It is not often you read the newspaper and start to identify a common theme.
Yesterday, in the pages of the Asian Wall Street Journal, a very definite theme emerged, and it wasn’t a positive one.
The first article I read examined the Malaysian government’s decision to overturn a 25-year agreement with the state of Terengganu. This was an agreement that saw the state government get a 5% stake of oil revenues produced in its territory. Breaking this agreement will cost the local government M$810 million ($213 million) this year alone.
Why was this agreement broken?
The central government - run by UMNO - doesn’t like the new ruling party in Terengganu which is the Pati Islam se-Malaysia, better known as PAS.
The second story I read focused on a dispute in Indonesia between state-owned PT Telkom and five foreign-operated local partners. One of these, PT AriaWest - which is part-owned by AT&T - is threatening legal action. All five say that PT Telkom has failed to live up to contractual obligations. AriaWest says the government has taken a "belligerent attitude" towards its grievances.
The last story centred on Malaysia’s Renong and its boss Halim Saad. The article’s focus was on whether he would honour a put option that would allow UEM to sell back its stake in Renong to him. The cost of honouring this contract could be M$3 billion. Most local analysts wonder where he will find the money to do so.
Overarching theme
The common thread that runs through all three of these stories is an important one, and in case you haven’t already guessed, it is the sanctity of contracts. In all three of the above cases, contracts are either being flouted or there is the expectation they will be.
This is the great lesson that has emerged from the Asian crisis. Prior to the crisis, Asia was keen to cloak itself in all of the paraphernalia of Western-style capitalism. Via stock exchange reforms and such like Asia looked to be catching up with Western systems at a commendable speed. And with this, vast numbers of contracts were signed.
Now this is the key point. The contract is at the heart of the Western (or, more accurately, the Anglo-Saxon) capitalist system. Contracts are the keystones that hold the bridge together. Without contracts, capitalism is no better than a great number of brutes fighting for the spoils in the jungle.
In this system, reneging on a contract is a very serious thing indeed. The damage that will be done to a company’s institutional reputation can be terminal.
Now, back to Asia. During the crisis, the principle of the contract has come under severe pressure. And what worries me is whether it says something deeper about ‘Asian’ capitalism.
With the exception of one or two locales, is it possible to conclude that there is a respect for contracts in this part of the world? Certainly, multinational companies must have concluded, through bitter experience, that contracts signed in this part of the world aren’t like contracts signed in New York or London.
Breaking trust
This cannot be good for Asia. There is a game called the Prisoner’s Dilemma, in which it is statistically proven that those who break a 'trust' can make a short term gain, but in the medium and long run they lose because everyone knows they lie and thus cannot be cooperated with.
This is the reputational damage that Asia will take a decade to recover from. It will mean foreigners charging risk premiums to invest - and that is bad for Asia.
The larger question is whether Asia will understand what has happened and embrace the concept of the contract’s sanctity. New York Stock Exchange or Nasdaq-listed companies that break contracts on a whim have historically been punished by lamentable share price performance. As more Asian companies seek to list in the US they must understand this and the consequences for their stock price (and their management’s share options) if they are exposed as people who only believe in a contract when it suits them.
