Source: ASIAWeek:

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NOVEMBER 3, 2000 VOL. 26 NO. 43 ASIAWEEK

The War Against Cronies

Malaysia's Jomo Kwame Sundaram is on the frontlines of the struggle to change Asia's business culture. Here's why it is taking forever

By ALEJANDRO REYES

The fire in Jomo Kwame Sundaram's eyes probably began to burn on July 21, 1983. On that muggy Thursday the Malaysian economist's college schoolmate Jalil Ibrahim was found dead in the underbrush of a banana tree grove in Hong Kong's rural New Territories. Police reckoned that 36 hours before, after lunch and coffee with somebody in his room at the Tsimshatsui tourist district's luxury Regent Hotel, Jalil was strangled with a white bathrobe belt. His body was stuffed into a large suitcase, which a porter was told to cart through the Regent lobby and load into a taxi trunk.

Mak Foon Than, a Malaysian businessman, was later jailed for the murder. A 35-year-old executive of Malaysia's state-owned Bank Bumiputra, Jalil was sent to Hong Kong to investigate losses at its subsidiary, Bumiputra Malaysia Finance. BMF had lent to some shaky companies, including the giant Carrian Group headed by Malaysian-born businessman George Tan, which eventually crashed in October 1983. Among other things, Jalil had tried to find out who owned a block of 25 million Carrian shares and whether loans had gone to undeserving but well-connected borrowers.

"Jalil was a good and honest man, and his death was a turning point for me," recalls Jomo, 47, grimly. His friend's killing led the Universiti Malaya professor to his life mission: the fight against cronyism, the cozy and often corrupt connections between politicians and businesses. In a country where such ties are commonplace (though not necessarily illegal or even improper), Penang-born Jomo has stood against the tide - and faced down personal attacks and lawsuits. He has also received death threats, including, he recalls, a letter soaked in blood warning against his activism.

Named after two African nationalist leaders, Jomo fights at the frontlines of Asia's war on cronyism, along with other prominent opponents of impropriety in public office (see stories, page 50).

Firing up their struggle have been the spread of democracy in recent decades, the Asian Economic Crisis of 1997-98 and the global push for better governance, transparency and accountability. The ongoing political storm rocking Philippine President Joseph Estrada (see story this issue), accused of taking millions in illicit gambling money from a crony, is but the latest public eruption over the endemic cronyism afflicting Asia.

Jomo fumes that in Malaysia "practically every big businessman has had to ingratiate himself with politicians." That statement applies to much of the region, from Indian industrialists pleading for licenses to Japanese contractors bidding for infrastructure projects. And if Asia is to stay competitive and stave off another meltdown, it must not let up on its crusade against crony politics. "Cronyism does big damage to the economy," says Perfecto Yasay, former head of Manila's Securities and Exchange Commission, who had alleged that Estrada tried to pressure him into clearing a friend in a stock manipulation probe.

Besides giving a privileged few obscenely huge gains at public expense, cronyism discourages investment by the great majority of firms which don't know people in high places. That translates into slower economic growth, lower government revenues and fewer jobs. Scandals over shady deals can destabilize governments and unseat national leaders. Reprising the 1986 People Power protests that brought down Philippine president Ferdinand Marcos, Indonesian students railing against "KKN" - Bahasa initials for cronyism, corruption and nepotism - forced Suharto to resign in May 1998. Two Pakistan prime ministers, Benazir Bhutto and Nawaz Sharif, also fell amid charges of rampant corruption - a fate Estrada is now battling to avoid in the Philippines.

If cronyism is such bad news, why is it still stubbornly flourishing? One immediate reason: the region's economic rebound, which has dulled the zeal for painful change. "When you have growth rates of 6%, 7% or 8%, people feel the pressure is off," says World Bank president James Wolfensohn. At last month's IMF-World Bank annual meetings in Prague, he cited flagging reform in the three nations worst hit by the Crisis: Indonesia, South Korea and Thailand. Wolfensohn warns: "You can mask the problems by economic growth, but you have within it the seeds of the next crisis."

In Seoul, for example, President Kim Dae Jung "was elected to deal with corruption and cronyism, but has not yet been successful in doing so," the World Bank chief laments. Kim has used state power to try to force leading chaebol to restructure, and to reduce their influence in government. But business groups like Daewoo and Hyundai have been able to rebuff many of Seoul's restructuring demands, and in thousands of companies and agencies across the country, contacts forged in school, at work or in business still afford advantages to the well-connected.

The long, bruising fight, however, comes as no surprise to veterans of the war on cronyism. Like President Kim, whose decades of struggling for peace, human rights and democracy was finally recognized with this year's Nobel Peace Prize, the investigators, journalists, academics and bureaucrats taking aim at anomalies know that they must dig in for a protracted battle against daunting odds and powerful forces. "This is a cultural thing that you cannot end overnight," says Lee Seog Hyun, secretary general of the Citizens' Coalition for Economic Justice, South Korea's largest NGO and a staunch opponent of chaebol dominance and clout.

Jomo certainly knows how relentless the struggle is and how strong the forces ranged against reformers. Over the decades, he has written or co-written 81 books on political economy, especially the links between business and politics. One of them, The Political Economy of Malaysia, co-authored with his colleague Terrence Gomez in 1997, spurred calls for change from the opposition and even members of the dominant United Malays National Organization. Harvard- and Yale-educated Jomo has emerged as one of the harshest critics of Prime Minister Mahathir Mohamad's government (the PM no longer shakes his hand when they meet), though Jomo has not joined any opposition party.

One difficulty about fighting cronyism is that doing so seems to go against Asian ways. Rooted in centuries of feudal and peasant life, personal relationships and patronage have long been a part of politics and business in the region. Moreover, decades of government involvement in national economies, whether socialist like China or capitalist like Japan, have promoted close ties between officials and business people. Such cooperation has even been praised for driving East Asia's so-called economic miracle; its one-time admirers included the World Bank, now a leading critic of cronyism.

In authoritarian regimes, strongmen like Suharto and Marcos skillfully used business links and grants and favors for friends as convenient and necessary means of maintaining support and enriching their families. But even when democracy came to the Philippines, South Korea, Pakistan and other countries, irregularities didn't disappear. Instead, the need for mammoth funds to mount election campaigns allowed big business to keep buying influence. The list of Estrada's alleged cronies, for instance, mirrors the bankrollers of his successful presidential candidacy in 1998.

Notably, too, most Asian nations are at a stage of development where America was in the early part of the 20th century. Cronyism was rampant in the U.S. then - indeed, it was in America at the time that the word was first used with its current meaning - and it took the Crash of 1929 and the Great Depression to push the U.S. to develop institutions, laws and social attitudes that diminished the practice. That is what Asian nations need to do now: enact laws, create structures and, most important, change social behavior and thinking to ensure that cronyism doesn't pay.

For now, some have even argued that using connections can be an effective way - even the only way - for businessmen to cut through red tape and for governments to get priority projects off the ground. In India, says constitutional lawyer Rajeev Dhawan, businessmen have no choice but to play the crony game. "If you want any government contract, you will have to be routed through someone," he argues. "What people call cronies are really a highly centralized gangster army of middlemen." Hilton Root, a Los Angeles-based economist with many years experience in Asia, adds that cronyism arrangements and ownership structures like the chaebol are ways in which businesses cope with the uncertainties of a society lacking in reliable institutions.

In fact, the law may not even punish cronyism. "For a long time, criticism of cronyism was not taken seriously, because there was no violation of the law as such," Jomo explains. "Corruption was different because it was illegal, while cronyism was considered to be legal." The law may even punish those who expose crony deals; whistleblowing officials could be charged with divulging state secrets, a common occurrence in China and worrisome enough in some other authoritarian nations. Says Jomo: "Almost everything has become confidential. As far as the government is concerned, when in doubt, chop it as secret." (For all his exposes, though, Jomo has not run afoul of Malaysia's Official Secrets Act.)

Efficiency can become an excuse for special arrangements. Last year, the Hong Kong government denied allegations that it had awarded the Cyberport office and residential development to Richard Li Tzar-kai's Pacific Century Group without the usual tender because of Li's tycoon father Li Ka-shing's close connections to Chief Executive Tung Chee-hwa and to China. Officials insisted that Pacific Century was the one company with the required expertise and that a speedy selection was imperative for the project to be launched as quickly as possible. But the appearance of conflict of interest did Hong Kong's reputation damage.

Estrada has suggested that if a crony delivers, then favoritism, if there had been any, may be justified. "He's a good crony," he once said to counter allegations that pal Eduardo "Danding" Cojuangco, chairman of food and beverage conglomerate San Miguel, is profiting from their friendship. "Danding does not owe money to the government," said the president. "He has made San Miguel profitable again." For his part, Mahathir has called every Malaysian his crony, while businessmen reputed to be close to him have simply shrugged off criticism of their apparent relationship.

Sadly, many Asians have the same uncaring attitude. Across the region, the public has often been all too willing to accept that ends-justify-the-means line of defense and tolerate sleaze - to a point. Says Beijing taxi driver Zhang: "We actually don't mind if government officials are corrupt. As long as they accomplish things for society at large, that's okay. What we don't like are those officials who take public money and don't perform."

Common, too, is the argument that cronyism will die out naturally - that as Asian economies develop and societies become wealthier, corruption will diminish. Not true, says lawyer Dhawan. Feudal social orders certainly foster cronyism, but it is very much a modern scourge that can plague even developed economies and must be fought with new thinking and innovative solutions. "While earlier cronies were old, wizened people, there is a new breed around - younger and more experienced," Dhawan explains. "They work in concentric circles around the center of power."

New or old, however, cronies often share some underhanded methods. Last year, Jomo came under intense pressure from a well-connected business group whose contracts with the government he had written about. Some visitors to his office threatened lawsuits, while offering to help him out with easy credit. "These people thought we knew more about some wheeling and dealing than we actually did," Jomo recalls. "You have a family, so think of them, they said. We will take you all the way [to court]. We will bankrupt you. You won't get a job anywhere." He continued his exposEs; he has stood up to pressure before. In 1986 he was the first professor in Malaysia ever to be demoted. He got a promotion again only in 1991.

Even when a social upheaval brings down a corruption-ridden regime along with its hangers-on, new cronies could arise, along with some old ones. Much has been made of the return of Cojuangco and Lucio Tan, who made fortunes under Marcos and have regained clout after supporting Estrada. In South Korea, campaigns against chaebol dominance needs to take account of how cutting them down to size may hurt the economy and employment.

In Indonesia, new cronyism is not much of a problem - yet. "The economy is so flat that there are no big deals to pervert," says Jim Castle, founder of Jakarta consulting firm Castle Group. But there are concerns about deals covering the huge debts and banking interests taken over by the Indonesian Bank Restructuring Agency. IBRA is taking a second look at assets turned over to the state by owners of banks that went bust and had to be rescued. Meanwhile, the World Bank and the IMF have questioned a $2.7-billion debt restructuring deal with the Texmaco Group.

In the fight against cronyism, as with any disease, prevention is far better than cure. Perhaps the best way to cut out sleaze is freeing up business sectors and removing the incentive to cultivate connections for commercial advantage. That includes lowering import tariffs and quotas. Another important preventive is limiting election spending, which Thailand's new constitution has tried to do. In the Philippines, former House speaker and presidential candidate Jose de Venecia proposes that the state fund presidential campaigns. Otherwise, "candidates will continue to be beholden to big business for support. This system breeds cronyism." Yasay suggests limits on how much an individual contributor can give a candidate: "If somebody gives 2 billion pesos, then the candidate, if he wins, has to repay that."

For South Korean political scientist Lee Ki Taek, political maturity is the only way to curb cronyism. The Yonsei University professor wants to see election campaigns focus on issues rather than personalities. That would limit the incentive to support and gain influence with particular politicians. But Lee has an even better idea: the introduction of transparency in all aspects of politics and business, particularly when it comes to the interaction of vested interests and officials. "Cronyism will gradually disappear if we have a legal and transparent lobbying system," he says. In short, require all dealings affecting the public interest to be made public. For instance, all contracts worth, say, $100,000 or more should be detailed on the Internet, with the names of winning bidders and their beneficial owners published. If certain parties keep getting the deals, the public can ask questions and check things out.

Transparency will help promote accountability - another necessary remedy to cronyism, says Eddie Leung, chief editor of activist newspaper Hong Kong Voice of Democracy. Accountability, he carps, "is just a joke here." He recalls a recent scandal involving defective apartment blocks built by the Housing Authority, for which no one was penalized (though the authority's chief resigned). He adds that Hong Kong Chief Executive Tung Chee-hwa "is not elected by the people so there is no way that he is accountable to the people. The only one Tung needs to be accountable to is Beijing."

Certainly, if the public has no way of removing an errant official, the corrupt will more easily thrive. In China's ongoing crackdown on corruption, the Communist Party leadership still decides who gets the ax, and one Politburo member allied with President Jiang Zemin has allegedly been spared, despite his wife's involvement in a $10-billion smuggling scandal.

Lawyer Arittha Wickramanayake, chairman of the Sri Lanka chapter of anti-corruption coalition Transparency International (TI), looks to a generational change to eventually put merit above connections. That will happen in his country if, as he predicts, a new class of state-educated professionals without family connections or friends in high places emerges. "Their expectations are high," Wickramanayake explains. Thailand's former prime minister Anand Panyarachun, TI's chairman in Bangkok, agrees. He says even family businesses that have long worked political links for profit "realize that the writing is on the wall" (see interview, page 53). Lucio Tan Jr., a son of the Estrada-linked tycoon, said in a recent interview that he aims to cleanse the family reputation partly by being more transparent in business.

Building public awareness through protests and exposes, as Jomo has done, is crucial to shifting social attitudes away from the feudal subservience that lies at the core of cronyism and the public's acceptance of it. "What we have been writing and talking about for 10 to 15 years has been in public discussion over the past two-and-a-half years," says the academic. "People are aware of [cronyism] and condemning it. This is a major achievement." Hopefully, the new spirit will spread fast enough to avoid another regional convulsion - courtesy of its cronies.

With reporting by Arjuna Ranawana/Kuala Lumpur, Warren Caragata/Jakarta, Antonio Lopez/Manila, Laxmi Nakarmi/Seoul, Anthony Sabine/Hong Kong and Ritu Sarin/Delhi