Professor Kishore Mahbubani, Dean, LKY School of Public Policy, 

Professor Wang Gungwu, Chairman, LKY School Governing Board; Faculty of Arts & Social Sciences, National University of Singapore, 

Distinguished guests, 

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Ladies and gentlemen. 

As I wondered about what I should be sharing with you today, in this venerable institution of learning, I reflected on my two chosen fields of academic study, politics and economics, and my experiences while running a business in Malaysia and the ASEAN region. I learnt back then that politics and economics are always inextricably linked, but back at home here in ASEAN, I find that politics overwhelms economics and the ability to understand and navigate politics is an essential trait for business. Possibly for the following reasons. 

When we talk about the great melting pot of diversity, in race, religion and culture that is ASEAN, we are also implying that there is great intensity of politics whenever we bring that diversity to bear, within and across national borders. 

Most of our political systems remain in that difficult transition phase from one party or one group (for want of a better term) dominance so the risk of unprecedented political change frequently surfaces. 

All ASEAN countries feature the heavy presence of the government in the economy and business to accelerate and manage development. It is hard to find a material business where the hand of government is not visible – licenses and permits, rules and regulations, government the customer, GLIC the investor and even GLC the competitor. Even when the government just sets the rules of the game, they are often made deliberately unclear for the private sector so that power remains firmly in the hand of the bureaucrat or politician. 

And there is then the politics between ASEAN countries too; nationalism is the greatest threat to AEC 2015. 

So, to thrive businesses cannot ignore politics – they have to understand it country by country where they operate and then for the region as a whole. And, guiding principles and tactics have to be imbedded as part of business strategy.

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Ladies and gentlemen 

My home country, Malaysia, is always the first to mind when it comes to ethnic politics. Our political parties are mainly race based and we have an affirmative action program to rebalance wealth in favour of Bumiputras (indigenous people) built into national economic policies. And, over recent years Malaysians have probably strengthened identification with their ethnic group more than they have with their country (sadly) 

Businesses in Malaysia have to take into consideration government policies on race. In some activities licenses are subject to quotas- for instance, if a stockbroker can't hire enough Bumiputra remisiers it cannot grow its number of remisiers. Government tenders have Bumiputra ownership rules, and there is pressure to ensure that there are enough Bumiputras in various key rungs of management and the board. So, if you want to make personnel decisions based only on merit you can't, and that brings about some very tough specific situations. 

I am not opposed to the idea of government intervention in the economy to create better distribution of wealth between groups of people to maintain political stability. But, race-based affirmative action is difficult to implement effectively, even harder to undo and has massive side effects that can undermine what the government is trying to achieve in the first place – competitive zeal of beneficiaries and intra-race class tensions for instance. 

At CIMB, our approach to managing this challenge is instead to focus on diversity as a huge source of strength. When we build teams at the company I always encourage managers to have diversity in gender, race, age and backgrounds so that we get different views and a wider range of capabilities. So when the composition of managers that we have is heavily skewed in terms of race, gender and age something must be wrong and the management should intervene. In the case of gender, if you can't have say at least 25% females in your team, something is not right. In the case of Bumiputras if you can't meet a 30% threshold when they comprise 2/3rds of the population, something is not right. But, when we intervene we try to do it in a way that doesn't make any individual feel penalized which can be terribly demotivating. 

From a national policy standpoint I have openly advocated a review of affirmative action policies to make it more relevant for today's market place, and today's Malaysians. I think that bringing diversity to the fore, together with needs based affirmative action as articulated in the Government's conceptual New Economic Model document should be the foundations of a better way ahead. If nothing else, the terminologies used are just so much less polarising than an overt race based preference policy. 

Of course, it's not just in Malaysia that businesses have to be conscious about diversity and balance. For instance, ethnic tensions in Myanmar are dripping cold water on the euphoria surrounding the country's opening up. At CIMB Indonesia we have had to intervene to balance not just expatriates but also the religious make-up of our local management team. In short, wherever in ASEAN be extra sensitive to diversity- not easy to manage, but very powerful when you can leverage it. After all, its diversity is one thing that makes ASEAN great in the first place. 

Ladies and gentlemen 

In all ASEAN countries we are witnessing political transition, in broadly the same direction – towards multi party systems, stronger institutional checks and balances and so on – but each doing so in their own unique way and pace. Most recently in Cambodia, we had to take precautions at our branches when the election results saw the ruling party’s dominance diminish sharply. Even here in Singapore the PAP doesn't take its reelection for granted anymore. 

When it comes to political contests the safest approach is of course to steer clear of being deemed friendly to any political party or figure but that can be very tough when their presence is so ubiquitous in business and more so when you are a significant business as CIMB is. 

In Malaysia, CIMB's approach is to be "close but not too close", and it is as awkward as it sounds. We have managed to continue to thrive as an investment bank at home since the late 1980's, through several periods of major political change. Although BN/UMNO has always been in government, the party leadership has gone through periods of major overhaul. In the early 1990's we saw an optically smooth transition of economic leadership from Daim to Anwar, but in practice, the business sector was rocked by the emergence of Anwar- linked business groups to challenge "Daim-established" groups. Then, when Anwar was dismissed as Finance Minister and Deputy Prime Minister in the midst of the Asian Financial Crisis, the wholesale removal of his inner circle of advisers and businessmen also saw the downfall of many key businessmen. The Mahathir-Badawi and Badawi-Najib transitions were well orchestrated leadership hand-overs, but still triggered upheavals in the business circles. 

For me the tactic of being "close but not too close" means being conscious of having a good relationship with the powers that be, but not be seen to milk it and self-regulating the influence you are perceived to have. It is tough to get it right but it is certainly worth trying very hard because I have at first hand seen the downfall of bankers that have gotten "too close" – how they enjoyed the fruits of their influence but, when leaders change they fell from grace brutally, (in a modern social sense). 

Integrity as a principle in business dealings is a crucial principle to imbed in any business. Quite apart from the morality of it, "corrupting" is a dangerous game when mixed with our dynamic political environment. The clampdown on corruption in Indonesia takes me back to the early 2000's when we were told that the only way we would be able to win a bid for Bank Niaga was to make a contribution (anecdote). We stuck to our principle and still won the bid. Imagine the sleepless nights I would still have today as new governments since continue to dig up past malpractices. 

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Ladies and gentlemen 

I recall some of my old economics textbooks saying that the government has no business being in business. But, today's consensus is that at our stage of development there are many reasons for the government to own and have stakes in companies – ownership of strategic assets, capital in activities like infrastructure and banking, wealth redistribution and so on. 

When you look around in Asean though, does the government need to be in so many activities, own so many businesses? 

The key is how to govern the government so that it doesn't crowd out the private sector and that it competes fairly at all times. Governments need to continuously assess why and how they exist because of the natural unfair advantages that it has and creating market failures, not to mention the poor record of government owned businesses. 

It worries me for instance how much property development is being undertaken by Malaysian GLC's and government agencies, and because banks think they are safe borrowers they lend. This is a clear example of market failure and unless the government cuts back on the supply side, KL could face an office glut in a few years time. 

When you are having to compete with GLC's or are having to deal with a government owned monopoly it can be tough. Air Asia for instance always screams about having to contend with MAS and Malaysia Airports and in such cases it is imperative that governments balance it's presence by setting up effective regulatory bodies, and in this case Malaysia needs a national aviation regulator.

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Ladies and gentlemen 

I am one of the strongest advocates of ASEAN economic integration. CIMB operates with a tagline "ASEAN for you", I am a founder of ABC whose raison d'être is to champion less barriers to cross border business, and we set up CARI, a not for profit organisation to promote AEC. But, as we now come close to 2015 

I think that the real politics of integration may well see us disappointed with the reality of AEC at its start, and possibly for many years to come. 

AEC is a great idea and much has been achieved since only 2007 when our leaders embraced the notion of economic integration. 

However, the ASEAN 2012 scorecard claim that 67.5% of the targets under the AEC blueprint have been achieved and that by Jan 1, 2010, the ASEAN-6 had “already” become effectively a free trade area, is but a glossed over reality. There remain substantial exclusions to free trade even among the ASEAN 6 – states have made use of an extensive “exclusion system” and placed products on the Temporary Exclusion List, the Sensitive and Highly Sensitive List (for example for agricultural products) or the General Exclusion List (if goods need to be protected due to “national security, public morals and health reasons). 

On the issue of non-tariff-barriers, the 2007 AEC Blueprint states that NTBs should all be removed. Deadlines are even specified in the ASEAN Trade in Goods Agreement (ATIGA) but the Blueprint does not clearly define what an NTB is so many trade-distorting measures have persisted despite these deadlines. 

ASEAN countries are still guilty of para-tariff measures such as levying additional charges or taxes on imports, quantity control measures including non-automatic licensing for “sensitive products”, quotas or prohibitions for certain product categories, monopolistic measures such as having single channels for imports, and technical measures such as marking, labeling, packaging, testing, inspection or quarantine. 

It is in fact the very construct and ethos of ASEAN which perpetuates the issue of NTBs. While there are virtues to the ASEAN Way; the informal, non-binding and consensus-seeking approach of intergovernmental cooperation does not give ASEAN the clout it needs to push through regional economic integration. 

And whatever will get done pursuant to the AEC will likely create winners and losers. National monopolies and protected industries are particularly vulnerable. The AEC will certainly be blamed and attacked by the losers. My biggest fear is that national leaderships will not be able to withstand these attacks, or worse, economic nationalism – sometimes accentuated by ethnic or religious parochialism – becomes a political platform to undermine regionalism. Just a couple of years ago, one of the most urbane Indonesian ministers, threatened blackberry rim with sanctions if they decided to set up in Penang instead of Indonesia and just last week one of Indonesia's best know businessmen made it plain to a large global audience (when egged on by non other than Kishore) that he is not a fan of AEC. I expect these sentiments to be more and more pronounced as businessmen finally pay attention on the details of AEC initiatives. 

Even today, 2 years before AEC we find little traction for ASEAN as a common identity. As arguably the best known proponent of ASEAN, CIMB with its tagline of AFY has witnessed up close the politics of regionalising a business and discovered how being ASEAN has not helped much at all at the regulatory level, and that between neighbours it is more competition than facilitation. 

Despite having been in Indonesia since 2002, then investing in Thailand in 2008 and Singapore in 2009 and having loudly expressed our alignment to ASEAN, not once have we felt recognised as an ASEAN entity by any regulation – you are either foreign or local. It was noticeable that yesterday's MOU (not agreement) on cross border offerings of collective investment schemes was signed by only 3 countries. And, I have always asked this question, would the Singapore, Indonesian or Thai government prefer HSBC or CIMB to be the top four letter bank in the region? 

In a nutshell, as enthusiastic as I am about economic integration I am concerned about AEC's prospects- we must have an honest assessment of it and help everyone to prepare for a realistic version of AEC 2015 or disappointment and perhaps back peddling could severely set back the integration itself. For now, businesses looking at ASEAN as a single production base should be mindful that it is going to be a bumpy political ride.

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Ladies and gentlemen 

The art of navigating politics is about continuously assessing the political environment and how it could facilitate or hinder what you want to do. We at CIMB have got right, and also got it wrong; let me share the story of 3 M&A's. 

When we launched a hostile take-over bid for Southern Bank Berhad (SBB) back in late 2005 we had to withstand public pressure against a Malay government- controlled bank taking over a Chinese entrepreneur's bank. But, I was always confident because the centre was strong then; PM Badawi had a huge electoral mandate and he made it clear from the start that the government would not intervene and the deal would be decided purely by market forces. We were even able to rename our company from Bumiputra Commerce to CIMB. 

In contrast stands the bitter experience of the Malaysia Airlines (MAS) – Air Asia (AA) share swap in 2011 where Khazanah and Tune Air created cross shareholdings and a business collaboration arrangement. We thought that the deal made absolute economic sense for MAS and AA. We also prepared for the skeptical consumer by proposing the setting-up of a regulatory body to make sure they actually benefitted from the tie-up. But, we misjudged the politics around the deal – internally, MAS staff could not digest the perception of being controlled by Tune; while externally, we did not move fast enough to set up the aviation authority to placate the public and there was a groundswell of opposition within political circles against ceding control of the national airline to Tony Fernandes. And of course, these days the centre is not as politically secure as it was before the 2008 so called political tsunami. 

The deal was incessantly attacked and the government decided that it had to be unwound and MAS and AA went their own way. But I always ask myself this – did our failure to anticipate and manage the politics deny the country the creation a globally competitive airline? Certainly SIA was a beneficiary of our failure.

In Indonesia, economic nationalism is currently an easy sentiment to exploit for political gain. When we first invested in Bank Niaga in 2002 we were welcomed with open arms; last year BI even contemplated forcing all foreigners to sell down their controlling stakes in banks and got considerable political backing for the idea. So, for us today not only is another M&A not on the agenda, our focus is to adjust our regional strategy to limit the extent that our Indonesian business is operationally integrated; less one ASEAN bank, more multi-local bank.

In short, in ASEAN long term strategies must be constantly revisited to cater for changing political dynamics. And in the case of us having to adjust our ASEAN ambitions, it is sadly consistent with the concern I expressed earlier about the political realities of AEC as we get closer and closer.

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Ladies and gentlemen 

We are doing business in arguably the best geographic location for this century that will see Asia regain its stature as the centre of the world economy. Kishore has frequently and so eloquently written of the fabulous upside to doing business here.

I hope I have, no doubt less eloquently but from the ground level as it were, shown that a key challenge for all of us is the politics surrounding doing business in ASEAN. Perhaps if we collectively better manage and leverage diversity, mitigate some of the side effects of active government presence our economies and strengthen our commitment and push for regional integration, ASEAN will scale even greater economic heights than Kishore and others have us dreaming of.

Thank you. 

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