economics

March 22, 2010

The Beijing consensus

Filed under: Uncategorized — ktetaichinh @ 7:58 pm
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Recent Jetstar and Rio Tinto woes point to a distinctive legal dilemma emerging in socialist Asia.

WHAT do Stern Hu and Jetstar Pacific have in common? Both cases are not only important cautionary tales for Australian investors in socialist Asia; they also point to fundamental differences in the way law functions in this region.

The background to the Jetstar Pacific case provides valuable insights into the region’s socialist legal system. In 2007 Qantas bought a minority stake in Vietnam’s Pacific Airline. Its business strategy seemed sound: rebadge the company as Jetstar Pacific, inject urgently needed capital and expertise, then compete with Air Vietnam, the state-owned national carrier, for market share.

But Air Vietnam and its powerful state allies reacted in highly unexpected ways to the aggressive market competition. The first sign of trouble surfaced in the stream of articles in the state-controlled press enthusiastically reporting Jetstar’s flight delays and other problems while remaining silent about Air Vietnam. Then the Civil Aviation Administration warned Jetstar Pacific not to use the Jetstar logo because it might convey an unfair market advantage.

In April 2008 Vinapco, a monopoly supplier and subsidiary of Vietnam Air, increased the service fee for aviation fuel by 40 per cent. When Jetstar refused to pay the increase, Vinapco suspended supplies. Jetstar was forced to cancel fights until the Vietnamese CAA ordered Vinapco to resume supply.

Later that year Jetstar lodged a complaint with Vietnam’s competition authority. After the authority took no action, the company, with foreign-investment community support, lobbied Vietnam’s prime minister to intervene. The authority investigated and in January 2009 found Vinapco had abused its monopoly position by ”imposing disadvantageous terms on a customer”. The Competition Council upheld the competition authority’s findings, ordering Vinapco to pay a fine (US$168,300) and separate from Vietnam Airlines.

Although the local press reported that Air Vietnam vigorously opposed the council’s decision, it seemed the legal ruling had settled the matter. That was until late last year, when the economic police prevented Jetstar executives Luong Hoai Nam, Tristan Freeman and Daniela Marsilli from leaving Vietnam.

Economic police subsequently arrested Luong Hoai Nam for ”irresponsibly causing serious losses”. The charge relates to $31 million in losses Jetstar incurred in 2008-09 for fuel hedging transactions. Under the Penal Code, anyone who has direct management of socialist (state-owned) property and is ”neglectful of their responsibilities” can face three to 12 years’ jail.

Although Qantas owns 27 per cent of Jetstar Pacific, the state retained a 70 per cent shareholding.

While some commentators claim the Jetstar prosecution reflects turf wars between conservatives and reformers in the Vietnamese government, this obscures a broader issue. State officials in socialist legal systems can use the system to effectively criminalise market competition.

In the Rio Tinto case, the company has argued its executives merely bypassed state negotiators to deal directly with Chinese steel mill operators; as for Jetstar Pacific, it has apparently incurred official sanctions for winning market share from a state carrier.

Despite remarkable efforts in China and Vietnam to improve their legal systems, highly discretionary bureaucratic regulation still dominates. If it is unclear when business activities will offend vague principles and policies, the threat of prosecution transforms calculable commercial risk into incalculable criminal risk.

What should we make of the Jetstar and Rio Tinto cases? Are they merely aberrations in fast-changing economies or do they suggest qualitative differences between the Chinese/Vietnamese legal systems and Western models? In fact, a distinctive type of legal development is emerging in this region, sometimes called ”the Beijing consensus” to differentiate it from the Washington consensus that has dominated global governance for the past 50 years.

Although the Chinese model is difficult to pin down it is non-democratic, export-oriented, open and yet not dependent on legal rights and public accountability for state officials.

What does the Chinese legal development model mean for the region and Australia? As China’s economic rise becomes clearer, its legal development model seems to attract more admirers in Asia and beyond. The Chinese model may be difficult to resist for leaders in countries such as Vietnam that are interested in boosting their economy while curbing social and political pluralism. Even countries such as Thailand and Indonesia that are pursuing a more liberal development trajectory may increasingly turn to China for inspiration as the disparity in economic power increases.

Pressure for Australians investing and trading with this economically dynamic region to conform to the Beijing model is likely to increase with the rise of China. This may not cause economic pain, but it will require Australian officials, companies and lawyers to know much more about the region’s legal models and not to assume convergence with the Western rule of law.

It also emphasises the need to rethink Australia’s heavy reliance on multilateral treaties to curb regulatory behaviour in China and Vietnam. As the Doha round of trade talks and the Copenhagen climate conference suggest, China is prepared to set its own ground rules on international co-operation.

John Gillespie is a professor in law and director of the Asia Pacific Business Regulation Group, Monash University.

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