ForeignPolicy.com

By GREG RUSHFORD
April 13, 2012

Why the Obama Administration is targeting Malaysia and Vietnam in the trans-Pacific trade talks.

.Unless you happen to be a trade policy junkie like me, odds are you haven't been following the progress of talks on the Trans-Pacific Partnership, the latest regional group formed out of frustration with the glacial pace of global trade liberalization. But it's worth paying attention. The TPP discussion offers a good excuse to take a closer look at the problematic impact of crony capitalism in Southeast Asia -- and, in particular, at the fate of government monopolies in countries whose leaders are loath to relinquish control to the market.

The TPP negotiations, which should be concluded by the end of this year, are largely the brainchild of Singapore and New Zealand, which launched them, along with Chile and Brunei, back in 2006. Australia, Peru, and the United States have since joined the party. But it's the application of Malaysia and Vietnam -- and U.S. demands on them -- that are causing the biggest stir. For, to its credit, Washington is pressing both countries to agree to "21st century" rules for leveling the international playing field that go far beyond the elimination of tariffs and plain-vanilla government subsidies. The primary target: big state-owned enterprises (SOEs).

For years, SOEs in Malaysia and Vietnam have been criticized for murky business practices that keep competitors at bay and government employees in Mercedes. The idea now is to use the lure of membership in the TPP to persuade the Malaysians and Vietnamese to emulate Singapore -- specifically, the government's giant investment company, Temasek, whose business is both transparent and on the up-and-up.

Don't pop the champagne corks just yet, though. While Hanoi acknowledges that its SOEs have, well, certain problems, the Vietnamese Communist Party is deeply reluctant to cede control of its big enterprises and the patronage that goes with it.
A quick look at how the enterprises in question operate sheds light on why prospects for serious reforms are unlikely. In Malaysia, powerful SOEs cast a long shadow over the economic landscape. Today, these corporations sit astride some 15 percent of the economy, including the key energy, telecommunications, and financial services sectors.

Consider Khazanah Nasional Berhad, the government's investment arm, which dates to 1993 and now owns over 60 corporations. Among its investments are the UEM Group (which dominates highway and commercial construction), financial institutions (including Santubong Ventures), and Integrated Healthcare Holdings (a major hospital operator). Khazanh also holds a 60 percent stake in Malaysia Airports and 36 percent of Telekom Malaysia.

And then there's Petronas, Malaysia's giant oil and gas corporation, which has enjoyed a monopoly since 1974. With profits of $40 billion in 2010 ($10 billion more than ExxonMobil!), Petronas is one of the world's great money machines.
The anti-corruption watchdog Transparency International ranks the Malaysian energy giant at the bottom of its company scorecard both on anti-corruption efforts and organizational disclosure. Petronas probably has good reasons for secrecy; it has only grudgingly launched an anti-corruption initiative that will compel it to share information with the Malaysian Anti-Corruption Commission.

Prime Minister Mohamed Najib has acknowledged the need for broad SOE reforms on the grounds that crony capitalism is discouraging foreign investment. He also pressed for Malaysia's first antitrust law, which went into effect in February 2012. From now on, the SOEs will have to answer to a Competition Commission with wide investigative powers. While the prime minister (who appoints the members of the commission) faces some opposition from within his ruling party, he's positioned to use the TPP talks as an excuse to sustain the effort to rein in state-owned enterprises.

The same cannot be said for Vietnam. To be sure, the Politburo started down the capitalist road as far back as 1986 with the Doi Moi reforms, which were intended to mirror Deng Xiaoping's capitalist-socialist hybrid in China. By 2006, the SOEs' share of GDP had been whittled to "just" 38 percent. But the party and the bureaucracy have since managed to push back, stalling further efforts at privatization or internal SOE reform.

In 2008, a group of Harvard economists who run an advisory program in Vietnam drove the point home with a detailed 56-page analysis of why Vietnam hasn't managed the sort of growth that would put it in the income category of, say, South Korea or Taiwan. The report places much of the blame on the SOEs, which include the country's dominant oil, electricity, railroad, telecommunications, banking, and insurance companies. Not only did the companies lack professional management, the report concluded, but they also failed to focus on improving their ability to compete in international markets. Worse still, the economists said, insiders had used the SOE reforms to build personal fortunes by misappropriating state assets.
While it is a crime in Vietnam to criticize the economic policies of the Communist Party, SOE scandals have occasionally become a matter of public record.

Vinashin, the state-owned shipping company that Prime Minister Nguyen Tan Dung once predicted would become the world's fourth-largest shipbuilder, collapsed in 2010 under the weight of $4.6 billion in debts -- a good chunk of which was owed to foreigners. The impulse to use government credit to invest in businesses beyond Vinashin's competence (such as speculating in real estate) had proved irresistible, it seems. (Nine of Vinashin's executives, including its chairman, were recently sentenced to long prison terms.) Post-scandal, Vinashin is now being restructured, but not necessarily reformed. According to Jonathan Pincus, Dean of the Fulbright Economics Teaching Program in Ho Chi Minh City, the government's approach to reform does not involve "tightening corporate governance" or "increasing transparency."

Much the same story can be told about EVN, the state-owned electricity monopoly. Like Vinashin, EVN neglected its core business to speculate in real estate. Of course, investing in anything but power plants may have looked reasonable from EVN's perspective, since the company's owners (the government) required EVN to sell power for less than the real cost of producing it.

In any event, last year Prime Minister Dung ordered EVN to spin off its telecom and banking subsidiaries. But EVN's incentives to mimic the private market are still undermined by the need to keep the party and the bureaucracy happy (and affluent).
Meanwhile, U.S. trade negotiators are making it too easy for the Vietnamese to hang tough: The one carrot that might tempt Hanoi to challenge the stakeholders in the SOEs -- greater access to U.S. clothing and shoe markets, where tariffs run as high as 36 percent -- is off the table. So Washington's ambition to bring trade into the 21st century has effectively been stalemated by its own insistence on what amounts to 18th century protectionism back home. "They are asking us to swallow a lot," one Vietnamese negotiator says, "but we don't want to choke."

Why, you might ask, is the Obama Administration so determined to reform the SOEs in Malaysia and Vietnam? It would certainly mark a step forward in the effort to promote global economic efficiency by expanding trade. But Washington also has a bigger goal in mind: using reforms in Southeast Asia to set an example for China, the world's epicenter of state capitalism.

The auguries are not favorable, at least in the near term. China, like Vietnam, views state-owned enterprises as a means to a political end -- a mechanism for reaping the fruits of growth without sacrificing the perquisites of government power. And nothing that comes out of the TPP is likely to change hearts and minds in Beijing.