Over the last decade, exponential growth rates have turned Southeast Asia into an unmitigated success story of 21st century capitalism. However, behind the facade lurks a murky underworld, argues the University of Chicago sociologist Kimberly Kay Hoang in her book Spiderweb Capitalism. Through fieldwork in Vietnam and Myanmar and interviews with hundreds of insiders, she exposes an intricate nexus of bankers, accountants, lawyers, bureaucrats and investors who facilitate capital flows through shell companies and financial centres like Singapore to hide the origin of dirty money, enabling local elites to accumulate obscene amounts of wealth. What’s more, after the 2008 financial crisis, the West lost its supremacy in frontier markets, with a rising China that is unconstrained by Western regulations gaining the upper hand. Is corruption a price worth paying for Asia’s ascendancy? In an exclusive interview to World Finance’s Alex Katsomitros, Hoang shares her thoughts on the origins of this murky ecosystem and how to unravel it.

What is spiderweb capitalism?
We usually think of global capital movement as capital moving from nation A to B. Spiderweb capitalism is a system that features a complex web of subsidiaries, offshore shell companies and money flows interconnected across multiple countries that obfuscate the origin of capital. Offshore financial centres have enabled economic and political elites – often the same people in developing economies – to secure exclusive, quasi-legal opportunities for wealth accumulation. These are multi-layered deals sometimes not available on the public market.

I differentiate between ‘big spiders,’ ultra-high-net-worth individuals (UHNWIs) whose capital flows through these webs, and ‘smaller spiders’: high-net-worth individuals (HNWIs) who are highly compensated agents building these webs on behalf of UHNWIs, but bearing the criminal and reputational risks. Every piece of the web is connected by different financial professionals: bankers, lawyers, accountants, PR agents. They are purposely obfuscated from one another in their relationship with the web. Each specialist builds one part, but they don’t know how other parts are constructed.

What are the power dynamics between UHNWIs and HNWIs?
I use the words ‘co-ordination’ and ‘sabotage.’ There are instances where they build these webs together. But between emerging and developed economies, there is also sabotage. You have joint ventures between local investors and entrepreneurs from overseas where the former will find ways to kick the foreign investor out by mobilising capital restriction laws or engaging the state to issue back taxes. So there can be co-ordination at the beginning and sabotage towards the end as a way to consolidate the resources. Sometimes there is also a protective approach to the local economy in regard to natural resources, such as oil, gas, minerals.

Do HNWIs aspire to become UHNWIs?
Many UHNWIs I have studied were once HNWIs who grew wealthier. HNWIs want to ultimately become UHNWIs, but it is more nuanced than simply a story of greed. Inequality has become wider since 2008. We thought that the financial crisis would democratise the system with the Occupy Wall Street movement. What I have uncovered during my research is that there are variations in the one percent, and we should differentiate between the 0.1 percent and the rest.

What is hard for the public to understand is that HNWIs feel economically precarious. We can make assumptions that it is just greed, but it is deeper. Their socio-emotional feeling is typically middle class. They talk about securing their children’s future, higher education costs, helping them buy homes. So it is less about wanting to get on the Forbes list and more about the fear of falling behind. That motivates them more than anything else.

One aspect of spiderweb capitalism is what you call ‘relational capitalism,’ which includes ‘homosocial bonding rituals’ like wild nights out. Is that specific to Southeast Asia or a broader phenomenon?
I first captured these rituals in my book Dealing in Desire, where I argued that the Vietnamese sex industry plays an important role in cementing relationships of trust between political officials and private entrepreneurs. In Spiderweb Capitalism, I talk about relationships of mutual hostage and destruction. Through these experiences they build homosocial bonding rituals, but it is also a way of getting dirt on one another. If something goes wrong on a deal, they can release to the media photos of their partners at orgy parties.

When you don’t have faith in the rule of law and each bureaucrat can interpret laws differently, relationships are crucial to moving around the regulatory apparatus. They are especially important when something goes wrong. If there are charges of corruption or back taxes, how do you manage that? You go to the bureaucrats. Even in relationships between entrepreneurs, how do you trust your partner? That is why relational capitalism is important in these economies.

Initially I thought it was a very Asian way of doing business. I have given talks in the US and Europe and bankers told me that their rituals are not that different. Before 2008, strip clubs and prostitution were a big part of the culture.

The Epstein case is very Western. If a business person ingratiated himself with high-level politicians, including Bill Clinton, Prince Andrew and Donald Trump, who knows what dirt he had on them? So perhaps it is more generalisable and not culturally specific to Asia, but we don’t have empirical evidence.

You mention in the book that the US is the largest offshore jurisdiction. So did this system originate in the West?
My research subjects would repeatedly remind me that this system was invented in the West. It goes back to colonialism, the British Empire and small sovereigns linked to it. Delaware has always been there, and we pretend it is not. Interestingly, after the Panama Papers leak, Mossack Fonseca moved their headquarters to Delaware. In the words of my research subjects, the biggest gangsters are in Delaware!

One thing that is different in Asia is that when you have an authoritarian state, offshoring is one mechanism that makes investors feel they can protect their investments from arbitrary state capture. They worry that the state can capture assets at any moment. We are seeing that in China right now, as Xi Jinping is weaponising charges of corruption to consolidate power.

Offshore structures have a bad rap, but if you take a conservative economist approach where you don’t want to stop all investment, it is a mechanism to protect assets as much as a way to evade taxes.

Is corruption a price worth paying for rapid development?
Many government officials feel that if there was a crackdown on corruption, it would affect their bottom line, and capital would stop coming in. They look at how rapid development has been, even in authoritarian states like China. Some were hoping that Myanmar would leapfrog Vietnam by introducing a democratic state with the election of Aung San Suu Kyi. It turned out that the military still had a strong hold on the economy and crony capitalists wouldn’t suddenly disappear. China and Vietnam have experienced rapid growth, but inequality is extremely wide. We imagine this trickle-down economy, but many people have been dispossessed. They have better infrastructure, but they have not gained from it.

For many economists, however, Vietnam is a success story. So what is the right balance between pro-growth and anti-corruption policies?
That is a short-term success story. What will it look like 20 years from now? Much of the growth is linked to money lent from other countries. For example, sovereign wealth funds channel massive private investments through these offshore vehicles. With spiderweb capitalism, it is challenging to differentiate between funds from sovereign and private investors. China, the world’s largest lender, uses offshore vehicles to mask its origin as state capital.

China has a long-term vision that the West does not have because of our election cycles

They form shell companies that make private investments in these countries and offer loans that will have to be paid back in 20–50 years. Many people I studied told me that China is a more benevolent lender than the West, pointing to bad lending practices of the World Bank and IMF in Latin America as an example of what not to follow. So I would ask economists to take a long view. Can we build models that project 20–50 years from now, particularly with China’s Belt and Road Initiative? China has a long-term vision that the West does not have because of our election cycles.

Is the West missing out on investment opportunities in frontier markets by being too moralistic compared to China?
When the West dominated the global economy, having global laws around corruption made sense. We now live in a different world with the rise of China. You have competition for investment from all around the world. I empathise with Western investors who are constrained by things like the Foreign Corrupt Practices Act. JPMorgan Chase paid hundreds of millions in fines for the Sons and Daughters programme in Hong Kong. Meanwhile, their competitors from China, Russia, even Eastern European countries, don’t have to adhere to those laws. Does that mean that we should enable corruption? The answer is no, it is just that we do not live in a world where there is cross-border collaboration. Because of geopolitical conflicts, China, US, Europe and Russia will not share information on which oligarchs are offshoring their funds.

So how can we unravel this web?
Berkeley economists Gabriel Zucman and Emmanuel Saez have suggested a global asset registry. That is very optimistic. One challenge is that we are asking regulators to regulate themselves. The only way is separation between the political and economic spheres: regulators and private investors. We see less of that with the revolving door system where people spend years working in the US regulatory apparatus and then work for Wall Street. In Asia, the political and economic spheres are one and the same. So separation is the solution. That means that local and foreign investors couldn’t capitalise on their political ties, and that would hurt their bottom line, so I don’t know how it could happen. Vietnam is a young economy. There is a new generation rising, people who have been educated abroad and have a broader worldview. Not a ‘let-me-get-rich’ attitude, but a more nationalistic, community-orientated perspective that is about the long-term view. Perhaps that is the future.