Sept 8, 2000 

WORLDVIEW
Harun Rashid

An eminent economist, who lives and works in Chicago, feels that the Malaysian economy is strong on fundamentals. He says it is outstanding among countries in Southeast Asia in its ability to recover from a recent financial crisis. Perhaps he is right. Perhaps not.

Those who live in Malaysia, and have a daily dose of political propaganda, are probably not able to see things as clearly as someone in Chicago. Looking toward Chicago, one notices that it is difficult to see well that far away. It's another world. Perhaps the view is better when one looks from there to here. Perhaps not.

What do you suppose he is looking at? What does he see? Whatever it may be, it seems rosy enough as he tells it. The implication of his remarks is that there is stability and opportunity for participation in the Malaysian adventure. If one is looking for an adventure (some might call it an education) then he is right. Education, however, always has its price.

An economist educated in western universities and observing the operation of western markets may not be the best pundit for Southeast Asia. This is because the perceptions are so totally different. The rules are different. Let me elaborate.

In western markets there is the tacit understanding that a contract is a legal and binding agreement made in good faith by parties acting freely. One could argue effectively that it is the contract which makes western civilisation possible. There is an extensive body of law that establishes how agreements involving commercial transactions may to be conducted with a degree of certainty. 

The basic rule of the contract is that the intent of the parties must be unambiguously clear. A contract drawn between two parties which does not reveal the true intent of either party is not a valid contract, and thus not enforceable. 

Either party, suffering from a breach or anticipated breach of a contract, may take action to mitigate damages. In fact, there is a legal duty to do so. Such action, if reasonable, will be upheld by the courts. But that is in the western markets.

Redefining royalty 

In Southeast Asia it is often the case that what appears a contract is not in fact a contract. A recent example is the royalty contract between Petronas, the national oil company, and the state of Terengganu from which the oil pumped. 

Though this contract has been in existence for a decade or more, and the royalty honoured twice a year since it was signed, now it is not a contract anymore. Now it is something else, according to the federal government, and the terms are to be unilaterally changed over the objection of the state government.

This is an unusual point in the law, in that the party leaders of the Umno-BN coalition are seen to be bringing the re-definition though they are not parties to the contract. If they prevail in the attempt to interfere with the contract between Petronas and Terengganu, it will be as an outside third party, not as one of the original contractors. 

In Malaysia, the prospect is very real that the federal government will be allowed to intervene and thus become a party to a new agreement with the state. It is a new contract, one which includes them as a new party, and one to which they are the only signatories. How does this appear viewed from Chicago?

It is possible that this eventuality has escaped the notice of the economist in Chicago, who views eastern markets as fledglings of western markets. Western markets are said to rapidly reflect all available
information and risk. This is not true in eastern markets. The risk is that you will lose whichever decision you make after the first bad one, entering the eastern market.

In western markets incorporated companies are deemed to be run by executives who have every incentive to make the company a success. They are well paid and duty bound to make every exertion to give value to the shares of the company. 

The share price is said to reflect the activities of the corporation in the eyes of the investing public. Quarterly reports give accurate information on the affairs of the corporation, and projections of both the business plan and an evaluation of the prospects for future earnings.

In eastern markets the shares of a corporation are often created on a napkin in a coffee shop. Corporations spring up like weeds between the cracks in the sidewalk, and have less chance for survival.

The shares are a means to entice an unsuspecting fund manager into taking a ride in blue sky land. The value of shares is based more on what dreams can be generated in a controlled news world, and the market for these new shares fluctuates according to the presence of new and virginal money, usually from novices and foreigners. 

The novices have a better chance. They know they don't know what is going on, and will generally run when they feel uneasy. The professionals are using other people's money, and generally will try to "average out" with a small loss. Good luck. 

House of cards

A typical eastern corporation owns a big interest in several other firms, and there are large holding companies that have dozens of technically bankrupt companies that are so interlocked that the whole house of cards has been insolvent for years, but just hasn't had the nerve to admit it. 

They will fall over eventually, but in the meantime they continue to trade as though there was a breath of life left. The government typically gives CPR at the last minute, on the theory that they are indispensable to the economy (too big to fail).

Western fund managers are starting to salivate like anxious bottom fishermen as the wringing out process continues. Ahhh ... when is the best time to buy into a burning house? A burning house of cards at that. When is the best time to buy into a bankrupt company? When is the best time to buy shares in a company run by the children of corrupt politicians? 

If you have a bargain hunter's nose, the eastern markets have the delightful perfume you are searching for, in the form of new technology shares, dot.com shares, fibre-optic shares, or whatever is making the news in western markets. 

But whatever the hype, remember that there is no conception of fair play, no conception of a contract in the western sense, and no judiciary to provide a fair hearing for your disappointments, and the process of entering and staying the legal queue is about seven to nine years, for the first level. Appeals can take much longer. 

There is no need to be frightened, or to avoid the eastern markets. Everyone has to learn some time. Perhaps not.

HARUN RASHID is a scientist avidly interested in the application of Islamic principles in international affairs. The promotion of goodwill through civilisational dialogue motivates his writing. His Worldview column is a personal analysis of Malaysian affairs from a global perspective.