Open-and-shut case? Not quite

  Does economic liberalization lead to political openness? A new book finds little evidence in Singapore and Malaysia, writes Salil Tripathi
  Far Eastern Economic Review
July 15, 2004

INREVIEW: BOOKS: SOUTHEAST ASIA

Transparency and Authoritarian Rule in Southeast Asia: Singapore and Malaysia by Garry Rodan. Routledge/Curzon. $95

WHEN EAST ASIA plunged into financial free-fall after Thailand floated the baht in July 1997, economists and analysts were quick to point out that the crisis was sudden and acute because they did not have reliable information. Had they known the countries' financial indicators, like balance of payment statistics, outstanding debt (both public and private), and the tenure of that debt, they would have learnt of the underlying weaknesses of the so-called miracle economies much sooner. The markets would have punished the laggards and rewarded the fiscally fit.

In the wake of the crisis, economists and executives at the World Bank, the International Monetary Fund (IMF), major investment banks, creditors and brokers from financial markets, even business publications, collectively called for good governance. And greater transparency was a critical component of good governance, they chorused.

Rulers soon fell in Thailand and, more spectacularly, Indonesia. The political temperature soared in Malaysia, where then-Finance Minister Anwar Ibrahim emerged as the markets' favourite with his talk of reforms. This ferment was coupled with demands for greater political freedom, particularly in Indonesia and Malaysia, and it became received wisdom to argue that throwing open markets and enhancing transparency would give rise to democracy and openness.

This is part of a widely held belief that greater economic liberalization inevitably leads to political openness.

Yet the international record in this arena remains mixed, and there may not be a simple cause-and-effect relationship between economic and political transparency and openness. But the peculiar nexus between business and politics in Southeast Asia--and political change in Thailand and Indonesia--made it seem as though the elusive evidence was at hand.

Garry Rodan is one of the foremost international scholars on Singapore and Malaysia, and is the current director of the Asia Research Centre at Murdoch University in Perth, Australia. Rodan has written an enlightening, challenging and provocative book in which he questions the assertion that greater financial and economic transparency inevitably leads to a more open society. To do this, he draws on meticulous research, looking at political theory, academic literature, newspaper reports and research from international investment firms.

Rodan's conclusion is sobering: The governments of Singapore and Malaysia understand the kind of transparency markets need. But they protect their political process from public demands for transparency.

How? By offering limited concessions to the markets. By doing this, they have undermined the rhetoric of transparency, Rodan says.

During the heady summer of 1997, it seemed the world was going to turn upside down. People were protesting on the streets, banks were collapsing, well-connected businessmen were close to bankruptcy and once-stable currencies were crashing. Media--domestic and foreign--had a field day.

The IMF called for greater clarity in the data being assembled and disseminated. The World Bank accepted that its verdict on "Asian miracles" was premature, and later, it published a collection called The Right To Tell, on the importance of the role of free media in economic development.

Sensing political changes in the region, and realising the markets' needs, Singapore promptly accepted the transparency rhetoric. The government encouraged companies to provide quarterly reports. Rodan shows that to a limited extent, real changes were made. Singapore's Government-Linked Companies came under scrutiny.

This was also the case in Malaysia, for the conglomerates run by businessmen close to the elite in the United Malays National Organization, the leading party in Malaysia's ruling coalition.

And yet, seven years after the crisis, there has been little political change in either country. Mahathir Mohamad's retirement was completed on his terms, and he hand-picked his successor.

This recent period has also coincided with direct attacks on the media, particularly in Malaysia, which has used draconian laws against journalists. Rodan points out how copies of this magazine were held up from circulation in Malaysia, and its former correspondent there unprecedentedly served time in jail. The ever-present threat of  libel suits and the selective denial of access to foreign media ensured that editors of some international publications encountered severe problems in handling difficult topics regarding either country.

That some publications, including this magazine, the Asian Wall Street Journal (both published by Dow Jones & Co), the Economist, BusinessWeek and others, continued to raise inconvenient questions about bailouts and opacity--which Rodan approvingly notes--is a tribute to the persistence of those reporters and editors. Several stories, however, never made it to print in many publications, which shows the extent to which Singapore and Malaysia succeeded in framing the rules of engagement with the international press on their terms.

Rodan breaks new ground in highlighting the role of investment banks and brokerage houses (a point first noted by international publications) in "talking up" countries when they felt this was necessary. That story echoes the more recent history of Wall Street firms and their reports on particular sectors, where clients were favoured with good reports. Rodan's book would have even greater value had the investment banks' role in Asia been placed under scrutiny as intense as that recently regarding companies in the US.

Rodan does not address whether the disconnect between economic transparency and politics is permanent.

Will economic openness never lead to political loosening? And is that the fault of markets or individual players?

Free-market economists will argue that individual businesses may accept a certain level of opacity to collude with a political elite in a particular country. But in a genuinely free-market economy, such monopolies and oligopolies will collapse as other firms will emerge seeking to gain from a profitable market.

That's fine in theory, Rodan argues. In the real world there are states that have the power to grant licences and to regulate, and such states can astutely estimate the needs of powerful individual players in the international arena, meet their needs and carry on as if this is business as usual. That, he says, is what happened in Singapore and Malaysia.

Rodan notes that leaders of Singapore and Malaysia, preside over economies heavily dependent on international capital investment. They could not altogether ignore the "new mantra" of the virtues of  transparency. Their success lay in embarking on "a selective reform agenda--one that steered well clear of  political openness and scrutiny, but delivered on some improvements to corporate disclosures and other limited forms of transparency." Rodan asserts that such limited reforms were enough for the markets.

Economics may be dismal, but the conclusion need not be. The demand for greater transparency by outsiders will continue. Whether that leads to an eventual change in the regimes is a separate question. What will change those regimes will not be dictated by markets alone. All far-reaching political changes must, in the end, come from within.

Salil Tripathi is a London-based writer who covered the Asian financial crisis as a REVIEW correspondent


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