NEWS ITEM: Morgan Stanley's chief economist in Asia, Andy
Xie, resigned last week after sending an e-mail to colleagues that described
Singapore's economic success as "mostly from being the money laundering center
for corrupt Indonesian businessmen and government officials". Now, he added,
"Indonesia has no money. So Singapore isn't doing well." Xie sent the e-mail
after attending the International Monetary Fund and World Bank meetings in
Singapore last month, where, he wrote, delegates "were competing with each
other to praise Singapore as the success story of globalization". Morgan
Stanley ranks sixth among merger advisers in Singapore this year, handling
US$1.5 billion of deals, reports Bloomberg. The saga of Andy Xie, erstwhile chief Asian economist of an investment
bank, makes for interesting reading, pointing as it
does at the perils of leveling any questions on the future of Singapore, or
indeed its present governance.
The country hasn't done itself any favors by adopting a thin-skinned attitude
to the media and being overly defensive of its governing coterie. Standards are
flexible when discussing other countries, though, as Singaporean politicians
are adept at putting down their neighbors.
In this context, this week's comments by Senior Statesman Lee Kuan Yew
concerning Malaysia's inter-racial politics and the future of liberal democracy
support my arguments of two weeks back [1] wherein I pointed out that Southeast
Asia is where democracy goes to die. Unwittingly, Lee may also have raised
another question: just who needs Singapore? For that matter, who needs Hong
Kong or Shanghai, other than current residents of these cities?
Parasite or haven?
Firstly, what is the function served by city-states? Looking through history,
we find that they tend to thrive as centers of commerce, with political power
following the money as it does today.
In the Asian context, the volatility endured by businessmen across the
fractured landscape rendered the existence of such city-states a matter of
necessity. Thus, there is some truth to the assertions of the aforementioned
economist in characterizing the role of city-states as places for money
launderers and the corrupt to gather. Ironically, as I pointed in an earlier
article, [2] the city-states themselves are relative paragons of virtue, at
least on the issue of corruption, if not quite in the realm of liberal
democracy.
Existing as oases in an otherwise scary landscape allows the likes of Hong Kong
and Singapore to attract a wide array of businesses to their shores, ranging
from multinational companies to trading groups. But it is as financial centers
that they have really shone in recent decades, becoming a convenient meeting
ground for investors and issuers. This is, however, controversial, from the
perspective of the countries that would otherwise have directly attracted or
absorbed the capital.
For example, the Malaysian dilemma has been that despite having world-class
ports and financial regulations, Singapore still steals a march. Be it the
value-added business around logistics or the listing of companies, Singapore
has a growing lead on Malaysia. Similarly, Indonesia has found it difficult to
operate effective ports, despite having a large number of natural locations.
The less said about its financial center aspirations the better.
Despite all that, Asian city-states face significant challenges in their next
stage of growth. As China and India develop, their governments would obviously
prefer to have financial markets under their direct control instead of being
farmed out to tertiary locations.
In essence, the future of Asian city-states is an opposing bet on the
development of soft infrastructure, such as regulations and the legal
environment in China and India. If and when these giants have their systems in
place, their need for Hong Kong and Singapore simply disappears.
These city-states certainly know that, which is why they have become more
desperate in attracting new capital and businesses. While both have recorded
some successes, it is also important to examine how it can all go horribly
wrong.
Existential dilemma
Historically, the governments of China have never trusted overly powerful
city-states. The trifurcation of China following the Han dynasty was followed
by the even bloodier Six Dynasties period wherein power alternated at the point
of economic swords wielded by chieftains. The need for consolidating power
necessitated the marginalization of city-states.
Given that historical context, the recent decline of Hong Kong and now Shanghai
hardly presents a surprise. In the late 1990s, Beijing was sufficiently alarmed
by the growing independence of Guangdong province, which had received a
significant fillip from the economic liberalization launched by Deng Xiaoping.
The rise of domestic capitalism involving key members of the local government
created the real possibility of the province shrugging off Beijing's edicts.
This necessitated drastic action eight years ago, when Premier Zhu Rongji
ordered the closure of Guangdong's International Trust and Investment Corp
(ITIC) as well as various other investment companies around the country.
Tellingly, China ITIC, based in Beijing, was exempt from the orders.
Having nipped Guangdong in the bud, Beijing then took steps to ensure that Hong
Kong did not emerge as a secondary threat. In the face of an economic downturn
and property market collapse, the city-state's government was facing key
pressures. During this period, Beijing adopted a steadfast standoffish
attitude, allowing its handpicked chief executive, Tung Chee-hwa, to deliver a
"death of a thousand cuts" to the city.
This ensured that Hong Kong people blamed their local heads, rather than
Beijing, for the sorry mess the city had become. Following the onset of the
avian-flu and SARS (severe acute respiratory syndrome) crises three years
ago, Beijing apparently changed its tack on Hong Kong, arranging to help the
city by allowing in property investors from the mainland. Still, Hong Kong's
future as a city-state remains in doubt as it is literally being suffocated by
southern China's pollution.
Shanghai was an altogether different story. The city's importance grew strongly
during the course of Jiang Zemin's reign. This year, the city shrugged off
Beijing's edicts on cooling down its property market, essentially emerging as a
city-state in the process. Admittedly, this strategy was too risky and worse,
short-term focused. Predictably, it ended with Beijing re-imposing control
after sacking Shanghai Communist Party chief and mayor Chen Liangyu.
Hopeless and hope
The outlook for Hong Kong is dire, as the city no longer offers meaningful soft
infrastructure advantages over mainland China. This implies that it is
condemned to a future of being a tourist location, although quite how this
strategy will gel with its current air pollution remains a mystery to me.
All is not lost for city-states though. Some, like Macau, will never face a
significant downturn as their economy is based on non-cyclical business, namely
gambling. Asians love gambling like Americans love burgers, thus making Macau
essentially bullet-proof, which is a good idea for its crime-ridden hotel
lobbies as well.
Other city-states such as Dubai in the United Arab Emirates have enough local
capital and modernization gap against neighboring states to guarantee their
future. Arab and Islamic states around Dubai are also somewhat relieved at not
having the responsibility for managing financial markets, seeing as how
horribly complicated that can get.
As I noted in the afore-referenced article on democracy, Thailand's recent
military coup was supported by the middle classes wanting to reassert their
control. Thaksin Shinawatra had gradually reduced the power of urbanites in
general, and residents of Bangkok in particular, depending as he did on the
support of Thais in rural areas. Facing marginalization, the monarch and the
army essentially restored power to the capital, thus perpetuating the city's
pre-eminence across the country.
Continued political volatility in Southeast Asia, as well as the ongoing
conniptions in Indian politics, imply a continued demand for Singapore to
operate as a regional center. Thus, Singapore is evidence that reports of the
death of city-states are exaggerated, as Mark Twain may have put it.
