“NASA hotspot data in Sumatra over the past 10 days (11-21 June) has revealed hundreds of fire hotspots in palm oil concessions that are owned by Indonesian, Malaysian and Singaporean companies,” the group said in a statement received by AFP.

Singapore’s smog index hit the critical 400 level on Friday, making it potentially life-threatening to the ill and elderly, a government monitoring site said. On Saturday morning, the reading was at 323, still in the “hazardous” zone.

Parts of Malaysia close to Singapore have also been severely affected by the smog this week.

“Fires across Sumatra are wreaking havoc for millions of people in the region and destroying the climate. Palm oil producers must immediately deploy fire crews to extinguish these fires. But really cleaning up their act starts with adopting a zero deforestation policy,” said Bustar Maitar, head of Greenpeace Indonesia’s forest campaign.

The Indonesian environment minister Balthasar Kambuaya said Friday that a team has investigated eight companies suspected to be behind the fires and promised to reveal the companies’ names after the probe.

A senior presidential aide Kuntoro Mangkusubroto said Friday that the fires happened in concession areas belonging to Asia Pulp & Paper (APP) and Asia Pacific Resources International (APRIL).

“It is very clear that the fires are in APP concessions and APRIL. We need to settle this matter,” he told reporters while showing the distribution of fires from 1 to 18 June in concession areas in Riau.

APP, the world’s third-largest paper producer said in a statement late Friday that “ground verification” detected “only 7 points that are actually forest fire, affecting around 200 hectares of land”.

“They are under and being controlled by approximately a thousand fire fighting crews and their team. Our team’s preliminary investigation found that 5 of the fires were set by the community to clear land for crops and 2 cases are still under investigation”, APP added.

APRIL could not be reached for comment.

Indonesia stepped up its fire-fighting efforts Friday by deploying aircraft to artificially create rain and to water bomb the blaze.

The haze crisis has caused a dramatic escalation in tensions between tiny Singapore and its vast neighbour, with the city-state repeatedly demanding that Jakarta steps up its efforts to put out the fires.

 

More:

Sunny places for shady people.

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On the road

June 17, 2013

The longest trip I ever made away from the family. Three-and-a-half weeks including Astana.

From there I arrived in Beijing. Domingo Cavallo sitting in the seat next door except I didn’t recognise him. We shared a cab into town and had a nice chat.

Various talks in Beijing, but also desperately trying not to stop to smell the rose(s) and get on with my research. The revelation of this trip was Line 6, newly opened, of the Beijing Underground. What a line. It connects, on a straight, east-west route, the greedy gweilos of Chaoyang district and the paranoid, pipe-hitting, nationalistic politicians and bureaucrats in the Beihai North and Chegongzhuang areas. Plus it ends up in IT-land Haidian. It’s the golden line of money and power, with the fastest trains to match. Well built.

Beijing subway

Tianjin was easy on the 300kmh train. Back in the day I was pulled over on the expressway doing 160kmh. You are the fastest today, said the policeman. ??, I replied. He popped the fine in a briefcase, heaving with cash. Still took 2 hours door to door. The train is 30 mins. Then an interesting factory manager. Minimum wage in Tianjin this year is Rmb1,800. Ouch.

Then 5 hours on the high-speed to Shanghai. I never liked the place, but this time, for the first time, they charmed me. The urban planning is just better than Beijing. The people are calmer, less bullshitty than they were. Beautiful dinner with friends. Small dogs. I am still obsessed with where all the dog shit goes. They say no owner cleans up after the pooches. It’s the waidi ren, the peasant slave labour, that just picks up the shit early in the morning while Shanghai is dozing.

No high-speed to Guangdong yet, so took the sleeper. Beers in the dining carriage with a businessman who told a story you just could not make up. It’s like they just want to write the next book for you, take the weight… We trade numbers. A Burmese-Chinese returnee who can’t speak Chinese and a Shanghainese too.

In Guangdong I have to go to Zhongshan, near Zhuhai, to see a rather smart company. Seems to me a lovely place, not visited in 15 years. Taxi driver says street crime is on the rise. But I think the people are great, open, smiling at the gweilo.

Then across the border for a weekend on Coloane, at Pousada de Coloane. Sunday lunch at Fernando’s, my favourite anywhere. You never could book. However they have introduced a piece of paper on which you write your name after 12.30, when restaurant already full, and they use this to determine who at the bar is next. Even Portugal is making progress. I lament the changed shape of the Vinho Verde bottle.

Hong Kong is a whirr of money pigs and talks. In the midst I am drinking ??in the FCC when a svelte young colonial strides in. It is Hemlock. I hardly know him. Convex chest, unhunched shoulders, a smile… He tells me, apologetically, that he has ‘a girlfriend, almost half my age…’ Wonders will never frickin’ cease. Of course he still shoves a plate of noodles in his face at 11am. But Thus Spake Zarathustra just came to a movie theatre near you.

All in all, a lovely trip. Problem is that in the whole month only Bowring tries to really nail me, with a question at the FCC. God bless. It is one of the points that Charlie Munger lists in his guide to gentle informational murder. They just don’t challenge you. And yet without the struggle, we cannot progress.

Finally, I get home. And the wife tells me to stop swearing so much. Gravity, at last.

 

Some media stuff:

Pilling on Indian IT after a chat

Marginal Revolution likes the book. And is probably right that neither beach reader nor academic reader will be happy.

Tom Holland on the book.

Jake Van der Kamp responds to Tom Holland in the SCMP, except without reading the book. This is staggeringly lazy. File under Howard Davies. And I have often quite liked Van der Kamp’s stuff. But this thin, indolent drivel is a pretty good guide to why so many millions remain poor. How can anyone serious pass judgement on something they have not read? It is a book about stages, that takes in your view, Mr Van der Kamp, and the other one. Separately, and somewhat pedantically, ‘fulsome’ does not mean ‘full of’. It means ‘insincere’.

And now Holland responds. His main point is valid. I said at the beginning (and end) of How Asia Works that this is a book about economic development. Real development is also about social and political development. But I was not willing or capable to try to put the other parts of the equation in the same book. It would be too complex. And people would not absorb the basic message about economics. The next book will deal with the institutional stuff.

RTHK on the book. I had to download a plug-in to run this, but assume the average reader is more tech savvy than I. Trick is to do all this and then hit the play button to start the show. But first go to ‘Select segr’ and choose the 11.05 slot. With Phil Whelan. That is where the interview is. Very clunky stuff. But listenable if you get there. ACTUALLY… just did this again a slightly different way. Went here. Then just scrolled down the page and hit the button next to ‘Joe Studwell — How Asia Works’. Took a couple of secs to load up, but then fine.

Podcast interview by the Economist Intelligence Unit in Hong Kong. It was the end of the day. I am more tired than at RTHK, but still a decent chat.

Amcham in Beijing. The podcast should be here.

More to come when I remember what it was.

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Malaysian squib

May 6, 2013

Malaysian election 2013

Results are in and the opposition alliance won only 89 seats in Sunday’s election. The ruling UMNO alliance took 133 seats, down only 5 from the last election.

Still, there were some important shifts in voting patterns.

The main ethnic Chinese opposition group, the Democratic Action Party (DAP) did very well, a reward for years of political hard work and standing up to the bullying and intimidation of UMNO. UMNO’s in-house ethnic Chinese running dog party, the Malaysian Chinese Association (MCA), did very badly and looks like political toast. This is good news.

The opposition Pan-Malaysian Islamic Party (PAS), campaigning for the introduction of sharia, faired poorly. Anwar Ibrahim’s policy to bend with the wind and let PAS have whatever it wanted backfired.  This is also good news.

Malaysia can be added to the list of countries whose electors are now more grown-up than its politicians.

Still, going forward I would expect another period of misery as Najib fails to deliver any significant internal UMNO reform.

The pain will likely be leavened for the middle class by a stock-market bull run, for which all the pieces are now in place.

As the official ad campaign has it, Malaysia Truly (south-east) Asia.

 

Just in:

GaveKal, the firm that bought my interest in Dragonomics, reports that Sabah and Sarawak are 18% of the population but 36% of BN seats following the election (see Mr. Yap’s comment).

Household debt in Malaysia is now 80% of GDP, with the average family spending 44% of income to service debts. (It’s that old IMF trope — seen throughout south-east Asia — a first world financial structure with a third-world economy).

UMNO/BN got back in with lots of spending promises, but the fiscal deficit is already 5% of GDP.

 

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What’s Good About Malaysia?

May 3, 2013

Mal Krishnan Mal KuokMal Hussain Mal Syed M Mal Anwar Mal Jomo Mal Mahathir

 

Among the major economies of east Asia, Malaysia — which will hold a national election on  Sunday — is the most racially mixed, a melting pot of people of Malay, Chinese, Indian and Sri Lankan ancestry.

All the racial ingredients are present to foment east Asia’s most dynamic and cosmopolitan society — a California, Holland or south-east England of today, or a Tang China or Arab ascendancy of a earlier epoch.

Unfortunately, the ingredients have long been just that — ingredients. In 1965, Malay fear of being outnumbered by ethnic Chinese (and the reverse) was the background to the break-up of a union with Singapore. More recently, the cosmopolitan dream has languished under the affirmative action policies of the ruling United Malays National Organisation (UMNO). Affirmative action has too often meant filling the boots of a small Malay elite, and assorted running dogs, rather than taking the country forward.

Today, many Malaysians of all races reckon themselves less integrated and less happy than ever. And yet despite this, the signs of cosmopolitan promise in this most beautiful and enchanting of Asian nations never disappear.

The richest man in Malaysia is a reclusive Tamil, Ananda Krishan, an extraordinary entrepreneur who has bent every political leader for two generations to his will. Even politicians who hate each other end up agreeing with Krishnan’s agenda, and admiring the Islamic-art inspired Twin Towers he built in Kuala Lumpur. If government had forced him to do something more useful than run monopoly concessions from tv to telephones, and fret about the layout of his luxury yacht, this son of Sri Lankan railway clerks would surely have built one of the greatest branded businesses in the region.

The richest Malaysian long since moved on from Malaysia, in part because of his frustration at the place’s limited ambitions. Robert Kuok, commodities kingpin and Shangri-la hotelier has, in his latter years, put on an ever more Chinese face, but his own family is a wondrous assortment of different races, from West Indian to Welsh and Arab to Malay. His first, late wife was half-British.

The biggest financial services conglomerate put together in Malaysia is the work of a Malay-Arab-Indian, Rashid Hussain, whose inititals gave rise to the ubiquitous RHB logo seen everywhere in the country. One of the fastest growing businesses of late belongs to a Pashtun-Malay entrepreneur, Syed Mokhtar Al-Bukhary, so sharp that a Chinese billionaire once told me he refused to eat chocolates sent to him by Syed Mokhtar until they had been tried on his family pet (the tycoon and the animal survived). The best known Malaysian brand these days is low-cost airline Air Asia, run by an ethnic Indian, Tony Fernandes.

Nor is this cosmopolitan smorgasboard of talent limited to the business sphere. In Jomo Kwame Sundaram (Indian Tamil-Indonesian-Teochew Chinese), currently serving as Assistant Director General of the United Nations’ Food and Agriculture Organisation (FAO), Malaysia produced south-east Asia’s most prolific and respected development economist.

In Mahathir Mohamad — one- or two-quarters Indian, two- or three-quarters Malay, though in power he declined to concede his mixed race ancestry for political reasons — Malaysia produced the south-east Asian politician who came closest to creating a viable industrialisation strategy, one that could have put his country on the track that Japan, South Korea, Taiwan and then China followed.

The mercurial Mahathir, however, studied but failed to digest the real lessons of north-east Asia. Agriculture was left stuck in the colonial mould, while industrial policy never harnessed competition to developmental ends in the manner of more successful east Asian states, as any businessman who works in both Malaysia and China will tell you.

Today, Malaysia’s businessmen goof around buying English soccer clubs (Queen’s Park Rangers, which came bottom of the Premiership this year, Cardiff which is joining it) when they could and should be driving their nation’s economic development.

UMNO’s defensive claim going into this Sunday’s election is that it is a tried and tested ‘product’. But given that Malaysia was much the most profitable British colony, and now has an even more formidable resource base after the discovery of vast natural gas resources, a modest GDP per capita lead over neighbouring Indonesia and Thailand is far from impressive. It is the US$15,000 GDP per capita lag on Taiwan and South Korea — much poorer states at the end of the Second World War — that tells.

Anwar Ibrahim (Malay-Indian), who leads the largest opposition party, Keadilan, has little to recommend him. A former Finance Minister, he has bent with the political winds for decades, only leaving UMNO after Mahathir turned on him. The leaders of allied opposition parties are untested in power beyond the local level — indeed sometimes at any level.

Yet Keadilan and its allies do offer Malaysia the chance of rule by a different party after 56 years of UMNO incumbency. It is a chance worth taking, even if — as appears to be happening to Japan’s LDP after defeat by its opposition — the main benefit would be to shake UMNO out of its corrupt and navel-gazing torpor.

Sunday is also a chance to change the nature of racial politics in Malaysia. Race has become an albatross around the country’s neck. It should be Malaysia’s greatest asset.

 

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