The world’s most unproductive entrepreneur

The new book by Wall Street Journal reporters Tom Wright & Bradley Hope, Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the Worldis amazing. It must be one of the most detailed accounts of high-level corruption ever produced. I had followed their reporting on Malaysia’s 1MDB scandal, and generally understood that the financier Jho Low had colluded with former prime minister Najib Razak to embezzle ungodly amounts of money from the state development fund.

But what I had not really grasped before reading this book is that Low did not just steal money that belonged to the Malaysian state and people–he actually organized the creation of the 1MDB fund, and effectively controlled it. The 1MDB fund in fact never had any other purpose or rationale than as a vehicle for corruption.  The scheme got its start when Low approached the sultan of Terengganu, cleverly exploiting the opportunities for corruption in Malaysia’s system of hereditary monarchies:

He’d built a quick reputation in Malaysia as a deal maker, but, as always, Low was keenly aware of how his success stacked up on a global stage. Low had observed the power and status of Khaldoon Al Mubarak of Mubadala, who ran the Emirati sovereign wealth fund. A fund like that had billions of dollars in investments, not mere millions.

Why, Jho Low wondered, couldn’t he put together a sovereign wealth fund of his own—one based in Malaysia? But where could he find the initial funds? Traditional sovereign wealth funds invest oil profits, and so Low honed in on the Malaysian state of Terengganu, which was rich in offshore oil and gas fields.

But it didn’t take long for that local fund to become a national initiative. In August 2009, Najib announced the launch of the 1MDB fund at a dinner with the crown prince of Abu Dhabi:

The 1MDB fund was simply the Terengganu Investment Authority, which had recently raised $1.4 billion in Islamic bonds, transformed into a federal entity. The 1MDB fund would be responsible for repaying the bonds. Once Najib came to power, Low convinced him to take over the fund, broaden its remit, and look for Middle East backing.

Low’s pitch for the 1MDB fund was basically that it would be a completely unaccountable vehicle for the prime minister to dish out development projects and political patronage to benefit himself and his supporters:

The 1MDB fund was supposed to invest in green energy and tourism to create high-quality jobs for all Malaysians, whether of Malay, Indian, or Chinese heritage, hence the slogan “1Malaysia.” The fund, Low promised the prime minister, would suck in money from the Middle East and borrow more from global markets. But he had another selling point, one which Najib, who was ambitious, found extremely attractive: Why not also use the fund as a political-financing vehicle? Profits from 1MDB would fill a war chest that Najib could use to pay off political supporters and voters, restoring UMNO’s popularity, Low promised.

Over the next few years, Low and his conspirators would use 1MDB to borrow billions of dollars from global capital markets, and would simply take much of the proceeds for themselves. To achieve all this required Low to do constant networking, set up immensely complicated financial and legal arrangements, and splash out tens of millions of dollars along the way to win friends and influence people. Low in fact worked hard at his corruption, and displayed unmistakable entrepreneurial flair–a huge amount of effort deployed to make his country poorer not richer.

Previously I had thought of corruption as mostly acting like a drag or tax on the economy: the extraction of bribes to approve a construction permit or dismiss traffic fines. My imagination had not quite encompassed the idea that corruption could be a motivating force for huge economic initiatives that would be entirely wasteful. So one lesson from the book seems to be that I have been insufficiently cynical about human frailty.

Low’s tale also made me recall the distinction that William Baumol made between productive and unproductive entrepreneurs, in a famous 1990 article:

The basic hypothesis is that, while the total supply of entrepreneurs varies among societies, the productive contribution of the society’s entrepreneurial activities varies much more because of their allocation between productive activities such as innovation and largely unproductive activities such as rent seeking or organized crime. This allocation is heavily influenced by the relative payoffs society offers to such activities. …

If entrepreneurs are defined, simply, to be persons who are ingenious and creative in finding ways that add to their own wealth, power, and prestige, then it is to be expected that not all of them will be overly concerned with whether an activity that achieves these goals adds much or little to the social product or, for that matter, even whether it is an actual impediment to production (this notion goes back, at least, to Veblen). …

There are a variety of roles among which the entrepreneur’s efforts can be reallocated, and some of those roles do not follow the constructive and innovative script that is conventionally attributed to that person. Indeed, at times the entrepreneur may even lead a parasitical existence that is actually damaging to the economy.

Baumol’s article cited many interesting historical examples of unproductive entrepreneurship, but his contemporary examples were all a bit dull: he mentions tax evasion and corporate lawsuits. Low’s audacious scheme to create a sovereign wealth fund in order to plunder it surely makes him the paragon of twenty-first-century unproductive entrepreneurship.

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Gessen on Shalamov: “It was nothing personal. Just the twentieth century.”

I really enjoyed Keith Gessen’s new novel A Terrible Countrya charming, convincing and moving account of a young American’s complicated relationship with Russia. The narrator is a struggling low-level academic specializing in Slavic literature, who must return to Moscow to care for his aging grandmother. He gets by teaching an online course in Russian literature, but generally seems more passionate about playing pick-up hockey than the great Russian books.

One of the only exceptions, to my surprise and delight, is a digression on Varlam Shalamov’s Kolyma Stories, which I just read this year and immediately recognized as an indisputable masterpiece. Here is the narrator’s appreciation of Shalamov:

Shalamov saw things differently from Solzhenitsyn. He saw them doubly, ambivalently. He thought Solzhenitsyn was a windbag. Physical pain, hunger, and bitter cold: these could not be “overcome” by the spirit. Nor did the world divide neatly, as it did for Solzhenitsyn, between friends and enemies of the regime.

For Shalamov, in the camps there were people who helped him and there were people who brought him harm (who beat him, stole his food, ratted him out), but the majority of the people he encountered did neither. They were just, like him, trying to survive. There was great brutality in the camps, and very little heroism.

In his memoirs he told a remarkable story about learning, at one of the darkest moments of his camp life, that his sister-in-law, Asya, with whom he was close, was in a nearby camp. Shalamov was in the hospital with dysentery, and one of the doctors wanted to know if he wished to send Asya a message. Only half alive, Shalamov scribbled her a short and unsentimental note. “Asya,” it said, “I’m very sick. Send some tobacco.” That was all.

Shalamov clearly remembered this with shame, but also with understanding: he was weak, on the edge of death, and had been reduced to a bare animal existence. There was no great lesson in this, except that in certain conditions a man quickly ceases to be a man.

It was nothing personal, as the saying goes. Just the twentieth century.

This is very well put, far better than I managed when trying to express what is so great about Kolyma Stories (here is my previous post on Shalamov).

For more on Gessen’s novel, Francise Prose’s review is on the mark, and gives a good flavor of what the book is like.

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A novelist’s view of China’s rise, from 1983

Walter Tevis’ 1983 science-fiction novel The Steps of the Sun is mostly not a very good book; unlike some of his other books (the excellent chess novel The Queen’s Gambit, or The Color of Money) it has not aged well. The one thing about the book that does seem ahead of its time is the worldbuilding: it is set in a future world in which China has unquestionably risen. Here is one background passage:

Half the people on the street were Chinese. By midsummer New York always seems to be a Chinese city, a kind of cultural suburb of Peking. The Russians are ahead of everybody else at heavy industry; the art comes from Buenos Aires and Rio de Janeiro; the political life in Aberdeen and Hangchow is far more lively than New York’s; and if you want to make a really big business arrangement you go to Peking, the world’s richest city.

But New York is still New York, even with its elevators not working and a total of one hundred fifty taxis permitted to operate (Peking has thousands, they are electric powered and have leather upholstery). But Peking is still a stodgy businessman’s city, with all the old China erased from its neoclassical architecture. The Chinese come to New York for the civilized life.

New York is the major city of a second-rank power, of a country whose time is slipping away; but it still has a bounce you don’t find anywhere else. There are restaurants with white tablecloths, with waiters in tuxedos that look like they came from the last century, and, however they beer-feed and hand-rub their fat old steers in Japan, the Kansas City steak served in a New York restaurant, with the dim lights and the polished wooden bar and the tuxedoed waiters, is still one of the delights of the world. And New York theater is the only theater to hold anybody’s interest for long; American music is the most sophisticated in the world.

The Chinese are still, behind those stuffy facades, the greatest gamblers on earth and the trickiest businessmen; they’ve accommodated their ideology and their asceticism of the last century to their present wealth with the ease of the Renaissance Popes; they are Communists the way Cesare Borgia was a Christian. And they love New York.

Some of these details are remarkably prescient: the Chinese tourists crowding the streets of New York, and the way the city serves as a kind of living museum of a certain type and period of culture. The bit about China being ahead of the US in electric vehicles also has a ripped-from-the-headlines feel. In another passage, a billionaire shows off his ability to speak Chinese (remind you of anyone?).

This is pretty unusual stuff for 1983, when Americans were obsessed with the rise of Japan and had barely begun to notice China. William Gibson’s much more famous Neuromancer, from 1984, chose Japan as the natural setting for its hyper-technological fantasies. So I am curious what might have inspired this aspect of the book; there is little in Tevis’ biography to suggest a particular interest in or knowledge of Asia.

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Are giant factories a symptom of labor repression?

That is the suggestion made in Deborah Cohen’s interesting review of Joshua B. Freeman’s Behemoth: A History of the Factory and the Making of the Modern World.

Giant factories were a feature of both the US and Soviet economies in the 1930s, which led some observers at the time to speculate that capitalism and socialism were converging toward a single economic form. But this convergence turned out to be quite temporary, as giant factories lasted much longer in the USSR:

By the late 1940s, the era of the showcase factory was over in the United States. The strength of unionization, particularly demonstrated by the formidable strike wave of 1945–1946, made clear to industrialists the danger of concentrating workers in a few plants.

More than simply a means of controlling costs or rationalizing distribution, the drive to open smaller and decentralized plants, especially in the low-wage, nonunionized South, was also a strategy to ensure that a company’s entire operation couldn’t be hamstrung by a strike.

At the same time, by contrast, industrial gigantism continued apace across the Eastern Bloc. The East Germans built the steel town of Stalinstadt (now Eisenhüttenstadt); in Poland, there rose Nowa Huta, with a workforce of nearly 30,000 by 1967. Crippling labor unrest wasn’t a problem that particularly worried leaders in the Eastern Bloc, who could count on a network of spies as well as a cadre of factory workers who were fervent believers in socialism.

The current world champion of industrial gigantism is, of course, China. The “Foxconn City” facility in Shenzhen is generally thought to be the world’s largest manufacturing facility, employing something over 200,000 workers. Strikes in China are not uncommon but tend to be short-term events related to specific disputes, rather than an organized strategy as part of collective bargaining. This of course is because China does not have independent unions; the state-controlled union tends to side with management. So the risk to a company’s operations from an individual strike is still low–though it is worth noting that Foxconn does not depend on one single large facility but instead has lots of large facilities, in China and many other countries.

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The Volgograd Tractor Factory in the 1930s

 

What surprised Pieter Bottelier about Chinese economic history

Pieter Bottelier has observed a lot of recent Chinese economic history, starting with his tenure as head of the World Bank’s office in China from 1993-97. But his new book, Economic Policy Making in China (1949-2016): The Role of Economists, goes farther back, and opens with an interesting collection of “puzzles and surprises” he encountered doing research on these earlier periods.

I quite enjoyed these observations; here is a selection of a few of them:

  • Surprise: The Chinese communists, who were relatively inexperienced in economic matters when the CPC was gaining strength in the 1930s and ’40s, were more effective in suppressing inflation in areas they controlled than Chiang Kai-shek’s more experienced Nationalist government.

If Chiang Kai-shek had been able to control hyperinflation during the civil war, it would have been much harder for the communists to prevail in that conflict. I was surprised to see how much importance the communists attached to financial stability and how effective they were in fighting inflation before the establishment of the PRC in 1949. …While most historians typically focused on the political and military achievements of the CPC, I found that the financial history, including a surprising degree of fiscal conservatism and appreciation of the importance of financial stability, deserves more attention.

  • Surprise: The extent to which initial economic reforms in the late ’70s were influenced by the need to create jobs for the millions of people (especially youth) returning to the cities from the countryside after the Cultural Revolution had ended.

To reduce the risk of social instability, there was a compelling need for job creation in urban areas after the Cultural Revolution. One of the first and most important reform measures in the late 1970s was to legitimize and facilitate street vending and other labor-intensive retail trading. Most of the millions of people returning to the cities after the Cultural Revolution had been forced by the Party to undergo “re-education” through labor in rural areas. If it hadn’t been for the special efforts to create job opportunities in urban areas for these people, Deng Xiaoping’s economic reforms might not have been as successful as they were.

  • Surprise: The importance of coining the term “socialist market economy” in 1992 to describe the kind of economic system China wanted to establish.

I was surprised to learn how important this had been in the evolution of China’s reforms. In the West, we normally don’t attach a lot of importance to names; we ask rhetorically: “what’s in a name?” By contrast, in China the name of a person, thing or concept is typically very important; a name has real meaning. One of the more important contributions Jiang Zemin made to China’s reform efforts when he was the Party’s General Secretary (1989-2002) was to give a name to the goal of these efforts.

  • Surprise: I was surprised to find that leading Chinese reform economists consider Gu Zhun, a philosopher/economist and historian (who was trained as an accountant and who died in 1974), the “father” of China’s market reforms.

Gu Zhun is now recognized as one of the most important thinkers of the Mao era. He was a brilliant and courageous intellectual; an original thinker with a fiercely independent, some say stubborn, mind. Like Sun Yefang, he opposed some of Mao’s economic policies in the 1950s. He died (of lung cancer) at the age of 59. Had his health kept up for another decade, he might have emerged as one of the most important Chinese reform economists under Deng Xiaoping. Given the breadth and depth of his interests and academic pursuits, he would be called a “Renaissance Man” in the West.

There are several more surprises discussed in the introduction, and I could have read even more of them – it’s a nice format. But the book then shifts gears, and becomes mainly a series of biographical sketches of a number of people who were influential on Chinese economic policymaking (despite the title, not necessarily trained economists). Both parts were reminders of just how much there still is to learn about even fairly recent history in China, so much of which is still obscured by a combination of official propaganda and reformist mythmaking.

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Making sure our expectations for the future are sufficiently weird

As someone who is professionally required to at least occasionally issue prognostications about the future, I enjoyed this passage from Cory Doctorow’s Walkaway, in which a character warns against the perils of straight-line extrapolations:

End-timers used to project our consumption levels forward, multiplying our population by our needed resources, and get to this point where we’d run out of planet in a generation and there’d be famine and war.

That kind of linear projection is the kind of thinking that gets people into trouble when they think about the future. It’s like thinking, ‘well, my kid is learning ten exciting new things every week, so by the time she’s sixty, she’ll be smarter than any human in history.’

There are lots of curves that start looking like they go up and to the right forever, but turn into bell curves, or inverted Us, or S-curves, or the fabled hockey-stick that gets steeper and steeper until it goes straight vertical.

Any assumption that we’re going to end up like now, but moreso, is so insufficiently weird it’s the only thing you can be sure won’t happen in the future.

That’s a fairly self-referential statement for a character in a science-fiction novel to make, but thankfully most of the characters in this piece of utopian fiction do not go around making speeches; Doctorow is very good at writing real, vivid people, not types or abstractions.

Perhaps the line is meant to highlight that the world Doctorow imagines in Walkaway is indeed very much like now, but moreso: it’s a straight-line extrapolation of rising inequality, increasing automation and declining labor participation. What he’s trying to imagine is the moment when that curve starts to turn into something else.

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Varlam Shalamov’s prose of the future

For the last couple of weeks I have been steadily working my way through Varlam Shalamov’s Kolyma Stories, a newly-translated collection of tales drawn from the author’s experiences at the most notorious outpost of the Soviet Gulag system. Perhaps not everyone shares my fascination with prison literature, but I found these stories remarkably fresh and closely observed.

One of the closest things to a statement of purpose from Shalamov comes at the opening of the 1960 story “The Necktie”, when the narrator asks himself how he can make his story “a piece of the prose of the future”:

In the past and at present a writer needs to be someone like a foreigner in the country he is writing about if he wants to be a success. He has to write from the viewpoint—interests, vision—of the people he grew up among and from whom he got his habits, tastes, and views. A writer writes in the language of those in whose name he speaks. And that is all. If a writer knows his material too well, the people for whom he is writing won’t understand him. The writer will have betrayed them and gone over to the side of his material.

You mustn’t know your material too well. Every writer in the past and the present had that defect, but the prose of the future demands something different. It will be professionals with a gift for writing who will speak out, not writers. And they will tell us only about what they know and have seen. Plausible accuracy is the force behind the literature of the future.

Shalamov was not a foreigner in the country of the Gulag: he was very much on the side of his material. In his stories he does not explain too much about the camp system, but simply recounts the actions of its participants, and this is usually all that is really required to understand how it works. As the translator, Donald Rayfield, observes in his introduction, “Despite his own assertion…Shalamov knew his material perfectly, and he wrote in a way that everyone can understand.”

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