The myth of crony capitalism

12 February 1998

Since mid-1997, Bangkok has had a new type of short-term visitor: the print, TV and radio journalist who has been sent off to Thailand to "do a story", because suddenly this place is newsworthy. Over the last couple of weeks, these journalists have all been asking the same lead question: tell me about crony capitalism. Now there’s even a US government team flashing through Asia, asking the same question on behalf of Clinton and Albright.

The economic collapse in Asia has been so fast, so confusing. Only a few months ago, the Asia story was all about miracles and tigers and dragons. Now its about bust banks, shaky regimes, and riots. And the consequences are flowing back to the west in the form of falling exports and floods of cheap Asian imports. Few people in the west know much about the region. Even among high policy-makers, the knowledge level is low. Last year Chang Noi was invited to a prestigious Washington university and was amazed by the naivety of the questions faculty members posed about Asia. Many people are looking for an explanation, and preferably a quick and easy explanation. Enter "crony capitalism".

It’s such a good explanation, first and foremost, because it’s such a catchy phrase. Alliterative. Rhythmic. Memorable. And most of all, short. Analysis wrapped up as a sound-bite. A verbal cartoon in which a complex and murky picture has been reduced to a few simple, stark and powerful lines.

It’s also deceptively understandable. The exact definition of "crony capitalism" is not at all clear. But most people can easily think up their own meaning. It conjures up a businessman who succeeds not by skill, technique, foresight or hard work but simply by making friends with powerful people. The suggestion is: Asian businessmen of this type borrowed huge amounts of money off international banks, divided it up between insane property developments and Mercedes Benz, and that is why Asia is now in a mess. Some moderately respectable western economists have analysed the Asian crisis along these lines.

The crony capitalism explanation is also comfortingly distancing. It says: Asia does not have proper businessmen who invest and compete, like businessmen back home. It provides an excuse for bankers and fund managers fleeing the region, for governments discreetly looking the other way. Asia is simply getting what it deserves.

Now, Asia may very well be getting what it deserves, but is "crony capitalism" the right way to explain why?

The phrase first became popular in Asia to describe the later stages of the Marcos regime in the Philippines. Here was a real dictator who centralised power under his own control, and hung on for a long time. A handful of business families which cosied up to Marcos ended up running almost everything profitable. The journalists and political fact-gatherers now trawling through Asia are trying to make this model fit over the current crisis. They ask: who are these ten (twelve/twenty/thirty) family which control the Thai economy? How do they operate? Do they get together and plot? Do they act this way because they are Chinese?

But the crony capitalism model seems a very poor fit for the three countries at the eye of the Asian storm: Korea, Indonesia and Thailand.

Korea’s corporate structure is highly complex. The interplay between technocrats and chaebol heads took the economy from Burma-like status to membership of OECD over forty years. Certainly the economy has become badly unbalanced in the last few years. But we can’t explain this by imagining the Korean planners, politicians and chaebol-heads getting together to divide up the economy like Marcos and his drinking buddies.

Indonesia was probably closer to the crony capitalism model in the past, during the middle-period of the Suharto reign. But recently it seems to have developed towards something rather more primitive. The games played by the Suharto brood and their allies has very little to do with "capitalism" in any form. They are much closer to the mixture of trading monopolies and toll-gates by which Asian rulers gathered revenue in the past.

In Thailand too, the crony capitalism model fits the past much better than the present. During the period of military dictatorship, a handful of families did very well by cultivating the patronage of the generals. Some of these families are still the corporate leaders of today. But the way they operate has changed a lot over the past generation.

As long as there were dictators who had lots of power and who stayed around long enough to get things done, then making friends with them made a lot of business sense. But over the last 25 years, this form of dictatorship has passed into history. Both politics and business have become more competitive. For a time in the 1980s, there was a transitional form. Gangs of businessmen aligned themselves with gangs of politicians and fought against rival gangs for both political office and business privileges. In this era, many figures from the "big business families" went into politics (Sarasin, Osathanugroh, Techapaibun). The big political parties of the era were floated on corporate donations.

But over the last ten years, even this system has fallen apart. For one simple reason: it no longer works. Governments come and go too quickly. A new wave of entrepreneurs has risen to challenge the established families. The press is on the look out for good scandals. Opposition politicians need to find fuel for no-confidence motions. There is no longer the time and space to make the really big crony deals work. Of course there are still some pockets of resistance. The telecommunications industry seems to have been structured like a Monopoly game for a few privileged players. The allotment of mega construction contracts still seems to operate by some very special rules. But these areas are becoming the exception rather than the rule.

The political parties which flourished in the gang era have fallen apart. Many big Thai corporate interests are now at the forefront of the push for a cleaner and more transparent system. Of course, they played the crony game when it worked. But now they too often find they pay the money but don’t get the result. So now they want to change the game.

So looking around Bangkok, who are the "crony capitalists". Thaksin Shinawatra? He would seem to be a leading candidate. His business success was founded on government-allotted concessions. But who has he been a crony of? Why did he have to plunge into politics himself? And why is he now floundering?

Who else? Dhanin? Chatri? Adisai? Where are these crony capitalists?

Crony capitalism is a poor description of present-day realities. It is also a bad and misleading explanation of the Asian crisis.

The huge, destabilizing capital inflows of 1994-6 did not flood into Asia because of crony capitalism. The explanation lies in the greed, carelessness, lack of control, and herd behaviour of the international financial markets. The diversion of too much of this cash into bad investments had little to do with crony capitalism. From steel magnates to noodle vendors, entrepreneurs read the swelling of the bubble as a signal to invest. They were following market signals, not making clubby little deals. The catastrophic failures of economic management cannot be explained by crony capitalism. The decay of the technocracy and the failure of political leadership have much more deep-seated causes.

Of course, connections count a lot in Thai (and Asian) business. Mutual back-scratching goes on all the time. Gifts and rewards are common (Thaksin’s Daimler). Corruption is big.

But the crony capitalism explanation is just much too simple. It suggests that the problems come down to a few corner-cutting businessmen and a few high-living politicians. Eradicate them and everything will be all right. But the problems are much bigger, much deeper, much more international.

Behind the failure of the technocrats lies a broader decay of the bureaucracy and wholesale commercialisation of politics. Behind the financial crisis lie the poor standards of corporate governance and the limited grip of the rule of law. Behind the destabilising money inflows lies the lack of regulation in international financial markets.

The crony capitalism model offers a simple, catchy and curiously comforting way to explain the Asian crisis. One western magazine labelled the crisis rather hopefully as a "revolution against crony capitalism". But the reality is not so simple, not so decisive, and not necessarily so optimistic.