NEWS ITEM: Morgan Stanley’s chief economist in Asia, Andy Xie, resigned last week after sending an e-mail to colleagues that described Singapore’s economic success as “mostly from being the money laundering center for corrupt Indonesian businessmen and government officials”. Now, he added, “Indonesia has no money. So Singapore isn’t doing well.” Xie sent the e-mail after attending the International Monetary Fund and World Bank meetings in Singapore last month, where, he wrote, delegates “were competing with each other to praise Singapore as the success story of globalization”. Morgan Stanley ranks sixth among merger advisers in Singapore this year, handling US$1.5 billion of deals, reports Bloomberg.

The saga of Andy Xie, erstwhile chief Asian economist of an investment bank, makes for interesting reading, pointing as it does at the perils of leveling any questions on the future of Singapore, or indeed its present governance.

The country hasn’t done itself any favors by adopting a thin-skinned attitude to the media and being overly defensive of its governing coterie. Standards are flexible when discussing other countries, though, as Singaporean politicians are adept at putting down their neighbors.

In this context, this week’s comments by Senior Statesman Lee Kuan Yew concerning Malaysia’s inter-racial politics and the future of liberal democracy support my arguments of two weeks back [1] wherein I pointed out that Southeast Asia is where democracy goes to die. Unwittingly, Lee may also have raised another question: just who needs Singapore? For that matter, who needs Hong Kong or Shanghai, other than current residents of these cities?

Parasite or haven?

Firstly, what is the function served by city-states? Looking through history, we find that they tend to thrive as centers of commerce, with political power following the money as it does today.

In the Asian context, the volatility endured by businessmen across the fractured landscape rendered the existence of such city-states a matter of necessity. Thus, there is some truth to the assertions of the aforementioned economist in characterizing the role of city-states as places for money launderers and the corrupt to gather. Ironically, as I pointed in an earlier article, [2] the city-states themselves are relative paragons of virtue, at least on the issue of corruption, if not quite in the realm of liberal democracy.

Existing as oases in an otherwise scary landscape allows the likes of Hong Kong and Singapore to attract a wide array of businesses to their shores, ranging from multinational companies to trading groups. But it is as financial centers that they have really shone in recent decades, becoming a convenient meeting ground for investors and issuers. This is, however, controversial, from the perspective of the countries that would otherwise have directly attracted or absorbed the capital.

For example, the Malaysian dilemma has been that despite having world-class ports and financial regulations, Singapore still steals a march. Be it the value-added business around logistics or the listing of companies, Singapore has a growing lead on Malaysia. Similarly, Indonesia has found it difficult to operate effective ports, despite having a large number of natural locations. The less said about its financial center aspirations the better.

Despite all that, Asian city-states face significant challenges in their next stage of growth. As China and India develop, their governments would obviously prefer to have financial markets under their direct control instead of being farmed out to tertiary locations.

In essence, the future of Asian city-states is an opposing bet on the development of soft infrastructure, such as regulations and the legal environment in China and India. If and when these giants have their systems in place, their need for Hong Kong and Singapore simply disappears.

These city-states certainly know that, which is why they have become more desperate in attracting new capital and businesses. While both have recorded some successes, it is also important to examine how it can all go horribly wrong.

Existential dilemma

Historically, the governments of China have never trusted overly powerful city-states. The trifurcation of China following the Han dynasty was followed by the even bloodier Six Dynasties period wherein power alternated at the point of economic swords wielded by chieftains. The need for consolidating power necessitated the marginalization of city-states.

Given that historical context, the recent decline of Hong Kong and now Shanghai hardly presents a surprise. In the late 1990s, Beijing was sufficiently alarmed by the growing independence of Guangdong province, which had received a significant fillip from the economic liberalization launched by Deng Xiaoping. The rise of domestic capitalism involving key members of the local government created the real possibility of the province shrugging off Beijing’s edicts. This necessitated drastic action eight years ago, when Premier Zhu Rongji ordered the closure of Guangdong’s International Trust and Investment Corp (ITIC) as well as various other investment companies around the country. Tellingly, China ITIC, based in Beijing, was exempt from the orders.

Having nipped Guangdong in the bud, Beijing then took steps to ensure that Hong Kong did not emerge as a secondary threat. In the face of an economic downturn and property market collapse, the city-state’s government was facing key pressures. During this period, Beijing adopted a steadfast standoffish attitude, allowing its handpicked chief executive, Tung Chee-hwa, to deliver a “death of a thousand cuts” to the city.

This ensured that Hong Kong people blamed their local heads, rather than Beijing, for the sorry mess the city had become. Following the onset of the avian-flu and SARS (severe acute respiratory syndrome) crises three years ago, Beijing apparently changed its tack on Hong Kong, arranging to help the city by allowing in property investors from the mainland. Still, Hong Kong’s future as a city-state remains in doubt as it is literally being suffocated by southern China’s pollution.

Shanghai was an altogether different story. The city’s importance grew strongly during the course of Jiang Zemin’s reign. This year, the city shrugged off Beijing’s edicts on cooling down its property market, essentially emerging as a city-state in the process. Admittedly, this strategy was too risky and worse, short-term focused. Predictably, it ended with Beijing reimposing control after sacking Shanghai Communist Party chief and mayor Chen Liangyu.

Hopeless and hope

The outlook for Hong Kong is dire, as the city no longer offers meaningful soft infrastructure advantages over mainland China. This implies that it is condemned to a future of being a tourist location, although quite how this strategy will gel with its current air pollution remains a mystery to me.

All is not lost for city-states though. Some, like Macau, will never face a significant downturn as their economy is based on non-cyclical business, namely gambling. Asians love gambling like Americans love burgers, thus making Macau essentially bulletproof, which is a good idea for its crime-ridden hotel lobbies as well.

Other city-states such as Dubai in the United Arab Emirates have enough local capital and modernization gap against neighboring states to guarantee their future. Arab and Islamic states around Dubai are also somewhat relieved at not having the responsibility for managing financial markets, seeing as how horribly complicated that can get.

As I noted in the afore-referenced article on democracy, Thailand’s recent military coup was supported by the middle classes wanting to reassert their control. Thaksin Shinawatra had gradually reduced the power of urbanites in general, and residents of Bangkok in particular, depending as he did on the support of Thais in rural areas. Facing marginalization, the monarch and the army essentially restored power to the capital, thus perpetuating the city’s preeminence across the country.

Continued political volatility in Southeast Asia, as well as the ongoing conniptions in Indian politics, imply a continued demand for Singapore to operate as a regional center. Thus, Singapore is evidence that reports of the death of city-states are exaggerated, as Mark Twain may have put it.

[1] Demo-Crazy, Asia Times Online, September 23.
[2] The wages of corruption, Asia Times Online, August 19.